interim report on cost recovery and tariff practices for urban...

Cost Recovery and Tariff Practices for UWSS Sector in India

Ludhiana

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Interim Report

On

Cost Recovery and Tariff Practices for Urban Water Supply and Sanitation

in India

Chandigarh Case Study

Prepared for

Water and Sanitation Program – South Asia

June 2008

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LUDHIANA Table of Contents

1 Context and Background .................................................................................... 3

2 City Profile .......................................................................................................... 3

2.1 Physical Environment and Topography ...................................................... 3

2.2 Demography .............................................................................................. 3

2.3 Socio-economic Profile .............................................................................. 3

3 Institutional Framework for Water Supply and Sewerage Services ..................... 4

3.1 Organisational Structure ............................................................................ 4

3.2 Water Supply and Sewerage Department .................................................. 5

3.3 Punjab Water Supply and Sewerage Board ............................................... 6

3.4 Ludhiana Improvement Trust ..................................................................... 6

3.5 Punjab Urban Development Authority ........................................................ 6

4 Existing Infrastructure and Services ................................................................... 6

4.1 Water Supply ............................................................................................. 6

4.2 Sewerage .................................................................................................. 7

4.3 Key Issues in Service Provision ................................................................. 8

5. Water Supply and Sewerage Finances............................................................. 10

5.1 Cost recovery: Current Performance .............................................................. 12

5.2 Tariff Structure ............................................................................................... 14

6 Analysis ............................................................................................................ 16

6.1 Cost Recovery ......................................................................................... 16

6.2 Economic Efficiency ................................................................................. 17

6.3 Equity and Protection of Vulnerable Sections ........................................... 17

6.4 Affordability .............................................................................................. 17

6.5 Resource Conservation ........................................................................... 18

6.6 Acceptability and Practicality .................................................................... 18

7 Summary .......................................................................................................... 18

7.1 Recommendations ................................................................................... 18


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LUDHIANA

1 Context and Background In order to access funds for water supply and sanitation improvements under JNNURM, municipal service providers are required to levy „reasonable user charges‟ so that operation and maintenance costs are recovered within seven years. The Ministry of Urban Development, with assistance from the World Bank Water and Sanitation Program - South Asia, has prepared guidelines on the design and implementation of user charge reforms in line with JNNURM requirements. These guidelines are available as a separate document. The guidelines draw on lessons from a review of current user charges and cost recovery arrangements in 23 cities in India. This report focuses on one of those cities: Hyderabad.

2 City Profile Ludhiana is an industrial, commercial, educational and religious center located in the Malwa region of Central Punjab. It is situated on the Grand Trunk Road connecting Delhi to Amritsar and is the largest city of Punjab in terms of area and population.

2.1 Physical environment and topography Ludhiana district is bounded by river Sutlej on the northern side, Ferozpur and Moga districts on the western side and districts Sangrur, Fatehgarh Sahib and Ropar on the southern, south eastern and east sides, respectively. The climate of Ludhiana is semi-arid. The total annual rainfall is 600-700 cm, 70 percent of it falling from July to September.

2.2 Demography In 2005, the population was estimated at 1.65 million, though there is an additional floating population of 0.2 million. For purposes of this report, the population for 2008 is assumed to be 1.7 million. According to the 2001 Census, 16.7 percent of the population lives in slums. There are 209 slums located in 31 of the city‟s 75 wards with an estimated population of some 230,000. The growth of slums has been driven by rapid industrialization, which attracts migrant populations. The 2006-07 municipal budget reserved 5.8 percent of total development resources for slum development.

2.3 Socio-economic profile Ludhiana is known as the “Manchester of India,” being the hub of the Indian hosiery industry and other small- and medium-scale industries including, for example, textiles, machine tools, bicycles, sewing machines and motor parts.

Table 6.1: Decadal Growth Rate of Population

Year Persons Decadal Growth Rate

1971 401000 59.76%

1981 606000 51.12%

1991 1042740 72.07%

2001 1398467 34.11%


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3 Institutional Framework for Water Supply and Sewerage Services

Ludhiana Municipal Corporation (LMC) currently delivers 17 of the 18 functions listed in the 12th Schedule of the 74th Constitutional Amendment Act. The government of Punjab is committed to transfer the last function, urban planning, to LMC under a Memorandum of Agreement recently signed under JNNURM. The most recent municipal elections were concluded in August 2007.

