This Literature Survey has been submitted by

Mr. Anirudh Dhawan

ID No: 212142

On Economics-I

During the Monsoon Semester 2013

Cost Recovery in the Increasing Block Tariff System in India

Introduction

The need for imposing a tariff on the consumption of water domestically by households arises for the basic reason of revenue sufficiency. Due to the economic diversity prevalent in the society and diversified and potential inequitable use of the good, this tariff has to be determined keeping in mind the basic principles of equity and fairness and should be made to be economically efficient. Hence, reasonable objectives for an adequate tariff scheme would be all of these three, revenue sufficiency, economic efficiency and equity and fairness. This literature survey would concentrate only on the first aspect, that of revenue sufficiency vis-à-vis imposition of water tariffs.
The various single-part tariff systems followed in major cities in India include increasing block tariffs (IBT), uniform water tariff, linear water charge and a pre-determined annual flat rate. The first three are for connections that are for connections that are metered and the last one is for connections that are unmetered.
This literature survey seeks to assess whether the tariff system of increasing block tariff is adequate for production cost recovery in the Indian cities that it is being currently implemented and to ascertain the possible reasons for such a deficit, if at all there is any, by comparing the literature currently available on this topic.

Literature survey

With respect to production cost recovery through the imposition of water tariff in various major Indian cities, McKenzie and Ray use empirical evidence to show that for the years analysed (1993, 1995, 1997, 2002, 2003 and 2004), Chennai is the only city which has been able to cover the operating and maintenance costs involved in the production and supply of water to domestic households. The tariff scheme in Bangalore and Mumbai doesn’t entirely recover the costs involved but comes close to it, while in Hyderabad and Delhi, only 66-68% of the total operation and maintenance costs are being met through the imposition of tariffs. Water is free or highly subsidized in some states, and thus, more than 40% of India’s water does not generate any revenue
Mathur and Thakur analysed the same relation for five cities, Agra, Allahabad, Bangalore, Pune and Vadodara. All these cities have at least one element of metered volumetric charge being imposed on the consumers, with only Bangalore following the Increasing Block Tariff scheme within the metered volumetric charge scheme. This study analysed the revenue earned by the state government from the imposition of the said tariff and how far that goes to recover the expenditure incurred by the government in providing the water facilities to the consumers. The study, in fact, listed the recoveries from the sale of water in percentage terms vis-à-vis the cost incurred by the government in water provision. Data for the years 1995-1996 and 1999-2000 was analysed. The study found that Agra accounted 97.94% recovery of expenditure involved in water supply in 1999/00 up from 78.53% in 1995/96, while the corresponding figure for Allahabad in 1999/00 was 108.03% up from 83.59% in 1995/96, for Bangalore in 1999/00 was 106.29% up from 90.32%, for Pune in 1999/00 was 74.41% down from 92.52% and for Vadodara in 1999/00 was 48.26% up from 32.95% in 1995/96. This study also notes that most of the households in the cities that use an increasing block tariff system fall into the first or second block, thereby getting large subsidies for water.
A study conducted by Raghupati and Foster, however, concludes that the charges imposed on the domestic consumers are nowhere near enough to recover the costs involved in the production and supply of water. For cities with an increasing block tariff system, only a few of the highest blocks come close to actually recovering costs of even operation and maintenance. They also state that the charges imposed on residential consumers are usually one-tenth of the probable total production cost involved.

Table 1: Direct comparison of revenue earned and total expenditure for major Indian cities City | Year | Revenue Received (in Rs. crores) | Revenue Expenditure (in Rs. crores) | Deficit % | Surplus % | Bangalore | 1998-1999 | 1936.6 | 2035.9 | 5.1 | - | Chennai | 1999-2000 | 2070.1 | 1818.1 | - | 12.2 | Hyderabad | 1999-2000 | 2162.7 | 3175.8 | 46.8 | - | Delhi | 1997-1998 | 1062.3 | 1365.5 | 28.5 | - | Mumbai | 1999-2000 | 9712.1 | 5820.8 | - | 40 |
Source: Rajan Padwal, Issues of Pricing of Urban Water

Figure 1: Volumetric tariffs for water in Indian cities
A plot of Percentage of cities on the x-axis and Average volumetric charge (Rs./m) on the y-axis.
Source: Raghupati and Foster, A Scorecard for India

