Pak Water

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Urban Water Innovation

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Systems in Newly 5
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Industrialized Countries: 7
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Case Studies of Brazil,

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China, India and South 12
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15 Africa 14
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Jan Peuckert
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25 Introduction 25
26 26
27 The urban water sector owes its extraordinary importance to the fact that water is essential 27
28 for human life, and there are high environmental and public health externalities that 28
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29 derive from the use or the lack of access to water and sanitation, especially in urban areas. 29
30 The moral imperative to universalize access to improved drinking water and sanitation has 30
31 been globally recognized. Many newly industrialized countries (NICs), including Brazil, 31
32 China, India and South Africa (the BICS countries), have internationally committed to 32
33 the UN Millennium Development Goals, which prescribe the halving of the 1990 share of 33
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34 population without access to improved drinking water and sanitation by 2015. 34

35 In these countries, the social, environmental and economic pressures for change are 35
36 particularly high, as recent demographic, economic and political dynamics have drastically 36
37 increased the quantitative and qualitative demand for urban water and sanitation services. 37
38 Their rapid economic growth has seriously aggravated already existing problems related 38
39 to water scarcity and water pollution, which are increasingly perceived as potential 39
40 constraints to further development. Continuous urbanization trends further intensify 40
41 the pressure to solve these immediate problems. The expansion and modernization of the 41
42 urban water infrastructures will therefore require heavy investments in the next decades 42
43 to ensure a safe and sustainable provision of water and sanitation to everybody. 43
44 Being highly capital-intensive with long investment cycles and a monopolistic 44
45 structure, the water sector has been typically a less innovative sector with relatively low 45
46 research and development expenditures; technological change used to be rather slow 46
47 and incremental rather than radical in nature. But since traditional water technologies 47
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120 I n n o v a t i o n S y s t e m s a n d C a p a b i l i t i e s i n D e v e l o p i n g R e g i o n s
1 have reached and exceeded the limit of sustainable water provision in many places, a 1
2 technological paradigm shift is inevitable. 2
3 While the traditional water resource planning approach relied on physical supply-side 3
4 solutions, the technological paths to be explored under the new paradigm are efficiency 4
5 improvements, options for demand management and water reallocation among users 5
6 to reduce the projected gaps and to meet future demands. Besides the technical aspect, 6
7 this implies the adoption of a variety of institutional and organizational innovations. 7
8 The changing paradigm has many components, including a shift away from the primary 8
9 reliance on finding new sources of water supply to address perceived new demands, a 9
10 growing emphasis on incorporating ecological values into water policy, a re-emphasis on 10
11 human needs for water services and efforts to uncouple economic growth and water use. 11
12 New technologies often face mismatches with the established socio-institutional 12
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13 framework (Freeman and Perez, 1988). A change towards the new paradigm therefore 13
14 involves a transition in the socio-technical configuration (Geels 2002, 2004). In NICs, the 14
15 economic and political transitions and the growing social and environmental pressures at 15
16 the socio-technical landscape level may help to destabilize the unsustainable technological 16
17 regime and establish sustainable niche technologies. The critical water situation poses a 17
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window-of-opportunity for an early entry into the internationally emerging market of
environmentally benign water and sanitation technologies. By proactively forming lead
markets for sustainable water technologies, NICs may build up technological competences
that further reinforce their economic development processes (Walz, 2010; Peuckert, 2011).
This study aims to assess how far current constellations of the urban water supply
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23 and sanitation sector in four of these countries, namely Brazil, China, India and South 23
24 Africa, promise to induce new environmentally sustainable technologies to be developed, 24
25 diffused and integrated into their economic catching-up processes. A comparative 25
26 framework based on the concept of innovation system (IS) functions is developed that 26
27 allows identifying strengths and weaknesses of each sectoral innovation system (SIS) and 27
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28 giving an overall evaluation of the innovation performance potential. 28

29 29
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31 Related Literature 31
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33 The heuristic of the IS, which more recent innovation research calls on to explain 33
34 innovative activity (Lundvall, 1992; Nelson, 1993; Lundvall et al., 2002; Carlsson et al., 34
35 2002; Edquist, 2005), has gained relevance for the analysis of economic development 35
36 processes. Consequently, the building-up of indigenous innovation capabilities has 36
37 become a centerpiece of national catching-up strategies. Within the theoretical framework 37
38 of IS, the generation and diffusion of new technological solutions are assumed to depend 38
39 on social interactions of various agents in the innovation process. IS scholars stress the 39
40 interactive and non-linear character of the innovation process, which is influenced 40
41 by many complexly interlinked economic, social and political institutions. Increased 41
42 significance is being attached to soft context factors such as communication patterns, 42
43 user-producer linkages and regulation patterns. 43
44 SIS and their implications for the catching-up of NICs have encountered increasing 44
45 interest within the innovation research community. The SIS concept emphasizes the 45
46 systemic differences that derive from the characteristics of the knowledge bases and sector 46
47 structures (Malerba, 2002). Within the catch-up project on sectoral systems (Malerba and 47

U r b a n Wa t e r I n n o v a t i o n i n N e w l y I n d u s t r i a l i z e d C o u n t r i e s 121
1 Nelson, 2011), a number of international comparative studies have been conducted to 1

2 analyze the interplay between national innovation systems (NIS) and SIS for as different 2
3 sectors as pharmaceutics (Ramani and Guennif, 2012), automotive (Quadros et al., 3
4 2010), semiconductors (Rasiah et al., 2012), telecommunications (Lee et al., 2007), agro- 4
5 food (Gu et al., 2012), and software (Niosi et al., 2012). Additional studies on SIS in 5
6 developing countries have been published by Malerba and Mani (2009). This study aims 6
7 to complement the previous literature by adding insights to another sector of upmost 7
8 socio-political and environmental relevance and very particular structural characteristics: 8
9 the urban water supply and sanitation sector. 9
10 Cozzens and Catalán (2008) have studied the water and sanitation sector from an IS 10
11 perspective, suggesting the concept of global innovation systems (GIS) for its analysis. 11
12 In order to be able to include non-commercial goals, as for instance the expansion of 12
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13 service coverage or environmental protection, they suggest a more generally defined 13
14 IS with broader actor categories referring to problem-solving organizations rather than 14
15 firms, to knowledge and information organizations rather than research organizations 15
16 and governance rather than government. These suggestions have been regarded as they 16
17 better adapt to the conditions found in the urban water and sanitation sector. But in 17
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Naonal
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contrast the sector is analyzed within national boundaries and compared across countries
(see Figure 7.1), relating this research to the SIS literature mentioned before.
Naonal
Innovaon
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23 System System System System 23
24 Brazil China India South Africa 24
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26 Sectoral Brazilian Chinese Indian South African 26
27 Innovaon Urban Water Urban Water Urban Water Urban Water 27
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28 System and Sanitaon and Sanitaon and Sanitaon and Sanitaon 28

29 Urban Water Innovaon Innovaon Innovaon Innovaon 29
and Sanitaon System System System System
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Figure 7.1 Definition of system boundaries
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36 Method 36
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38 In this study, we apply the analysis scheme suggested by Bergek et al. (2008) as a 38
39 comparative framework (Figure 7.2). First, we will describe the IS components: the main 39
40 actors of the urban water and sanitation sector, their relations and the institutional 40
41 framework. In a second step, we try to assess the main IS functions: Legitimation, Resource 41
42 mobilization, Knowledge creation, Guidance of search, Entrepreneurial experimentation, Market 42
43 formation and Knowledge diffusion through networks. 43
44 The concept of IS functions has originally been developed to describe the dynamics of 44
45 technological innovation systems (TIS). We do however believe that it can also be employed 45
46 to structure a cross-country analysis for a certain sector. By referring to the same categories 46
47 we aim at contributing to a methodological consolidation within the IS research. 47

