Price-setting for Residential Water: Estimation of Water Demand in Lahore

The population of Lahore has roughly doubled over the past twenty years, and an increase of two million is expected by the year 2020 [UN (2005)]. This has important implications for city planning as demand for housing, electricity, water, sanitation, public health, education, and infrastructure grows accordingly. Water and Sanitation Agency (WASA), the city’s official water supplier, has often responded to the growing demand by offering the supply-side solution: augmenting supply capacity by exploiting new water resources.1 Such investments are costly, but in view of the public good nature of water, WASA has kept tariffs well below the costrecovery level, relying on heavy loans and subsidies. While this arrangement may have worked in the past, it is now becoming increasingly unsustainable, because (1) WASA is facing severe financial constraints and which has led to poor service and underinvestment, and (2) the environmental cost of extracting water is increasing. With its low tariff rates and continually increasing costs, the WASA Lahore is unable to meet even its operation and management (O&M) costs [WASA (2007)]. WASA has been receiving financial assistance from the provincial and Lahore district governments as well as international donors in the form of grants and loans with the grant element gradually diminishing over the passage of time. In 2007, WASA currently owed Rs 5.6 billion to these agencies [WASA (2007)]. Deteriorating financial situation has also led to short-term planning, reactive operational strategy, and underinvestment in asset maintenance, future capacity, IT equipment, management and accounting information system, and training [IFC (2005)]. Consequently, WASA has shown suboptimal performance: low pressure and irregular supply, leakages, poor customer service, etc.