Another study performs a comparative analysis between the tariff structure in the cities of Chennai, Bangalore and Hyderabad and the extent of production cost recovery from these tariffs. Data from Bangalore shows that the percentage of recovery of costs is 21% for the first block (0-25 m3), 41% for the second block (25-50 m3), 118% for the third block (50-75 m3), 162% for the fourth block (75-100 m3) and 206% for the fifth block (above 100 m3). The first two blocks accounts for a total revenue of less than 15% of the total revenue earned by the state government through water pricing (including both domestic and industrial), despite the fact that they account for 78% of the total domestic consumption. In Bangalore, the first two tariff blocks earn US$ 0.21 per m3, while the total production cost involved is US$ 0.34 m3, similarly, in Chennai, the first two tariff blocks earn US$ 0.26 m3, while the production cost involved is US$ 0.27 m3, and in Hyderabad, the first two tariff blocks earn US$ 0.14 m3, while the production cost involved is US$ 0.26 m3.
Supporting this view, McKenzie and Ray also concur that the first block should be the ‘lifeline block’ for those surviving on the minimum amount of water any human needs for survival. This block should be reserved for those who are in absolute desperate need of water, however, as the figures show, a majority of the city is falling under the first two blocks in cities such as Bangalore and Hyderabad. “Coupled with the low tariffs in the first couple of blocks, the result in Bangalore is that 93 percent of the customers account for less than 15 percent of revenues, and are paying less than 41 percent of the cost of providing them with water”.
The view that a large first block is highly detrimental in terms of achieving the prescribed goals of the tariff scheme and is contrary to the principles associated with the construction of such a scheme is also advocated by Folifac and Gaskin. They also illustrate the example of cases where households share a meter. In such cases, the poor families which actually belong in the lower income blocks with a large family size might find themselves in the higher blocks, while high income families with a smaller family size might end up in a lower block due to lesser consumption levels. In addition to this, a large first block provides the consumers no incentive for efficiently and moderately using water resources. A TERI Report also concurs with this view, saying that in an increasing block tariff system, a good cost recovery can only be achieved if the blocks are well designed.
Another study acknowledges the fact that cities with unmetered connections might have rampant wastage of water resources as there is no incentive for the consumers to actually utilise the water they are provided efficiently and optimally. It also states another reason for inadequate operating and maintenance cost recovery inasmuch as metered and unmetered connections are concerned. It relies on empirical data to prove that there is a great disparity in the total tariff acquired through the imposition of a fixed tariff in cases of unmetered connections and through the imposition of any kind of tariff in cases of metered connections, and this only proves to be a substantial hindrance in the complete recovery of production costs. Adding to that, McKenzie and Ray state that most lower-income groups in urban areas don’t have metered connections, due to their inability to afford such a connection, and hence, they don’t benefit from the increasing block tariff system, in fact, as they don’t have metered connections, they have a negative overall effect on the production cost recovery by way of imposition of tariffs.
Whittington also notes that in addition to the excessively large first two blocks in various major cities, the prices that the consumers falling into the aforesaid blocks have to pay is also very less. This figure is a lot lesser than the average financial cost involved in the production and supply of water. This, he notes, is the price that the majority of the population is paying as water tariff. This leads to a significant fall in potential revenue earned by the state government, as a majority of the population is paying a price which is less than the average cost of production.

Conclusion

This literature survey arrives at the conclusion that the phenomenon of recovery of production costs through the means of imposition of a tariff on the consumption of water as a good through the increasing block tariff system is varied and diverse. Adequate recovery of costs largely depends on the formation of blocks such that the provision of subsidies is restricted strictly only to those groups who are in desperate need of them. This entails fixing a first block such that the consumers who fall into such a block are only those members of lower-income groups who actually require the aforesaid subsidies. This, however, has not been adequately done in India, in cities where the increasing block tariff system is followed. The reason behind the varied results is that while some cities have adequately implemented the block scheme and have, hence, been able to recover the production costs involved, albeit not guaranteeing economic efficiency and proper equity and fairness, other cities, have not been able to do so and are, hence, not able to even recover the operation and maintenance costs involved in the production and supply of water.
While there is a lot of dexterous analysis about the reasons for the failure of the increasing block tariff scheme in various cities on various fronts, there is a severe dearth of recent statistics about this phenomenon, with the most recent being the statistics taken in the year 2002. The lack of recent statistics is a major shortcoming in the literature available on this subject.
Bibliography

1. John Boland, ‘Pricing Urban Water: Principles and Compromises’ (1993) 92(1) J of Contemporary Water Research and Education

