The World Bank

Inefficiency of Rural WaterSupply Schemes in India

Paper 2

June 2008

Policy Paper extracted from the World Bank Study on Review of Effectiveness ofRural Water Supply Schemes in India, June 2008

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In the last one-and-a-half decades, there hasbeen an annual average expenditure ofabout one billion US dollars in the rural

water supply sector in India. This has led toan appreciable increase in coverage (from75 percent in 1997 to 97 percent in 2006,according to official statistics), but the overallimprovement in the provision of water supply inrural areas has not been commensurate withthe level of expenditure undertaken due toinefficiencies and wastages of various kinds. The10-state study on the Effectiveness of Rural WaterSupply Schemes, undertaken by the World Bank atthe request of the Government of India, haslooked at various aspects of ‘inefficiency’ alongwith measures to address these issues.

Cost of Water

The total cost of water supply per kiloliter (KL)is a useful summary measure of resource useefficiency. This has been estimated for supply-driven and demand-driven piped water supplyschemes for the various states covered in thestudy. The total cost of water has been computedby taking into account the capital, and operation

and maintenance (O&M) cost of the mainscheme, the capital and O&M cost ofsupplementary government-provided sources,the institutional cost, indirect power subsidyprovided to the schemes, the cost of servicesprovided by Support Organizations/non-government organizations, and the coping costborne by households such as the opportunity costof time spent on water collection, expensesincurred on own water source, and for the repairof government-provided sources. This is found tobe high with an average of about Rs 38 (US$0.9)per KL for the supply-driven schemes of the10 states together, compared to an economiccost1 of about Rs 16 (US$0.3) per KL for a goodperforming scheme. The schemes underdemand-driven programs have a distinctly lowercost of Rs 26 per KL (US$0.6) of water supply ascompared to schemes under supply-drivenprograms. The overall efficiency of schemesunder demand-driven programs is greater thanthat of schemes under supply-driven programs.

Currently, the supply-driven rural water supplyschemes dominate the scene. If the cost of waterin supply-driven schemes could be brought downto that of the demand-driven scheme, therewould be savings of resources of about Rs 12 perKL or about Rs 120 per household per month,assuming the household water consumption level

Inefficiency of Rural WaterSupply Schemes in India

1 The economic cost is derived from the cost norms for various states. Efficient institutional costis taken as 10 percent of the total cost. It is assumed that water could be supplied at 70 lpcd.Assuming that a proportion of households would access standposts and will spend time tocollect water (about one hour each day), the cost of water including the cost of time spent wouldbe about Rs 23 per KL (US$0.5).

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(from all sources) to be about 70 liters per capitaper day (lpcd). This is quite a large saving ofresources, which could be put to alternative usein rural areas, benefiting the rural people.

Sources of Inefficiency

Why is the cost of water so high, especially insupply-driven schemes? Four important reasonsare: (a) the high capital cost of the schemes;(b) high institutional costs associated with theprograms; (c) the existence of multiple schemesserving the same population leading to resourcewastage; and (d) unsatisfactory performance ofthe schemes in terms of the quantity of watersupplied in relation of design supply and inother respects, forcing the households to incursignificant coping costs.

Excessive capital cost: Compared to the costnorms, the capital cost of schemes is found to behigher by 50 percent or more in 18 percentcases. It is higher than the norm by 100 percentor more in 11 percent cases. This obviouslypushes up the cost of schemes. A second factorthat tends to raise the capital cost of schemes isthat in many cases the economies of scale are notbeing reaped. Econometric analysis of the costdata of piped water schemes reveals significanteconomies of scale—as the number ofhouseholds covered by the scheme goes up, thecost rises less than proportionately. A study of

Among existing groundwater-based schemes,about one-third are in size below 200 households.The implication is that in many cases a largerscheme than the existing ones would be able toreap economies of scale and reduce cost. On theother hand, there are a number of surfacewater-based schemes serving more than 7,000households, with huge diseconomies in scale.

