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Non-Revenue Water (NRW) and Cost Recovery in Urban India: Case of Bangalore

Maitreyee Mukherjeea

Namrata Chindarkarb

Jenny Grönwallc

aCorresponding Author: Institute of Water Policy, National University of Singapore, 469C Bukit

Timah Road, Singapore 259772; Email: sppmamu@nus.edu.sg

bLee Kuan Yew School of Public Policy, National University of Singapore, 469C Bukit Timah

Road, Singapore 259772

cStockholm International Water Institute, Linnégatan 87A, Box 101 87, 100 55 Stockholm,

Sweden

ABSTRACT

This paper examines the issue of non-revenue water (NRW) in urban India taking the city of

Bangalore as a case study. Using empirical evidence from a survey conducted among 601 low-

income households in Bangalore, we investigate the major sources of NRW for water utilities

and propose policy recommendations based on the analysis. Our key finding is that public stand

posts and public wells, which supply free water, are a non-trivial source of NRW. In addition, we

find that revenue generation from metered tap connections is sub-optimal. Further, we observe

potential revenue being shifted away from the public water utilities towards private providers as

several households pay for water obtained from neighbors, tankers, or other private sources.

Drawing upon our findings, we propose a new tariff structure for urban water utilities to

consider. We also review the implementation of pre-payment metering (PPM) for public stand

posts in other developing countries and its feasibility in Bangalore.

Key words | Increasing block tariff; Non-revenue water; Pre-payment metering; Urban water;

Volumetric pricing

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1. INTRODUCTION

The Planning Commission of India (2012) estimates that the country’s urban population

comprising 380 million people (as per 2011 census) is predicted to increase to 600 million by

2030. Rapid urbanization in India has been accompanied with severe resource constraints,

especially water. This poses a tough challenge for policymakers. While water demand

management has been at the core of most urban policy discussions, an issue that has not been

sufficiently addressed is that of non-revenue water (NRW). Formally, NRW is the ‘difference

between the volume of water put in the distribution system and the volume that is ultimately

billed to consumers’ (Kingdom et al., 2006). It comprises of real and apparent losses to the water

utilities. Real losses are caused by poor infrastructure, which results in losses from the raw water

source to the final consumer. Apparent losses on the other hand are associated with inadequate

metering, incompetent tariff structure, and unauthorized consumption (Alegre et al., 2000;

Frauendorfer et al., 2010).

In developing countries such as India, NRW is associated with ageing infrastructure, apparent

losses, and corruption (Gonzalez-Gomez et al., 2011). It is argued that poor management

capacity and weak institutions augment the losses for water utilities in these countries. Reducing

NRW requires skilled staff such as engineers and a crew of plumbers as well as managers with

autonomy and decision-making ability (Kingdom et al., 2006). Often, the decisions that need to

be made are politically unfavorable such as disconnecting unauthorized connections in urban

slums, which in India form critical vote banks. Moreover, it is argued that the water utilities are

particularly prone to corruption and political manipulation. As water utilities in India are

monopolistic government agencies, they suffer from problems of non-transparency and imperfect

information (Elshorst & O’Leary, 2005).

A further issue pertaining to NRW in urban India is that of tariff structure and cost recovery. The

main sources of revenue for water utilities are water taxes that are based on property values and

water user charges that are based on volumetric consumption (Singh et al., 2005). A study by the

World Bank and the National Institute of Urban Affairs (NIUA) found that of 260 cities and

towns surveyed in India, 36% implemented the fixed rate per household per month tariff

structure, which was the highest proportion. Only 6% implemented increasing block tariff (IBT),

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while only 2% implemented a combination of fixed rate and IBT (NIUA, 2001). In addition,

pricing or optimal tariff rate is also an issue. The NIUA study found that tariff structures set in

most cities do not reflect actual costs incurred. The average operating and maintenance (O&M)

cost in metropolitan cities is INR 15/m3. However, the typical water user charge is between INR

1.50 - 2.00/m3.1 The figures highlight the inefficient tariff structure and low cost recovery by

water utilities in urban India.

Even though the problem of NRW in urban India is acknowledged by policymakers, a significant

gap is the lack of empirical evidence at the household-level on the extent of NRW due to

apparent losses. In this paper, we aim to address this gap using the case study of Bangalore.

Using a household survey conducted by the Institute of Water Policy (IWP), National University

of Singapore in the urban slums of Bangalore in 2012-13 we examine whether public stand posts

and public wells are notable sources of NRW. We also assess whether water utilities are losing

revenue due to insufficient metering. To delve into other plausible reasons for NRW, we

examine whether revenue is being shifted away from water utilities towards private providers,

due to the poor quality or absence of supply.

The survey consists of a sample of 601 households in six wards. It focused only on households

residing in urban slums. This was because these households depend largely on public stand posts

and public wells, for which there are no water user charges.2 Further, these areas tend to have

inadequate metering and a high proportion of unauthorized connections. Our findings suggest

that public stand posts and public wells, which are provided by the water utility for free, are non-

trivial sources of NRW. In addition, we find that revenue generation from metered tap

connections is sub-optimal. We also observe potential revenue being shifted away from the

public water utility towards private providers as several households pay for water obtained from

neighbors, tankers, or other private sources.