3.1 Organizational structure Figure 6.1: Organizational Structure of Deliberative Wing of Ludhiana Municipal Corporation

The Deliberative Wing (elected body) of LMC (Figure 6.1) comprises 75 councilors and five State Assembly representatives. All policy decisions are taken by the house. The Executive Wing (administrative body) (Figure 6.2)is headed by a Commissioner who is appointed by the state government. There is no fixed term for this position and the present incumbent has been in the post for five years. He is supported by an Additional Commissioner, two Joint Commissioners and an Assistant Commissioner who are also appointed by the state government. Departmental heads, including the Superintending Engineers (SEs) are also appointed by the state. There are two SEs each for water supply, sewerage, buildings and roads. Each one is in charge of two zones.

Finance and ContractsCommittee

House Tax

Committee

Councillors

Deputy Mayor

Senior Deputy Mayor

Mayor

Deliberative Wing

(elected)

Executive Wing

(administrative)

Municipal Corporation, Ludhiana

Department of Local Government

Government of Punjab


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Figure 6.2: Organizational Structure of the Executive Wing

Source: CDP, 2006.

Key departments in LMC include: 1. Water supply and sewerage (O&M Cell); 2. Building and roads; 3. Health (responsible for solid waste management); 4. House tax; 5. Fire brigade; 6. Accounts; 7. Law branch; 8. Agenda branch (secretarial functions); and 9. Library.

3.2 Water supply and sewerage department The O&M Cell is headed by a Joint Municipal Commissioner who is supported by two SEs. Under them are placed various executive engineers, assistant engineers/subdivisional officers and junior engineers (Figure 6.3). The total staff strength of the Cell as of 2007 is 1,452 of a sanctioned quota of 1,568. The number of staff per 1,000 connections is 7.63. . Billing and cost recovery is a separate function managed by a Joint/Assistant Commissioner in charge of the four city zones.


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Figure 6.3: Organizational Hierarchy for Water Supply and Sewerage

3.3 Punjab Water Supply and Sewerage Board This parastatal organization is responsible for the planning, design and construction of all water supply and sewerage capital assets in Punjab including Ludhiana. It executes capital works on behalf of LMC on the basis of an agency charge. Capital expenditure is borne by LMC which takes on responsibility for O&M after construction.

3.4 Ludhiana Improvement Trust The Trust is responsible for achieving planned growth and development for Ludhiana and, so far, has planned 29 residential and commercial schemes around the city and numerous smaller housing developments. To date, 23 of the schemes have been transferred to LMC.

3.5 Punjab Urban Development Authority This Authority was established under the Punjab Regional Town Planning and Development Act 1995. Like the Trust, it develops notified pockets of land and then hands them over to LMC. In January 2007, the state government abolished the Authority‟s Ludhiana wing and replaced it with the Greater Ludhiana Area Development Authority, which will be involved in the development of the entire district.

4 Existing Infrastructure and Services

4.1 Water supply Ludhiana has no perennial water source. The nearest river (Sutlej) is some 15 km away and dry for much of the year due the presence of the Bhakra dam upstream. In the absence of alternative options, the city has for centuries been dependent on groundwater for its drinking water supply. This is accessed via 448 deep motorized tubewells and 200 shallow tubewells in various locations around the city. While the use of tubewells avoids the large pumping and transmission costs that would arise from a surface water scheme, poor resource conservation is imposing environmental and social costs. The city has a rapidly depleting water table and, over