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Figure 7.2 Steps of an innovation system analysis
The analysis is based on a survey that was conducted in 2009 among 40 national
experts of the water sector, complemented by an extensive review of available sector
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23 studies from international organizations as the World Bank, the Asian Development Bank 23
24 and the United Nations, articles from scientific journals as for instance Public Utilities or 24
25 Water Policy, as well as governmental publications. 25
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Actors, Networks and Institutions
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30 The institutional framework is decisive for the direction of technological change within the 30
31 sector. The right changes in the socio-technical environment may create the possibilities 31
32 for sustainable niche markets to become technological regimes. Therefore institutions 32
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33 that incentivize the protection of water resources and the rationalization of water use, as 33
34 for instance regulations that implement high standards for water and wastewater quality, 34
35 consumption-dependent and increasing water tariffs, participation of stakeholders in 35
36 decision making, holistic thinking and integrated water resource management, create 36
37 conditions that make the development and diffusion of environmentally sustainable 37
38 technologies more likely. 38
39 We will therefore begin each case study by describing the main actors, networks and 39
40 institutions that build the SIS. In order to accommodate the model to the specificities of 40
41 the water and sanitation sector, Cozzens and Catalán (2008) suggested a more generalized 41
42 IS. Following this approach, we will look at three generic types of system elements in each 42
43 country, when analysing the urban water and sanitation sector: 43
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45 • Problem-solving organizations (PSOs): These are private or public urban water 45
46 infrastructure operators, suppliers of technical equipment and water users. 46
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1 • Knowledge and information organizations (KIOs): These are universities and public 1
2 laboratories but also social and environmental organizations. 2
3 • Governance and rules of the game: Here we look at standard-setting organizations, 3
4 regulatory agencies, public planners and project developers, capital providers and 4
5 financial institutions. 5
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7 PSOs are the locus of experimentation and the centre of the innovation process, trying 7
8 new options in technologies and approaches. In the urban water and sanitation sector the 8
9 PSOs will usually be found in urban water and sanitation utilities. KIOs are the locus of 9
10 creation and exchange of different kinds of knowledge. These are generally universities, 10
11 research institutes and public laboratories, but in the urban water and sanitation sector 11
12 non-government organizations (NGOs) or industry organizations are also included. 12
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13 Furthermore, standard-setting organizations, regulatory agencies and public planners 13
14 provide governance and institutions as participatory water councils can provide a forum 14
15 for communication among stakeholders and establish user–producer linkages through 15
16 which market information is diffused. 16
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24 Public planners / project
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developers (PUB)
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26 Social and 26
27 environmental Capital providers / 27
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28 organizaons (ORG) financial instuons 28

29 (CAP) 29
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31 Operators of water 31
32 infrastructure (OPE) 32
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36 Universies / public 36
37 laboratories (UNI) Suppliers of technical 37
38 equipment (SUP) 38
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42 Regulatory agencies 42
Standard seng
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organizaons (SSO)
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45 Source: Expert Survey 45
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Figure 7.3 Typical network of actor types in the BICS countries
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1 In order to get an idea about the strength of linkages and the existence of networks 1
2 within the IS, we asked the sector experts to assess the extent of interaction between 2
3 actor types within their country. The average results (Figures 7.3 and 7.4) are depicted 3
4 using multidimensional scaling, giving an intuition about the typical structure of the 4
5 IS of the urban water and sanitation sector. The closer two actor types are positioned on 5
6 the picture the more intensive is their interaction in the perception of the experts. Lines 6
7 depict high- and dashed lines medium-intensity interactions. 7
8 Typically, there seem to be three clusters of actors within the urban water sector in 8
9 the BICS countries: (1) the water industry composed of the infrastructure operators and 9
10 their financial and technical suppliers; (2) the demand side constituted by water users 10
11 together with social and environmental organizations; and (3) intermediary institutions 11
12 as regulators, standard-setting organizations and universities as a third group. Public 12
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13 planners and project developers take a special position in the centre between the three 13
14 groups, but interact more intensively with the infrastructure operators. 14
15 In conjunction with broader political and economic changes, all four countries have 15
16 embarked on institutional reforms towards the implementation of the new technological 16
17 paradigm of sustainable water provision. Restructurings have been more disruptive and 17
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intense in South Africa, where institutions have changed most profoundly after the
end of apartheid. Changes in China related to the general economic reforms have also
been profound but more progressively developed over a longer period of time, while in
Brazil UNI
China
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OPE ORG 28
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very strong interacon
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very weak interacon 32
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34 India SSO
South Africa PUB 34
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SSO
45 SUP CAP Source: Expert Survey
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47 Figure 7.4 Actor type networks of the urban water and sanitation sector 47

1 Brazil and India changes happened rather incrementally. Comparing the institutional 1
2 frameworks of the four countries we observe diversity in the degrees to which institutions 2
3 that promote innovations in the sustainable urban water sector have been successfully 3
4 implemented. 4
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6 Brazil 6
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8 The main features of the current sector structure in Brazil were laid during the 1970s, through 8
9 the implementation of the National Basic Sanitation Plan (PLANASA) by the military 9
10 regime. It consisted of an administrative centralization process that effectively assigned 10
11 water operation and management to the state level. Although the legal responsibility 11
12 for water and sanitation services provision remained with the municipalities, the role of 12
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13 local governments was reduced to signing long-term concession contracts to the newly 13
14 established large state-owned companies. After an initial success with a rapid expansion 14
15 of service coverage, the PLANASA scheme eventually failed by the end of the 1980s. 15
16 Since the 1990s, as a part of the economic liberalization policy of the Cardoso 16
17 administration and as a means of overcoming fiscal restrictions and to compensate 17
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increasingly lacking public investments, Brazil opened the urban water and sanitation
sector to private participation. This policy was supported by international financial
organizations as the World Bank and justified by the need to foster operation efficiency
(Sabbioni, 2008). The Public Concession Act of 1995 challenged the state monopoly
particularly in metropolitan areas. Henceforth, Brazilian states took many different
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23 approaches for financing water and sanitation operations, including concessions to 23
24 private investors. 24
25 Since 2003 the Ministry of Cities (MC) is entrusted with the responsibility to guide 25
26 and monitor the urban water supply and sanitation sector. Thereby the notion of ‘water 26
27 supply and sanitation’ was progressively replaced by the concept of ‘basic sanitation’, 27
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28 which also integrates the collection, treatment and disposal of solid wastes, storm-water 28
29 drainage and the control of vectors of transmittable diseases. 29
30 The 2007 National Sanitation Law has implemented fundamental principles of 30
31 modern water and sanitation management, setting the universalization of access to water 31
32 and sanitation, transparency and social control, security, quality and regularity in service 32
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33 provision as ultimate policy objectives. For the first time the Law makes the adoption 33
34 of national guidelines for public policy and management in the basic sanitation sector 34
35 possible. It establishes criteria for municipalities and states to access federal financing 35
36 and determines the constitution of councils with the participation of civil society. These 36
37 councils have leverage to influence the municipalities’ decisions regarding tariff setting 37
38 and termination of service due to lack of payment. 38
39 This participatory decision-making approach is also reflected in the constellation 39
40 of the network analysis (see Figure 7.4). Water users take a relatively central position. 40
41 Brazilian public planners seem to intensely interact with water users and social and 41
42 environmental organizations, indicating that sustainability concerns are already raised 42
43 at the stage of project design. 43
44 The most central actors of the Brazilian urban water IS are the operators of the water 44
45 infrastructure. They have the closest links with their financial and technical suppliers, 45
46 but also hold intensive relations with regulating agencies and, most importantly, with 46
47 water users, which indicates that user–producer linkages are relatively well developed. 47

