Regulation of Urban Water and SanitationMatching Sectoral Challenges with

Regulatory Opportunities

Dr. Subodh Wagle,

Dean, School of Habitat Studies, TISS,

Coordinator, ReLi-Group, Prayas

Mr. Pranjal Deekshit,

Doctoral Candidate,

School of Habitat Studies, TISS,

Sr. Research Associate, ReLi-Group, Prayas

Overall Strategy of the Presentation

Lessons from Regulatory Theory & Practice in India

(Part A)

Opportunities Provided by Regulatory Design (Part B)

Sectoral Challenges in Urban Water and Sanitation (Part C)

Recommendations for Regulatory System in UWS Sector (Part D)

Complexities to be Addressed

Way Forward

Part A

Learning from Theory and Practice of Regulation in

India

Regulation: The Fundamentals

• Three Basic Governance Functions: (a) Decision-Making, (b) Implementation (of Decisions) and (c) Regulation

• Regulation Function (Classical Understanding): Regulation involves ensuring adherence to rules during ‘Decision-making’ and ‘Implementation of Decisions’

– Core Objective: Protecting and Promoting the public interests

– Public Interest : Sum total of broader and larger interests of society as whole and (private) interests of the vulnerable sections in particular

• Regulatory System: System comprising policy framework and institutional structure for regulation

• Regulation (Post-Reform Understanding): Classical Regulation Function plus Decision-Making (especially techno-economic and financial)

Location of Regulation in Governance?

Basic Governance Functions

Decision-Making Implementation Regulation

Broad Policy Making

(Substantive Values)

Non-Value Policy

Decisions

Monitoring

Routine Executive Decisions

Implementation of Decisions

Ensuring Compliance

Government (Centre/State)

Independent Regulator

Public /Private /PPP Utility OR ULB

Independent Regulator

New Post-Reform Structure (Proposed)

Framework for Assessment

Process of Regulatory Design• Why Regulation?

– Rationale for Regulation (Various Options)

• What to Regulate? What for?

– Areas of (Regulatory) Intervention and Objectives for Intervention (Various Options)

• Who Regulates?

– Organizational Forms and Structures of Regulatory Agency (Various Options)

• How to regulate?

– Process Aspects of Regulatory Functioning and also of Regulatory Design

Why Regulation? : Options for Rationales

• Controlling Natural Monopoly: Unavoidable Monopoly due to the essentially monopolistic nature of the sector

• Controlling Political Expediency/ Opportunism: Control on opportunistic / irrational / anti-public decisions due to partisan politics or politics of patronage (given the Indian context)

• Ensuring Techno-economic Rationality: Control for Ensuring Rational Techno-economic Decisions and Their Implementation

• Facilitating Private Investment / Participation

• Ensuring Social Equity

• Ensuring Quality and Service Standards

• Ensuring Environmental Considerations

THE OPTIONS NOT EXCLUSIVE AND COULD BE COMBINED

What and What for of Regulation:Areas of Interventions and Objectives

• Allocation or Rights to Water

• Tariff (Bulk and Retail)

• Obligations and Conditionalities (Sanitation)

• Sectoral Planning and Review

• Approval and Review of Projects

• Regulation of Private Participants (Entry-level and Later)

• Groundwater Recharge and Extraction

• Water Conservation and Pollution Control

• Quality and Standards of Services

• Grievance Redressal and Dispute Resolution

Who of Regulation?Organizational Model

1. Unitary Regulatory Model: All Sectoral Governance Functions, including Regulation by Government Agencies

2. Dualist Regulatory Model: Regulation by an IRA and the other Sectoral Governance Functions by Government

3. Monitoring, Oversight, Compliance Regulator

4. Advisory Regulatory Body

– ‘Weak’ or ‘Strong’

5. Conflict resolution Body

Options:

Design Features for Organizational Models• Levels of

– ‘Specificity (Exactness)’ of Substantive Values (as specified in the act) (Options: Very High to Low, or Specific to Vague)

– Key Role Allocated (to Regulatory Body) (Options: Decision-Making, Monitoring, Advisory)

– Discretion (in decision-making) (Options: Very High to Nil)

– Participation of Stakeholders (or especially Rights-holders) (or could also be defined in terms of Level of Potential Influence of Stakeholders) (Options: Very High to Very Low Level)

– Autonomy (to make executive/ regulatory decisions) (Options: Very High to Very Low Level)