High institutional cost: The high institutionalcosts of supply-driven schemes tends to raisethe cost of water supply. In demand-drivenprograms, the institutional cost (as percent oftotal expenditure) is on average about11 percent. In supply-driven, the corresponding

Figure 1 Total Cost of Water Supply, Piped Water Schemes

Compared to the cost norms, thecapital cost of schemes is found tobe higher by 50 percent or more in18 percent cases. It is higher thanthe norm by 100 percent or more in11 percent cases

Source : Computed from survey data.

cost variation with scheme size in terms of thenumber of households covered shows that, forgroundwater-based supply, the size classes 500 to1,000 households and 1,000 to 1,500 householdshave relatively lower cost, compared to smalleror larger piped water supply schemes.

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figure is about 24 percent. There is, however,significant variation across states. The ratio ofinstitutional cost to total expenditure on ruralwater supply in the supply-driven programs is50 percent in Karnataka, 40 percent in Kerala,about 30 percent in Uttar Pradesh andUttarakhand, but much lower at about15 percent in Maharashtra. These variationsconfirm that substantial reduction in institutionalcost is possible.

A detailed examination of the components ofinstitutional costs reveal that in supply-drivenprograms more than 85 percent of theinstitutional costs are the salaries and staffwelfare costs, including gratuity and pension.The expenses on travel, publicity, and so on, arerather small in relation to a demand-drivenprogram. In the demand-driven programs, thestaff costs are the main item, but it accounts foronly a half of the total expenses. Travel and rentare important items of cost. Administrative costand office cost, other than rent and publicity,account for about 20 percent of the totalinstitutional cost. A comparison of the break-upof the institutional cost between supply-drivenand demand-driven water supply programsclearly shows that a part of the institutional costunder supply-driven programs may not be very

productive insofar as it is used merely to paysalaries and meet other staff costs for an undulylarge bureaucratic set-up created for theimplementation of the central and stategovernment schemes for rural water supply.

Existence of multiple schemes: Resourcewastage arises also from the existence ofmultiple schemes in the same area. Often, thepoor functioning of one scheme makes itnecessary for it to be supplemented by anotherscheme. Needless to say, this raises the overallcost of service provision to the government.Survey results bring out that about half of thehouseholds in Karnataka and Tamil Nadu areusing more than one scheme. The same appliesto the users of piped water schemes inUttar Pradesh. Overall, about 30 percenthouseholds are using multiple schemes to meettheir requirements.

Unsatisfactory performance of schemes: Theday-to-day operations of the piped water supplyschemes leave much to be desired. Theperformance is unsatisfactory in terms of boththe quantity and quality of water supplied.

A study of the water quality2 reveals that severalimportant parameters exceed the permissiblelimits in a significant proportion of cases(Figure 2). In regard to water consumption, the2 Water quality study has been undertaken for 7 states out of the 10 surveyed.

Figure 2 Water Quality, Rural Water Supply Schemes (Percent of Sample ExceedingPermissible Limit, by Parameter), Source End

Source: Water quality survey.

AP = Andhra Pradesh; KAR = Karnataka; KER = Kerala; MAH = Maharashtra; ORSS = Orissa; PUN = Punjab; TN = Tamil Nadu.

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The day-to-day operations of thepiped water supply schemesleave much to be desired. Theperformance is unsatisfactory interms of both the quantity andquality of water supplied

survey finds that the quantity of water obtainedby rural households from the piped water supplyschemes is commonly less than design, especiallyin summer months. In multi village and regionalschemes, for instance, the design lpcd is 47on an average, but the actual supply in summerreported by households is 31 lpcd.

Water consumption study (based on actualmeasurement rather than recall) reveals that thepiped water supply schemes meet only a minorpart of the water requirements of households.The quantity of water obtained from the schemeis generally well below the norm of 40 lpcdcurrently being used by the government for ruralwater supply (Figure 3). The implication ofsupplying a small quantity of water comparedto design is obviously a high cost per KL ofwater supply.

Some of the other dimensions of unsatisfactoryperformance of piped water supply schemes arethat the hours of water supply are lower thandesign, a section of households does not get daily

supply of water, and there are problems offrequent breakdowns. In multi village andregional schemes, for example, the actual hoursof supply on average are 3.3 as against theaverage of design hours of 8.

