VI Annual International Conference on Public Policy

IIMB

Urban Drinking Water Sector Reforms in Brazil

ANJUM PARWEZ PGPPM 2011-13

Date : 29.12.2011

INDIAN SCENARIO

Urban Population
Rapid Urban Population Growth. 280 Million in the year 2000 (27.7% of total population). By 2015 it will be 32.5% of total population and it will reach 820 Million by 2051.

Major Challenge
How to keep the pace of infrastructure development in tune with the growth of the urban population.

Section 3 Water supply is one of the most important.

INDIAN SCENARIO Contd..

Issues related to urban water supply

Demand-Supply gap Limited hours of supply. Deteriorating financial and technical performance. Chronic inefficiencies. High Physical losses ranging from 25 to over 50 per cent. Un-economic tariff structure. Poor operation and Maintenance (O&M) practices. Poor collection efficiency. Substantial number of illegal connection. Low institutional credibility.

Section 3

Financial Shortfall Required Amount : US$ 64181 Million

Learning From Other Countrys Experience Brazil is one country which has gone through many challenges in water sector and has finally emerged in improving the situation

Brazilian Experience
Early Phase : 1964 to 1971
National Housing Bank established in 1964 to implement urban development policy. Universal water supply was recognised as priority sector. Municipalities were given a role in the water supply. Municipalities formed autonomous departments or mixed ownership companies. Majority of the municipalities took the responsibility of water supply. Funding from BNH.

Brazilian Experience Contd National Sanitation Plan : 1971

Creation of 27 state owned water and sanitation companies. State owned companies were made responsible for construction, operation and maintenance of water supply system. License to be given by municipalities. Corporate culture brought in state owned companies. Cross subsidy to weaker municipalities. Full cost recovery with a rate of return of 12%. An investment of US$ 6000 million between 1971 and 1981. Coverage increased from 60% in 1970 to 86% in 1990. Water services to people increased from 30 million in 1971 to 64.6 million in 1981. Creation of competent manpower in state managed companies. Standardisation, research, technology transfer.

Brazilian Experience Contd

Weaknesses
focus was more on construction and expansion and less on operation part. highly centralized system. public involvement in the policy making was systematically warded off. The role of municipalities was reduced only to the signing of the concession agreement. With the end of military rule in 1985, the Housing Bank was dissolved in 1986.

Brazilian Experience Contd From 1964 to 1995, the water supply sector was dominated by public sector companies. Good results however a long period of 30 years accumulated a long list of problems.
Increase in physical losses. Insufficient commercial initiative. inadequate tariff policies and structures. lack of effective regulations. loss of billings and revenue. Overstaffing due to political interference. Delays in responding to opportunities for technical and administrative modernization. large operating costs. Lack of administrative continuity. Un-professional management. Challenges of mobilising the financial resources. The estimated investment requirement for Brazil in mid 90s to provide water and sewerage services were R$ 42 billion over a period of 15 years.

Brazilian Experience Contd Major policy change in 1995

Federal concession law facilitating private sector participation. Federal, state, and local governments allowed to contract with the private sector for the provision of public services. State/local governments authorised to pass concession legislation. Water regulatory law of 1997 authorized municipalities to grant concessions. Element of competitiveness and transparency was brought in awarding of concessions. State owned companies were put to compete with private companies in getting concession contract from municipalities. Since 1996, 65 municipalities in 10 states that serve 7 million customers signed concession contracts with private service providers. investment commitments by the private sector in Brazil's water and sanitation sector reached US$ 3 bn in 1994-2004. many of the state owned companies got their shares listed in Brazilian stock market as well as on the New York Stock Exchange.

Brazilian Experience Contd

In January 2003 President Silva assumed office.

Luiz

Incio

Lula

da

Creation of a Ministry of Cities and the Council of Cities with the purpose of 'proposing goals for the formulation and implementation of national urban development policy, as well as monitoring and assessing its execution". To further promote Public Private Partnership, Federal Public Partnership Law was enacted in 2004. A private trust fund named FGP (Fundo Garantidor de Parcerias Pblico-Privadas) was created as a backstop facility that will guarantee governments financial commitments under PPP contracts.

Brazilian Experience Contd A new regulatory framework has been put in place in 2007 with the passage of Law No.11.445, known as Basic Sanitation Law Integrality of steps and transparency of actions based on information systems. Safety, Quality and Regularity. Municipality the focal point. The standard of service has to be well defined. The municipality has to establish user rights and obligations. Every aspect like planning, service provision, management, fiscalisation and regulation has the social control

Brazilian Experience Contd

Private Companys performance

The average productivity index of private company is 3.92 whereas for state owned and public administered company it is 4.38 and 7.89 respectively. Lower losses of water in case of private companies. It is 34.6% on average in private companies whereas in state owned companies, the average loss is 46.59%. The average tariff of private companies are R$ 1.366 per KL which is less than the average tariff of state owned companies which is R$ 1.4641 per KL.

Learning from Brazilian Experience

Paying Capacity. In India the average expense on water supply by lower middle class family is about US$ 10 annually. It comes to about 0.5% of the income. In case of Brazil it is 2.3% to 3.4%. There is enough scope to increase tariff in India. Strong role of federal govt. In India it may not be possible to the extent of Brazil however the releases from GOI to states in urban sector may be linked to reform performance by states in water sector. Focused approach to reach the poor. By providing access of safe drinking water to poor section and slums, the social inequality may be reduced to great extent. Soft loan to private operators who have schemes focused on poor.

Learning from Brazilian Experience Contd.

Targeted Subsidy
Metering and billing mandatory for all. For poor the bill will be paid by federal district where the monthly consumption is up to 10 cubic meter. The system of targeted subsidy will improve the metered connection. This will lead to improved collection efficiency. PPP model has to vary from one city to another depending upon local conditions.

PPP models

Learning from Brazilian Experience Contd. Flexibility in Private Participation. there are no model approaches that can be adopted by governments for improving WSS services. The PPP model for each city has to take into account the specific conditions as well as the principal reform objectives of that city. Federal Guidance on PPP models. Setting up Standards on concessions that involve payment of subsidies to private partners. In case of India such standardisation of PPP in water sector is yet to be placed properly.

Learning from Brazilian Experience Contd.

Regulatory Framework. privatization is not a sufficient condition to improve efficiency, unless coupled with regulation to curtain anticompetitive practices. Strive to Improve. Brazil has always looked back and has tried to improvise the policy to improve the water supply condition. Tariff parity between Public and Private sector Projects. The general perception in India is that private sector participation will increase the tariff and most of the groups resisting PPP give this logic. The experience of Brazil breaks this misnomer.

Learning from Brazilian Experience Contd. Cost Recovery. Full cost recovery with a rate of return of 12%. This provided enough capital for rotation and taking up new projects and expansion. Priority Sector. Water supply identified as priority sector. Government Guarantee. A private trust fund named FGP (Fundo Garantidor de Parcerias Pblico-Privadas) was created as a backstop facility that will guarantee governments financial commitments under PPP contracts.

Learning from Brazilian Experience Contd. Dynamic Database. In Brazil, the Sistema Nacional de Informacoes (SNIS) database successfully incorporates benchmarking within water sector. SNIS assist the Federal government in prioritizing water sector investments. Promoting Partnership between domestic and International companies. This type of arrangement help in building the capacity of local companies. Exploring Bond Market for ULBs. Multiple sources of funding including debt from financial institutions and capital markets. Listing of State Owned Companies in stock exchange.

Thank You