1 The typical PSO in the Brazilian urban water and sanitation IS continues to be a 1
2 large quasi-public company that jointly provides water and sanitation services to various 2
3 municipalities within the state. For instance, the two Brazilian megacities São Paulo and 3
4 Rio de Janeiro are served by SABESP and CEDAE respectively, which are mixed public– 4
5 private companies with majority share of the state Government. Both companies can 5
6 be considered outcomes of the PLANASA scheme. CEDAE was created in 1975 when the 6
7 State of Rio de Janeiro fused with the State of Guanabara. SABESP was created in 1973 as 7
8 a result of a fusion of companies and autarchies that until then had managed the water 8
9 service and sewage collection in the cities of the state. 9
10 As the network analysis reveals, universities and public laboratories are linked to water 10
11 users and standard-setting organizations, but hold no intense contact with the water 11
12 industry. Although in general the interaction of all actor types within the IS seems to be 12
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13 strong, the relatively weak university–industry link could have important consequences 13
14 for the functioning of the SIS by hindering the industrial application of knowledge that 14
15 was created in the research sector. In fact, Furtado et al. (2009) diagnosed a lack of formal 15
16 mechanisms of knowledge transfer and the need to strengthen the ties between the 16
17 academic and industrial spheres, when evaluating the impacts of the Brazilian Program 17
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for Research in Basic Sanitation (PROSAB).
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China has a centralized political system with considerable decentralization of power
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23 across the four layers of government at the national, provincial, prefectural, county levels. 23
24 Legislative and regulatory powers as well as planning and development responsibilities 24
25 are with the national government. The provincial government has historically played 25
26 an advisory and oversight role, while local governments play the dominant role in 26
27 infrastructure service provision and financing of their public utilities. The Chinese fiscal 27
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28 system is relatively decentralized, with most of the tax revenues collected and spent at 28
29 the local level. 29
30 The typical PSO in China is a relatively small municipally-owned water company. 30
31 But, as one of the Chinese experts pointed out, the differences are large between the 31
32 big cities (that is, Beijing, Shanghai, Wuhan), operated by state-owned companies, 32
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33 and small towns, often operated by domestic private firms with concessions by the 33
34 local government. Urban water supply and sanitation is the responsibility of cities 34
35 under complex arrangements that differ substantially from one city to another. Local 35
36 governments are responsible for urban water services, including tariff setting, subsidies, 36
37 utility management, and definition of scale and scope. Most cities independently provide 37
38 water services within their boundaries regardless of their size, since inter-jurisdictional 38
39 cooperation is difficult due to the high degree of decentralization. 39
40 According to Cosier and Shen (2009), certain areas of the urban water resource 40
41 management framework may benefit from greater levels of coordination. There is 41
42 obviously a common thread between water abstraction, water supply, water use (including 42
43 efficiency measures, quality protection and wastewater disposal), yet the management 43
44 system adopted for each of these aspects are not well integrated in practice. Other than 44
45 in the actor type model, water and wastewater companies are usually separate from each 45
46 other, and in larger cities services are even further unbundled. Many cities have also 46
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1 separated the responsibility for wastewater between government drainage departments 1

2 and wastewater treatment companies. 2
3 Accordingly, the Chinese experts that were surveyed identified the lack of an integrated 3
4 management as the most important need for improvement of the Chinese urban water 4
5 IS. The conflict between the Ministry of Water Resources (MWR) and the Ministry of 5
6 Housing and Rural–Urban Development (MHURD) seems to be a major concern in urban 6
7 water management. This problem is further amplified as the institutional division of 7
8 responsibilities at the national level is reflected in equivalent line agencies at each of 8
9 the lower levels of government. Each agency reports to both their political leader at 9
10 the same level, as well as the agencies above them. And each agency monitors agencies 10
11 below them. Many cities have established Water Affairs Bureaus that report to the MWR 11
12 and are mandated to provide integrated water management and supervise urban water 12
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13 utilities, yet the MHURD still issues most of the policy guidance related to urban water 13
14 utilities. The various water companies may have the same parent bureau, which may be 14
15 the construction or the water bureau, or they report to different bureaus. 15
16 The network analysis shows an extremely intense interaction of the various actor 16
17 types within the IS (see Figure 7.4), but it is especially strong among universities, 17
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public planners, regulating agencies and standard-setting organizations, which may be
explained by the high formal coordination and reporting requirements of the public
administration system. The Ministry of Health is responsible for drinking water quality
and together with the Standard Administration issues the respective national standards
that must be met by urban suppliers. The National Development and Reform Commission
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23 (NDRC) provides overall development policy and financial supervision to the urban 23
24 water and sanitation sector and administers the most important concessionary finance 24
25 program. 25
26 Although the overall intensity of interaction in the system seems to be very high, the 26
27 relatively isolated positions of water users and environmental and social organizations 27
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28 hint at their weak integration. This conjecture is supported by the comment of a Chinese 28
29 expert: ‘Generally speaking, the stakeholders are getting more and more interactive 29
30 together. However, how to integrate the concerns of the users of water needs to be 30
31 improved largely.’ Although basic institutions for river basin management are in place, 31
32 there is no legal definition and no institutional arrangement that could guarantee the 32
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33 effective participation of all stakeholders. According to Shen (2004), participation is the 33

34 weakest point of the water resource management in China. 34
35 The Water Law is the most fundamental and comprehensive law of water governance 35
36 in China. It was first promulgated in 1988, later revised and amended in 2002. The 1988 36
37 Water Law marked a fundamental change both in water policy and water administration 37
38 as it set up a series of new water resource management systems, such as water supply 38
39 and demand planning, water use permits and water use charges. Later, the 1988 Water 39
40 Law was criticized for its emphasis on water exploitation over water saving and on 40
41 economic benefit over environmental protection, the lack of implementing river basin 41
42 management, and the incomplete implementation of water rights. The amendment of 42
43 the Water Law in 2002 emphasizes demand management and water quality protection 43
44 and thus paved the way for a transition from a focus on infrastructure development to 44
45 a phase where more attention is being devoted to the management and protection of 45
46 water resources. 46
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1 India 1
2 2
3 India has a federal form of government with a strong central government. But in the water 3
4 supply and sanitation sector, post-independent India adopted a state-centric approach for 4
5 securing the right to drinking water. The responsibility for the urban water supply and 5
6 sanitation sector are dispersed among government layers. 6
7 The severe drought in 1987 in conjunction with the general macroeconomic crisis 7
8 of the late 1980s brought the opportunity to reform the Indian water sector and led to 8
9 the adoption of modern principles of water governance in the first ever National Water 9
10 Policy. This policy assumed a holistic view of the water sector and advocated for the 10
11 development of integrated information systems, conservation of resources, emphasis on 11
12 multipurpose projects and periodic groundwater assessment. It also prioritized for the 12
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13 first time in Indian history drinking water over other water uses and stated that water 13
14 rates should not only convey the value of scarcity but also cover a portion of fixed costs 14
15 and the annual maintenance and operation charges. 15
16 The central Government is responsible for the regulation and development of inter- 16
17 state rivers and river basins. It also establishes the policy framework for the management 17
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of water resources and provides funds for water and sanitation projects via the budgetary
routes. Both the development responsibilities and some of the legislative powers are with
the state governments. In most states however, the functions of policymaking, financing
and economic regulation overlap or are improperly distributed. The lack of constitutional
power makes the central Government too weak to coordinate institutional issues at the
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23 state and inter-state levels, and achieving country-wide consensus on national policies 23
24 has proven difficult. One of the Indian experts comments, ‘In fact, even after 60 years 24
25 of independence we have not formulated an integrated water policy. Ground water has 25
26 gone down, surface water is highly polluted and still no serious attempt is being made to 26
27 improve the situation.’ 27
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28 With the Constitutional Amendment of 1992 the responsibility for urban water 28
29 supply and sanitation services was clearly assigned to local bodies. The operation and 29
30 management responsibility is supposed to be passed on to the local entities upon 30
31 completion of the infrastructure construction works which are the responsibility of the 31
32 states. However, due to lack of capacity and incentives, municipalities often leave state- 32
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33 level entities to carry out operation and management functions. Most local entities have 33
34 either not taken up the responsibility of the water and sanitation service or have merged 34
35 it with other municipal services. 35
36 Consequently, institutional arrangements of the PSOs vary significantly from state 36
37 to state: state-level Public Health Engineering Departments, specialized state-level Water 37
38 and Sanitation Service Boards, specialized City-level Boards, Municipal Corporations and 38
39 Urban Local Bodies deal with urban water and sanitation issues. The local government 39
40 institutions in charge of operating and maintaining the infrastructure are generally weak 40
41 and often lack the financial resources to carry out their functions. 41
42 Accordingly, the only more intense relation of the infrastructure operators that is 42
43 indicated by the network analysis exists between the infrastructure operators and their 43
44 capital providers. Indeed, the network analysis shows a very fragmented IS (see Figure 44
45 7.4), where the actors of the public administration, that is, the regulatory agencies, the 45
46 standard-setting organizations and the public planners, take a peripheral role and are not 46
47 connected to each other or to any other of the actor types. 47

