Regional: Promoting Financially Sustainable Regulatory Framework for Water Tariff in South Asia

Sovereign Project | 45373-001

Summary

The R-CDTA will assist India, Nepal and Sri Lanka to identify and address the primary and pressing issue in the existing national water tariff frameworks. The R-CDTA will provide assistance in formulating and/or updating, where applicable, a national water tariff framework to regulate water in its economic and social dimensions.

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Project Name Promoting Financially Sustainable Regulatory Framework for Water Tariff in South Asia
Project Number 45373-001
Country Regional
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8036-REG: Promoting Financially Sustainable Regulatory Framework for Water Tariff in South Asia
Technical Assistance Special Fund US$ 1.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Sector / Subsector Water and other urban infrastructure and services - Urban policy, institutional and capacity development - Urban water supply
Gender Equity and Mainstreaming Effective gender mainstreaming
Description

The R-CDTA will assist India, Nepal and Sri Lanka to identify and address the primary and pressing issue in the existing national water tariff frameworks. The R-CDTA will provide assistance in formulating and/or updating, where applicable, a national water tariff framework to regulate water in its economic and social dimensions.

The R-CDTA will include (i) a general review and analysis of the water sector in the three South Asia countries to identify whether water tariff framework is in need of adjustments in order to improve financial and operational sustainability, as well as promote private sector participation in the urban water sector (including review of fixed or flat rate tariffs, volumetric and increasing block tariffs etc, their relevance and problems, and related regulatory and institutional arrangements in the three South Asia countries); (ii) identification of 5 pilot areas, including 2 cities for India, 2 for Nepal (one of which will be a small town) and 1 for Sri Lanka, for detailed assessment of the effectiveness/impacts of the ongoing reforms, with a focus on tariff reforms, in the water sector; (iii) a comprehensive water tariff study for the three South Asia countries, including national guidelines on water tariff setting and formulation, detailed formula for full cost recovery for water tariffs, assessment and analysis of a range of tariff structures that could satisfy the design objectives of cost recovery, economic efficiency, equity and affordability; and (iv) specific recommendations on implementation of the national guidelines in the 2 Indian pilot case study cities in relation to their water tariff structures, detailed tariff calculation formula, and tariff approval process, and institutional arrangements. In formulating or advising the respective national guidelines on water tariffs, inputs will be sought from the 5 case study areas.

The R-CDTA will engage consultants with requisite expertise to work closely with the implementing agencies as well as the local and/or state governments of the 5 pilot areas, where applicable. The R-CDTA consultants are required to prepare a high quality water tariff study covering the abovementioned areas and create an effective knowledge dissemination channel, including at least two (2) workshops and/or roundtable discussions in the three South Asia countries, respectively; a regional level workshop and/or roundtable discussion and a final publication of the study including, among others, a tool kit or handbook to define and describe the national guidelines on water tariffs to promote knowledge and experience sharing. The proposed duration for the R-CDTA would be 10 months.

In the case of India, as requested by MOUD, the R-CDTA will assist MOUD to prepare national guidelines on water tariff formulation, which is a crucial step to effective regulation of the water sector in the urban areas. The national guidelines on water tariff will conceptualize the idea that water is an economic good. The national guidelines would be a step towards water demand-management and conservation and would contribute to the national sector strategy and long-term sustainability of the water utilities.

In the cases of Nepal and Sri Lanka, detailed discussions will be held with the executive agencies in a reconnaissance mission to discuss the scope, the impact, outcome and expected outputs of the R-CDTA before the signing of the Letter of Agreement.

Project Rationale and Linkage to Country/Regional Strategy

In the past decade, rapid urbanization in South Asia has contributed substantially to the GNP. In some countries, contribution to GNP from the urban sector alone has grown by 10 percentage points, which is substantial and reflects South Asia's continued and robust growth in the last decade. However, urban infrastructure development as well as basic public services, in particular water supply services, have lagged behind the rapid economic growth. Many cities suffer from dilapidated and aging or even lack of public infrastructures and sub-standard service levels.

As urban infrastructures and services are the mandate of the public sector, the government provides funding for asset creation. In most cases, the government also continues to operate public utilities, including water, sanitation and solid waste. Due to the weak fiscal position of the local governments who often run the public utilities, central grants and external aid funds are required for asset creation. Due to the weak capacity and limited operational and financial resources of the local government, public utilities are not operated in an efficient and financially sustainable manner.