1 The figures in the study reflect 2001 prices but are nevertheless useful for purposes of illustration. 1 Indian Rupee (INR) = 0.0169 USD as of May 30, 2014. 2 As will be discussed in subsequent sections, water provided through public stand posts and public wells has a high cost of production. While making explicit normative arguments is beyond the scope of this paper, we propose policy recommendations taking the equity aspect into consideration.

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Drawing upon our findings we propose policy options which can potentially help reduce NRW in

urban India more generally, as slum settlements and inadequate metering are common across

cities. Specifically, we propose a revised volumetric pricing model for domestic consumers,

which would recover the cost of production of water and ensure that the low-income households

are not burdened. In addition, we provide a review of pre-paid smart card water metering policies

from developing countries, which have been used for public stand posts. We argue that in

addition to generating revenue, these policy options are likely to induce conservation among

consumers.

Our recommendations are based on our findings from the survey and are plausibly different from

the course of action proposed by Bangalore’s water utility board. Interviews with officials from

the Bangalore Water Supply and Sewerage Board (BWSSB) suggested that there might be

eventual phasing out of public stand posts, replacing them with private metered connections for

each slum household, which would be billed under a new tariff structure. The feasibility of this

policy is unknown in the light of issues pertaining to illegal squatting and lack of proper home

ownership titles. While we acknowledge these concerns, we consider them beyond the purview

of our data and analysis.

This paper is organized as follows. Section 2 provides a brief overview of NRW in Bangalore

due to real losses, current tariff structure, and status of metering. Sections 3.1 and 3.2 present the

empirical analysis of NRW and discuss the results. Section 4 proposes policy options and section

5 concludes.

2. CURRENT UNDERSTANDING OF NRW IN BANGALORE

Over the past couple of decades, Bangalore has experienced rapid urbanization and population

growth, stressing its available water resources. Presently, the city’s water supply is largely

dependent on the Cauvery Water Supply Scheme, which was first commissioned in 1974, and

subsequently improved through stages I, II, III and IV (Table 1). Water is pumped to the city,

through a distance of around 100 kilometers and at an elevation of 500 meters. The water is

stored at T.K Halli reservoir, treated, and distributed to the city. This involves significant

expenditure on electricity, costing nearly INR 5 billion (109) (USD 82.4 million) annually

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(Central Groundwater Board, 2008). According to the Cauvery River Water Disputes Tribunal,

Bangalore can withdraw a maximum of 538 million m3 of water per year. At this level, the

average daily extraction limit is about 1425 MLD.3 With completion of the ‘Cauvery Stage IV

Phase II’ infrastructure scheme in 2012, the city is already pumping around 1410 MLD each day,

of which about 30% is lost to leakage, designated as NRW due to real losses (The Times of

India, 22 Feb 2013). Hence only about 900 MLD are received by the city, which is much less

than the current demand of about 1700 MLD (BWSSB, 2013).

Table 1. Projected provision of Cauvery Water Supply Scheme (CWSS) for Bangalore

Year of commissioning Stage of CWSS Potential supply (MLD)

1974 I 135

1983 II 135

1993 III 270

2002 IV, Phase I 270

2008 IV, Phase I 100

2012 IV, Phase II 500

Source: BWSSB

The city’s main water utility is the Bangalore Water Supply and Sewerage Board (BWSSB),

which is a government agency. Though the networks for surface water and sewage distribution

have gradually expanded beyond the city core, the BWSSB service area is essentially limited to

the city core and former city municipal councils (CMCs) under the Greater Bangalore Water and

Sewerage Project (GBWASP). About 110 former villages at the fringes remain under the

jurisdiction of Bruhat Bangalore Mahanagara Palike (BBMP), which is also a government

agency. The IWP survey revealed that the core area of the city receives better service with

regular Cauvery water supply, with the frequency being daily or every other day. However, the

situation changes as one moves towards the newly added non-core areas, where the supply by the

water utility board is unreliable.

3 1 MLD (million liters per day) = 1000 m3 per day.

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All BWSSB tap connections are claimed to be metered and water deliveries are charged

according to a fixed rate4. The tariff structure is different for domestic and commercial

consumers. Moreover, apart from the piped connections, there are monthly charges for bore

wells dug by individual households or commercial enterprises. The current domestic tariff

structure includes five consumption blocks and a separate flat tariff for apartments (Table 2).

This volumetric block tariff was last revised in February 2005.5 Since then, there have been two

electricity tariff hikes, resulting in a 46% increase in BWSSB’s power expenditures. Moreover, it

is estimated that the real incurred cost of production and distribution of Cauvery water to the city

is INR 32 per m3 (Times of India, 7 Jul 2013). A simple comparison of the cost of production

with the current tariff structure reveals that the revenue generated is inadequate to meet

BWSSB’s expenditure and deficits.

It is estimated that not increasing its water charges in accordance with electricity tariff hikes has

resulted in a loss of nearly INR 24 million from 2008-09 to 2011-12 for BWSSB. In spite of this

loss, BWSSB has undertaken several capital investments in developing infrastructure for

extension of the Cauvery Drinking Water project, Cauvery Stage IV Phase II project, and others6

(The New Indian Express, 11 May 2013).

Figure 1 graphically summarizes our preliminary analysis using secondary sources of total water

loss starting from extraction of raw water from Cauvery to its delivery to households in the city.

