Water tariff and free water

The price in question

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God gave us water so it should be free. Yes but he forgot the pipes. – Quote

The pricing of water in urban areas has firmly entered the political decision making space with the Delhi announcement of 666 litres per connection per day free. Here is a good look at what goes into decision making and how a solution is arrived at.

Cities get water from quite huge distances. Bangalore for example gets its water from the river Cauvery 95 kilometres away and about 300 metre below the city.  Typically there are three components to the investment requirement for water. First is the capital requirement to collect, treats, pump, store, distribute and measure through meters the water supplied to all the myriad connections. Then collect, convey and treat the consumed water which now emerges as wastewater. This is the Capital cost of the system.

Then there is the electricity bill to paid for pumping the water and treating the wastewater, the chemicals required in cleaning the water and wastewater, the salaries of the employees and meter readers , the routine repairs that are needed etc. This is the Operations and Maintenance Cost.

Finally there is a sinking fund to be collected to replace the entire infrastructure when the life of the equipment is over.

As a rough idea in Bangalore it cost Rs 80 for a kilo-litre of water to be produced and delivered to the consumer. The cost in Delhi is reported to be about Rs 28 a kilo-litre.

These three components make up the investments for water supply and waste water collection. There are three ways this can be funded, by the tax payer, by the consumer or by grants from foreign agencies.

Remember the true cost of water is when it is returned back to nature at a quality decided as appropriate not to cause pollution. The ecological cost would also include the preservation and management of the lakes and rivers and their catchments to continue to supply the water as well as the treatment plants needed to treat the sewage to appropriate standards.

Consumer: For the consumer there is usually a connection cost for water supply and sewerage and in a well functioning system a monthly bill based on the volumetric consumption as reported by the meter. In many cases if metering is not there is a flat charge or something linked to property tax.

Now if free water is given to the consumer of domestic connections the only way to recover the cost would be from two other categories of consumers the non-domestic consumers such as hotels and restaurants and from the industrial sector. However if the tariff for these sections go up too high there is a resource substitution with industries shifting to ground water or to private water supply.

Tariff: While it is a fact that no human being should be deprived of water due to the cost of it, it is also a fact that water is an economic good and requires monies to supply. A good via media would appear to be universal connections given to all families and houses in cities, a free 50 litres of water per person per day as prescribed by WHO guidelines and then a reasonable tariff to recover costs. A fact to be remembered is that about 50 % of piped water in a city goes as non revenue water, either physically leaking from the system or simply not billed or collected. It would be important for city utilities to bring this number to less than 20 %.

Way forward: It would be ideal for cities to put the data in public domain and go inform large scale consultations with its citizens on how to arrive at a tariff. With responsible fiscal behaviour will come sustainability and with universal connections will come equity. Sources such as groundwater accessed through hand-pumps can easily be made free if the aquifers are well maintained and are not polluted and do not go too deep.

Innovative dialogue is the way forward and this is the right time for urban India to enter into the dialogue and enter into a compact with its political parties for good water governance.

The water pricing and tariff in question

Much debate has been ignited by the recent decision of the Aam Aadmi Party in Delhi to give 20,000 litres of water per month per connection free. Here is how water pricing can be seen and choice of water prices determined

First some beliefs

1. We all have to pay for good quality piped water. Directly as a consumer, indirectly as a tax payer or even more indirectly as inflation. It is best to pay as a consumer and keep the utility supplying water fiscally buoyant so as to be able to extend services and keep up the quality of the infrastructure.

2. Eventually both environmental externalities and social externalities will need to be factored in. On the environmental side the continuous availability of good quality water will demand investment in catchments and rivers and groundwater and rainwater. Negative externalities will need to be costed and the treatment cost of waste-water included in the price of water.  On the social front , water is a community property resource and its increased availability upto a point improves health and economic outcomes of communities . This will result in increased productivity , less expenses on medicines and especially a better future for children . However a combination of good water supply , access to safe sanitation and good hygiene behaviour should be encouraged altogether.

Now to the idea of pricing …

Let us assume 100 kilo-litres of water coming in to a city. The cost of the water will include the Capital cost amortized over the life of the project , the Operations and Maintenance cost for running the entire system and a sinking fund to replace the equipment at the end of its life.  For a moment let us assume that this cost of water production is Rs 10 per kilo-litre ( a 1000 litres) Now if a utility is to run as a no profit no loss entity it has to recover the cost from its consumer. However unfortunately there is a lot of loss in the system. Some water leaks out of pipes. Some water gets to consumers who do not pay or are not required to pay. Figures can reach 50 % but let us assume an efficient institution and a figure of 20 %.

Now let us do the Maths

Cost incurred to get and distribute water to the city 100 KL x Rs 10 per KL = Rs 1000

Cost to be recovered from 80 KL (since 20 KL is lost )  = Rs 1000 /80 = Rs 12.50 Kl

Typically consumers in a city are divided into three broad categories of users

Domestic      Non domestic (commercial)  and  Industrial. Typically the later two categories can afford to pay more for water. Let us assume an ideal distribution of the remaining 80 KL of water as follows

Domestic     Non domestic   Industrial               Loss               Total

KL                         KL                    KL                         KL                    KL

52                      16                           12                  20                     100

Now if we charge double the tariff for non domestic consumers (such as hotels ,restaurants, pvt establishments etc) i.e Rs 25 a kilo-litre and four times for Industrial consumers i.e. Rs 50 a kilo-litre we will have the following tariff

Total cost to be recovered  –     1000 Rs

From Non-domestic –   16 x 25 = 400

From industrial =            12 x 50 = 600

Total cost recovered                  Rs  1000

Free water is then possible for the domestic sector without   the institution incurring any loss.

Of course there are caveats.

1. The 52 Kl coming in to the city should be enough for all the population of the city. At a standard of 140 lpcd , this 52 KL can service a population of 52000/ 140 = 371 people.  For 20 million people like Delhi to have water at 140 lpcd the city will need 20 million x 140 x 100/52 = 5385 million litres a day. It is better to drive consumption down to an efficient 100 lpcd , in which case the requirement would be 20 million x 100 x 100 / 52 = 3847 million litres per day.
2. Source substitution will occur if prices go up. Both the non-domestic and especially the industrial sector will go for groundwater or private water tanker if that is cheaper than the tariff imposed by the cross subsidization. Hence groundwater and tanker water will need to be regulated and charged at the same price as piped water.
3. Metering both bulk and retail will be a must. All connections must be individual and all connections must be metered.
4. If water is free for the domestic sector there will be no incentive to conserve it. Pricing is a must for this sector too. People are not hindered by the price of piped water but by the absence of connections and the initial connection cost. This must be universalized and made free.
5. It is better to make the WHO guideline of 50 litres per capita per day which is the basic minimum for health and hygiene, free..i.e.50 x 5x 30= 7500 litres per month free. Anything above must be charged at a minimum price of say Rs 4 a KL . Anything above 135 lpcd should be charged at non-domestic tariff.
6. Special teams will need to be created and dialogues will be necessary to increase the connections and consumption for non-domestic and industrial use.
7. To get to a 20 % leakage figure will be no easy task but all new pipelines and connections must be designed for 24/7 water.
8. Wastewater will need to be collected and reused/recycled as non potable water or as ecological flows through wetlands into rivers.

So here then is the final tariff structure

Domestic                 Non domestic                Industrial

Litres                    Rs                               Rs                                    Rs

Slab   0 -7500            Free                      25                             50

7500- 15000         4                                  25                              50

>15000                25                                25                                50