1 Unlike in other decentralized countries, there are no autonomous regulatory agencies 1

2 for water supply and sanitation at the state or national level. Multiple ministries are 2
3 cross-functionally involved in the water sector, but no agency currently plays the 3
4 role of the economic regulator. The Ministry of Urban Development (MoUD) is the 4
5 principal department of the central Government that coordinates urban water supply 5
6 and sanitation activities, and the Central Public Health and Environmental Engineering 6
7 Organization is its technical arm. The MoUD receives assistance from the Ministry of 7
8 Health and Family Welfare, Ministry of Water Resources, Ministry of Environment and 8
9 Forests and the Planning Commission. 9
10 Economic regulation is a relatively new concept in India which has been introduced 10
11 as part of broader sector reforms and the increasing role played by the private sector. But, 11
12 regulation requires accurate data, a commodity that is badly missing in the Indian water 12
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13 sector. Instruments to make informed decisions on proper allocation of water resources 13
14 (water rights market) still have to be developed in most states. 14
15 In the 1990s, the central Government realized the need for taking water end-users 15
16 into account. With this objective, the policy began to refer to the economic use of 16
17 water, inculcating responsibilities in users by imposing charges, and responsibility for 17
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the operation and maintenance of the services. In recent times, the potential roles of
NGOs and the private sector in urban basic services are being recognized. According to
the network analysis, social and environmental organizations are central to the IS and
interact with water users as well as with universities and public laboratories.
Not included in the actor model, the so-called informal sector has been traditionally
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23 present in Indian cities. The role of small independent water providers is often 23
24 underestimated. According to estimates of Kariuki and Schwartz (2005), in Delhi they 24
25 serve 6-47 per cent of the households with water. The urban middle class have learned to 25
26 live with irregular, unpredictable and often polluted public water services by developing 26
27 coping strategies which include investments in household storage, purchasing of bottled 27
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28 water for drinking, installation of household water purification systems or purchase of 28

29 water from vendors (Briscoe and Malik, 2006). 29
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31 South Africa 31
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33 Since the end of apartheid in 1994, water policies and water legislation underwent a 33
34 profound revision. Reorganizations and reallocation of powers and functions have shaped 34
35 the structure of the water sector significantly. Several acts provide the legal framework, 35
36 including the Constitution which ensures the right to clean water, the National Water 36
37 Act which ensures free basic water and sets the rules for establishing and running local 37
38 water authorities; and the state and local government acts. 38
39 South Africa is one of the few countries in the world that has constitutionally 39
40 anchored the basic right to sufficient water. The water law defines a modern legal system 40
41 quite conducive for market-based water allocation, full cost recovery and integrated 41
42 water resource management. One of the important objectives of the national water 42
43 policy is to progressively decentralize water management responsibilities. As local Water 43
44 Services Authorities (WSA), metropolitan municipalities, some district municipalities 44
45 and authorized local municipalities are held responsible for ensuring provision of water 45
46 services in their jurisdiction. Publicly or privately-owned companies can be contracted as 46
47 water service providers. According to Busari and Jackson (2006), currently there are four 47

1 partnerships with privately-owned companies. Since the choice of technology rests with 1
2 the WSAs, they may be considered the main PSOs within the South African water IS. 2
3 The central Government confines itself to ensure that service provision by 3
4 municipalities conforms to national water policy and standards. The key governmental 4
5 agency, the Department of Water Affairs (DWA), is evolving into a strategy and policy- 5
6 setting body, a supporter and regulator, divesting of operational responsibilities for water 6
7 systems. However, many municipalities are reluctant to take delivery of the water and 7
8 sanitation schemes, as incentives are low and local management capacities often limited. 8
9 The supportive role of the national and provincial government to municipalities is crucial. 9
10 Government funding for water services is allocated by the Department of Provincial and 10
11 Local Government through the equitable share mechanism, the municipal infrastructure 11
12 grant (MIG) and the capacity building grant. 12
F
13 A feature that distinguishes the South African water and sanitation sector from other 13
14 countries and not included in the actor model is the existence of 15 regional public 14
15 Water Boards that operate dams, bulk water supply infrastructure, some distribution and 15
16 some wastewater systems. They are an important institutional tier between the national 16
17 and local governments, and at the same time a strong linkage between water supply and 17
18
19
20
21
22
O
sanitation and water resource management. To harness the existing capacities within the
sector, the DWA recommends to local governments the use of partnerships with Water
Boards for the provision of water services.
The low interactivity of the IS revealed by the network analysis (see Figure 7.4) seems
to contradict the general characterization of the institutional framework as valuable to
18
19
20
21
22
O
23 ‘treat water as an economic good, strengthen allocation capabilities, increase the reliance 23
24 on market forces, revive the payment culture, ensure financial self-sufficiency, promote 24
25 decentralised decision structures and encourage the adoption of modern technology and 25
26 information inputs’ (Saleth and Dinar, 2004; as quoted in Backeberg, 2005). 26
27 Some interaction seems to exist between standard-setting organizations and suppliers of 27
R
28 technical equipment, which also hold relatively good connections to universities and public 28
29 laboratories. According to one expert, it is the big multinationals (for example, Veolia, Suez 29
30 and Siemens) that tend to dominate in terms of equipment provision, other multinationals 30
31 (like SRK, Keyplan and Golder) are doing design and installation, while smaller domestic 31
32 companies tend to be involved at the local level with upgrades and operation support. 32
P
33 Remarkable is the completely isolated position of water users and social and 33
34 environmental organizations, indicating a lack of user–producer linkages which 34
35 contradicts the official stakeholder participation policy. Although the South African water 35
36 legislation is excellent, the real situation seems to be different. Considering the intensity 36
37 and the extent of the recent institutional changes in the South African water sector, it is 37
38 yet not surprising to find the actor network in a weak stage of reformation. 38
39 39
40 40
41 Innovation System Functions 41
42 42
43 Following the analysis scheme of Bergek et al. (2008) the next section revises the 43
44 performance of each IS with regard to its basic functions. By comparing the functionings 44
45 across countries an attempt is being made to identify the strengths and weaknesses of 45
46 each national water sector with respect to its potential for bringing about sustainability 46
47 innovations. 47