While transferring raw water (approximately 1410 MLD) from Cauvery to Bangalore city, 30%

is estimated to be lost in transaction (The Times of India, 22 Feb 2013). Provision of water, at no

charge through public stand posts and public wells, accounts for about 20% of the water

distributed in Bangalore (Connors & Brocklehurst, 2006). Hence, public stand posts seem to be

potential sources of NRW, which we will examine further. Additional sources of unaccounted

4 It is estimated that BWSSB has about 800,000 connections currently. From these, it generates INR 450 million in revenue, of which INR 350 million it has to spend as electricity costs and INR 100 million are other operating costs (The New Indian Express, 17 Oct 2013). 5 A revised tariff only for apartments was announced on July 7, 2013. However, the price blocks for the majority of consumers have not been revised. 6 The funds to offset deficit (due to subsidies and insufficient revenue collection) and undertake new projects have mostly come from government grants, BCC (Beneficiary Capital Contribution), market borrowings, and other international agency loans like those from Japan International Cooperation Agency (JICA), Japan Bank for International Cooperation (JBIC), World Bank etc. [BWSSB website: http://bwssb.org/current-projects-2/ ; http://bwssb.org/cwss-stage-iv-phase-2/] [AQ2]

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losses during distribution include leakage, illegal connections, and faulty or defunct meters for

which there is no official estimate available. Further, there is the issue of the inefficient tariff

structure that fails to ensure minimum cost recovery. In subsequent sections of this paper, we

examine in detail the revenue losses from different water supply sources.

Table 2. Current domestic water tariff structure of BWSSB

Water delivered (m3/month) Rate (INR per m3)

0-8 6

8-25 9

25-50 15

50-75 30

>75 36

High rise building/apartments residents 19*

Source: BWSSB

Note: There is a minimum monthly charge of INR 48, which is collected from all domestic customers.

*Revised tariff for apartments as announced on July 7, 2013. Tariff charged as flat rate per m3 of water.

<Figure 1 about here>

3. EMPIRICAL ANALYSIS OF NRW

3.1 Data and results

The IWP survey was conducted in six wards of Bangalore city to ensure representation of urban

low-income households from the city core as well as the non-core areas. A sample of 100

households was randomly drawn from each of the six wards - Halsoor, Hebbal, Vijinapura,

Kengeri, Shettihalli, and Bellanduru (Figure 2 and Table 3).

<Figure 2 about here>

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Table 3. Characteristics of the six wards included in the IWP survey

Ward Estimated

population

Area

(sq.kms) Level of urbanization

Water Utility

Board

Bellandur 20,576 26.4 former villages BBMP

Halsoor 35,891 1.7 core city area BWSSB

Hebbal 24,161 1.2 core city area BWSSB

Vijinapura 35,087 2.0 former CMC BWSSB

Shettihalli

28309

9.0

partly former villages

and partly former CMC

BBMP &

BWSSB

Kengeri 24,870 4.8 former TMC BWSSB

Source: BBMP website

Note: BWSSB- Bangalore Water and Sewerage Supply Board; BBMP- Bruhat Bengaluru Mahanagara Palike;

CMC- City Municipal Corporation; TMC- Town Municipal Corporation.

Table 4 summarizes the various sources of water reported by the households. More than half of

the survey respondents in Halsoor, and almost two thirds of those in Hebbal, report having

access to an individual tap connection, providing them with water from the Cauvery River. The

rest of the wards are mostly supplied by groundwater from bore wells (either through public

stand posts or individual connections). The proportion of households obtaining water from a

public stand post is highest in Kengeri (60%) and lowest in Vijinapura (4%). Although fair

proportions of the Vijinapura households (22%) report obtaining water from tap connections

supplied by a bore well, the public supply system at the time of the survey was poor (being

supplied once or twice a month), forcing respondents to buy water from private wells or tankers.

Another distinct water supply source found only in Vijinapura was private tankers sent by

politicians. Respondents reported getting water free of charge from tankers supplied by

politicians contesting the May 2013 state assembly elections.

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Table 4. Sources of water reported by respondents

Ward Households

with bore well

supplied tap

connection (%)

Households with

Cauvery water

supplied tap

connection (%)

Households

depending

upon public

stand posts (%)

Households

depending

upon private

suppliers (%)

Halsoor 0 58 42 0

Hebbal 7 64 20 12

Vijinapura 22 5 4 92

Kengeri 17 16 60 15

Bellandur 5 2 31 65

Shettihalli 24 2 30 33

Source: IWP survey of households, N=601

Note: The water sources are not unique and therefore the numbers may not add up to 100%.

Table 5 summarizes the extent of metering among households connected to the Cauvery water

tap connections while the primary water source for the households and whether they pay for it is

summarized in Table 6. Proportion of metered tap connections is highest in Hebbal (87%) and

Vijinapura (81%). However, it is relatively low in Halsoor (66%) and much lower in Kengeri

(39%), Bellandur (29%), and Shettihalli (12%).

The three main primary sources of daily water supply that emerged were individual tap

connections (192 households), public stand posts (176), and private providers (180). Of those

households relying primarily on an individual tap connection, 63% report paying for water, while

61% of those relying on private providers pay for their water. It is important to highlight here

that the 63% who reported paying for individual tap connection are the ones who regularly pay

water bills.7 Only 2.3% of the households relying primarily on a public stand post report paying

for water, while a small number relying on public wells did not pay for water at all. It was noted

that a substantial proportion of households relying on private sources did not have to pay for

7 The remaining households in the sample were either yet to get a metered connection or had faulty meters and therefore were not paying water bills. There were also respondents who were receiving monthly bills but complained that the water supply was insufficient and too irregular. Residents paying bills reported the value to be ranging from INR 50-200. Taken as a proportion of the total sample of 601 households, approximately 20% were paying regular water bills for their individual metered connections.