– Accountability towards Government

– Accountability towards other StakeholdersResources and Livelihoods Group, Prayas,

Pune10

Options:

Autonomy and Accountability

Autonomy Levels

• Autonomy in Decision Making

• Autonomy in Selection of Members

• Management Autonomy

• Financial Autonomy

Accountability Levels

• Primary and Secondary Legislations

• Appealing Mechanisms

• Government Orders/ Directions

• Transparency and Public Participation

Features of CurrentOrganizational Structure & Composition

• Organizational Structure

– Conventionally in the form of an apex body

– Decentralization involves decision making at different levels, importance to WUAs and RBOs

• Composition

– WRAs in India constituted of techno-economic experts, no experts on social equity despite preamble statements

• Selection Process

– Merit-based selection process, build safeguards from ‘political patronage’

• Representation of stakeholders limited to public consultationsResources and Livelihoods Group, Prayas,

Pune12

Comments

Organizational Models (Who?)

• Decentralized structure appropriate for water

• Transitory systems: from current state to end state

• Regulatory outcomes dependent on member selection –need for ‘selection rule book’

• Advisory regulator ineffective, but ‘Strong’ advisory could be useful

• Compliance, monitoring – useful models in water sector

How?Process Aspects of Regulatory Design

Background Note 5

14

Evolution of Regulatory System

• Inappropriate process can lead to inappropriate outcomes

– Deteriorating legitimacy of the WRAs (e.g., the WRA laws)

• TAP-C to avoid these problems

– Transparency, Accountability, Public Participation, and Capacity Building of stakeholders for regulatory interventions

• TAP-C to be incorporated throughout all the stages of regulatory process

– Regulatory Design

– Establishment of the Regulator

– Functioning of the Regulator

Resources and Livelihoods Group, Prayas, Pune

15

Comments:

Regulatory Process• Process of regulatory design

– Draft bill prepared by the government, no stakeholder participation in preparing the draft, consulted only once and not on final draft

• Process of regulatory establishment

– Government’s steps: development of rules for selection of members, actual selection, development of rules for functioning of the regulator

– Regulator’s step: development of CBR

• Functioning of the Regulator

– Actual decision-making by the Regulator

– Importance of TAP-C in avoiding confusion, disillusionment, and suspicion about the implications of regulation

Resources and Livelihoods Group, Prayas, Pune

16

Part C:

Major Challenges in the Urban Water, Sanitation and Solid-Waste Sector

Major Challenges in the UW Sector

• Paradigm level Challenges

– Rethinking of centralized water supply systems, Exploring decentralized supply systems based on conservation of local sources

– Conjunctive-regulation of urban ground-water usage with surface water local sources as well as big-common sources (Dams)

– Devising an effective regulatory structure for Demand-Side Management in order to ensure efficient usage of water (E.g. RWH)

– Assessing the need of private sector participation on the background of unique Indian context of political economy

• Paradigm level Challenges in Sanitation

– Exploring for and gaining to large scale acceptance to the decentralized sanitation systems from public and industry

– Gaining acceptance from society at large for internalizing environmental costs in tariff structure for sewage treatment

• Paradigm Level Challenges in MSW sector

– Devising rules and their enforcement of them to control waste-generation (Use of plastic, interests of plastic industry, behavioral issues)

– Formalization of collection, conveyance, treatment industry

• Challenges common to sanitation and MSW sector

– Gaining acceptance from society at large for internalizing environmental costs in tariff-structures for sewage and waste treatment

Major Challenges in Sanitation & MSW

Major Challenges in the UW&S and MSW Sector

• Strategy Level Challenges

– Large-scale political influence / reluctance / opposition to evolution of robust design of regulatory system (Autonomy of the Regulator, viz., govt.)