Junior Engineer

Sub Divisional Officer

Executive Engineer

Superintending Engineer

2 zones

Superintending Engineer

2 zones

Jt Mun. Commissioner

Municipal Commisioner


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the past two decades the average depth of deep tubewells has increased from 300-350 feet to 450 to 475 feet. LMC officials believe that the water table is dropping by 2-3 feet per year, and the incidence of pump burnout is increasing, as are pumping costs. Some of the tubewells feed into the city water supply network directly, without storage, while others supply overhead reservoirs. All tubewells are equipped with chlorinators which add 0.2 part per million (ppm) of bleaching powder for treatment. The current supply covers all notified areas within the city limits, equivalent to 85 percent of the total municipal area, serving roughly 1.45 million people. LMC plans eventually to bring the undeclared areas under its purview and provide them with complete water supply facilities. Some 250,000 people live in these areas and currently depend on private boreholes for their domestic water needs. The demand from these areas was estimated at 62,000 kld in 2006. Water supply to the declared areas is estimated at 410,000 kld (Table 6.1), equivalent to 220 lpcd. However, the lack of metering makes it difficult to determine the actual supply to end users. LMC estimates that 80 percent of the available supply is consumed by domestic users while 20 percent is taken by the commercial and industrial sector. Water is supplied three times a day for about 12 hours in total. Each domestic plot is given a ½” connection even if it is a multistoried building. Distribution within the premises is managed by the owner from the ground sump.

4.2 Sewerage As with water, LMC and the Water Supply and Sewerage Board are jointly responsible for sewerage. Provision of domestic sewerage services (though not industrial) is a mandatory function of LMC, which currently operates a network of 1,384 km covering 67 percent of the land area.

Some 432,000 kld of wastewater is generated from declared and undeclared areas, industrial units, hotels and hospitals. The network faces a heavy burden due to the dyeing industry and other industrial discharges. Wastewater is collected into sump wells then pumped into a large nallah with the help of 17 pumping stations. Three sewage treatment plants have been constructed recently with a total capacity of 311,000 kld. As storm water drainage covers only 11 percent of the city, runoff is also discharged into the sewer system, resulting in silting and blockages.

Table 6.1: Water Supply and Sewerage System in Ludhiana

A. BASIC PROFILE OF CITY/TOWN

Total area of the city/town 159.37 sq km; Declared area135.46 sq km

Total population of the city/town 1398467 (2001 Census); 1700000 (2008)

Total slum population 183033 (2001 Census)

Number of slum settlements Registered -57 Unregistered – 152

Number of wards 75

B. WATER SYSTEM DETAILS

Sources of Water Supply 1. Own Source

Number of tubewells 448 (deep) & 200 (shallow)

Total water supply /water produced (in kl/day) 415000 kld


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Do you have flow meters at the production source? No

Total water demand (in kl/day) 410000 kld

Total area served by water supply 100% declared area (135.46 sq km)

Total population served by water supply (population coverage)

1.41 million (as of 2006)

Total water supply coverage (network coverage %) 85%

Total sewerage coverage (in %) 67%

Daily hours of supply 12

Per capita availability of water 220 lpcd

Total Transmission Infrastructure for Water Supply and Sewerage

Water Supply

Number of schemes currently running: None

New schemes introduced/proposed in this financial year: JNNURM

Total pipeline length:1494 km

Diameter range: 3 inch to 12 inch

Rising main (in km):

Number of standposts: 500

Number of tankers: 25

Number of handpumps:

Sewerage

Total length of sewer line: 1384 km

No of manholes: 25000

No of pumping stations: 17

No of STPs/sewerage farms: 3

Total Water Storage Capacity Current Capacity Number Capacity

OHT: 63 55000 kld

Underground storage:

TOTAL

Shortage in storage capacity: Nil Source: Data provided in questionnaire

4.3 Key issues in service provision Discussion with city officials and a review of available literature revealed the following constraints on service provision: Water Supply

Reliance on a depleting groundwater supply, with no conservation measures in place. A rainwater harvesting initiative was launched in 2001 but dropped after a change in administration;

The absence of energy auditing, bearing in mind the power-intensive nature of the water supply system;

A lack of data on the existing piped network (location, depth, pipe size, and so forth);

Dilapidated network infrastructure, with many pipelines laid through open drains and sewers, causing contamination;

Leak detection equipment is available but not being used; and Coverage does not extend to undeclared areas.

Sewerage

Only two-third of the declared area is covered; The network is poorly installed, old, deteriorating and subject to frequent

blockages; Storm water drainage is inadequate, adding to the load on sewers and causing

silting;


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9

Sewage treatment capacity is only 70 percent of wastewater generated (a gap of some 120,000 kld); and

There are no facilities for the treatment of industrial effluent such as dyes arising from textile and other industries.