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water as they were land owners themselves and owned private bore wells inside their household

premises. Another category of households depending on private sources were tenants, who

reported that water charges were incorporated in their rents. A few households also reported

receiving water from neighbors, temples, or construction sites for free as a gesture of goodwill

and therefore did not pay for it.

Table 5. Proportion of metered tap connections

Ward % Metered % Non-metered

Halsoor 66 34

Hebbal 87 13

Vijinapura 81 19

Kengeri 39 61

Bellandur 29 71

Shettihalli 12 88

Total 63 37

Source: IWP survey of households, N=601.

Table 6. Primary water sources and payment status

Primary source of daily water supply Number of respondents reporting the source as

primary, and the proportion of those respondents

who pay for water from that source

Number Proportion who pay

(%)

Individual tap connection 192 63.0

Public stand post 176 2.3

Public well 8 0

Private provider 180 61.1

Combination 43 46.5

Total 599

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Source: IWP survey of households, N=599. Of the 601 households interviewed, two households in Bellandur report

a nearby lake as their primary water source. Combination refers to those households which access water from both

public as well as private sources

In Table 7 we examine the distribution of households by income category and whether they pay

for accessing water from public sources, that is, water supplied by water utility boards. We

observe that within each income category a majority of the households do not pay for accessing

water from public sources. This is true even for households with income of INR 30,000 and

above. Interestingly, the proportion of households paying for water from public sources

decreases as we move to higher income categories. A plausible reason could be that many

households in the higher income categories own private bore wells and therefore may not be

accessing water from public sources. However, the relationship between income category and

paying for public water sources is not statistically significant as the chi-squared statistic is 9.12

with a p-value of 0.17.

Table 7. Distribution of households obtaining water from public sources by income and their

payment status

Income category

(INR per month)

Number of respondents in each income category, and the

proportion of those respondents who pay for water from

a public water source

Number Proportion who pay (%)

0 to 5,000 88 36.4

5,000 to 10,000 175 37.7

10,000 to 15,000 78 37.2

15,000 to 20,000 37 18.9

20,000 to 25,000 8 12.5

25,000 to 30,000 11 18.2

More than 30,000 10 20.0

Source: IWP survey of households, N=407. These data pertain to households with access to public water sources,

which include individual connections, public stand posts, and public wells.

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In Table 8, we look at the distribution of households by income category and whether they pay

for accessing water from private providers like tankers, neighbors, and other sources.

Interestingly, we observe that even in the lowest income categories the proportion of households

paying for water from private providers is either higher or nearly the same as that of those paying

for accessing public water supply. Therefore, there is some evidence that in the absence of public

water supply, lower income households are likely to pay to access water from private providers.

Table 8. Distribution of households obtaining water from private sources by income and their

payment status

Income category

(INR per month)

Number of respondents in each income category, and the

proportion of those respondents who pay for water from

a private water source

Number Proportion who pay (%)

0 to 5,000 38 55.3

5,000 to 10,000 105 47.6

10,000 to 15,000 60 55.0

15,000 to 20,000 18 38.9

20,000 to 25,000 10 50.0

25,000 to 30,000 6 33.3

More than 30,000 12 25.0

Source: IWP survey of households, N=249. These data pertain to households with access to a private water supply.

3.2 Discussion

Our findings reveal that only 63% of all households with individual connections are metered.

Among the six surveyed wards, Halsoor and Hebbal have the highest proportion of households

with tap connections supplying Cauvery water. The other four wards have less than 10% of

households with access to Cauvery water tap connections (except Kengeri, with 16%).

Vijinapura, which lies just at the border of the core area, was found to be the most water scarce

with inadequate public water supply through tap connections and even the public stand posts

(through bore wells) provided water to the residents only once or twice a month, leading to high

dependency on private providers.

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Our empirical analysis finds that irrespective of regularity of supply or access to surface or

groundwater, nearly 30% of all households depend upon public stand posts as their primary or

fallback water source, and nearly all pay no water user charges, thus making it a non-trivial

source of NRW. The magnitude of this loss seems even more significant in the core areas

because the public stand posts and public wells here are being fed by Cauvery water, whose cost

of production is estimated to be INR 32/m3. In addition, we also find that nearly 37% (Table 6)

of the households in the sample with metered tap connections do not pay any water user charges.

In-depth responses revealed that this is either due to faulty meters or non-installation of meters at

the time of the survey. Some of the households were also suspected to have illegal connections.

Many households were highly unsatisfied because of irregular supply and hence felt no necessity

to pay a water tariff. Thus, even metering does not seem to guarantee revenue generation for the

water utility boards in Bangalore.

We further find that households in the lowest income category pay for water from private

providers if they have no access to water from public sources. In-depth responses revealed that

on average households accessing water from neighbors or other private sources pay INR 2 per 20

liters (equal to INR 100/m3). This is approximately 17 times more than the minimum tariff

charged by BWSSB, which is INR 6/m3 of consumption (BWSSB website). Those who buy

tanker water pay even more, approximately INR 500 for 4 m3 (equal to INR 125/m3) (The New

Indian Express, 15 Feb 2013). Therefore, poor service provision seems to be shifting potential

revenue away from the water utility boards towards private providers thus augmenting NRW.

