lessons from power sector reforms for the reform of the indian urban water sector

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Lessons from power sector reforms for the reform of the Indian urban water sector

Payal Malik Tuesday, 18 March 2008 00:00

Although in the larger hydrological picture, the urban consumer's water demand necessarily competes with that of the rural consumer and the farmer's demand for water as an input, the management of any given amount of urban water is a problem that can be sensibly isolated from the larger picture. This partial equilibrium problem was the object of this study. If one were to compile two lists, one of the areas of economic management that directly impinge on the day-to-day quality of life of all citizens, and another of the areas in which misguided policies have resulted in outcomes far short of potential outcomes, then it is reasonable to conjecture that the electricity and water sectors would have pride of place in both lists. In both cases, not only were policies followed that were contrary to good sense as dictated by the science of economics, but more perversely, they undermined the very political and economic interests whose furtherance was proclaimed by socialist rhetoric to be the raison-de-etre for these policies. Indian economic policy failures are often charitably excused by the plea that policy-makers were soft-hearted, but presumably hard-headed. However, an ex ante appraisal of the economics underlying these policies leads one to believe that they were soft-headed, while the ex post impact on the populace points to hardness of heart. While the continuance of these policies in the short run may be attributed to naivete and an ideologically blinkered world-view, or an inability to recognize and repair the unintended consequences of well-meaning efforts, their longevity points elsewhere. It is evident that the political and economic elites coalesced into a nexus that supped at the high table on the rents created by the misguided policies while placating the electoral vote-banks with a steady diet of socialist rhetoric and some populist crumbs from the table.

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As in every other area of economic policy-making, the populist consensus on so-called socialist strategies has been sturdy and tenacious enough to withstand all challenges short of a crisis or voter rebellion. The crisis in the electricity sector stems as much from the consumption aspirations of the citizenry as from the demands of factories, farms and service-providers who increasingly have to compete not only among themselves domestically, but also with the rest of the world. Somewhat differently, the crisis in the water sector is caused largely by the inability of existing water-management institutions to slake the thirst of consumers. Although in the larger hydrological picture, the urban consumer's water demand necessarily competes with that of the rural consumer and the farmer's demand for water as an input, the management of any given amount of urban water is a problem that can be sensibly isolated from the larger picture. This partial equilibrium problem was the object of this study. Intellectual map of the dirigeste What did the dirigeste view of the electricity and water sectors amount to?

First, water and electricity are often viewed as ``public goods'', although they do not have the properties required of public goods. Applying standard definitions, water and electricity are private goods. This seemingly innocuous error has been used to dictate inappropriate institutional design, and distort investment and pricing decisions. However, this error does not stem merely from intellectual lethargy. As in many other policy problems where the commodity in question is inappropriately labelled a ``public good'', the reason for this inappropriate categorization is not difficult to see. The inherent nature of a true public good does not allow straightforward commercial or economic cost-benefit analysis. As such analysis is invariably vitiated by considerations of externalities and some of the concerned goods being ``merit goods'', the planner or policy-maker has wide latitude and discretion in skewing decisions in a chosen predestined direction. Thus, by the sleight-of-hand of simply labelling private goods as






public goods, headroom is created for policy intervention and distortion. Another peculiar view espoused by radical Greens and anarchists is that water is a common property resource of the community and its allocation and value cannot, indeed should not, be determined using the standard economic paradigm. This warm and fuzzy view may be appropriate for small communities drawing their water from an unspoilt mountain stream or natural spring, but wholly inappropriate for large urban areas with treated and piped water. Water treatment and transport are costly activities and represent value addition to the raw water. The problem of designing institutions for the allocation of these costs is no different from that faced in a host of other commodity markets in which transport depends on a fixed common network. Secondly, in line with the philosophy of Soviet-style planning, which in its purest form sought to reduce the entire economy to one monolithic enterprise whose technology was represented by a vast input-output table that the planner used for decision-making purposes, electricity and water were viewed as the products of centrally controlled and very highly vertically and horizontally integrated ``sectors'' run by bureaucrats. Undoubtedly, the nature of technology involved (e.g., the network nature of the distribution system) organically forces a degree of horizontal and vertical integration. However, it stretches credulity to argue that the full integration of the value-addition chain with respect to both water and electricity were technologically determined. Clearly, scant attention was paid to the possibility of using functional distinctions to disaggregate the value-addition chain so that appropriate institutions could be designed for these functionally distinct activities. For instance, it is by now clear and well-accepted that electricity is not the product of a single vertically integrated industry but consists of at least three functionally distinct activities, namely generation, transmission and distribution, which admit quite different industry structures and allocation institutions. Thirdly, populism reduced prices, literally and figuratively, to ciphers that were incapable of conveying any useful economic