BOX 6.1: Water Supply Targets identified in City Development Plan

Water supply targets

100 percent water supply within two years; Area coverage from 85 percent to 100 percent; Water supply 12 hours; and Efficiency in management for:

Regularization of illegal connections; Equal distribution of water; Repair of leakages of old reservoirs; Enforcement of repair of private individual connections; Involvement of private public partnerships; Proper design and coordination; and Capacity building in all categories.

Sewerage targets

Maximum area coverage within six years under JNNURM; Regularization of illegal connections; Simultaneously lifting of muck with tractor trolleys; Regular cleaning of sewer in participation with private Mohalla

Sanitation Committees as well as to check broken and open manholes;

Proper design and coordination; All road gullies to be disconnected from sullage sewers and to be

connected with storm sewers in a phased manner; and To create awareness, particularly in slum areas, to discourage

throwing of municipal solid waste (MSW) in sewer lines.


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5. Water Supply and Sewerage Finances LMC generates revenue from a variety of taxes, fees and user charges but needs state government approval to change the rate at which they are applied or introduce new ones. This constrains the scope for increasing revenue and improving service standards; nevertheless LMC‟s finances have shown a growing operational surplus over the last five years, with a cumulative annual growth rate of 7 percent. Roughly 70 percent of the city‟s income comes from octroi/share of value added tax (VAT), property tax and water supply and sewerage charges (Table 6.1). Table 6.1: Increase in Own Sources of Revenue from 2002-07 ( in Rs. million)

Head of Account 2002-03 2003-04 2004-05 2005-06 2006-07 CAGR

Octroi /share of VAT 1109.30 1140.28 1225.55 1351.91 1351.07 5%

Property tax 333.52 344.25 355.65 376.67 412.83 5%

Advertisement tax 1.57 1.21 1.11 4.24 30.63 110%

Tehbazari (market fees) 14.62 16.53 19.61 18.83 24.54 14%

Water & sewerage 183.41 235.1 187.16 213.25 225.01 5%

Other misc income 266.11 225.06 234.04 477.7 802.66 32%

Total 1908.53 1962.43 2023.12 2442.6 2846.74 11%

Water and sewerage charges contributed more than 60 percent of the nontax revenue income in 2006-07, but have been growing at cumulative rate of just 5 percent. Revenue expenditure has grown steadily at a rate of 13 percent over the last five years. Almost 60 percent of the expenditure in 2006-07 was on establishment, though there is a recruitment freeze and the number of staff has fallen from roughly 8,000 a few years ago to the current level of 6,241 (ICRA Limited, 2008). Power is the second largest expenditure head, and accounts for 23 percent of the total. The power-intensive water supply is responsible for the huge bills. O&M costs constitute 18 percent of the total and are increasing due to old and deteriorating assets. Loans taken for water supply and sewerage services are presented in Table 6.2. Capital expenditure overall has been increasing at 11 percent per annum, and on water supply and sewerage account at a cumulative rate of 20 percent (Table 6.3).

Table 6.2: Loan and Interest for Water Supply and Sanitation (in Rs. million)

Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07

Principal 1.75 23.71 128.06 43.9 83.52

Interest 42.39 49.16 41.62 31.54 39.47


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Table 6.3: Income and Expenditure Account of Ludhiana Municipal Corporation (in Rs. million)

Sr.

No

Fin

an

cia

l Y

ea

r

Ow

n S

ou

rce

Rev

en

ue

Dev

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ha

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Inc

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Cap

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Lo

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(HU

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Su

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s/D

efi

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To

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Su

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s/D

efi

cit

1 2 3 4 5(3+4) 6 7 8 (6+7) 9 10 (5+8+9) 11 12 13

14 (11+12+13) 15

16 (14+15) 17(5-14)

18 (10-16)

1 2002-03 1908.6 158.33 2066.93 19.57 71.43 91 13.4 2171.33 724.04 142.49 189.93 1056.46 1538.77 2595.23 1010.47 -423.9

2 2003-04 1962.5 2.62 1965.12 13.47 0 13.47 17.97 1996.56 780.79 308.94 174.73 1264.46 1592.02 2856.48 700.66 -859.92

3 2004-05 2023.17 0 2023.17 20.91 73.1 94.01 15.97 2133.15 903.88 305.63 178.88 1388.39 1850.31 3238.70 634.78 -1105.55