4. POLICY RECOMMENDATIONS

Based on our findings, we argue that a plausible solution to reducing NRW is appropriate pricing

of public water supply. Having identified public water sources as a non-trivial source of NRW,

we focus on how the water utility boards might generate more revenue and at the same time

ensure equity in access while inducing conservative behavior among consumers. Our

recommendations are based on our findings from the analysis. Since the direction of the official

policy is unknown, we assume two possible scenarios:

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Scenario 1: the water utility board decides to phase out all public stand posts and replace them

with individual connections under a new tariff structure that covers the cost of production and

generates a fair profit.

Scenario 2: the stand posts remain but the water purveyor decides to meter them to generate

revenue, along with individual metered connections for those who can afford.

4.1 Scenario 1: revised volumetric pricing structure

Previous studies suggest that subsidized water prices fail to benefit the low-income households

for whom the subsidy was originally designed. This is because very few of these households

have metered tap connections. Therefore, it is the middle and higher income households who

enjoy the subsidy (Mathur & Thakur, 2003). Further, low-income households tend to have lower

levels of water consumption. Therefore, broad consumption blocks turn out to be inefficient for

volumetric pricing as broader consumption blocks with lower tariffs means that most of the

consumers, including the middle and higher income households would fall within the first or

second block. When households, which can otherwise afford to pay more, are supplied with

highly subsidized water, the water utility does not generate adequate revenue as most consumers

fall under subsidized broad consumption blocks. This results in inefficiencies for the water

utility, and can consequently have an adverse effect on its service quality (Komives et al., 2005).

Broad consumption blocks are also inefficient from the water conservation perspective as there is

no monetary incentive to utilize less water. The purpose of our proposed volumetric water

pricing model therefore is to generate enough revenue for the water utility to cover cost of

production while also having enough funds for maintenance and expansion works. At the same

time, we bear in mind the affordability of water prices for low-income households and their

ability to pay. A graphical representation of our model is provided in Figure 3.

Our volumetric pricing model heavily draws upon the model proposed by Wichelns (2012). The

salient feature of the model is the differentiation of blocks for low and higher income

households. Under this model, the water utility’s revenue is estimated to be:

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃1𝑉1 + 𝑃2𝑉2 + 𝑃3𝑉3

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where, 𝑉1 is the volume of water consumed by low-income households in Block 1, 𝑉2 is volume

of water consumed by higher-income households in Block 2, and 𝑉3 is the volume of water

consumed by higher-income households in Block 3. 𝑃1, 𝑃2, and 𝑃3 are prices of water in each

block. As against the current block pricing implemented by BWSSB, this model is designed to

restrict only low-income households within parameters of Block 1, while others pay (at non-

subsidized rates) accordingly for their higher consumption.

It is critical that the volume of water consumption as well as the price under Block 1 be optimal

for the low-income households. The optimal value of 𝑃1 is computed as:

𝑃1 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑊𝑎𝑡𝑒𝑟 𝑖𝑛 𝐵𝑙𝑜𝑐𝑘 1 − 𝑆𝑢𝑏𝑠𝑖𝑑𝑦

The optimal value of 𝑃2 then requires that the water utility be able to cover the cost of production

as well as the subsidy offered under Block 1. We term this the recovery block. Therefore, the

optimal value of 𝑃2 is computed as:

𝑃2 = 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 𝑖𝑛 𝐵𝑙𝑜𝑐𝑘 1 + 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑊𝑎𝑡𝑒𝑟 𝑖𝑛 𝐵𝑙𝑜𝑐𝑘 2

As the water utility needs to generate revenue enough to cover cost of production as well as

generate profits to support maintenance and expansion works, the optimal value of 𝑃3 is

computed as:

𝑃3 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑊𝑎𝑡𝑒𝑟 𝑖𝑛 𝐵𝑙𝑜𝑐𝑘 3

+ 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑡𝑜 𝐹𝑎𝑐𝑖𝑙𝑖𝑡𝑎𝑡𝑒 𝑀𝑎𝑖𝑛𝑒𝑛𝑎𝑛𝑐𝑒 𝑎𝑛𝑑 𝐸𝑥𝑝𝑎𝑛𝑠𝑖𝑜𝑛

<Figure 3 about here>

We draw upon our empirical findings, which suggest that there is revenue collection potential

even among the low-income households, to simulate different tariff structures. For designing the

appropriate blocks, we extrapolate that these low-income households, who currently pay nearly

INR 100/m3 to private providers would have the ability to pay at least INR 16/m3, which is 50%

of the INR 32/m3 cost of production. Using these figures and applying our proposed model, we

generate revenue collection simulations for the water utility boards using subsidy levels of 40%,

50%, and 60%.

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From the IWP survey it was found that the average monthly water consumption of low-income

households is approximately 43.2 LPCD.8 For the purposes of our model, we assume average

monthly water consumption of low-income households to be 50 LPCD. Extrapolating from this,

the total households average monthly consumption would be between 6 to 9 m3, depending on

household size of 4 or 6 members. We use 0-8 m3 as the volume of water that would be

subsidized under Block 1 as this justifies our calculations and is also the lowest block being used

in the current BWSSB tariff model.