information. As politically determined prices were divorced from the underlying economic fundamentals of consumer preferences and production technology, represented by the forces of demand and supply respectively, they were incapable of serving any useful economic function such as guiding investment choices, technological choices, or consumption choices. For instance, apart from legal and institutional barriers to entry, absurdly distorted prices rule out private investment in most parts of the electricity and water sectors except when all commercial risks are eliminated by the provision of comprehensive state guarantees. Distorted pricing of inputs and outputs forces inappropriate choice of technology and spatial location of production activities. Finally, populist pricing provides final consumers with no incentive to economize and wisely use electricity and water, should they be lucky enough to actually get these goods. In short, lower than ``equilibrium'' prices of water and electricity encouraged demand and discouraged supply, thereby quantity-rationing a (substantial) number of potential buyers. It is telling that in the popular imagination water tariffs are often referred to as ``taxes'' rather than as ``prices''. This confusion neatly encapsulates a basic flaw in the status quo and indicates a direction for policy reform. Taxes as an economic category describe an impost by the state for the purpose of providing public goods or for redistribution of resources by fiat. Being artificial impositions by the state, they carry information about the state's moral stance, but little useful information regarding economic values, preferences, technology, etc. On the other hand, as was stressed by von Hayek, prices are the life-blood of the economic system as they incorporate and disseminate vital economic information with an efficiency that a tax cannot hope to match. So, changing tariffs from whimsically imposed ``taxes'' to economically-justified ``prices'' is a major part of the reform agenda. Fourthly, it is a corollary of the above characteristics that, as the management and pricing of water and electricity eliminated the possibilities of private investment and curbing demand, using public investment to augment supply was the only way to bridge the demand-supply gap. This reliance on a single policy instrument






resulted in a Soviet-style obsession with building visible ``temples of modern India'' without any effort to justify them commercially, or efficiently exploiting existing assets, or maintaining and upgrading existing systems, or finding appropriate alternative technologies instead of big projects. For instance, in the power industry, the obsession was to build new power plants rather than improve the woeful PLFs of existing plants, or to eliminate power theft; in the case of water, the obsession was to augment the amount of water going into municipal networks, without caring that most of the water simply leaks out of the network before reaching the consumer. Unfortunately, the statist planning mentality inevitably reduced the assets created by public investment to ends in themselves. Once created, these assets usually languish without a determined effort to see that they deliver the value that the planners expected from them. Populism implies that it is politically more advantageous to build new assets rather than do the harder work of maintaining existing ones. After all, a new water treatment plant or electricity generation plant built with public money is decidedly more visible and politically bankable than a less visible project to strengthen the distribution network. Such public investment has a number of other aspects. First, the paucity of public resources and the myriad demands on these resources for purposes that properly lie in the state's eminent domain (e.g., the provision of true public goods) mean that the opportunity cost of these funds is high. Secondly, public investment in projects with low average revenue implies large implicit subsidies to those who can access the resulting outputs. Thirdly, by subsidizing the consumption of the ``lucky'' (and needless to say, affluent and politically well-connected) few, public investment has (inadvertently?) served as a means for significant transfers across economic classes, albeit of the type purportedly not favored by promoters of populist policies. What is to be done? The solutions of the problems afflicting the water and electricity sectors require concerted policy responses in a number of directions. As the details of the required policies have been studied






above, it suffices here to place these policies in a broader intellectual and political context. First, it needs to be recognized intellectually that both water and electricity are private goods. A practical corollary is that the consumption of these goods needs to be accurately metered for each consumer. Treating these goods as ``public'' goods that are jointly consumed by a community implies a moral hazard problem leading to a tragedy of the commons. The broad principles governing the design of institutions for the welfare maximizing provision of private goods are well-understood, indeed staple, parts of the economics literature. These insights are being sharpened at the level of market micro-structure in sophisticated economies; see Wilson (2002). However, in India, the debate is still at a relatively rudimentary stage as we are still grappling with first-order problems of institutional design such as the role of the private sector in these markets, whether these goods should be allocated via the price mechanism, what should be the nature of regulatory design and the nature of contracts governing relationships among the players in these markets. In sophisticated economies, most of these elementary issues have been dealt with over the past two decades or so and the debate has moved on to second-order technical issues, e.g., the design of market micro-structure for spot, futures and option trading in these goods. However, as a latecomer to the party, India does have the great advantage of being able to learn from the experiences of other countries and being able to take into account the possible market micro-structure issues even while resolving the first-order problems. At this point, however, one encounters an ideological shibboleth that has characterized Indian policy-making over a long period: a desire to constantly re-invent the wheel. There is a self- serving myth perpetuated by generations of Indian policy-makers in myriad contexts that Indian problems are somehow unique and not amenable to solution using standard economic science. These assertions are little more than an attempt at brand differentiation and the creation of an intellectual local monopoly. In every area of reforms in India, this assertion has been shown to be spurious. To be sure, there are historically determined local variations that have






