Meeting the Water Challenges in Asian Cities: Up-Scaling Successful Practices

Meeting the Water Challenges in Asian Cities: Up-Scaling Successful Practices

A knowledge paper presented during the seminar of the same title45th Annual Meeting, Board of Governors, Asian Development Bank. Manila, Philippines. 2 May 2012.

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2 PwC | Meeting the Water Challenges in Asian Cities: Up-Scaling Successful Practices

Growing urbanisation in Asia

Increasing water stress

For the first time in human history, half of the world’s population lives in urban areas. According to UN, as of 2010, Asia and Pacific is one of the least urbanised regions of the world with only 43% urbanisation. However, this region witnessed the second highest urban population growth rate of 2% per annum between 2005 and 2010, next only to Africa. It is estimated that by 2030, 55% of Asia’s population will live in urban areas.

The pull factor of cities is evident considering the strong positive correlation between urbanisation and economic growth. In many developed countries, cities contribute to more than 80% of the GDP. Even in developing countries of Asia, cities contribute more than two-thirds of GDP despite low levels of urbanisation. Urban areas support the creation of highly specialized infrastructure due to higher density and better utilisation. Such infrastructure can be a major source for improving productivity. Cities also provide the right environment for flow of ideas and often become centres of innovation.

The fast-paced urbanisation is leading to increasing pressure on natural resources, especially water. According to the World Resources Group, the annual water demand in Asia will increase by over 50% between 2005 and 2030. Additional demand from municipal and domestic sector alone will be approximately 174bn m3 per annum.

One of the Millennium Development Goals (MDG) targets is to reduce the proportion of people without improved access to sanitation and basic water by half by 2015. Asia has made good progress towards meeting the MDG target in drinking water largely due to efforts made in India and China. However, the sanitation target is likely to be missed. Even in the case of drinking water, over 90m urban dwellers in Asia continue to remain without access to adequate water.

Rapid urbanisation places competing demands on existing water resources and leads to depletion of ground water in many urban areas. Scarcity of safe, affordable and reliable water could perhaps be the most serious challenge that could derail the urban growth machine.

While the burden of unreliable water supply is felt by all sections of the society, the impact is more pronounced on the poor. An intermittent and unreliable water supply forces the poor to forgo work on days when water arrives. Alternatively, they may have to pay much higher for supply from illegal or informal networks. The impact on women and children is also higher as they are most likely to be involved in such activities.

Meeting the Water Challenges in Asian Cities: Up-Scaling Successful Practices | PwC 3

Water sector reform is challenging

According to the United Nations, access to water is regarded as a human right. Providing access to a certain minimum quantity of water for meeting basic human needs is one of the fundamental responsibilities of the State. However, investment in water supply has often lagged behind what is actually needed. Further, water supply systems are seldom efficiently managed leading to high levels of Non-Revenue Water (NRW). The traditional response to improving water supply has been to augment source capacity and creation of water treatment plants. In many instances, this has been akin to putting more money through a leaking system, literally and figuratively.

Despite widespread recognition of the need to adopt an integrated view encompassing surface and groundwater, institutional responsibility for managing different sources of water continues to remain fragmented. Projects continue to be planned based on administrative jurisdiction, which fail to take into account the impact on water resource availability and extraction at a basin level. In Chile, the growing stress on water resources led to reforms in 2005 and new water and environmental laws and regulations were put in place with focus on cost recovery through water tariff revisions and focus on improvements in water efficiency. Such reforms on cost recovery and efficiency brought about the much needed results with few sectors like mining and wood pulp increasing the water efficiency substantially. Water consumption has also gone down by 10%.

According recent estimates by ADB, the NRW in urban water utilities in Asia is to the order of 29bn m3 of treated water every year. Even cutting the physical losses to half the present level would mean that 150m people could be supplied with treated water. However, public utilities management may have preference for large capital investment projects as these projects could improve the availability of water without immediately addressing the endemic issue of poor maintenance and inefficient distribution system. Capital investment intensive projects also provide better mileage from a political economy point of view.

There are examples of recycling and reuse of wastewater in Asia, especially in Singapore, Korea and Japan. However, most countries in developing Asia have yet to come-up with a coherent strategy for recycling and reuse of wastewater. One of challenges in this area has been the relative poor coverage of underground sewerage systems to capture and channel wastewater to treatment plants for recycling and reuse. Further, easy availability of ground water at several places and lack of regulation on its extraction also reduce the relative attractiveness of the more expensive proposition of recycling and reuse.