Some of the piped water schemes (20 percent to30 percent) do not function for many days ina year due to system breakdowns (annualbreakdowns is 23 days in Karnataka and 36 daysin Uttar Pradesh). Around 30 percent householdsusing piped water schemes do not get dailysupply in summer (some do not get daily supplyeven in other seasons).

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Costs borne by households: The unsatisfactoryperformance of the piped water supply schemescompel the rural households to adopt copingstrategies in the form of traveling considerabledistances and standing in long queues to collectwater, storing water, incurring expenses onprivate water sources, and incurring expenses onrepairing public water sources. These and othermeasures taken by households (for example,some households boil water) impose a heavy coston them. The average coping cost per householdis Rs 81 (US$1.8) per month (about 3 percent ofincome), ranging from Rs 32 (US$0.7) to Rs 287(US$6.5) per month across different categoriesof schemes.

Defunct schemes: Another dimension ofinefficiency is that many schemes get defunctbefore they complete their useful life. Accordingto the results of the Habitation Surveyundertaken in 2003, about 28 percent of spotsources in Kerala are defunct. This proportion insome of the other states covered in the study is17 percent for Tamil Nadu, 14 percent forMaharashtra and Karnataka, and 10 percent forUttarakhand. Information from other sourcesindicate that in Karnataka, 19 percent of the

handpumps, 8 percent of the mini water schemes,and 7 percent of the piped water schemes aredefunct. In Uttar Pradesh, 10 percent of pipedwater supply schemes are defunct and 55 percentare only partially functional.

Resource saving: Given that there are markedinefficiencies in the rural water supply schemes,significant savings of resources can be madethrough efficiency improvement. For the 10states studied, the wastages of resources in theperiod 1997–98 to 2005–06 due to inefficienciesof the schemes has been assessed at Rs 470billion. These resources, if invested productivelyin these states, would have raised their netstate domestic product by about one percent.Evidently, the inefficiencies of rural waterschemes impose a significant cost tothe economy.

How to Reduce the Inefficiency ofRural Water Supply Schemes?

To reduce the inefficiency of rural water supplyschemes, action is needed basically on threefronts. First, a substantial part of the inefficiencyis traceable to high institutional cost. This can be

Figure 3 Water Consumption, Households Using Piped Water Schemes, by Scheme Type and State

Ruralwatersupplynorm

Source: Water consumption survey.

AP = Andhra Pradesh; KAR = Karnataka; KER = Kerala; MAH = Maharashtra; ORSS = Orissa; PUN = Punjab; TN = Tamil Nadu.

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Incentive for a state-wide approachcould be provided to states thatcommit upfront to developinga state-wide and sector-wide approachand adopt sector reforms, irrespectiveof sources of financing

reduced through decentralization, for example,shifting the responsibility of mini water schemesand single village schemes to Gram Panchayats(GPs) and user communities; unbundling multivillage schemes into smaller schemes andhanding over the O&M responsibility ofintra-village schemes to the GPs (except in‘over-exploited’ aquifers or in ‘quality-affected’areas, where multi village schemes, relying onsurface water, would be justified), and by movingover increasingly to demand-driven programs.

Even though the advantages of demand-drivenprograms are recognized, such programsconstitute at present only about one-tenth of thetotal expenditure being incurred on rural watersupply. The fact that charges are not imposed, orif imposed are not compulsorily collected frombeneficiary households in supply-driven schemes,discourages rural households from opting fordemand-driven schemes in which they would berequired to bear the entire cost of the O&M.

This obviously needs correction through theinstallation of an appropriate mechanism toincrease cost recovery in supply-driven schemes.To provide added encouragement to the reform

process, financial incentives should be provided tostates to adopt reforms for all new rural watersupply investment and address institutional andcost recovery issues for all schemes. Incentive toincrease state allocations under Swajaldhara couldbe provided through central funds, by linking thesewith matching or increasing state funds utilized forimplementing the Swajaldhara reform program;central funds can top-up state funds disbursed onSwajaldhara principles.

Similarly, incentive for a state-wide approach couldbe provided to states that commit upfront todeveloping a state-wide and sector-wide approachand adopt sector reforms, irrespective of sourcesof financing.

