Accelerating Private Sector Engagement for Urban Water Security

In November 2024, heavy rains flooded Chennai and Bengaluru, disrupting millions of lives. This served as a stark reminder of India’s need to ramp up spending on water and sanitation (WASH) infrastructure as cities grow and climate change exacerbates natural disasters. While governments around the world are finding innovative ways to work with the private sector to share this investment burden, public-private cooperation in India’s WASH sector has room to grow. To enable private sector participation the government could consider a thoughtful, staged process of “partnership-enabling reforms” that includes preparing public institutions, supporting innovation, and strengthening community engagement.

Preparing Public Institutions for Private Sector Engagement

For effective private participation, the government must work on quantifying the value of water, design transparent contracts, and promote innovative management contract designs.

Pricing water in India has voter implications; therefore, water is not valued, leading to wastage and mismanagement. A recent report by the Global Commission on the Economics of Water highlighted the need to recognize the full value of water. The government can address this by establishing clear national mandates for water utilities to assign value to water, ensure cost recovery, financially restructure utilities, and prioritize customer service delivery. Such approaches have previously improved water utility performance. However, no systemic change is possible without proper enforcement mechanisms, which should be the government’s top priority.

Another challenge is opaque contracts in water-related projects. Delhi’s failed attempt to privatize its water supply agency, the “Jal Board” in the early 2000s, due to lack of transparency underscores this need. Private-sector contracts must be transparent, with clear roles, and value propositions for governments and customers. The government should clearly lay out objective criteria, define clear risk-sharing mechanisms between public and private parties, provide for contingencies, and strictly follow the process of awarding contracts. Under the Namami Gange Programme, the contract structuring on the hybrid annuity model and the one city one operator model address these challenges and offer a good model to emulate.

Additionally, the government should focus on promoting innovative management contracts improving public-private risk management. Performance-based contracts for private water utilities should be explored, as they can be up to 68 percent more efficient in reducing water loss than public utilities, according to the World Bank. For instance, in Ho Chi Minh City, a private contract cost $15 million, compared to the $120 million it would have taken to supply the same volume of water through other means. The contract resulted in 122 million liters of water saved per day after six years, increased water supply reliability, and connected more users to the new piped water system. This will make private sector involvement more palatable to government entities by providing taxpayer savings.

Accelerating Innovation

To accelerate innovation, the government should demarcate areas for co-innovation and provide risk sharing for capital inflow.

The government’s private sector engagement strategy and demarcating specific areas for co-innovation should be based on private sector consultations and a thorough assessment of the business case of each opportunity, private sector interests, and their ability to manage the projects partnering with the government.

The sector offers emerging opportunities for innovation and private engagement including new water and wastewater treatment technologies, desalination, reuse of treated wastewater, stormwater management, river rejuvenation, and new information technology solutions to improve utilities’ performance. New technology players like Smartterra are providing digital and AI-enabled solutions helping reduce leakages and improve revenues for water utilities.

Partnering with the government, the private sector should provide innovative risk capital. In the United States, for example, in collaboration with the Goldman Sachs Urban Investment Group; Calvert Foundation; and D.C. Water, the water and sewage authority for the District of Columbia, created an Environmental Impact Bond that reduced risk while providing low-interest municipal bond financing. This $25 million, 30-year municipal bond allowed private risk sharing for a novel green infrastructure approach for managing stormwater runoff.

Building Consensus and People Engagement

Informed public consultations involving local communities, civil society organizations, employees, and labor unions, are essential for successful private sector participation. Public resistance and exclusion from the decisionmaking process have led to failed projects in various places. Therefore, public support right from the project design stages is crucial.

While private players may raise prices as subsidies end, contracts can ensure service to underserved citizens and mandate the continued provision of direct subsidies. Governments can also initially separate private operator payouts from customer tariffs to minimize price increases and try to increase consumers’ willingness to pay. All of this requires robust consumer engagement.

The Odisha state government engaged water volunteers or “Jal Sathis” as facilitators to build community partnerships for urban water supply management. Through an incentive mechanism, these self-help group members participated in functions of new connections, billing, collection, leakage reporting, and water testing. This is a good example for the central and state governments to emulate.

The water and sanitation sector in India has significant financial, technical, and managerial gaps that the private sector can help bridge. Advancing water and sanitation goals necessitates a comprehensive strategy to engage the private sector.

Bhawna Prakash is senior fellow at the Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies in Washington, D.C.