1 Legitimation 1
2 2
3 In all four countries the urban water service sector is under serious pressure. Rapid 3
4 industrialization and continuous urbanization trends have aggravated already existing 4
5 problems related to the available quantity and quality of water. Increasing water scarcity 5
6 and water pollution are posing a threat to any further development. 6
7 Moreover, a large part of the population continues without access to improved 7
8 drinking water and sanitation, which have been internationally recognized as a 8
9 fundamental human right, and social pressures are growing to assure universal access to 9
10 basic water services. The commitment to the UN Millennium Development Goals (MDG) 10
11 to halve the 1990 percentage of the population without access to improved water services 11
12 by 2015 has lifted this moral issue on an international level. 12
F
13 Huge investment efforts into the application of new sustainable water technologies 13
14 will be necessary to solve these problems, since the traditional approach of simply 14
15 expanding water provision has in many urban agglomerations reached a physical limit. 15
16 As any new paradigm, sustainable water technologies encounter resistance from the 16
17 established regime. The function of legitimation is important to counteract this inertia by 17
18
19
20
21
22
O
lobbying and forming coalitions in favour of the new technologies.
In the questionnaire, the experts were asked to which extent they agreed with
descriptions of governmental policy motivations. Based on the results in Figure 7.5, it
was induced which arguments are brought forward in order to justify investments and
research efforts within the water sector and which importance is thereby given to the
18
19
20
21
22
O
23 mission of environmental sustainability. 23
24 24
25 BR CN IN ZA Descripon of the governmental policy 25
(1 = strongly disagree, 4 = completely agree)
26 26
27 27
1 2 3 4
R
28 28
29 Providing access to drinking water and wastewater 29
treatment is a main goal of social development
30 30
policy.
31 31
The water sector is idenfied as a crucial sector for
32 32
environmental improvement (water quality,
P
33 ecological balance). 33
34 34
The water sector is idenfied as a potenal driving
35 force within the catching-up of the naonal 35
36 economy. 36
37 37
38 The water sector is idenfied as a strategic sector for 38
long-term economic growth.
39 39
40 40
The development of domesc advanced water
41 technology competencies is a major policy goal.
41
42 42
43 Government policy assumes that the water sector
43
44 creates jobs on a large scale. 44
45 45
Source: Expert Survey
46 46
47 Figure 7.5 Legitimation of water sector policy 47

1 For all countries except for South Africa, the experts widely agree that the importance 1
2 of the water sector for environmental improvements is clearly identified by policy. In 2
3 South Africa, instead social issues seem to dominate the discourse, giving priority to social 3
4 inclusion through coverage expansion over environmental protection. In South Africa 4
5 and in China, the economic significance of the water sector as a driver for catching-up 5
6 and long-term growth is most clearly expressed. Only Chinese policy also refers to the 6
7 water sector as a potential area of domestic technology development. 7
8 Overall, the function of legitimation in China seems most adequately fulfilled with 8
9 sector policy being strategically oriented towards the integration of environmentally 9
10 sustainable water technologies into the economic catching-up process. Legitimation is 10
11 also strong in Brazil and South Africa, but in Brazil environmental sustainability is a 11
12 priority issue, while in South Africa conflicts with social goals may arise. In India the 12
F
13 recognition of the strategic importance of the water sector is widely missed. 13
14 14
15 Resource mobilization 15
16 16
17 The successful creation and diffusion of innovations requires the provision of financial 17
18
19
20
21
22
O
capital and human resources. When looking at the function of resource mobilization in terms
of financing, it must be distinguished between investments in water service infrastructure
which primarily contribute to the function of market formation, and science and technology
(S&T) programs that are a direct input to the knowledge creation function (see Figure 7.6).
In all four countries public funding for S&T is the most important source of financing
18
19
20
21
22
O
23 technology development, since water-related research is primarily led by Government. 23
24 24
25 Brazilian Urban Water Chinese Urban Water Indian Urban Water South African Urban 25
26 and Sanitaon and Sanitaon and Sanitaon Water and Sanitaon 26
Innovaon System Innovaon System Innovaon System Innovaon System
27 27
R
28 Municipal Infrastructure 28
29 New and substanal Grant (MIG) allocated 29
resources for sanitaon Investment of US$11bn about US$700 million in
Investment of about
30 Resource
projects and slum during 11th FYP (2006-
US$8bn (2002-2007) in
2010/2011 to local 30
urbanizaon 2010) in urban water and governments for water
31 Mobilizaon for
sanitaon
urban water and
and sanitaon 31
investments in water sanitaon, corresponding
32 and sanitaon
Growth Acceleraon
to a gap of US$3.9bn 32
Program: Investments in Annual investments „The water sector is well
P
33 infrastructure
sanitaon sector of tripled compared to the
between required and
developed, but under 33
available funds
34 US$20bn in the period of period 1991-2005 resourced both financially
2007-2010 and more importantly
34
35 with human capital“ 35
36 36
„General lack of sciensts
37 and engineers in all 37
PROSAB (Program for MLP 2006-2020 (Naonal Water Technology
aspects of the water
38 Research in Basic Medium and Long Term Iniave in the 11th FYP
sector“
38
Resource Sanitaon): US$17 million S&T Development Plan): (2007-2012): US$65
39 Mobilizaon for since 1996 great increase of resource million
39
„We have lost our
40 research in water and input
naonal skills base [...] we 40
sanitaon CT-Hidro: US$25 million in „Lack of an effecve think
41 technologies 2007 for R&D in water In 2007 US$120 million tank force not having
have lost innovave edge 41
and will need a massive
42 resources and water for S&T in the water vested interests at the 42
program to rebuild any
management sector naonal and state level“
form of credible research
43 capacies“
43
44 44
45 45
Figure 7.6 Resource mobilization
46 46
47 47

1 Brazil 1
2 2
3 Infrastructure investments have been high in Brazil. In 2005, the federal Government 3
4 pledged US$ 350 million to finance public sanitation projects and US$320 million to 4
5 private company projects. From the federal budget, another US$400 million in grants to 5
6 state and municipal governments were laid out through individual and party parliamentary 6
7 bills (Oliveira, 2008). Within its Growth Acceleration Program the Brazilian Government 7
8 has reserved about US$20 billion for further investments in the Brazilian basic sanitation 8
9 sector within the period of 2007–2010. The programme allocates new and substantial 9
10 resources for sanitation projects and slum urbanization. 10
11 PROSAB is the major research programme in the Brazilian water and sanitation sector. 11
12 The focus of the programme is on developing and improving water treatment and sanitation 12
F
13 technologies on the basis of priority research themes and research networks involving 13
14 universities, technology institutes and private sector. Its main objective is to foster research 14
15 and development (R&D) in technologies of water supply, wastewater and solid waste that are 15
16 easily applicable, have low costs of implementation, operation and maintenance and have 16
17 the potential of improving the living conditions especially of the poor. Since 1996 five calls 17
18
19
20
21
22
O
with a total volume of about US$17 million have been made. According to Furtado et al.
(2005), the PROSAB Program has brought important structural changes within the research
sector, as for instance the formation of academic networks of water-related research, the
creation of a respective research infrastructure and the building-up of human resources.
In general, human resources do not seem to be the limiting factor for the development and
18
19
20
21
22
O
23 application of sustainable water technologies. Water engineers and technicians in the large 23
24 water and sanitation companies are usually well skilled, yet often still rely on the traditional 24
25 approach to solve water problems which has been large-scale and supply-side oriented 25
26 (Barraque et al., 2007). Training and educational programmes should open up curricula for 26
27 small-scale decentralized technologies in order to embrace the new sustainability paradigm. 27
R
28 In 2001 the Brazilian Government created the instrument of sectoral funds to 28

29 channel industry-generated revenues into R&D. The scheme was introduced to overcome 29
30 instabilities in Government spending on R&D which characterized the 1990s, and to 30
31 inject large amounts of money into the Brazilian research and IS. One of the 12 thematic 31
32 and two transversal funds (CT-Hidro) is dedicated to R&D in water resources and water 32
P
33 management. An important outcome of this innovative financing instrument is the 33

