In developing countries, it is extremely difficult to strike a balance between the competing priorities of socioeconomic and environmental goals within water utilities. India's water industry struggles with problems like budget deficits, accessibility restrictions, and poor service standards.
A recent study titled ‘Utility governance, incentives, and performance: Evidence from India's urban water sector’ looks at the difficulties in managing trade-offs between socioeconomic and environmental goals in water utilities in developing countries like India. The study examines 304 urban water supply services from 2010 to 2015 using a Stochastic Frontier Analysis (SFA) methodology, taking into account the roles of both socioeconomic and environmental factors.
The findings show there is room for improvement and significant inefficiencies in water supply services. The study recommends actions to increase efficiency, including lowering non-revenue water use, enhancing water quality, enhancing cost recovery, and enhancing bill collection. Additionally, extending the hours of water supply may result in better service delivery.
For social and economic development, network utilities like telecommunications, gas, and electricity are crucial. These industries offer useful insights for policy and governance and share similar technical and economic traits. Utilities that provide water must strike a balance between environmental, social, and economic performance goals. However, managing these trade-offs in developing countries is difficult, particularly with weak institutions. Political interests frequently put social goals ahead of economic ones, which results in financial losses, a reliance on subsidies, and poor service quality.
Universal access to water is still a major problem in India, where urban water suppliers are more concerned with immediate objectives than with sustainability and efficiency over the long term. Urban India faces significant problems with water supply despite reform efforts aimed at cost recovery, tariff rationalisation, and improved service delivery. Urban households only have 56.9% access to piped water inside their homes, and both quantity and quality problems still exist. Water is only supplied for as little as 1.5 hours per day in states like Gujarat and Maharashtra, which have made significant reforms.
The study emphasises the necessity of evaluating reform program effectiveness while taking socioeconomic and environmental factors into account. It estimates a multi-input multi-output distance function using stochastic frontier analysis (SFA) and identifies the causes of inefficiency. It focuses on Gujarat, Maharashtra, and Chhattisgarh from 2010 to 2015, makes a significant contribution to the literature as the first multi-dimensional performance analysis of Indian urban water supply services. The study assesses performance, evaluates the effects of particular indicators, comprehends how incentives affect the behavior of Urban Local Bodies (ULBs), and offers policy recommendations for the industry and its reforms.
It draws attention to the difficult challenges that water utilities face in balancing socioeconomic and environmental goals, especially in developing nations like India. While highlighting the need for better efficiency and performance assessment, it also provides details on potential policy suggestions.
What does the literature on water utility governance say?
Diverse industries are covered in the literature on water utility performance measurement, with an emphasis on effectiveness, cost reduction, enhanced service delivery, and accountability. In various parts of the world, researchers have used both parametric and nonparametric techniques, such as Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA). Sector regulators use these methods to determine tariffs, evaluate reforms, and assess social and economic policies.
Since the 1970s, performance measurement studies have gained popularity in developed nations like the US, UK, and some regions of Europe, but their use has been restricted in developing countries due to a lack of data and immature utility structures. Studies like these are made more difficult by the absence of sector regulators in developing countries.
The two main methods used to evaluate the performance of water and sanitation utilities are DEA and SFA. While SFA, a parametric method, estimates performance using particular functional forms, DEA, a nonparametric method, uses linear programming to determine an efficient frontier without assuming a functional form. Research on the performance of water utilities frequently employs both techniques.
Performance studies in water supply and sanitation frequently look at ownership influence, regulatory incentives, benchmarking, and exogenous factors, as well as market structure (economies of scale, scope, and density). The results differ between developed and developing countries, with developing countries typically experiencing economies of scale and developed countries occasionally experiencing diseconomies of scale. In developed nations, regulatory incentives frequently have a positive effect, but not always in developing nations, possibly because of institutional flaws.
Ownership effects also differ, with private operators performing better in developing nations while outcomes are inconsistent in developed nations. Due to the lack of data, non-parametric methods are more prevalent in developing countries, while parametric methods are more prevalent in developed countries.
Benchmarking studies frequently ignore quality metrics, which are important in attempts to reduce costs. Additionally, few studies in developing nations include equity, loss control, and service quality in benchmarking, which makes it difficult to create effective incentive programs. Exogenous factor studies reveal that water loss reduction targets have a negative impact on performance in developing nations, while financial incentives and managerial advancements have a positive impact.
Studies on economic and environmental performance emphasise the significance of bias correction in efficiency measures because it influences how water companies are ranked. Efficiency is greatly influenced by variables like water source, leakage rate, per-person consumption, and population density. The importance of choosing appropriate input and output variables to support sustainability goals is emphasised by sustainable assessments.
In addition, institutional and structural factors are very important for public utility performance. Along with market contestability, outside review, and economic regulation, ownership form, practice standards, and enterprise autonomy are examined. While privatization may not always result in better performance, it is thought to be essential for the economy to be regulated.
The literature on water utility performance measurement, in conclusion, reveals a wide range of approaches and performance-affecting variables. The results highlight the need for customised strategies in various contexts and the significance of including sustainability factors and quality measures in performance evaluations, particularly in developing nations. Furthermore, the importance of structures and institutions in determining utility performance highlights the requirement for an all-encompassing governance strategy.
Conclusions and policy recommendations
The study focuses on India's urban water supply sector, where significant reform efforts have recently been made with the goals of achieving universal access to clean drinking water, improving service quality, reducing water losses, and increasing operational efficiency and sustainability. A thorough pan-Indian study assessing how well municipalities performed in achieving these reform goals hasn't been done, though. This study fills that gap by using stochastic frontier models to analyze the socioeconomic and environmental effects of these reforms in Gujarat, Maharashtra, and Chhattisgarh from 2010 to 2015.
The study's findings show inefficiencies in these states' urban water supply services, indicating that municipalities could deliver better services with their current resources if they operated more effectively. These efficiencies haven't changed much over the studied period, indicating that the sector hasn't been focused on increasing efficiency.
Water quality, cost recovery, bill collection effectiveness, and non-revenue water are a few important factors that have a significant impact on inefficiency in water supply services. To reduce inefficiencies and improve sector efficiency, actions are advised to reduce non-revenue water, enhance cost recovery, and improve effective bill collection procedures. Additionally, extending the hours of water supply may result in better performance.
The study emphasises the significance of putting a priority on lowering water losses, enhancing water quality, and maximising cost recovery and bill collection efficiencies. By addressing these issues, municipalities may become more efficient, which could result in cost savings that can be used to increase service coverage and meet delivery targets. Designing financial incentives that support effectiveness and long-term sustainability is encouraged for policymakers.
Concerns about the institutional structure of the Indian urban water supply sector are also brought up in the study, particularly the lack of an efficient regulator. In order to encourage performance improvements, it suggests the establishment of proactive state-level regulatory agencies and strengthened governance capabilities. It is advised to take inspiration from other utility sectors, such as electricity, gas, and telecommunications, and to set up a centrally located independent regulatory body that collaborates with state water regulatory bodies. The sector is also encouraged to implement a robust performance benchmarking system to improve accountability, transparency, and progress monitoring.
Due to data limitations, the analysis is restricted to three states and includes data up to 2015–16. Data accessibility is recognised as a major problem, and the study calls for the collection and ongoing updating of data pertaining to water in the Indian water sector. To offer deeper insights for policymakers and regulators, future research may concentrate on cost, revenue, profit, efficiency, Total Factor Productivity (TFP), and other benchmarking techniques. It may also investigate the effects of structural, institutional, and governance dimensions on the performance of water supply services.
The full paper can be accessed here
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