The urban and water sector in South Asia is in need of a fresh injection of funds and expertise from various sources, including the private sector. To promote and attract private sector participation in the water sector, a sound regulatory framework for water tariffs is needed to establish an enabling environment. Further, a transparent and stable tariff framework can bring about improvement of local governments' fiscal position, and contribute to achieving financial and operational sustainability in the provision of water supply. Accordingly, a framework for water tariffs, specific to each country and its implementation based on the principles of cost recovery would help establish the needed enabling environment conducive for private sector investment. The immediate task is to identify what barriers reside in the current tariff mechanism in South Asia that constrains the sector's operational and financial sustainability, as well as hampers private sector participation due to lack of an enabling environment.

In the case of India, the current prevailing water tariff is not set at a level to achieve full cost recovery. Government-run water utilities currently recover less than 35% of operation and maintenance (O&M) costs. The utilities therefore are not financially self-sufficient and have been dependent on government subsidies. In this regard, formulation of national guidelines on water tariff has become critical in order to steer the government-run water utilities gradually towards full cost recovery as well as to ensure social affordability to make the sector sustainable. India's National Water Policy of 2002 did not directly address the mechanism for tariff adjustment. Since 2002, there has been increased focus by national and state officials on adequacy and quality of water supply. Proper pricing of water has been the subject in many of the state consultation meetings as more cities are moving towards 24X7 supply and improved water quality. The Ministry of Urban Development (MOUD) has established service level benchmarks, and the Jawaharlal Nehru's National Urban Renewal Mission (JNNURM) includes cost-recovery as one of the reform measures. Hence, there is a need for an overall national guideline of water tariffs for India.

In the case of Nepal, the Nepal Water Supply Corporation (NWSC) Act 1989 has provided that NWSC can impose fees and charges to recover operation costs. The Drinking Water Regulation 1998 also empowers the water supplier to levy a fee as fixed by the Service Charge Fixation Committee. The Nepal Water Supply Corporation Act 2nd Amendment (2007), Water Supply Management Board Act (2006) and Water Supply Tariff Fixation Commission Act (2006) have facilitated the improved management of water and sanitation services. The Water Supply Tariff Fixation Commission (WSTFC) was also created as the regulator for water tariff under the ongoing ADB loans. These regulations established the legal basis for private sector management of schemes and independent fee setting and regulation and are applicable to all urban schemes. However, there have been no clear guidelines on water tariff setting considering water's full economic value.

In the case of Sri Lanka, service areas outside Colombo are not subject to a tariff framework to guide cost recovery and financial sustainability. Assessment of the existing frameworks establishing principles and methods to attain full cost recovery can encourage private sector participation in the sector's investment activities, be it in rehabilitation or water supply augmentation. In addition, continued efforts were also identified by the ADB Sector Paper as well as CPS 2012-2016 to improve self-financing performance of operating entities through regulation and cost recovery together with other approaches and to provide continued support on water conservation through properly addressing the economic value of water in the tariff and regulatory framework.

Impact Improved water demand management by water utilities and water conservation
Project Outcome
Description of Outcome Adoption of tariff that enables cost recovery
Progress Toward Outcome
Implementation Progress
Description of Project Outputs

A summary of current water tariff structures prepared

An assessment of the reform effectiveness in the water sector completed

Clear blueprint of water tariff reform at national level prepared

Clear blueprint of water tariff reforms at state level prepared

Knowledge and capacity improved for better governance of water utilities

Status of Implementation Progress (Outputs, Activities, and Issues)
Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design Extensive discussions will be held during the inception mission with the implementing agencies.
During Project Implementation Extensive discussions will be held during the inception mission with the implementing agencies.
Business Opportunities
Consulting Services The CDTA will engage consultants with requisite expertise to work closely with the executing agency as well as the local and state governments of the 4 pilot cities. The CDTA consultants are required to prepare a high quality water tariff study report covering the abovementioned areas and create an effective knowledge dissemination channel, including four (4) workshops and a final publication of the study report including among others a tool kit or handbook to define and describe the national guidelines on water tariffs to promote knowledge and experience sharing among the states in India. The proposed duration for the CDTA would be 8 months.
Responsible ADB Officer Vivian Castro-Wooldridge
Responsible ADB Department South Asia Department
Responsible ADB Division Urban Development and Water Division, SARD
Executing Agencies
Asian Development Bank6 ADB Avenue, Mandaluyong
Metro Manila, Philippines
P.O. Box 789, 1099 Manila,
Philippines
Timetable
Concept Clearance 23 Aug 2011
Fact Finding 21 Nov 2011 to 22 Nov 2011
MRM -
Approval 22 Dec 2011
Last Review Mission -
Last PDS Update 14 Dec 2011

TA 8036-REG

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
22 Dec 2011 - 22 Dec 2011 31 Jul 2013 31 Aug 2013 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
1,000,000.00 0.00 0.00 0.00 0.00 0.00 1,000,000.00 22 Dec 2011 168,766.19

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