– Large-scale resistance by the para-statal agencies for private sector participation

– Challenge to seek private sector privatization without compromising social objectives such as equity

Major Challenges in the UW&S and MSW Sector

• Policy Level Challenges

– Devising a role for Central, State and Local level agencies in urban water sector

– Devising policies that would align interests of various stakeholders in urban water sector

– Amendment of policy instruments, supply and sewage acts, bringing in uniformity in the provisions

– Creating a robust, socially sensitive regulatory mechanism having sound techno-economic knowledge and free from political interventions

– Assessing viability of cross-subsidy models

Part D: Recommendations for Building Regulatory System for UWS

Overall Strategy of the Presentation

Lessons from Regulatory Theory & Practice in India

(Part A)

Opportunities Provided by Regulatory Design (Part B)

Sectoral Challenges in Urban Water and Sanitation (Part C)

Recommendations for Regulatory System in UWS Sector (Part D)

Complexities to be Addressed

Way Forward

What to Regulate? [Urban Water] - A

• For the Facilitating Private Sector Participation [At the ULB Level]

– Authenticity of studies such as “Willingness to Pay, Capacity to Pay”, ‘water-audits’, ‘energy audits’

– Third-party, independent assessment of public/Private utilities and their performance

• Process of Private Participation

– Selection of consultants (Bidding etc) for various assessment studies

– Selection of consultants for preparing DPRs, Contract-documents (E.g. BOT, BOOT, )

– Selection of Consultants for Credit-rating of the utilities/ULBs

– Selection of private company for as utility (Entry Level Regulation, eligibility political interests, political and non-political share-holders of the company, public-share]

• Substance of the proposals– investments and technical designs in the DPRs– Tariff, cross-subsidy models & its viability– Finances (If raised from market sources, Pooled-finance,

Municipal-Bonds),– Credit-rating done of the ULB– Contracts (Contractual terms and conditions,

incentives/disincentives to utility, waivers given to the private agency vis. a vis. the ULB)

• Planning process, compliance to the planning process [Availability of land, its acquisition, other preparatory work etc)

• Performance of the utility – Physical losses– Economic efficiency [Tariff setting, collection, recovery of O&M

costs/capital costs etc)– Equitable access, Equity in distribution, redress of grievances

• Performance of the mechanisms for user-participation

What to Regulate? [Urban Water] - B

What to Regulate? -Sanitation and Waste

• Apart from the common issues within urban water and sanitation

– Compliance to the environment standards

– Independent review and assessment treated sewage

Model Nature Strengths / Weaknesses

Unitary Model

All functions (Decision-making, Implementation & Regulation by Public Agencies

Weaknesses: Could not control Political expediency, Gross neglect to the sectoral-objectives , Weakens role of regulatory agencies (E.g. CPCB)

Dualist Model

Public Agencies and Independent Regulatory Agency share functions

Strengths/Weaknesses : Could control political intervention and seek public opinions but, can overlook equity issues, private-interests etc

Monitoring & Oversight Models

Limited to monitoring, evaluation and oversight

Effectiveness depends on strength of the T-A-P provisions and generation of relevant knowledge base for monitoring, Can not control political intervention, need stronger civil society to make use of KB

Advisory Models

Model A – [Secrecy in advise,govt. not bound to give reasons for rejection ] Model B– [Open advise, Govt. is bout to give reasons for rejection]

Limited to advisory roles, weak in nature, depends on strength of the civil society to make use of the advise (if given openly)

Who Regulates? Comments

• Scales or levels of at which regulatory Authority should function– ULB Level

• Regulation by contract• Independent authority at ULB level Regulation (Under the state-level

Authority)

– State Level Authority

• Regulatory process– Hearings– Public consultations– Conduct of Business rules

• Transparency– Self Disclosure of information– Disclosure should be in a friendlier manner to the primary stakeholders

(users of water – E.g. Easily accessible, understandable, local-language, issue-focused, non-bulky/clunky etc)

• Capacity Building– CB of the ULBs essentially to understand technical, legal, and financial

sides of the regulatory contracts, regulatory process etc– CB of the other stakeholder groups

How to Regulate? Comments

Complexities Involved

• Variation in operation costs, make standardization of watertariff highly difficult……………….. Need to continue subsidiesfor vulnerable sections?

• Industrial towns can enjoy the possibility of cross-subsidizing water-tariff at the system level. Mere trading-towns would face sever constraints……….. such towns need cushions?

• Conservation and Rejuvenation of local water sources-involve great cultural change, addressing this with rapid urbanization is more complex, What role could regulation play in addressing this challenge?

Way Forward• A Background (Discussion) Paper on the topic of ‘Regulation

of Urban Water, Sanitation, and SWM Sectors’

• Need for consolidation of knowledge in all the three sectors from the regulatory perspective

– Cross-country perspective

– Issues in India

• Differing processes for thee sectors, depending on the levels of availability of knowledge and experiences in sectors

• Consultations of Experts, Officials, CSOs

• Conducting stakeholder dialogues on regulation in urban water