4 2005-06 2442.74 96.88 2539.62 9.29 111.17 120.46 16.99 2677.07 928.40 355.06 279.85 1563.31 2154.46 3717.77 976.31 -1040.7

5 2006-07 2846.81 224.36 3071.17 5.52 40 45.52 15.79 3132.48 1042.07 396.74 310.64 1749.45 2356.18 4105.63 1321.72 -973.15

CAGR 11% 9% 10% -27% -13% -16% 4% 10% 10% 29% 13% 13% 11% 12% 7% 23%


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5.1 Cost recovery: current performance The O&M Cell receives no direct or indirect grants from the state government to subsidize service delivery; instead, LMC funds the services via transfers from its general surplus. The Cell has its own budget for water supply and sewerage, but is not required to be financially self-sustaining. Currently, it has an operational loss which is growing at a cumulative rate of 14 percent. One factor in this is the state government‟s exemption policy which has removed a large number of consumers from the water and sewerage charge net. A second factor is that, while overall revenues have grown by 5 percent, operating expenditures have grown by 10 percent. Power costs are the principal expenditure head, followed by establishment and O&M (Table 6.4).

Billing and collection systems are computerized and operated on a quarterly cycle, with a 10 percent rebate for bills paid within 15 days. Late payments (after one month) are, in theory, subject to an interest rate of 18 percent per annum. However, collection efficiency is low: just 15-16 percent overall in 2006-07, and 14 percent for the domestic sector (Table 6.5). Annual water charge billing saw a steep decline in 2006-07 following the announcement of an exemption from water and sewerage charges to plots below 125 square yards. This included the waiving of all arrears for such properties. To improve collection efficiency, LMC began a drive to seal and sell defaulters‟ properties, in accordance with its powers under the Municipal Act. Nearly 100 properties were sealed in 2007-08 but with little impact, given the small number. In contrast to the domestic sector, demand from commercial consumers has increased substantially. Again, however, there are substantial arrears, currently standing at 26 percent (Table 6.6). Note also that the 126-250 square yard property slab accounts for 70 percent of total demand but has the lowest collection efficiency, at 12 percent.

Table 6.4: Operative Account with regards to Ludhiana Municipal Corporation’s Water Supply and Sewerage Services (in Rs. million) Financial

Year Own Source Revenue

Estab. Exp.

Power O&M Total Operating Exp.

Capital Exp.

Total Exp.

Operative Surplus/ Deficit

Surplus/ Deficit

1 2 3 4 5 6 7(4+5+6) 8 9(7+8) 10 (3-7) 11(3-9)

1 2002-03 183.41 153.39 133.62 81.20 368.21 134.60 502.81 -184.80 -319.40

2 2003-04 235.10 167.77 164.95 87.89 420.61 202.27 622.88 -185.51 -387.78

3 2004-05 187.16 199.79 167.58 73.93 441.30 285.44 726.74 -254.14 -539.58

4 2005-06 213.25 196.40 202.71 78.44 477.55 180.62 658.17 -264.30 -444.92

5 2006-07 225.01 221.96 224.65 91.81 538.42 279.49 817.91 -313.41 -592.90


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Table 6.5: Demand and Collection Statement for Water Supply and Sewerage Services (in Rs. million)

Domestic Demand Commercial Demand

Ye

ar

De

ma

nd

Arr

ea

r

Intt

Arr

ea

r

To

tal

Do

me

stic

De

ma

nd

De

ma

nd

Arr

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r

Intt

Arr

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To

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Co

mm

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ial

De

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To

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De

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Re

co

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ry

(as

pe

r

Co

mp

. R

ec

)

Co

lle

cti

on

Eff

icie

ncy

2002-2003 72.30 479.87 43.18 595.37 13.65 109.43 9.84 132.92 728.29 123.19

17%

2003-2004 156.90 612.78 55.20 824.88 30.90 116.41 10.48 157.80 982.68 199.30

20%

2004-2005 117.85 690.61 37.59 846.05 22.09 145.76 7.95 175.80 1021.85 132.16

13%

2005-2006 141.78 858.83 39.93 1040.55 56.91 157.71 14.14 228.77 1269.32 151.08

12%

2006-2007 102.34 627.58 28.47 758.40 66.95 236.35 21.31 324.62 1083.02 169.60

16%

2007-2008 103.05 689.94 31.05 824.04 37.31 279.38 12.57 329.28 1153.32 102.84

Table 6.6: Plot-wise Demand and Collection Statement for Water Supply and Sewerage Services as of 2006-07 (in Rs. million)