To determine the volume of water under Block 2, we draw upon the guidelines prescribed by

Central Public Health and Environmental Engineering Organization (CPHEEO), which falls

under the purview of the Ministry of Urban Development of the Government of India. According

to CPHEEO (1999), each urban Indian consumer is entitled to 135 LPCD of water, which goes

up to 150 LPCD for metro cities with full sewerage coverage. Using these limits, the average

household water requirements for 4 and 6 member families have been estimated in Table 9. For

an average 4-member family we estimate 16.2 m3 as the optimum requirement. Therefore, we

determine the volume of water under Block 2 to be 9-16 m3. Beyond 16 m3, the household would

be over-consuming as per CPHEEO guidelines and therefore we estimate 𝑃3 as twice the cost of

production, that is, INR 64. This would enable the water utility to generate a profit for

maintenance and expansion as well as induce conservation. Table 10 presents the simulated

prices under our volumetric pricing model. It is important to highlight that the tariff blocks in our

proposed model are based on basic consumption levels and not on income levels. Therefore, the

high-consumption households would cross-subsidize the low-consumption households. While

our model is not income-based, we argue that it would still benefit a large proportion of the low-

income households as they tend to consume less water in comparison to high-income

households.9

8 LPCD- Litres per Capita per Day 9 Low-income families who may not necessarily benefit from the subsidy are those with a large family size or multiple low-income families residing in the same dwelling.

17

Table 9. Estimated levels of optimal monthly water consumption for 4 and 6-member households

depending on their daily requirements

Water requirement

(LPCD)

4 member family

(m3/month)

6 member family

(m3/month)

50 6 9

135 16.2 24.3

150 18 27

Source: Authors’ calculations

Table 10. Simulated prices per m3 under each block for proposed volumetric pricing model

Source: Authors’ calculations

Note:

All prices are estimated using INR 32/m3 as the cost of production.

𝑷𝟏 denotes water price (in INR per cubic meter) in Block 1 with subsidized rates.

𝑷𝟐 denotes water price (in INR per cubic meter) in Block 2 which covers cost of production of Block 2 and the

subsidy given in first block. So this is the recovery block.

𝑷𝟑 denotes water price (in INR per cubic meter) in Block 3 which is twice the cost of production and covers cost of

production of Block 3 and also generates profits for maintenance and expansion.

The argument underlying our revised pricing structure is that if water tariffs cannot cover the

minimum cost of provision, then there is little incentive and lesser resources for the water utility

to maintain and expand its infrastructure resulting in poor service-delivery. This augments the

real losses for the water utility. Li (2013) observes that when the deficit incurred due to subsidies

extended to low-income households is not totally covered by external or government agencies,

utilities tend to lower service quality to cut costs. This in turn discourages households to invest in

metered connections and to pay water bills regularly. As a result, even the apparent losses

Proposed

Scheme

Subsidy given under Block

1

𝑷𝟏(0-8 m3)

[in INR]

𝑷𝟐(9-16 m3)

[in INR]

𝑷𝟑(>16 m3)

[in INR]

Block 1 Block 2 Block 3

Scheme I 60% 13 51 64

Scheme II 50% 16 48 64

Scheme III 40% 20 44 64

18

increase. Proper pricing of water also serves to encourage consumers to use water judiciously

and reduce wastage. This would result in decreased demand thus reducing pressures on supply,

curtail energy expenditure thus decreasing cost of production, and consequently generate more

savings for the water utility.

The survey also found that as many as 15-18 households were sharing water and bill charges

from metered tap connections. This essentially means that a large volume of water is being

consumed but only one meter is being charged at a flat rate providing no incentive for optimally

using or conserving water. The proposed pricing model would also discourage such sharing of

connections as households will not get subsidized rates if their consumption is higher.

Based on the proposed pricing in Table 10, we simulate the revenue generated per household

under each block in Table 11. As is observed, from Block 3 onwards, our model is able to raise

sufficient revenue to cover costs and generate profits for the water utility. In terms of pricing

water for the middle and higher income groups, our model is a lot more economically efficient as

compared to the current (revised) tariff for apartment blocks, which is a flat tariff of INR 19/m3

for apartments. At the current rate, the water utility would still not be able to cover the cost of

production, let alone generate profits.

19

Table 11. Simulated per household cost of production of water and revenue collected under each

block

Block 1 Block 2 Block 3

8 m3/month 16 m3/month 18 m3/month 24 m3/month 27 m3/month

Calculation 8*𝑷𝟏 8*𝑷𝟏+8*𝑷𝟐 8*𝑷𝟏+8*𝑷𝟐+2*𝑷𝟑 8*𝑷𝟏+8*𝑷𝟐+8*𝑷𝟑 8*𝑷𝟏+8*𝑷𝟐+11*𝑷𝟑

Cost of

production10 256 512 576 768 864

60% subsidy 102 512 640 1024 1216

50% subsidy 128 512 640 1024 1216

40% subsidy 154 512 640 1024 1216

Source: Authors’ calculations

4.1.1 Calculating the effectiveness of the proposed volumetric pricing model

In order to determine whether our proposed pricing model would be effective, we use the

following population distribution in the city of Bangalore – 20% urban poor or low income, 50%

middle income, and 30% higher income (Connors & Brocklehurst, 2006) – and extrapolate the

revenue that would be generated, against the simulated per household cost of production of water

and monthly bills collected. Interviews with BWSSB officials revealed the number of metered

tap connections in Bangalore to be 0.7 million. For purposes of simplicity, we assume that there

are 1 million connections under BWSSB. Since we do not know the exact monthly water

consumption of these households, we assume that the low-income households consume within

the volume under Block 1 while the middle and higher income groups consume a mean value

between the volume ranges of Block 2 and Block 3. The estimated total revenue generated can

therefore be computed as shown in Appendix 1. The net revenue generated under each of the

subsidy schemes is positive and ranges from INR 33.2 million to INR 43.6 million. Thus, in

terms of positive returns, our proposed model does seem to be effective.