Much of the attention on climate change issue has been linked to reducing energy intensity. However, there is an important water-energy nexus which has to be considered holistically. For example, in water distribution system that depends on pumping, energy cost constitutes as much as half of the operating cost. Plugging water losses through better maintenance, rehabilitation of water system and introduction of energy efficient pumps would not only reduce NRW but also reduce energy consumption. Likewise, water is an important input in energy production and the actual quantum of water used varies across different types of systems, viz. thermal, solar, or nuclear. It is estimated that the power sector accounts for 80% of the industrial water consumption in Asia. This inter-linkage needs to be recognised and integrated into policy formulation at various levels, viz. determination of capital subsidies, lifecycle costing, tariffs and standard setting for equipment.

Findings from studies carried out by Independent Evaluation Department (IED) of ADB show that water supply projects are prone to multi-dimensional risks covering institutional, organisational, operational as well as project level factors. Institutionalising tariff reform, cost recovery, regulatory reform and private sector participation continues to remain a challenge. Despite a multi-pronged approach to projects, approximately half of the ongoing projects showed a declining performance of water operations.


An integrated view of urban waterCutting down on NRW requires a systemic change in the way projects are planned, designed and implemented. Greater attention has to be paid to systematic analysis of issues leading to poor quality of supply. Alternative choices have to be identified which can be implemented and would also deliver better service per unit of investment. This needs extensive participation and buy-in from stakeholders, including management and engineering staff at public utilities as implementing an NRW reduction programme involves changing operations and maintenance paradigm in utilities. There are quite a few successful examples of water utilities, viz. Singapore, Jamshedpur City, Phnom Penh and Manila (East Zone) having successfully reduced NRW to below 20%. While NRW in Singapore has consistently remained around 5%, East Manila has reduced its NRW drastically from 63% in 1997 to 16% in 2009. Further, Jamshedpur, India, reduced NRW from around 36% in 2005 to 10% in 2009 and Phnom Penh, Cambodia, reduced NRW from 72% in 1993 to as low as 6% in 2008.

Recovery of operation and maintenance cost continues to remain a challenge across several countries in the region. Low levels of tariff are often justified on the ground that the poor would be unable to afford cost-based tariffs. Yet, evidence from the field often contradicts this view on two accounts. Firstly, the cost of coping with unreliable water supply is quite high for the urban poor. Secondly, utilities often have high connection cost, which acts as a barrier for the urban poor in obtaining connection. Therefore, non-poor sections of the community tend to garner most of the benefit from subsidised water tariff.

Utilities have to move towards better targeting of subsidies and one of the measures is to ensure that only lifeline consumption is subsidised and tariffs for any usage above this level reflect the full costs, including environmental and social cost of over utilisation. Offering targeted subsidies for service connections rather than subsidizing user charges can enable water utilities to increase the number of customers and connect the poor. For instance, in Cote d’Ivoire, service connection fee is based on the number of taps in the household, enabling poorer households to connect at a reduced price. When replacing public taps with household connections in slum areas, the Bangalore Water Supply and Sewerage Board (BWSSB) provided connections at subsidised rates. This helped in drastically reducing water losses from public taps.

A transparent and accountable regulatory framework is essential for improving practices in tariff setting. Since delivery of water services in many countries in the region is under public management, independent sector regulation would be equally applicable to public and private sector entities. Ideally such a regulation should be set up through a separate legislation that ensures transparency and enables greater objectivity to the tariff setting process.

One of the hitherto neglected areas has been recycling and reuse of water. As a first step towards realising the potential, coverage of wastewater collection system should be improved so that all the wastewater generated in the city is channelled for treatment. Use of recycled water has significant environmental benefits in terms of lowering the usage of freshwater. There should be incentives for bulk users for using recycled water. In Singapore, recycled water tariff is lower than that for fresh water and furthermore the Water Conservation Tax, which is generally in the range of 30% to 45%, is not applicable on the sale of recycled water. The recycled purified potable water in Singapore is branded as NEWater and promoted by the government. It now meets almost 15% of the total demand in the city.

Much of the change in urban water sector has to be driven through improved governance and management. The underlying rules based on which the urban water supply sector operates need to radically change. Instituting a performance and accountability-based approach is at the core of this change. Transparency in operations can be brought about through ring-fencing of water supply function in water utilities and urban local bodies. The regulatory framework is an important part of the institutional landscape and needs to be designed, keeping the local conditions in mind. As a starting point, there should be clear separation of policy making, regulatory and operational roles. Malaysia established a national water asset holding company, PAAB (Pengurusan Aset Air Berhad) and a National Water Services Commission SPAN (Suruhanjaya Perkhidmatan Air Negara). It separated the functions of policy making (government), regulation (SPAN), asset ownership (PAAB) and service provision (state water companies) with formation of discrete agencies. SPAN now issues licenses for water operators, mainly state water companies. The performance standards are set and monitored by SPAN. The responsibilities of developing water infrastructure and sourcing for its funding is transferred to PAAB.