2. Om Prakash Mathur and Sandeep Thakur, ‘Urban Water Pricing: Setting Stage for Reforms’ [2011] National Institute of Public Finance Policy

3. Rajan Padwal, ‘Issues of Pricing Urban Water’ (2005) eSocialSciences Working Paper id:34

4. PwC, ‘Bringing water to your door step Urban Water Reforms for the next decade’ (2nd Annual India H2O Conference, Mumbai, April 2011)

5. S Gaskin and F Foliac, ‘Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis’ (2011) 3(13) J of Ecology and Natural Environment

6. David McKenzie and Isha Ray, ‘Household Water Delivery Options in Urban and Rural India’ (2005) Stanford Center for International Development Working Paper No. 224

7. TERI, ‘Review of Current Practices in determining user charges and incorporation of economic principles of pricing of urban water supply’ (2010) Project Report No. 2009IA02

8. Grail Research, ‘Water – The India Story’ (2009)

9. Usha P. Raghupati and Vivian Foster, ‘A Scorecard for India’ (2002) Water: Tariffs & Subsidies in South Asia Paper 2

10. Clarissa Brocklehurst and Amrit Pandurangi, ‘Tariff Structures in Six South Asian Cities’ (2002) Water: Tariffs and Subsidies in South Asia Paper 3

11. WSP, ‘Cost Recovery in Urban Water Services: Select Experiences in Indian Cities’ (2011) Water and Sanitation Program Technical Paper

12. David McKenzie and Isha Ray, ‘Urban Water Supply in India: status, reform options and possible lessons’ (2009) 11 Water Policy