Domestic Demand Commercial Demand Recovery Collection Efficiency

Are

a I

n S

q y

ard

s

Dem

and

Arr

ear

Inte

rest A

rrear

To

tal D

om

estic

Dem

and

Dem

and

Arr

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Inte

rest A

rrear

To

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om

me

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l

Dem

and

To

tal D

em

and

Recovery

fro

m

Dom

estic

Recovery

fro

m

Com

merc

ial

To

tal R

ecovery

CE

in

Dom

estic

CE

in

Com

merc

ial

To

tal

Co

llecti

on

E

ffic

ien

cy

0 - 125 7.12 40.59 2.27 49.99 12.11 61.10 5.49 78.72 128.71 8.15 8.61 16.76 16%

11%

13%

126 - 250

78.45 532.50 24.13 635.09 28.72 120.85

10.88 160.47 795.56 76.18 18.31 94.49 12%

11%

12%

251 - 500

14.70 62.56 2.86 80.14 11.14 30.20 2.73 44.07 124.21 21.84 9.47 31.31 27%

21%

25%

Above 500

9.18 32.49 1.46 43.14 14.96 24.18 2.19 41.34 84.48 8.11 18.96 27.07 19%

46%

32%

Total 109.47 668.15 30.74 808.37 66.95 236.35

21.31 324.61 1132.98 114.3 55.36 169.66 14%

17%

15%

5.2 Tariff structure The tariff structure is set by the state government. Tariffs were last changed in 2003 when annual rates were set for the period up to 2007-08. Prior to this, tariffs had not been revised since 1993, though the Municipal Act requires revision every four years. The current structure (Table 6.7) is based on volumetric charges for metered connections and on plot size for unmetered connections. Only commercial and industrial connections have meters. There are 168,194 registered water connections and 143,927 sewerage connections, 90 percent of them domestic.


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Table 6.7: Existing Tariff Structure for Water Supply and Sewerage Services in Domestic Sector

2003-04 2004-05 2005-06 2006-07 2007-08

Water Supply (Metered) Rates (Rs./kl)

Domestic 2.00 2.60 3.20 3.50 3.80

Nondomestic 4.00 5.20 6.40 7.00 7.60

Water Supply (Unmetered) Rates (Rs./month)

Up to 125 sq yards

50.00 55.00 60.00 exempted exempted

125 to 250 sq yards.

75.00 80.00 90.00 100.00 105.00

250 to 500 sq yards

100.00 110.00 120.00 130.00 140.00

500 sq yards and above

Only metered connections

Sewerage Rate (Rs. per connection/month)

Up to 125 sq yards

50.00 55.00 60.00 exempted exempted

125 to 250 sq yards

75.00 80.00 90.00 100.00 105.00

250 to 500 sq yards

100.00 110.00 120.00 130.00 140.00

500 sq yards and above

Equal to water charges

Own source of water supply

Equal to water charges of metered water supply

New connection fee

Rs.500 (all consumer categories). Meters are to be arranged by the consumer at own cost including cost of testing and seal.

Road cutting charges

Type of Road Water Supply Sewerage

Unpaved Road 3.00 6.00

Brick Road 10.00 20.00

Cement Roads 30.00 60.00

Metalled Road 40.00 80.00

Penalty clause In case of defect in water meter, the first bill shall be issued on average basis of the last three bills and thereafter if meter is not repaired by the consumer at own cost the rate shall be three times the average charges.

Due to the exemptions policy, only 96,340 water connections and 84,448 sewerage connections are subject to charges. A further 11,000 connections will be added to the books following a recent scheme for regularizing illegal connections. The number of domestic customers was rising until the amnesty came into force and removed 78,000. Customers in the commercial category have almost remained stagnant for six years (Table 6.8).