Focus on service delivery improvements

Water utilities should have clear metrics against which their performance should be measured. They should be accountable for improving performance across all dimensions including coverage, reliability, quality and affordability of service. The incentive system should recognise performance improvements and reward the utility. The incentive system should percolate to the staff level.

Ring-fencing of water operations can facilitate in introducing an incentive system. Moving from a situation of excessive subsidies to financial sustainability requires a clear plan involving pre-agreed support for water supply to meet the O&M gap that cannot be met from user tariffs. The gap funding should be on a reducing scale and reach a “no-gap” situation within a defined time period. The gap can also be clearly linked to service levels. Phnom Penh Water Supply Authority (PPWSA), Cambodia, operates on a full cost recovery basis without any state and/or donor subsidies. It has an estimated coverage level of 100% in the inner city with a 24-hour water supply, and 85% coverage of its total service area (up from 40% in 1993). This has

been achieved through revenue increase measures – tariff increases, reduction in unaccounted-for water and policy framework allowing utility autonomy and independent financial status. Effective awareness campaigns enabled PPWSA to attain buy-in, reduce illegal connections and gradually increase tariffs with broad public support.

Irrespective of the institutional arrangement for service delivery – a ring-fenced water supply utility, private sector or public utility under a contractual arrangement – clear performance agreement should be laid down covering:

Service delivery standards •

Coverage requirements•

Capital investment plan and execution, if applicable•

Payment mechanism•

Monitoring mechanism•

Recourse in case of non-adherence to service standards•


Localising PPP

A review of cross-country experience on Public Private Partnerships (PPPs) presents a more sobering picture. While private sector involvement has helped in improving operational efficiency and service, private sector investment has fallen short of expectation. Absence of a clear framework that can provide regulatory certainty in determining water tariffs acts as a barrier and prevents a private investor from committing significant capital investment to water projects. Absence of good quality data and information on quality of existing assets also increases the information asymmetry problem. Public funding for infrastructure coupled with private sector operations could achieve the optimal balance of risk. Therefore, management contracts have emerged as the preferred mode of private sector involvement on water projects. Still, there are variations in the models based on local scenario. For example, binding the private investor to commit a certain level of investment while the public sector bears the residual risk of additional investment in case of field assessment. This reveals that the need for such additional investment is another approach.

Total number of water PPP contracts signed in Asian Countries (1995-2010)Country No. of Contracts

China 1161

India 61

Indonesia 22

Malaysia 23

Philippines 17

Singapore 6

Vietnam 4

Thailand 19

Total 1326

Source: Global Water Intelligence

As indicated in the table, China has made significant progress in implementing PPPs in water sector in the last decade. Most of these projects were potable water and sewage treatment plants and were usually implemented under BOT agreements. The projects also include 22 water supply concessions signed since 2000.

There is also need for wider understanding of various forms of PPPs. Small Scale Water Agencies (SSWAs) play an important role in serving people in most of the developing countries across Asia, Africa and Latin America. More than half the population in many cities in developing countries get basic water service from these SSWAs who respond to local conditions. For example, when water utilities provide water through trunk lines but cannot justify investments in low-income neighbourhoods, individuals with water connections sell water through standpipes or extensions to their neighbours and extended families. In Mali, 25% of Bamako’s water supply moves through residential resale. The households that resell water can recoup the costs of their connections while offering credit and personalized services to customers who cannot afford a connection or meet a monthly bill. Where groundwater is available and extending pipelines is costly, bulk water supply systems bring water from private wells to secondary vendors. Such vendors account for more than 30% of supply in Tegucigalpa, Honduras, in Guatemala City, and in Lima, Peru, and a growing share in Turkmenistan and Uzbekistan. In addition, small-scale network infrastructure systems provide house connections. For example, aguateros cover more than 20% of Asunción, Paraguay, with some 200 aqueducts drawn from ground wells, each system serving between 50 and 1,000 families. In Malang, Indonesia, a small-bore developer put together a private sewerage system that ended up covering more than 1,000 families. SSWAs have been able to address water needs of consumers who are not served by the formal network and at costs that are lower or comparable to supply by public utilities. These institutions exist in a variety of ambiguous legal and institutional environment. Providing legitimacy and recognising the SSWAs could help the public utilities reach out more effectively to the urban poor and those living in un-planned colonies.


Mainstreaming stakeholder participation

Summary

PPPs essentially involve a shift from input-based to outcome-based performance monitoring and entail a greater shift of operational control of projects from the public to the private sector. This requires a greater clarity on project outcomes and demonstration of consequent benefits, else such substantive shift is likely to encounter resistance from various stakeholders and even hostility from the groups. Further, experience with PPPs in Asia and globally, strongly suggests that views and concerns of stakeholders, processes and content of information sharing, and the level of communication have a significant influence on successful implementation of PPP projects. The desired outcomes of PPP program should be clearly articulated and translated into effective communication objectives and also keep message simple, uncluttered and focussed with need to recognise and leverage multiple communication channels.