10 Cost of production is taken to be INR 32/m3, which is the current cost of production to get Cauvery water.

20

4.2 Scenario 2: pre-payment metering (PPM): an option to consider

If the water utility decides not to phase out public stand posts and public wells, it is essential to

consider alternative policy options especially given our empirical finding that public stand posts

and public wells contribute significantly to NRW. One such option is the pre-payment meter

(PPM), where the public or community water source is also metered. As there is no evidence

from urban India on metering community water sources, we draw upon cases from other

developing countries and evaluate its feasibility.

PPMs for electricity, gas, telecom and water, have been widely utilized by governments in the

developing world as an effective tool to recover costs, shorten realization time of profit, and

induce conservational attitudes among customers. PPM with its smart metering technology has

dual benefits. First, it avoids non-payment and consumer debts as consumers pay upfront for the

water. And second, it captures and stores the water usage information of each registered

consumer in its data logging system thus enabling the water utility to monitor and benchmark

consumption (Stewart et al., 2010).

PPM is being actively adopted in many developing countries such as South Africa, Uganda,

Brazil, and Bangladesh. Under this technology, consumers are provided with a registered card,

which needs to be topped up with cash balance. Each time they want to draw water from a tap,

they swipe their card and enter the amount of water they wish to draw. Water is then dispensed

and charged accordingly. Given the technology, a third benefit of this system that we identify is

disqualification of illegal connections and prevention of meter tampering.

In South Africa, PPM for public standpipes has been in operation since 1996. In 2003, PPM was

introduced for urban households in Johannesburg. The main purpose of the policy intervention

was to cope with the problem of over-supply and lack of ownership of water consumption by

residents. Here the residents were entitled to a monthly free supply of 6 m3, after which they

were required to pay for every additional m3 of water consumed. This indeed led to much less

usage of water by households, as many tried to consume within the free limit. Similarly in

Palmas, Brazil, installation of PPM lead to a 38% decrease in water consumption and 56% dip in

monthly water bill (Ruiters, 2007).

21

Berg and Mugisha (2010) use optimization models to show that in Kampala, Uganda, PPM

public stand posts have been successful in meeting financial limitations (low investment) and

social objectives (serving larger populations) while ensuring regular revenue collection for the

water utility. They conclude that PPM is an effective technological tool for serving the urban

poor. In Barind district of Bangladesh, Barind Multi-purpose Development Authority (BMDA)

has introduced PPM for irrigation water. Though it is mainly an energy measuring unit, this

scheme has helped in proper management of groundwater draft. The user pays upfront for

electricity consumption and hence tends to use optimal amount of water (Saiful, 2013).

Even though there are definite advantages to PPM, in South Africa specifically, it has received

some criticism due to procedural lapses in poor neighborhoods such as Orange Farm and Phiri.

The cause of discontent was that each household was entitled to only 6 m3 of water per month

irrespective of the number of people sharing one smart card. The Johannesburg High Court ruled

that as per basic human rights, each person within a household should be entitled to 1.5

m3/month and ordered changes in the policy accordingly (Bond & Dugard, 2008). Therefore, the

issue of fair distribution is critical for successful implementation of PPM.

4.2.1 Feasibility of PPM for public stand posts in Bangalore

As suggested by our findings, a significant portion of the water supplied to the city of Bangalore

is in fact NRW distributed through free public stand posts and public wells. As a measure to

control these losses, BWSSB started a new service delivery scheme in slums in 2000. With the

help of local NGOs and support from donor funds, they are attempting to bring every slum

household under their coverage of metered tap connections (Connors & Brocklehurst, 2006). Our

interviews with BWSSB officials revealed that once this project is completed, all public stand

posts in the city would be sealed and shutdown.

While the project undertaken by BWSSB is rational from the revenue generation perspective, it

seems less feasible in view of land legalization issues. We found in our survey that many of the

households in the slums are non-notified. Many are merely temporary settlements of laborers

clustered in tents (without permanent walls and roof), which do not fall under the category of

slums. Such temporary laborers often rely either on public stand posts or private tanker supply.

22

The question that therefore arises is how the water utility board would provide individual

metered connections to these illegal and temporary settlements.

A further issue with the BWSSB metering project for slums is the application and installation fee

that the urban low-income households need to pay. Currently, BWSSB charges INR 5000 to

install a new metered connection. Moreover, the cost of laying out and extending the metered

pipeline inside the house has to be borne by the household. From the in-depth responses in the

IWP survey, we found that households expressed discontent as even after getting the metered

connection they could not draw water. This was because they needed a pump to generate the

necessary water pressure and it was not affordable for them to invest in a pump. Raghupati and

Foster (2002) observe that in many Indian cities the average official connection cost is USD 20,

while practically the expenditure needed for expansion of services per household is around USD

150. But even after receiving considerable subsidies, many low-income households cannot afford

to bear charges of individual piped connections. Therefore, the question of affordability for

metered tap connections among the urban low-income households is a critical issue that the

water utility boards need to consider.

