Shifting Governance Models in Urban Water and Sanitation

1. Shifting Governance Models in Urban Water and Sanitation Paper prepared for the “The 21st Century Indian City: Developing an Agenda for Urbanization in India” March 22-24, 2011 Alison Post Assistant Professor Political Science and Global Metropolitan Studies U.C. Berkeley

2. Outline of presentation • Place Indian case in comparative perspective through discussion of reform initiatives in other countries in developing world • Will focus on two main reform initiatives: • Decentralization • Institutional reforms designed to isolate service providers from political pressure • Argument: both initiatives based on unrealistic assumptions about politics of service provision and hence did not solve problems

3. Historical backdrop to reforms • During import substitution (ISI) era, national agencies managed systems in many developing countries • In periods when governments had good access to finance  important gains in coverage, esp. under democratic regimes

5. Problems emerged with the national provision • Several problems emerged by the 1970s and 1980s • Focus on new infrastructure rather than system maintenance and commercial management • Difficult politically to raise tariffs in line with inflation  system financing via general tax revenue • Model difficult to sustain in the wake of the 1980s debt crisis • Led to “low level equilibrium”

7. Diagnosis: Incentives Problems • Common diagnosis in policy circles and international financial institutions  problems of sector derive from two incentive problems: • Systems managed at too far a distance from the citizens who consumed their services • Systems deprived of tariff revenues leaving little money for maintenance because of influence of politicians with short-run concerns

8. Decentralization • Decentralization would ensure service provision more responsive to local conditions in two senses: • managers would have better information about service needs • would be held more accountable to local populations

9. Insulation from Politics • Incentive problem: politicians’ electoral and patronage concerns prevent them from enforcing payment and levying sufficient tariff revenue to finance maintenance and system expansion • Low tariffs in short-run interest of consumers, but in long run detrimental to health of population • Proposed solution: shield systems from the direct influence of elected officials through: • Delegation of services to ring-fenced special purpose agencies • “Contracting out” to private service providers

10. Experiences with Decentralization • During the 1980s and 1990s, a large number of developing countries decentralized services • International financial institutions promoted this shift through lending programs • National politicians decentralized when it was consistent with domestic political incentives (fiscal motives common) • Trend particularly strong in Africa, Latin America, Eurasia, and the Asia-Pacific region

11. Responsibility for Urban Water and Sanitation Systems in 2008 Data source: United Cities and Local Governments (2008).

12. Responsibility for Urban Water and Sanitation Systems in 2008

13. Responsibility for Urban Water and Sanitation Systems in 2008

14. Responsibility for Urban Water and Sanitation Systems in 2008

15. Effects of Decentralization I • Nascent literature suggests that decentralization is not a panacea • Incentives to keep tariffs low and refrain from punishing customers for nonpayment of bills are stronger at the local level • Pressures to devote firm revenues to patronage employment and new household connections rather than basic maintenance • “Accountability” achieved is one that focuses on short-term, rather than long-term consumer interests

16. Effects of Decentralization II • National and intermediate tiers of government retain important financial and regulatory roles following decentralization • Local systems often remain dependent upon higher tiers of government for the financing of key pieces of infrastructure • Presence of shared responsibility makes it difficult for voters to attribute blame or credit to the right political actors • “Shared governance” also leads to coordination problems

17. Reforms to Shield Providers from Politics • Publications and lending programs launched by international financial institutions outlined reforms designed to insulate utility managers from political pressures • This would free providers from political pressures for patronage employment, low tariffs, low collection rates • Would allow managers to consider long-run objectives such as system maintenance

18. Institutional Reforms for Public Entities • Publicly-owned providers could be improved through institutional changes that gave providers greater operational independence • Would allow service providers to implement a series of controversial policies designed to help them to cover both operational costs and investment through tariff revenue.

20. Private Sector Participation • International financial institutions and academic analysts promoted a more dramatic variant of these institutional reforms during the 1990s in the context of the Washington Consensus reform package • Range of responsibilities could be “contracted out,” and contract compliance monitored by regulatory agencies

22. Effects of Institutional Changes I • Existing case studies suggest that institutional reforms have increased, rather than decreased, politicization • De jure independence is not the same de facto independence • Utility directors appointed by elected officials • “Independent agencies” can be heavily dependent upon subsidies for operations and/or the construction of basic infrastructure

23. Effects of Institutional Changes II • Cost recovery measures introduced by both public and private increase the salience of and level of political controversy • NGOs and other groups attack such policies • Cost recovery measures have, understandably, elicited stronger attention and controversy when private firms manage services • Firm threats to sue their government partners in international tribunals if governments violate contract provisions have added further to tension • Result: uptake of governance reforms and cost recovery policies has been uneven

24. Effects of Institutional Changes III • Many governments now opting hybrid “public-private partnerships” that include less visible roles for private capital • Ex.: SABESP, the water and sanitation provider for the São Paulo metropolitan area, 49% equity sold on New York Stock Exchange

25. Conclusions • Institutional reform initiatives in the water and sanitation sector in developing countries promised to correct incentive problems that trapped service providers in a “low level equilibrium” • Rather than improve accountability, decentralizing reforms have created complex systems of “shared governance” • Efforts to insulate service provision from electoral politics have done anything but that