Understanding stakeholders’ needs, concerns and interest at the preparatory stage of a PPP project is critical. For instance, early stage communication in Hubli-Dharwad 24x7 water supply in India assisted in dealing with widespread protests from citizens particularly on the perception that water supply has been ‘privatised to a foreign company’ and the fear of an abrupt increase in water tariffs. To overcome this, the implementing agency

Karnataka Urban Infrastructure Development Finance Corporation (KUIDFC) set up a Social Intermediation and Communication Strategy (SICS) Cell and recruited experts on community development, media management, etc., with the objectives of setting up institutional forums for interaction and consultation with stakeholders in order to resolve conflicts and explain the benefits of the project. In addition, Rural and Urban Development Association (RUDA), an NGO was appointed to carry out communication activities as per the approved action plan. Another case of reaping benefits of stakeholder engagement is Manila Water Company in the Philippines which provides clean, safe water and sewage services to approximately half of Manila’s population. When Manila Water acquired the East concession from the government operator, it launched a “Walk the Line” program in which all company staff – from managers to district level representatives – visited their customers, including residents of informal settlements, to consult with them on the delivery of these essential services to their community. Manila Water has established engagement plans for key NGO stakeholders, the media, and investors that include quarterly dialogues and visits to the company’s sustainable development and community projects.

Water is supplied through a variety of institutional arrangements that exist, both within public and private sectors. There are lessons to be learnt from all of them. The underlying system that drives incentives and accountability is more important to ensure efficiency service delivery rather than a choice between public and private sectors. Meeting the requirements of urban poor requires changing existing practices and adopting non-traditional practices which may be more flexible yet effective in delivering water to such consumers.


Attaining Access for All – Pro-poor policy and regulation for water and energy services, Asian Development Bank, 2010

Bringing water to your doorstep – Urban water reforms for the next decade, PwC and ASAPP Media Information Group, April 2011

Charting Our Water Future – 2030 Water Resources Group, 2009

Creating Effective Incentives for Water Reuse and Recycling, GE Power & Water, 2011

Enabling Water Services Delivery for the Urban Poor in Asia, USAID, 2006

Learning Lessons – Urban Water Supply Sector, Independent Evaluation, Asian Development Bank, 2011

National Water Services Industry Restructuring Initiatives, PAAB, Malaysia, 2010

Public Policy for the Private Sector, World Bank, 1998

Bibliography

Public-Private Partnership for Urban Water Utilities – A Review of Experiences in Developing Countries, Philippe Martin, World Bank, 2009

PPP projects in India – Compendium of case studies – Ministry of Finance, Department of Economic Affairs, GoI

Statistical Yearbook for Asia and Pacific 2011, UN MDG indicators database

Status Report on Integrated Water Resources Management and Water Efficiency Plans, UN Water, 2008

Success and Failures of PPP Projects – The World Bank, Europe & Central Asia Region, Warsaw, 2008

The Issues and Challenges of Reducing Non-Revenue Water, Asian Development Bank, 2010

Water Operational Plan 2011-2020, Asian Development Plan, 2011

Water utilities that work for poor people, WaterAid, 2009


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Thought leadership publicationsPwC possesses deep knowledge of issues confronting various stakeholders in water sector.

Water: Challenges, Drives and SolutionsOur latest publication suggests that three major areas need to be targeted for meeting water challenges – governance, financing and technological innovation.

Every drop counts –Water and Development: Challenges and opportunityIt captures the opportunities for advanced water technologies in India and addresses how water stewardship by stakeholders can help address the challenges.

Bringing water to your door step: Urban Water Reforms for the next decadeThis report analyses the issues faced by the urban water sector in India and lays out a reform agenda.

Improving your chances of successThe Water White Paper may drive industry change and new/different obligations, each imposing additional cost on water companies.

A risk-based approach to water regulationThis thought leadership publication highlighting the proposed changes in water regulation in UK and what this means for water companies.


Contacts

Kameswara RaoRegional International Development Assistance Partner India/South Asia region Hyderabad, India +91 (40) 6624 6688 [email protected]

John GibbsGlobal Water Supply Leader London, UK +44 (0) 20 721 23800 [email protected]

Ranen BanerjeeExecutive Director, Government Reform and Infrastructure Development (GRID) Gurgaon, India +91 (124) 330 6009 [email protected]

Mark RathbonePwC Asia Capital Projects and Infrastructure Leader Singapore, Singapore +65 6236 4190 [email protected]

Mario D’EliaInfrastructure Head Victoria, Australia +61 (3) 8603 6799 [email protected]

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Meeting the Water Challenges in Asian Cities: Up-Scaling Successful Practices

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