Table 6.8: Consumer Profile for Ludhiana Municipal Corporation’s Water and Sewerage Charge Customers

Year Domestic Commercial

2002-03 140964 15481

2003-04 160532 15450

2004-05 163747 15083

2005-06 170596 15347

2006-07 92569 15743


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6 Analysis

6.1 Cost recovery LMC has not recovered its O&M costs for many years. Own resources revenue from water and sewerage services falls short of operational expenditure by about 53 percent, and if capital expenditure is included (without depreciation), the gap widens to 68 percent. The same trend can be observed in terms of cost and revenue per kl. The cost of production is roughly Rs. 3.26 per kl, based on operating expenditure only, and Rs. 5 per kl including capital expenditure and depreciation. Against this, revenue is just Rs. 1.36 per kl. Despite the power cost of pumping, the cost of production is relatively low compared to cities such as Hyderabad and Chennai where it ranges from Rs. 7 to 12 per kl. It should, therefore, be possible to achieve a much better level of cost recovery. The exemption policy is the principal cause of the deficit, but NRW is another factor. This results from: 1. Illegal connections LMC recently legalized some 11,000 connections under its amnesty scheme, whereby no penalty was charged to offenders if they paid a connection fee and road cutting charges. While this is encouraging, the factors giving rise to illegal connections have not been resolved. Ludhiana residents are forced to make illegal connections because LMC provides only one ½” diameter connection per plot irrespective of the number of families living there. This restriction of giving one ½” diameter connection per plot is related to the exemption policy. If more than one connection was provided to a single plot, each individual plot would demand any number of free connections per plot. On other hand, the current policy of providing one free connection per plot is penalizing multibuilding and/or multiple family households as one connection is provided irrespective of the number of people living on an individual plot. Thus occupants often increase the number of available connections illegally.

Table 6.9: Water and Sewerage Consumer Profile (Plot Size-based) in Ludhiana Municipal Corporation Area (October 2007)

Domestic Connections Commercial Connections Total Connections

Area (sq yard)

Water Connection

Sewer Connection

Water Connection

Sewer Connection

Total Water Connection

Total sewer Connection

1-125 71854 59479 3578 4268 75432 63747

126-250 72358 58432 5147 6989 77505 65421

251-500 9389 8949 1682 1690 11071 10639

Above 500 2449 2283 1737 1837 4186 4120

Total 156050 129143 12144 14784 168194 143927


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2. Captive Production1 Captive production by industries is estimated at 60,000-70,000 KLD. If this was tapped by stricter vigilance, substantial additional revenues would be generated. 3. Standposts and tankers The Corporations provides free supplies to some 33,000 slum dwellings via 500 stand posts and 25 tankers. 4. Technical Losses In the absence of source and end point metering, it is difficult to estimate technical losses due to leakage but they are likely to be substantial given the old and deteriorating infrastructure. The Corporation could also harness substantial additional revenue from the undeclared area (15 percent of the city), where residents currently use private boreholes. Apart from the undeclared area, there appears to be a mismatch of 75,000 between the number of households in the city and the number of connections. LMC should undertake a physical survey to explain this, and use it to inform a revision of the exemption policy. Political interference in the functioning of the service has contributed to the low collection efficiency and to dissatisfaction amongst the workforce.

6.2 Economic efficiency Due to exemption policies and a lack of metering for the vast majority of connections, customers have no incentive to moderate their consumption. The plot size-based tariff structure is also wanting in that the plot size is not an efficient indicator of demand or economic status, and the property database is subject to manipulation.

6.3 Equity and protection of vulnerable sections By exempting all residential self-owned properties up to plots of 125 sq yard from water and sanitation service charges, the government has extended the subsidy to many households that are not actually poor; plots for slum dwellers, for example, rarely exceed 40 sq yards. Slum dwellers were, in any case, provided free water via standposts and tankers before the exemption was introduced. Following exemption, they continue to receive an inadequate service without legal house connections.

6.4 Affordability Based on WHO guidelines that up to 5 percent of the family budget can reasonably be spent on meeting subsistence water needs, and using the Planning Commission of India poverty line of Rs. 454 per month for urban areas, tariffs in Ludhiana would be affordable to the poor. However, most poor residents pay nothing to LMC.

1 Captive Production is a term used to describe the practice of industrial consumers producing

(extracted or have delivered) their own water as opposed to buying it from the municipal system.