to be accommodated, but the broad architecture of successful policy design does not vary very much. So, the second essential intellectual reform necessary for successful policy reform is to shelve the notion of India being an economic curiosum and be willing to learn from international experiences. Thirdly, as we know from economic theory and the experiences of other countries, changes in market design are required. In electricity, it is necessary to disaggregate functionally and develop markets that are consistent with a functional classification of value-addition activities. The electricity sector consists of three distinct commercial activities: generation, transportation and trade. An analogous classification is applicable to the provision of water too: water treatment, transportation and trade. While some Indian states have gone some way towards implementing this functional separation in the electricity sector, the water sector has seen no movement. Electricity is traded at two levels: bulk/wholesale and retail. In the market for bulk electricity, the generators are the ultimate source of supply and the distributors are the ultimate source of demand. As in any other market, there can be pure traders who neither generate electricity nor distribute it to the ultimate consumers. In India, the bulk electricity market has been strangled by vertically integrating the generation and distribution businesses in the form of SEBs, with almost no economic room left for genuine trading activity. Moreover, private generators have been discouraged by subjecting them to bureaucratic barriers in the form of licensing requirements and forcing them to sell their output to monopsonist SEBs. Opportunistic rent-gouging and capricious payment behavior by SEBs substantially raises the riskiness of private investment in generation, thereby rendering many potential projects infructuous. In the wholesale markets, the SEBs have, with very few exceptions, acted as monopolist distributors to hapless consumers, with plainly evident disastrous results. It is technologically and economically feasible to make the bulk electricity market competitive. The following steps are essential for this to happen. First, it is necessary to bring about a pan-Indian






market by eliminating barriers to movement of electricity. The strengthening of the national grid is an important technological step in this direction. Secondly, it is essential to eliminate the SEBs distribution monopolies, which also automatically does away with the SEBs monopsony status in the bulk market and creates a diversified and competitive set of buyers of bulk electricity. Thirdly, it is necessary to eliminate all unreasonable legal barriers to entry in generation, distribution and trading of electricity. These changes are essential in order to bring about some economic rationality to electricity prices by loosening the state's grip on the sector, improve the quality of service to consumers, and for the long-run, induce investment in all aspects of the sector without having to offer investors ironclad inefficient state guarantees that are opaque and therefore subject to unending controversy and litigation. Thanks to technological improvements, some large urban bulk electricity markets can be made competitive by allowing multiple distributors to compete for the same set of customers. Other wholesale markets may not allow multiple suppliers to compete in the market. In such markets, competition can be in two forms. First, potential distributors may be forced to compete for the market via an auction of the concession contract. Secondly, incumbents can be disciplined by the possibility of entry by competitors. Whatever be the nature of the bulk market, it is important to make the market contestable by lowering the legal and cost barriers to entry. There are two prerequisites for these conditions to obtain. One, sensible regulation is required to curb the variety of rent-seeking and entry-prevention strategies that the incumbent may employ. Two, it is necessary to divorce the distribution business from the ownership of the wires because transportation is the only part of the value addition chain that is a natural monopoly. Exclusive control of the transportation infrastructure by a distributor is a source of market power and a means for preventing entry into the distribution business. Even when a distributor owns the wire network, it is necessary that the regulator enforce a fire-wall between the two businesses by requiring open access to the network by all electricity traders in exchange for a regulated access charge. Apart from providing efficient transportation to traders, the other task of the electricity