13. D. Whittington, ‘Municipal water pricing and tariff design: a reform agenda for South Asia’ (2003) 5 Water Policy

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[ 1 ]. The author of this literature survey is Anirudh Dhawan, a 2nd Year law student at the National University of Juridical Sciences. The style of citation followed herein is the Oxford Standard for the Citation of Legal Authorities (OSCOLA) 4th Edition.
[ 2 ]. John Boland, ‘Pricing Urban Water: Principles and Compromises’ (1993) 92(1) J of Contemporary Water Research and Education 7, 9 (Any industry would become inoperable if there was no inflow of revenue. In order to recover the costs involved in the production and delivery of the good (in this case water to households) by the supplier (in this case the state governments), the supplier has to be compensated by the consumer to a certain extent for the service that is provided. This fact gains higher importance in the light of long term continuance of the supply of that good by that supplier. In order to fulfil this need, there needs to be a tenable model as per which tariff is imposed on the users of this good. Hence, one of the main reasons and aims for imposition of tariffs on the consumption of water is for the production cost recovery)
[ 3 ]. ibid 7-8 (This entails that a person should be charged as per his use of the good and that lower income groups should be charged a lower price in order for the imposition of tariff to be equitable, fair and economically efficient).
[ 4 ]. Om Prakash Mathur and Sandeep Thakur, ‘Urban Water Pricing: Setting Stage for Reforms’ [2011] National Institute of Public Finance Policy accessed 9 September 2013 (The Increasing Block Tariff system involves division of water use into separate pre-defined blocks. After a user has consumed more than a certain quantity of water, they shift to a higher block which involves paying a higher price for further consumption. In India, this system is followed in cities such as Delhi, Bangalore, Chennai and Hyderabad, for both domestic and industrial use of water. This system, in a way, allows for the high income households to subsidise the expenditure incurred on the consumption of water by the lower income households and paves the way for a more equitable domestic water distribution system. The division of the monthly blocks may vary from city to city as also might the price for each block and the increase thereof due to a shift to a higher block. For example, the initial monthly block for both Delhi and Chennai is 10 kiloliters (KL), for Bangalore is 15 KL and for Hyderabad is 30 KL. The price for the consumption of 50 KL of water by a domestic household is Rs 380 in Hyderabad, Rs 470 in Bangalore, Rs 850 in Chennai and Rs 132.8 in Delhi. This system of tariff imposition is very popular in developing countries where is there, generally, a considerable disparity in the higher income groups and the lower income groups) See also Rajan Padwal, ‘Issues of Pricing Urban Water’ (2005) eSocialSciences Working Paper id:34 accessed 10 September 2013, PwC, ‘Bringing water to your door step Urban Water Reforms for the next decade’ (2nd Annual India H2O Conference, Mumbai, April 2011), S Gaskin and F Foliac, ‘Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis’ (2011) 3(13) J of Ecology and Natural Environment 400, 406, David McKenzie and Isha Ray, ‘Household Water Delivery Options in Urban and Rural India’ (2005) Stanford Center for International Development Working Paper No. 224 accessed 9 September 2013.
[ 5 ]. ibid 7 (The Uniform Water Tariff system or a uniform volumetric charge is more simplistic system. It basically just involves the payment of a fixed amount for every specified quantity of water consumed. Usually the quantity is calculated in units of KL. This system is followed in Indian cities such as Kanpur, Surat, Indore and Madurai).
[ 6 ]. ibid 8 (The Linear Water Charge system is similar to the IBT system, but involves payment of a certain amount after consumption of every new unit after the initial block. Even though the tariff paid by a consumer is based entirely on his consumption levels, in most cases under such a system, a subsidised tariff is provided to those who can’t afford to pay such a fee, with subsidies being able to be incorporated in the base cost. Such a model for domestic consumption is mainly followed in Kerala) See also TERI, ‘Review of Current Practices in determining user charges and incorporation of economic principles of pricing of urban water supply’ (2010) Project Report No. 2009IA02 accessed 9 September 2013.
[ 7 ]. ibid 9 (A fixed or a flat rate tariff is a simple, pre-determined payment made in return for the consumption of water, irrespective of the quantity of water consumed. The calculation of the exact amount that is to be paid by the consumer is made on the basis of factors such as the rated property value, the number of taps in a given area, the size of the meter and the diameter of the pipe. Basically factors which can help broadly classify the amount of water consumed by a household or a given community. Such a system is followed in Indian cities such as Vijayawada, Gwalior and Patiala) See also S Gaskin and F Foliac, ‘Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis’ (2011) 3(13) J of Ecology and Natural Environment 400, 405.
[ 8 ]. ibid.
[ 9 ]. David McKenzie and Isha Ray, ‘Household Water Delivery Options in Urban and Rural India’ (2005) Stanford Center for International Development Working Paper No. 224 accessed 9 September 2013
[ 10 ]. ibid table 6.
[ 11 ]. Grail Research, ‘Water – The India Story’ (2009) accessed 12 September 2013
[ 12 ]. Mathur and Thakur (n 4) 10.
[ 13 ]. ibid 16.
[ 14 ]. ibid.
[ 15 ]. Usha P. Raghupati and Vivian Foster, ‘A Scorecard for India’ (2002) Water: Tariffs & Subsidies in South Asia Paper 2 accessed 11 September 2013
[ 16 ]. ibid 5.
[ 17 ]. ibid 4.
[ 18 ]. ibid 4.
[ 19 ]. Rajan Padwal, ‘Issues of Pricing Urban Water’ (2005) eSocialSciences Working Paper id:34 accessed 10 September 2013
[ 20 ]. ibid figure 1.
[ 21 ]. Clarissa Brocklehurst and Amrit Pandurangi, ‘Tariff Structures in Six South Asian Cities’ (2002) Water: Tariffs and Subsidies in South Asia Paper 3 accessed 10 September 2013
[ 22 ]. ibid table 3.
[ 23 ]. ibid 7.
[ 24 ]. ibid table 2.
[ 25 ]. McKenzie and Ray (n 9) 11.
[ 26 ]. ibid.
[ 27 ]. ibid.
[ 28 ]. S Gaskin and F Foliac, ‘Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis’ (2011) 3(13) J of Ecology and Natural Environment 400, 406
[ 29 ]. ibid.
[ 30 ]. ibid.
[ 31 ]. TERI, ‘Review of Current Practices in determining user charges and incorporation of economic principles of pricing of urban water supply’ (2010) Project Report No. 2009IA02 accessed 9 September 2013
[ 32 ]. ibid 65.
[ 33 ]. WSP, ‘Cost Recovery in Urban Water Services: Select Experiences in Indian Cities’ (2011) Water and Sanitation Program Technical Paper accessed 11 September 2013
[ 34 ]. ibid 12.
[ 35 ]. ibid table 6.
[ 36 ]. ibid 12.
[ 37 ]. David McKenzie and Isha Ray, ‘Urban Water Supply in India: status, reform options and possible lessons’ (2009) 11 Water Policy accessed 11 September 2013
[ 38 ]. ibid 448.
[ 39 ]. D. Whittington, ‘Municipal water pricing and tariff design: a reform agenda for South Asia’ (2003) 5 Water Policy accessed 10 September 2013
[ 40 ]. ibid 65.
[ 41 ]. ibid.
[ 42 ]. ibid.