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6.5 Resource conservation This is a very significant issue for Ludhiana given the depleting groundwater source and the current lack of alternatives.

6.6 Acceptability and practicality Political intervention in tariff setting has ensured that tariffs are kept low - and not levied at all on many domestic users. While this may be popular, low tariffs and inefficient collection mean that the service operates at a loss and lacks vital resources for maintenance and improvements.

7 Summary The current tariff structure addresses the key concern of affordability but does not achieve cost recovery, economic efficiency, resource conservation and even „equity‟ given the extension of subsidies to consumers who do not need them. The principal obstacles to cost recovery are:

The exemption policy, which undermines all efforts to improve cost recovery;

NRW resulting from illegal connections (inevitable given the policy of providing a single connection to buildings under multiple occupation), free standpost and tanker supplies, and technical losses;

Low collection efficiency compounded by an incomplete and irregularly maintained customer database; and

Inadequate technical data on the piped network, making it more difficult to manage physical losses.

This said, there is considerable scope for improving revenue (Table 6.10). Table 6.10: Revenue Generation Potential for Ludhiana Municipal Corporation

Revenue Generation Area Potential Revenue (in Rs. million)

Doing away with exemption policy 181 (includes revenue from water supply and sewerage services)

Controlling illegal connections 13.862

Replacing captive production by industries by providing them water

166

Increasing coverage in undeclared area 86

Improving collection efficiency 165.44

Total 612.30

7.1 Recommendations In making recommendations, the current constraints on the autonomy of the service provider have been borne in mind. 1. The exemption policy should be revised (and preferably withdrawn) as a matter of urgency. If a subsidy is to be provided to poorer users, it would be more appropriate to set the relevant plot size at 30 sq yards, in line with JNNURM norms. Qualifying households could be offered an exemption from charges or charged a minimal flat

2 This calculation may suffer from duplication as it may contain some of the recently authorized

connections under the Amnesty Scheme.


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rate which enables recovery of O&M costs based on a nominal consumption of 20 kl per month for a household of five. This would amount to a monthly charge in the region of Rs. 60, assuming a production cost of Rs. 3.0 per kl. 2. The current flat rate of Rs. 105 for plots above 126 sq yards should be applied to all consumers having a plot size above 30 sq yards. However, LMC would need to regulate the supply to these households if they are charged a flat rate, to ensure cost recovery and reduce wastage. This should achieve equity with fairness while assuring the provision of basic services. 3. In the longer term, in line with JNNURM provisions, LMC should work towards 100 percent metering and a two-part tariff structure: a fixed rate to recover fixed or sunk costs, and a volumetric tariff to recover the variable costs associated with consumption. To this end, LMC could provide free metered connections to properties up to 30 sq yards (25 sq m) and remove all standposts. A subsistence level of consumption (80 lpcd) could be provided free to the identified poor but a blanket subsidy for all consumers in the name of the poor should be avoided. For designated poor households, consumption beyond the lifeline amount could be charged at subsidized rates, as long as O&M costs are recovered. This would help to increase the number of formal connections and bring the poor into the water charge net. By linking consumption to charges, consumers would be provided an incentive to reduce waste. Tariffs for commercial and industrial users should also be reduced to encourage business, though cost recovery should not be jeopardized. The recommendations above would be subject to state government approval. There are other actions, however, that LMC could take at its own level to improve cost recovery: 4. Reduce NRW and increase coverage. This could be done by:

Extending the network to the undeclared area, with JNNURM support; Taking enforcement action to control captive production by industries; Improving administration and database management. Property tax data could

be used to identify illegal connections; the adoption of user-friendly billing and collection systems could also help;

Revising the exemption policy; and Mapping the existing infrastructure, then introducing flow meters and a leak

detection system. Leakage control could be outsourced to a private contractor.

5. Introduce resource conservation measures via policy and legislation and making a switch to volumetric charges for domestic users. Awareness campaigns could also help. 6. Reduce power costs, beginning with energy audits. New pumps may be needed, and could be procured and then maintained on a BOT basis. Were LMC able to implement these recommendations, it could easily achieve a 24x7 supply.

interim report on cost recovery and tariff practices for urban...

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