carrier is to expand and maintain the network by making the necessary investments. For this, it is necessary to provide this entity with a budgetary transfer. There is an extremely rich literature (use Laffont and Tirole (1993) as a starting point) analyzing the relationship between the regulator and the firm and we refer the reader to it for details. Electricity Act goes some way towards providing a legal framework for bringing about the market structure described above. For instance, the de-licensing of electricity generation, the legal requirement of open access to retail markets and the creation of independent regulators to oversee consumer interests are very sensible provisions. However, mere market design is not enough as the efficient operation of any market requires it to be embedded in a nurturing system of laws and their effective enforcement. For instance, laws related to property rights and contract execution need to take into account not merely broad philosophical aspects of fairness, ``rights'' and ``social justice'', but they should marry these principles sensibly with anticipated incentive and informational constraints under which any law-enforcement executive operates. Failure to harness together the law with sound economics has yielded laws in India that make most contracts not worth the paper on which they are written. It is a matter of everyday experience for every Indian citizen that contracts are flouted with impunity and any attempt for redress is drowned in ceaseless litigation. The most obvious instances of these problems are the very high incidence of electricity theft by consumers, and more disturbingly, the theft of electricity by many SEBs that callously exploit their state-owned and legally sanctioned monopsony status to simply not pay for the electricity or coal that they ``buy''. Therefore, a fourth essential and practical ingredient for the effective operation of electricity and water markets is the enactment of appropriate laws and their enforcement. For instance, Commercial or regulatory contracts specifying price, quantity, quality, etc., need to be easily enforceable, with enabling legislation and a judiciary that effectively punishes deviations from






the terms of a contract. In the case of electricity and water markets, a legal and political culture that enables routine and effective price exaction by sellers is a sine qua non for any market design to work. Unfortunately, India's legal culture in this respect has been steadily eroded by decades of politically sponsored loot masquerading as socialist populism. As we have argued above, Electricity Act provides a legal matrix in which the structure of electricity markets is brought in line with sound economic principles. Even more fundamentally, for the first time there is an attempt to fix and protect property rights by making electricity theft and manipulation of meters a penal offence. It is remarkable indeed that purloining electricity has not been ``theft'' for so long! Even as one deplores political populism, it is undeniable that there are significant distributional concerns regarding both electricity and water, but especially the latter. In a democracy, it is appropriate that the political process and the constitution should define the ends that the state should strive towards. However, most problems admit a number of solutions and it is the policy-maker's job to pick the one that achieves the mandated goal most efficaciously. For instance, suppose the political process mandates a specified amount of ``access to water and electricity'' by the ``poor''. This outcome can be achieved by forcing utilities, for all practical purposes, to give away these goods for free, or by directly transferring purchasing power to the poor without distorting prices for this purpose. Clearly, the Indian state has chosen the decidedly inferior former course. The reasons are not difficult to find. With a decrepit fiscal system, it is politically and fiscally expedient in the short-run to allow utilities to lose money through under-pricing and theft, rather than bear the subsidy burden directly and transparently. Moreover, price distortions can be used to buy off powerful constituencies, such as farmers, with favors of cheap power. Naturally, the only real beneficiaries of these give-aways are the large farmers who have pump-sets to run in the first place. Even for them, this stratagem has limited benefit as the tyranny of






double-entry bookkeeping rules out any more than a token amount of electricity supply at the absurd prices promised by politicians. One may wonder how this Mad Hatter's tea party, with ``Jam yesterday and jam tomorrow but never jam today'', is sustained. This has been done by the sleight-of-hand of confusing ends and means: instead of a clear objective of providing well-defined amounts of water and electricity to the poor, with subsidized prices as just one of the possible means, the politicians have managed to shift the goalposts and framed low prices as an end in itself! In both cases, the state has attempted to address distributional concerns via a high degree of de jure price discrimination and cross-subsidy. Of course, the pattern of de facto price discrimination is not congruent with the de jure pattern. By imposing wedges between marginal cost and de facto prices, the system imposes significant deadweight welfare losses on society. Furthermore, de jure price discrimination motivated by politics defeats any attempt at sensible ex ante economic calculus, e.g., what is the right amount to produce, by what means, by whom, who should consume the output. However, the ex post effects are easily discerned. As the prices do not convey appropriate economic signals, there is a mismatch between demand and supply across all the various artificially created segments of the markets. In every segment, there is excess demand, indicating that the price is below the equilibrium level. The effective price received by the supplier is the realized revenue per unit of output. The persistent supply deficit points to this incentive being inadequate to induce investment and augment supply to meet the demand. One reason for the parallax between de jure and de facto prices is the rampant corruption that enables many consumers to undermine the attempted market segmentation. For instance, a well-entrenched system of bribes allows households and industries with high electricity loads to masquerade as those with low loads and to manipulate their meters. Another reason is the ``coping cost'' imposed on a consumer by the endemic scarcity of water and electricity. As this cost is particularly onerous for the poor, the result is a significantly