The analysis of cost data suggeststhat significant economies of scalecan be achieved when designingrural water supply schemes serving500 to 1,500 households, unless localconditions are such that only a smallscheme is cost-effective

Second, cost reduction can be made byensuring that new schemes are largeenough to reap adequate scaleeconomies. The analysis of cost datasuggests that significant economies ofscale can be achieved when designingrural water supply schemes serving 500to 1,500 households, unless localconditions are such that only a smallscheme is cost-effective. At present,engineering considerations tend todominate the choice of scheme size.Economic considerations also need to bebrought in for making this choice. For theexisting large multi village and regionalschemes, greater efficiency may be achieved bydividing such schemes into smaller schemes,and handing over the O&M responsibility to theGPs and user communities.

Third, there is need to develop mechanisms forenhancing ‘accountability’ in service delivery.The roles and responsibilities of institutions atthe state, district, and GP level need to be betterdefined with regard to policy formulation,financing and regulation (that should remainstate responsibilities), and ownership anddevelopment of assets, and operation of service(that should be devolved to local levels).Institutional changes are needed to establishgreater accountability and thereby improveefficiency. Going for contractual relationshipswith performance improvement targets toimprove service performance will definitely

help. To this end, the Panchayati Raj Institutionsand user committees could be permitted tocontract the planning, designing, construction,and maintenance functions to agencies of theirchoice, which could include the state engineeringagencies or private engineering consultantsand operators. Another innovative step is tounbundle the bulk water supply and waterdistribution in multi village schemes (in areaswhere such schemes are justified). Bulk supplycould be managed by a professional public orprivate operator, who could enter intoenforceable contracts with the GPs and/or usercommittees that are responsible for distributionat the local level.

Policy Papers

This is one of the six policy papers that have been prepared on the basis of theWorld Bank study on Review of Effectiveness of Rural Water Supply Schemes inIndia (June 2008). These policy papers, published along with the Report, are on thefollowing themes:Paper 1: Willingness of Households to Pay for Improved Services and AffordabilityPaper 2: Inefficiency of Rural Water Supply Schemes in IndiaPaper 3: Multi Village Water Supply Schemes in IndiaPaper 4: Operation and Maintenance Expenditure and Cost RecoveryPaper 5: System of Monitoring and EvaluationPaper 6: Norms for Rural Water Supply in India

The World BankJune 2008

The World Bank, New Delhi Office, 70 Lodi Estate, New Delhi 110 003, IndiaTel: (91-11) 24617241, 24619491

Author and Task Manager: Smita Misra(Sr. Economist, SASDU, World Bank

Pictures by: Guy Stubbs/Water andSanitation Program–South Asia

Created by: Write Media

Printed at: PS Press Services Pvt. Ltd.

This Report has been prepared by Smita Misra (Sr. Economist, SASDU,World Bank), the Task Manager of this study.

The study was carried out under the overall guidance of Sonia Hammam,Sector Manager, Water and Urban, SASSD, World Bank. Data analysis hasbeen undertaken by Professor B.N. Goldar and his research team at theInstitute of Economic Growth, Delhi and the consumer survey was carriedout by the ORG Centre for Social Research (a division of A.C. NielsenORG MARG Pvt Ltd). Comments and inputs at various stages ofpreparation from the following World Bank persons are gratefullyacknowledged: Michael Carter, Rachid Benmessaoud, Clive G. Harris,Alain R. Locussol, Francis Ato Brown, Alexander E. Bakalian, Oscar E.Alvarado, G.V. Abhyankar, R.R. Mohan, S. Satish, N.V.V. Raghava, andCatherine J. Revels (WSP-SA). Special thanks are due to the Departmentof Economic Affairs, Ministry of Finance, the Department of Drinking WaterSupply, Ministry of Rural Development, and the Rajiv Gandhi NationalDrinking Water Mission for their interest and collaboration in the study.Comments and data inputs during the preparation of the Report aregratefully acknowledged from R.P. Singh and M. Nagaraju (DEA),Bharat Lal and R.K. Sinha (RGNDWM) and their team, and therespective State Government officials.

The Report has been discussed with the Government of India but does notnecessarily bear their approval for all its contents, especially where theBank has stated its judgements/opinions/policy recommendations.