34 relative stability of research funding over the last decade. The Water Research Fund’s 34
35 annual budget has been steadily increased and its actual expenditures for water-related 35
36 R&D have reached a peak in 2007 with an amount of about US$25 million. Although 36
37 actual expenditures have slightly decreased since then, 2009 saw investments in water 37
38 technology research of about double the size compared to 2001. The projected budgets 38
39 for the next two years are of US$35 million annually. 39
40 40
41 41
42 China 42
43 43
44 Water service infrastructure investments have been tripled over the past years. According 44
45 to the World Bank (Browder, 2007), in 1991–2005 a total of US$54 billion has been 45
46 invested in urban water supply and sanitation, equivalent to US$3.7 billion per year. 46
47 During the eleventh Five-Year Plan from 2006 to 2010 almost US$11 billion per year were 47

1 expected to be invested in the sector, three times as much per year as in the previous 1
2 15 years. Furthermore, the water treatment industry could also be one of the biggest 2
3 beneficiaries of the economic stimulus package in 2010–2011, as the Government plans 3
4 to invest about US$31 billion in environmental projects, like water sanitation. 4
5 The Chinese Government concentrates a considerable portion of its R&D investments 5
6 on a limited number of research areas to achieve ‘more breakthroughs in less time’. Among 6
7 these key technology areas list ‘water and mineral resources’, while ‘water pollution control 7
8 and treatment’ is one of the engineering megaprojects. Accordingly, the resource input on 8
9 S&T development for the water sector has been greatly increased. According to the MWR, in 9
10 2007 the central Government fund for S&T development was in the order of US$120 million. 10
11 Critics of this approach are concerned that long-term planning and concentration 11
12 of Government R&D investments on megaprojects could reduce the flexibility of the 12
F
13 Chinese IS in the face of rapid scientific and technological development and be harmful 13
14 to scientific creativity and bottom-up competition of ideas (Hao and Gong, 2006). In the 14
15 case of water technologies the strong political commitment has yet created a valuable 15
16 stability and also contributed to the functions of legitimation and guidance of search. 16
17 17
18
19
20
21
22
India
O
Although India is investing more than ever in the water and sanitation sector, the
expenditures are low compared to other countries with a similar level of development.
18
19
20
21
22
O
23 According to the World Bank (Makino, 2006), in order to achieve the MDG targets the 23
24 investment requirements for the urban water supply and sanitation sector in the period 24
25 2002–2007 were of US$12 billion. Actually available funds for investments in the water 25
26 and sanitation sector are much lower. The World Bank estimates a gap of US$3.9 billion 26
27 between required investments and available funds. 27
R
28 The development of water and sanitation technologies has also received more 28
29 attention by the Indian Government, although the determination to create indigenous 29
30 innovations in the water sector is by far not as pronounced as for instance by the Chinese 30
31 leadership. The tenth Five-Year Plan (2002–2007) has given some attention to water 31
32 purification, and hence various technological options for treatment of drinking water 32
P
33 were explored. Among a total of five new proposals that the Department of Science and 33
34 Technology has made for the eleventh Five-Year Plan (2007–2012) the Water Technology 34
35 Initiative with about US$65 million of funding ranks prominently. 35
36 Despite substantial expenditures the function of resource mobilization seems to be 36
37 limited by human resources, as one expert point to the lack of an ‘effective think tank 37
38 force not having vested interests at the national and state level’. 38
39 39
40 40
41 South Africa 41
42 42
43 Investments in water infrastructure are done by municipalities which receive budget 43
44 from the central Government. The 2010/2011 MIG allocated about US$700 million to 44
45 local governments for water and sanitation, corresponding to about US$14 per capita. Yet 45
46 one of the experts comments: ‘[T]he water sector is well developed but under resourced both 46
47 financially and more importantly [with] human capital’. 47

1 Lacking skilled human resources is the most pressing problem in the South African 1
2 urban water IS. Although South African scientists have made many technological 2
3 advances since the mid-twentieth century, experts are concerned about having lost the 3
4 ‘technological edge’. ‘We have a general lack of scientists and engineers in all aspects of 4
5 the water sector’, ‘We have lost our national skills base … we have lost innovative edge 5
6 and will need a massive program to rebuild any form of credible research capacities in 6
7 these hard areas like alternative treatment processes.’ 7
8 Accordingly, focus should be put on capacity building through supporting research 8
9 at tertiary institutions. One expert states, ‘I would increase spending on research and 9
10 development coupled to university education for building capacity in the water sector.’ 10
11 Water research in South Africa is coordinated and funded by the Water Research 11
12 Commission. According to one expert, ‘The Water Research Commission is doing a good 12
F
13 job and should continue to receive funding and political support.’ 13
14 14
15 Knowledge creation 15
16 16
17 In order to assess the success of domestic knowledge development, the number of national 17
18
19
20
21
22
patent offices. O
sustainable water technology patents that have been filed internationally will be looked
at (Figure 7.7). The concept of transnational patents used for comparison was developed
by Frietsch and Schmoch (2010) and corrects for different propensities to file at specific
In the last two decades the BICS countries have significantly augmented their share
18
19
20
21
22
O
23 in transnational patents of sustainable water technologies (that were divided into the 23
24 segments of wastewater, water supply and water use efficiency) from less than 1 per 24
25 cent of all transnational water patents to about 6 per cent in both sustainable water and 25
26 wastewater technologies and more than 3 per cent in water use efficiency technologies. 26
27 Since country sizes affect the absolute patent shares, for a meaningful comparison 27
R
28 the relative patent shares that reflect the specialization in each technology segment will 28
29 be analyzed. All countries except for China have traditionally been specialized in water 29
30 supply technologies, however with very low absolute shares, except for South Africa, 30
31 which was also the only country with a positive specialization in wastewater and some 31
32 activity in water use efficiency technologies. Today, all four countries are specialized 32
P
33 in water supply and wastewater technologies. This specialization continues to be most 33

34 pronounced in South Africa, followed by Brazil and India, and is less distinct in China 34
35 (although it now has by far the largest absolute shares). The situation is different for water 35
36 use efficiency technologies, an emerging sustainable technology field in which activity 36
37 was still low at the second half of the 1990s. The only country that meanwhile managed 37
38 to positively specialize in this segment is Brazil. 38
39 Brazil and India started from very low absolute shares in the second half of the 39
40 1990s with positive specialization only in water supply technologies. Since then both 40
41 have clearly intensified their specialization in sustainable water technologies, being now 41
42 positively specialized in all three segments. China has impressively expanded its absolute 42
43 patent shares as part of a general increase in patenting. While the positive specialization 43
44 in wastewater treatment technologies remained at the same level, it significantly 44
45 increased its (now positive) specialization in water supply technologies and reduced 45
46 its negative specialization in water use efficiency technologies. South Africa, initially 46
47 positively specialized in all three segments, managed to stabilize its absolute and very 47

Figure 7.7 Knowledge creation

1 high relative patent shares in water supply and wastewater technologies, but dramatically 1
2 lost dynamism in water use efficiency technologies. 2
3 3
4 Guidance of search 4
5 5
6 The engagement in innovation is a risky and enduring process that requires a long-term 6
7 oriented sector policy. In this section, whether political stability and vision formulation 7
8 promote the development of sustainable water technologies will be analyzed. Ambitious 8
9 targets and sector-wide strategic goals are supposed to support technological development. 9
10 In the questionnaire, the experts were asked to which extent they could agree with 10
11 descriptions of governmental policy characteristics. Based on the results in Figure 7.8, it 11
12 will be assessed to which extent sector policy gives the necessary guidance for successful 12
F
13 innovation development. 13
14 14
15 BR CN IN ZA Descripon of the governmental policy 15
16 (1 = strongly disagree, 4 = completely agree) 16
17 17
18
19
20
21
22
Sector-wide strategic goals (economic,
O
environmental, and social) are formulated by the
government.
Long-term sector policies and stable regulaons