regressive distortion of true economic prices, especially of water; in the case of electricity, the poor cope by simply doing without it, which does not impose a monetary coping cost but does impose significant costs by reducing the effective length of a day for the poor. High coping cost have also brought about a de facto market segmentation of a particularly inefficient and socially invidious kind: industry and the affluent have simply seceded from the decrepit public system by setting up a parallel private system. This islanding strategy not only undermines the price discrimination attempted by the state, but more seriously, it reduces the stake of the affluent segment of the market in sustaining and improving the public system. By impeding the expansion of the public system, the islanding strategy also sustains and reinforces the socio-economic wedge between those ``inside the system'' and those ``outside looking in''. Thus, the policy undermines and defeats the very objectives it is purportedly designed to serve. So, the fifth policy reform required is to replace the opaque system of price discrimination with a transparent system of direct budgetary transfers to well-targeted groups of consumers, e.g., a voucher-based system of transfers. Regulation and contracting Our discussion so far has touched upon some aspects of the regulator's job, e.g., price and quality regulation, ensuring open access to the market, inducing investment, etc. Given the Indian policy-makers’ new-found faith in ``regulators’’ as a panacea for all problems, it is important to delineate the regulator's role and the limits on his ability to bring about desired outcomes. With respect to the scope of useful regulatory activity, one needs to state the obvious: a regulator has no legitimate economic role in a market where competition can ensure first-best outcomes by means of conventional commercial contracts. The demand for regulators in such markets is silly at best or an attempt to re-introduce state interference at worst. All that such markets require are well-functioning judicial and executive institutions for contract






enforcement, prevention of market collusion and anti-trust activities, etc. However, the regulator is of crucial importance in a non-competitive market where a firm has the power to exact rents. Here, a regulator is charged to act as society's fiduciary to provide incentives to the firm to act in the social interest, howsoever this social mandate is defined. The regulator’s interaction with the firms is governed by the contracts between these entities and the regulator’s fiduciary responsibility to pursue the social mandate. Once they frame the regulator’s mandate, the state actors lose their ability to interfere with this interaction on a day-to-day basis. The potential benefits of regulation are well-understood. If the regulator has complete information, and the regulated firm's actions can be monitored perfectly, and the firm's actions are contractible, then the regulator can achieve the first best outcome by eliminating the firm's rent, i.e., reducing the firm's return to its opportunity cost. However, in a regulatory setting with asymmetric information, the regulator cannot achieve the first best outcome as it must compromise between the competing requirements to limit the firm's rent while ensuring that the firm's incentive compatibility condition is satisfied in the presence of private information. It is a staple result of the regulation literature that this trade-off forces the regulator to optimally compromise between the twin objectives, thereby leaving some rent for some types of the regulated firm; see Laffont and Tirole (1993). As the regulator is the state’s fiduciary, it is important to delineate the appropriate means and degree of control exercised by the state over the regulator. In this regard, it is vital that the political system provide a clear objective and mandate to a regulator. The regulator should have the legal basis and the incentives to pursue his mandate free of day-to-day political interference. For this, it is important that the process of hiring-and-firing regulators be extremely transparent and open to judicial and public scrutiny. Needless to say, very high standards of probity, knowledge, insight and good judgement should be prerequisites for a person to be hired to the regulator’s office. Equally, very strong evidence of the violation of these standards should need to be presented in order to fire an incumbent regulator. The regulator’s day-to-day functioning






should be disciplined not by the executive but by the judiciary in the light of the regulator's legal mandate, relevant case-law and precedents. It is sometimes argued that the regulator can be dispensed with and the relationship between the state and the firm can be governed directly by a contract. This is possible if one can draw up a complete contract, i.e., provide for every possible eventuality that might arise. That being practically impossible, a regulator is required for the quasi-judicial task of interpreting the social mandate and providing direction in states of the world not foreseen by the contract. In the absence of a regulator, even trivial conflicts caused by contract incompleteness would end up in the court's lap. The regulation of markets with state-owned participants poses peculiar political-economic problems. First, the regulator’s independence is especially crucial in markets where private and state-owned firms may coexist and compete. Without independence, there is insufficient institutional distance between a regulator and a state-owned firm, especially when there is no firewall between the state actors and the regulator. As both are manifestations of the state, it is not credible that a feeble regulator will be impartial and even-handed. Regulatory capture by state-owned firms is a very real threat, as has been the case in the power sector. In markets that were hitherto the preserves of the public sector and which are only now being opened up to private participation, potential private entrants have a justifiable fear of being exploited and treated capriciously by the state once they bear the sunk costs and enter the market. The only way to allay such fears is to set up strong independent regulators who can withstand the inevitable political pressures to play favourites with the public sector incumbent. However, creation and sustenance of independent regulatory institutions requires a substantial degree of political and judicial maturity. Ultimately, the state actors have to forbear routine interference in areas that they have considered to be a part of their eminent domain. The Indian political class has hitherto been unwilling to part with this fiefdom. Legitimate