In comparison, PPM might be a more feasible option. The stand posts are already installed in

several urban slum settlements. Drawing upon similar interventions in Africa, the estimated cost

of installing a PPM is approximately USD 100. The tariff structure for PPMs could be similar or

lower than our proposed volumetric pricing for metered tap connections. PPM would lessen the

burden of paying for individual connections for the urban low-income households. Instead, they

can share the costs with their neighbors and the community while having individual registered

smart cards. From the perspective of the water utility board, they would be relieved from their

task of legalizing several slum households so that they can be brought under the piped network

expansion scheme (Connors & Brocklehurst, 2006).

5. CONCLUSION

Cities in India are facing complex water supply and allocation problems. Reducing NRW is the

biggest challenge faced by the water utility boards. In this paper, we examined whether public

stand posts and public wells are notable sources of NRW in Bangalore. Our analysis using a

23

survey of 601 low-income urban households indicates that public stand posts and public wells,

which supply free water to the poor, indeed are non-trivial sources of NRW. Around 30% of the

households in our sample depend upon public stand posts as their primary or fallback water

source, and nearly all pay no water user charges. While it might be assumed that metering will

ensure revenue collection, we find that nearly 37% of the households in our sample with metered

tap connections do not pay any user charges owing to faulty or absence of metering.

Further, we also observe that potential revenue from low-income households is being shifted

away towards private providers. Households living in wards where water service delivery was

very poor depended on neighbors, tankers, and other private suppliers and paid nearly 17 times

more than the BWSSB water tariff for the same amount of water.

To enable water utility boards to recover cost more effectively, we propose a volumetric pricing

model that would likely reduce NRW. As the water utility is able to reduce apparent losses,

consequently they would be able to invest in infrastructure effective in reducing real losses too.

The current tariff structure is insufficient to cover the minimum cost of provision. Therefore, our

proposed model is designed in a way to reduce the price burden on the urban low-income

households while discouraging the middle and higher income households from free-riding on the

water subsidy. The key feature of our model is that since low-income households consume less

water, the subsidy is levied only on a narrow block of water consumption so as to prevent the

better off households from consuming water under the subsidized block. We also recommend

narrowing subsequent blocks of consumption so that wasteful consumption of water is

discouraged. Thus, the model satisfies the goals of efficiency, equity, and sustainability (both

from a resources as well as financial perspective). We also test the efficiency of our pricing

model and find that it is likely to generate a profit under different subsidy scenarios.

Further, we propose that instead of sealing off public stand posts and naively moving towards

metering every urban poor household, the urban water utility boards in India could consider

metering the stand posts on a pre-payment basis, taking lessons from other developing countries

such as South Africa, Uganda, Brazil, and Bangladesh. This would enable cost-sharing among

the low-income households while generating necessary revenue for the water utility. Ultimately,

24

the effectiveness of these policies hinges upon institutional reform as well as service

improvements.

25

APPENDIX

Appendix 1. Computation of total revenue generated from proposed pricing model

Income

group

Number of

connections

Average monthly

bill

Average cost of

production

Total

Revenue Total Cost Net

(millions) (million

INR)

(million

INR)

(million

INR)

60% subsidy

Low-income .2 102 256 20.4 51.2 (30.8)

Middle-

income .5 (512+640)/2=576 (512+576)/2=544 288 272 16

Higher-

income .3 (640+1024)/2=832 (576+768)/2=672 249.6 201.6 48

Net revenue

(million INR) 33.2

50% subsidy

Low-income .2 128 256 25.6 51.2 (25.6)

Middle-

income .5 (512+640)/2=576 (512+576)/2=544 288 272 16

Higher-

income .3 (640+1024)/2=832 (576+768)/2=672 249.6 201.6 48

Net revenue

(million INR) 38.4

40% subsidy

Low-income .2 154 256 30.8 51.2 (20.4)

Middle-

income .5 (512+640)/2=576 (512+576)/2=544 288 272 16

Higher-

income .3 (640+1024)/2=832 (576+768)/2=672 249.6 201.6 48

Net revenue

(million INR) 43.6

Source: Authors’ calculations

Note: We assume a maximum average consumption of higher-income households, who typically have larger living

spaces and modern sanitation, to be 24 m3/month.

26

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Received 30 May 2014; accepted in revised form 21 September 2014. Available online

29

FIGURES

Figure 1. Unaccounted water loss and water available for revenue collection

Source: Authors’ analysis using secondary sources

1 indicates amount of water drawn from the Cauvery River at source, of which approximately 30% is lost in

transmission.

2 indicates water that is supplied through the city distribution system, of which nearly 20% is lost as NRW through

public stand posts.

3 indicates water left to be priced for revenue out of which an unknown proportion is lost due to leakages, illegal

connections, and faulty or defunct meters.

1 2 3

water lost 423 197

available water 987 790 790

0

200

400

600

800

1000

1200

1400

1600vo

lum

e o

f w

ate

r (M

LD)

Illustration showing available water to be charged

?

?

30

Figure 2. Location of survey wards

Source: Adapted from BBMP zone map

31

Figure 3. Graphical representation of increasing volumetric water pricing model

Source: Adapted from Wichelns (2012)

Note: Price 𝑃 is a step function of the volume of water consumed, 𝑄. 𝐶𝑃 is the cost of production which remains the

same for all blocks. 𝑃1, 𝑃2, and 𝑃3 represent the water tariff charged at each subsequent block of consumption. The

shaded area provides the total loss or gain