1 2 3 4 18
19
20
21
22
O
23 reduce sectoral risks. 23
24 24
25 Different interests are aligned in a parcipatory 25
26 process. 26
27 27
Policies from different areas (infrastructure,
R
28 28
environmental, industrial, R&D) are coordinated in
29 order to increase their impact in the sector.
29
30 30
Source: Expert Survey
31 31
32 32
Figure 7.8 Guidance of search
P
33 33
34 34
35 Brazil 35
36 36
37 According to the survey results, the Brazilian water sector experts widely agree that 37
38 long-term sector policies and stable regulations reduce sectoral risks, and that different 38
39 stakeholder interests are aligned in a participatory process. Brazil has set ambitious targets 39
40 of universalizing water access and sanitation, while treating 80 per cent of sewage by 40
41 2010. This is an enormous organizational and technical challenge, which signals the 41
42 political determination to solve the pressing sectoral problems. 42
43 The creation of the MC in 2003 was an important step towards the integration of 43
44 various governmental policies relating to urban water and sanitation. The National 44
45 Sanitation Secretary is now responsible for the coordination of basic sanitation policies. 45
46 The 1997 National Water Act and the 2007 National Sanitation Act have implemented 46
47 47

1 fundamental principles of Integrated Water Resource Management by creating institutions 1

2 for broad stakeholder participation in sector decisions. 2
3 3
4 4
5 China 5
6 6
7 Water policy has become a major focus of high-level attention. Acknowledging the serious 7
8 threat that water pollution and scarcity pose to public health and economic development, 8
9 the Chinese Government promotes the idea of ‘sustainable water’ as a key policy goal and 9
10 ambitious quantitative targets have been set as part of the eleventh Five-Year Plan. Key 10
11 objectives of the water policy are: strengthening river basin management, protecting drinking 11
12 water sources, addressing trans-provincial water pollution, enhancing water saving in 12
F
13 agriculture and achieving 70 per cent of urban wastewater treatment by 2010 (OECD, 2007). 13
14 A distinct feature of the National Medium and Long Term S&T Development Plan 14
15 (MLP) is the adoption of innovation as a new national strategy and the goal of advancing 15
16 China to the rank of innovation-oriented countries by 2020. The MLP reflects China’s 16
17 determination both to overcome growing domestic social and environmental problems 17
18
19
20
21
22
O
through technology and to become a world leader in innovation. One of the ultimate 18
goals of the plan is to develop technologies related to water resources and environmental 19
protection. As already mentioned, among the 16 key projects to be launched, the 20
development of water purification technologies ranks prominently. 21
22
O
23 23
24 India 24
25 25
26 Since legislative power, technical capabilities, planning skills and operational 26
27 responsibilities are dispersed across government layers, water institutions in India remain 27
R
28 legally weak, functionally disjoint, sectorally biased and regionally uncoordinated. A 28

29 consistent national strategy for the water supply and sanitation sector is badly missing, 29
30 as was already mentioned when discussing the legitimation function. One expert points 30
31 to the fact that ‘… people are not aware about harms of polluted water. There is an 31
32 urgent need to launch a mass awareness program on quality of drinking water. Common 32
P
33 man must know that providing safe drinking water is gov[ernmen]t’s responsibility and 33
34 getting safe drinking water is his lawful right.’ 34
35 In order to solve the existing coordination problem to the water sector, one Indian 35
36 expert demands: ‘Appoint one nodal body or a Water Council to manage and regulate 36
37 water resource management. At present multiple ministries (maybe up to 13 ministries) 37
38 are cross functionally involved in water without any one ministry being in charge across 38
39 rural, agricultural, urban water management.’ 39
40 40
41 41
42 South Africa 42
43 43
44 The lack of political guidance from the South African Government is seriously criticized by 44
45 the surveyed experts: ‘At present government has lost focus and has no idea of the role of 45
46 water in future economic development … Government is reactive rather than proactive 46
47 and because they maybe lost core capacity in the water sector, they have also lost the 47

1 ability to understand what this means in terms of service delivery failure’, ‘Government 1
2 is in denial and refuses to accept that there is a water problem.’ 2
3 Besides the absence of a political vision, the alignment of interests and coordination 3
4 seems also to be missing. For instance, one expert states that, ‘A considerable disjoint between 4
5 government departments (for example, Mineral Resources, Human Settlements, Water 5
6 Affairs) exists, despite their common interest in the water cycle’ and it is asked for a ‘greater 6
7 interaction between housing development, water requirements and treatment of waste.’ 7
8 8
9 Entrepreneurial experimentation 9
10 10
11 The function of entrepreneurial experimentation is generally considered to be important for 11
12 an IS in order to create a variety of applications of newly developed knowledge as well as 12
F
13 to improve new technologies through learning-by-doing. In a mission-oriented IS it has 13
14 however to be secured that market competition among entrepreneurs would not yield 14
15 a selection environment that goes against the given mission. A well-defined regulatory 15
16 framework that monitors and enforces minimum standards is an important institutional 16
17 precondition to secure environmental performance. This will also be dealt with, when 17
18
19
20
21
22
analyzing the function of market formation.
In the urban water sector, security issues and the natural monopoly characteristic
do not allow for an unregulated competition through entrepreneurial experimentation. Yet
the opening of the sector to private participation, besides providing additional resources,
may introduce some competitive elements and allow for the inflow of new knowledge.
O 18
19
20
21
22
O
23 As an indicator for the extent of entrepreneurial experimentation data on investments in 23
24 water and sanitation infrastructure with private participation available from the World 24
25 Bank (http://data.worldbank.org) was used. A significant increase in private participation 25
26 in the BICS countries can be observed over the last decade (see Figure 7.9). Although data 26
27 are not complete, it is yet obvious that this is primarily driven by China and Brazil, while 27
R
28 private investment remains low for South Africa and India. 28

29 29
2000
30
investment in water and sanitaon with private parcipaon
Brazil China India South Africa 30

31 1800 31
32 32
1600
P
33 33
34 1400 34
35 35
1200
in million US$
36 36
37 1000 37
38 800
38
39 39
40 600 40
41 400
41
42 42
43 200 43
44 0 44
45 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 45
Source: World Bank
46 46
47 Figure 7.9 Entrepreneurial experimentation 47