mandated regulatory functions are routinely compromised by the issuance of opportunistic “policy” directives. Secondly, it has been argued that regulation is a means for disciplining and improving the performance of state-run utilities. This seems true in principle as one might expect state-owned firms to respond to incentives in the same way as private firms. Indian political reality, however, destroys this apparent parity. The regulator's ability to bring about desired outcomes depends on the regulated entity's sensitivity to financial incentives in the form of tariffs, transfers, penalties, etc. Historically, Indian state-owned entities have been motivated by myriad considerations, many of the non-commercial and non-financial kind. These considerations have been used as an alibi for poor commercial and financial performance by the managers of these entities and the political class that oversees and exploits these entities. The alibis of the ``social responsibility'' variety are routinely seized upon by the political class to open the public purse to provide open-ended non-performance-related subsidies to the state-owned entities. Consequently, these entities face very soft budget constraints and are unlikely to respond to regulatory incentives in nearly the same way as private firms might be expected to respond. So, regulation per se cannot be expected to improve significantly the performance of state-owned firms in the absence of substantive internal reform of these firms themselves.

The only way to have good regulatory outcomes when state-owned utilities are involved is to transform them into “private” firms, either via sale of equity and loss of direct state control, or by maintaining control but stripping away their government department character: have similar employment policies, have similar managerial and labor incentives, credibly deny them open-ended budgetary hand-outs and empower management to make commercially sensible decisions. Although the Indian state has failed to credibly implement the second route time and again, commitment to this route is piously intoned by elements of the Indian polity every time straightforward privatization is proposed, the political class is clearly loath to part with the milch cow fattened over decades. For instance, a red herring regularly tossed






into this debate is that instead of privatizing state-owned utilities, it is sufficient to “corporatize” them. While the change of legal status from government department to corporation is a necessary first step for reform, it will not by itself necessarily subject the organizations to external market discipline or force them to create internal systems of accountability. The setting-up of good internal and external incentive structures is of paramount importance for a well-functioning utility and the Indian state is yet to demonstrate its ability to set up such institutions. In the absence of credible state initiatives in this respect, privatization of a number of activities is the only realistic solution of the problem. In conclusion, the prescription for successful reform of Indian urban utilities can be summed up in the following simple mantra: (a) introduction of competition in the provision of services wherever possible, (b) independent regulation of providers where competition is infeasible, (c) introduction of meaningful user charges, (d) subsidies to the poor via direct transfers rather than via price distortion, (e) either the privatization of utilities, or of various functions, or at the very least, a substantial overhaul of the internal and external incentive structures that govern the utilities. The general thrust of these reforms is a shift from a bureaucratically-managed command-and-control system that pays scant attention to incentive issues to a system that is based as far as feasible on market-determined incentives. Successful transition is complicated as it requires parallel reforms in many interlinked areas such as labor and financial markets, organizational forms, corporate governance, etc. Experts recommend various institutional features that are needed if markets are to satisfactorily determine prices and patterns of investment in the area of urban utilities. In our study, we give particular attention to regulation as one such institutional feature. Yet, and here is the rub, the creation of these institutions and the implementation of complementary reforms is in the hands of the very political class that stands to lose the most from these changes. Slow and hesitant attempts to untangle the mess are under way in the face of pressure from the stakeholders. However, the strengthening of these weak institutions requires a statesman to rise above myopic political interests and cut the Gordian knot. In terms of the contest






for control, the vested interests who stand to lose from reforms are already organized within the firm and the state, and have direct influence and control over decision-making. In order to counter and overcome these vested interests, reformers need to build potent coalitions for reform if the reforms are to succeed.This essay is the summary of the findings of a project done by the author for WSP-SA, World Bank





lessons from power sector reforms for the reform of the indian urban water sector

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