Water

Nonrevenue Water: A Governance Challenge¹
(October 2006)

Non-revenue water (NRW) refers to water that a water utility does not receive any compensation for. It includes water not billed as a result of leakage, inadequate measurement, illegal use, and free (authorized) use.

The annual “water balance” of water utilities measures the difference between the total water volume produced and distributed by the utility and its total expected revenues. This discrepancy accounts for what the International Water Association (IWA) calls “nonrevenue water” or NRW.

NRW’s components are:

Estimates in Asian cities show that 50–65% of NRW is due to apparent losses. Real losses due to leakage, on the other hand, result from service connections, most of which are poorly constructed.

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Aside from wasting scarce resources and investments, high NRW rates also mean that consumers are paying for the inefficiencies of water utilities.

From the consumers’ point of view, those with illegal connections are cheating those who pay for water. Illegal connections can be the result of inadequate piped water coverage that, in turn, leads to high NRW. This reflects the water utilities’ inefficiency. Poor governance is at the root of this problem.

It is possible that those with vested interests condone the illegal sale of utility water to small-scale water providers (SSWPs) at high prices (low volumes). If this is so, it may also be possible that the total revenue from illegal sales is the same as the utilities’ official water sales.

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Not only would NRW reduction lead to more optimized water use and distribution, it would also reduce the demand for water, which immediately translates into cost savings on utilities’ operations and maintenance (O&M).

Programs for controlling NRW should tackle at least the three NRW components, and to keep in mind the following:

• Accountability must be high at all levels.
• Water services must be adequately priced.
• Reducing commercial losses is very important; it helps improve the revenue stream almost immediately.
• Reliable information on production and consumption is necessary.
• NRW is the result of a combination of factors, not of a single one.
• NRW programs must be institutionalized and not be the result of sporadic exercises associated with the availability of grants or loan financing.
• NRW cannot be addressed in isolation. An enabling environment must be created. This means that
  1. Utilities must have autonomy in terms of management, and they need competent and motivated employees.
  2. Tariffs must be adequate, which will result in cost and benefit incentives to reduce NRW.
  3. Good governance must be practiced.

In developed countries, the first effort to reduce NRW often involves the purchase of leak detection equipment. Experiences in Asia and other developing countries show, however, that it may be better and more realistic to go out and repair all visible leaks—of which there are usually plenty—and carefully scrutinize and accurately meter large water consumers.

Benchmarking NRW is also particularly useful, as it enables utilities to compare themselves with others, or compare their individual performances at different periods. In 2005, the South East Asian Water Utilities Network concluded the first phase of a regional benchmarking program that included NRW reduction as a key indicator. The table below shows a comparison of NRW rates across 47 water utilities in Southeast Asia.

Click here to view larger image.

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Reducing NRW is not technically difficult. It is, however, challenging in a governance sense. Illegal connections can only be eliminated when utilities have autonomy and discipline, and when they are accountable to regulators and the public. In addition, utility employees need genuine incentives to do their jobs and replace the incentives they have made for themselves through illegal connections, false meter reading, and others.

Comprehensive audits of water and service levels are needed and links between NRW, low service coverage, and SSWPs need to be explored. When tariffs are much higher, consumers will put pressure on operators to eliminate leaks and chase illegal connections. Good organizational development is needed to take advantage of autonomy and deliver accountability.

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• Asian Water Supplies: Reaching the Urban Poor
• NRW-Related Concepts and Definitions
• Caretaker Approach to NRW Reduction for Asian Cities
• NRW Problems, Solutions, Statistics