1 Brazil 1
2 2
3 Strong political opposition against water privatization and an ambiguous legal situation 3
4 created a high uncertainty for private investors and seriously limited the extent of 4
5 private and foreign participation in the Brazilian water sector (Tupper and Resende, 5
6 2004; Almeida and Mulder, 2005; Motta and Moreira, 2006). Although the 2007 National 6
7 Sanitation Law specifies that in principle municipalities have the conceding authority 7
8 over water and sanitation services, the political struggle between municipal and state 8
9 governments in the urban water sector is expected to continue as it still does not clearly 9
10 define the powers of concession in metropolitan areas (Oliveira, 2008; Sabbioni, 2008). 10
11 Nevertheless, investment in water and sanitation with private sector participation has 11
12 never been as high as in 2008, when it reached US$800 million. 12
F
13 According to Oliveira (2008), 25 per cent of the population is served by companies 13
14 with private sector participation, while this number is expected to grow up to 36 per 14
15 cent in the next decade. In urban areas, it is estimated that there are some 1,350 water 15
16 and sewage entities, of which 32 have been privatized. Concessions are the contractual 16
17 instrument of choice (McNallen, 2006). There were a few cases of concessions granted 17
18
19
20
21
22
sanitation sector.
O
to consortia of domestic and international companies where the domestic partner was
usually a contractor and the international partner was a company with experience in the
18
19
20
21
22
O
23 China 23
24 24
25 The traditional structure of full governmental provision of water service has changed 25
26 dramatically in China. Governments do no longer fully control the planning, operation 26
27 and management of water services as they used to do. The investments in water and 27
R
28 sanitation with private sector participation reached a peak in 2007, with almost US$2 28
29 billion being invested. 29
30 In contrast to Brazil, potential negative outcomes of privatization, as the loss of 30
31 decision-making autonomy of governments, unequal power relations and information 31
32 asymmetry in public–private–partnerships (PPPs), problems around equity, access for 32
P
33 the poor, participation and democracy in decision making, are much less emphasized 33
34 (Zhong et al., 2008). As part of a much wider and complex modernization programme 34
35 in water governance, private participation is rather associated with building economic 35
36 incentives, raising financial capital for infrastructure investments, widening the service 36
37 area, implementing principles of integrated water management, as for instance water 37
38 tariff reforms towards the reflection of full costs, more transparency, accountability and 38
39 control of the Government, more public participation, as well as decentralization of 39
40 water tasks and responsibilities to the local level. 40
41 According to OECD (2007), private sector participation in urban water supply now 41
42 counts for 15 per cent of urban water supply (serving 83 million people). International 42
43 firms own 44 per cent of the supply (in terms of population served), followed by local 43
44 Chinese companies (37 per cent) and expatriate Chinese companies (19 per cent). Though 44
45 the local Chinese companies may not have access to as large technical and financial 45
46 resources as the international investors, they are willing to take a longer-term view to 46
47 47

1 their investments, to operate with much lower margins and to build closer relationships 1
2 with local officials; they are thus rapidly gaining market share. 2
3 Most of the private participation arrangements do not displace the municipal 3
4 utility, but rather the private company becomes partner, either through a contractual 4
5 arrangement or through a joint venture. The general approach is that private companies 5
6 must invest to participate: service standards are well-defined; the private company does 6
7 not have to take the commercial risk involved with low tariffs, but rather will be paid by 7
8 the municipal utility for service provision. 8
9 9
10 10
11 India 11
12 12
F
13 In India, the discussion on redefining the role of state with special focus on public–private 13
14 arrangements is ongoing, but few states are already trying to obtain private funds directly 14
15 by inviting private bids for project construction. India has so far a mixed experience with 15
16 private sector participation in water and sanitation, and despite systematic advocacy, 16
17 there are only a few examples, mostly limited to projects serving industrial estates. Private 17
18
19
20
21
22
systems.
O
participation has so far been sought primarily to finance new water supply and sanitation
One often cited exemplary project was initiated in the State of Karnataka: the French
company Veolia increased water supply to 24 hours per day (ring-fencing demonstration
zones, renovating distribution network, installing meters, introducing a well-functioning
18
19
20
21
22
O
23 commercial system, and effectively employing grassroot social intermediation by an 23
24 NGO), without increasing the amount of bulk water supplied. 24
25 Information is scarce, yet the World Bank data demonstrates that private participation 25
26 in the Indian water supply and sanitation sector remains limited until now. The highest 26
27 investment with private participation reported in 2007 adds up to US$140 million, which 27
R
28 is less than 10 per cent of the investments in China in the same year. The uncertain 28
29 and unstable legal and regulatory environment and the current widespread policy of 29
30 not recovering actual costs of the water service from user charges has not provided the 30
31 guarantees private investors and lenders seek. Without aiming at full cost recovery of 31
32 water tariffs, private sector participation in urban water and sanitation utilities cannot be 32
P
33 a successful proposition. 33
34 34
35 35
36 South Africa 36
37 37
38 In South Africa, the possibility of private sector participation is also very controversially 38
39 discussed. According to Muller (2007), the former Director-General of DWAF, South Africa 39
40 has a history of effective public sector provision of water. In his opinion, privatization 40
41 pressures come primarily from the international debates and multilateral agencies such 41
42 as the World Bank. As he explains, the first post-1994 water concession involved the 42
43 British Biwater company that found it difficult to raise private finance and to meet its 43
44 investment targets, finally seeking additional subsidies from the national Government. 44
45 There are other examples of failed attempts of private sector involvement. A five- 45
46 year management contract for water services in Johannesburg was not renewed when it 46
47 expired in 2005. The private operator had encountered strong opposition when trying 47

1 to install pre-paid water meters in township areas. Yet, one of the surveyed expert states: 1
2 ‘The government is averse to PPPs, but I cannot see that any other type of solution exists 2
3 given the nature of the water crisis in South Africa.’ As this statement and the World Bank 3
4 data show, until now private participation in the water supply and sanitation sector has 4
5 been rather limited. 5
6 6
7 Market formation 7
8 8
9 In order to create a market for sustainable water technologies an institutional framework 9
10 has to be designed that effectively rewards the protection of water resources. This could 10
11 be done by price mechanisms that incentivize the rationalization of water use and the 11
12 minimization of water pollution or by mandatory regulations that enforce the adherence 12
F
13 to minimum quality standards by the market participants. 13
14 Ideally, the price for water use reflects not only the costs of production, but also its 14
15 environmental externalities and social opportunity costs. For various reasons, including 15
16 incomplete information and moral issues, the implementation of the ‘true’ price of 16
17 water is in reality not feasible. Cost recovery prices, consumption-based water billing 17
18
19
20
21
22
indicators are given in Figure 7.10.
2005 and Sanita on

O
and increasing water tariffs however set incentives in the right direction. Some available
Brazilian Urban Water
Innova on System
Chinese Urban Water
and Sanita on
Innova on System
Indian Urban Water
and Sanita on
Innova on System
South African Urban
Water and Sanita on
Innova on System
18
19
20
21
22
O
23 % Sold that is Metered (%) 100 99 58 100 23
24 Opera ng Cost Coverage
24
1.47 1.02 0.83 0.89
25 (ra o) 25
26 Source: IBNET –Internaonal Benchmarking Network for Water and Sanitaon Ulies 26
27 27
R
28 Figure 7.10 Market formation 28

29 29
30 Cost recovery is the declared policy goal in Brazil, China and South Africa, however 30
31 only in Brazil water tariffs are already high enough to pay for the cost of service delivery; 31
32 in China there are huge regional differences, prices are rising, but generally still below 32
P
33 cost recovery levels; in South Africa free water supply for basic needs is guaranteed; in 33
34 India low-quality public water is often a free community service. Inaccurate consumption 34
35 metering is still a common problem in Brazil. Starting from a very low level, China now 35
36 has a policy of universal metering, and water companies are rapidly installing meters. In 36
37 India there is no systematic metering, but even for customers that are effectively metered 37
38 the tariff is typically a uniform linear tariff. 38
39 39
40 40
41 Brazil 41
42 42
43 Some of the critical segments in Brazil’s water industry, particularly in the areas of water 43
44 loss and water reuse, offer large market potential for the application of innovative water 44
45 technologies. Water reuse is becoming increasingly important in Brazil, especially in the 45
46 large centres where water scarcity represents high operational costs for water impounding 46
47 and adduction. Recent legislation imposing charges for collecting and disposing effluents 47

1 in water bodies increases the demand for specialized consulting services and effluent 1
2 treatment technologies. 2
3 An example of successful market formation instruments is the innovative Basin 3
4 Restoration Program (PRODES) managed by the National Water Agency (ANA) that was 4
5 introduced in 2001 by the federal Government. It pays sanitation utilities for treating 5
6 wastewater based on certified outputs. Up to half of the investment costs for wastewater 6
7 treatment plants are eligible to be reimbursed over three to seven years, provided that the 7
8 quality of the wastewater discharged meets the norms. If the norms are not met repeatedly 8
9 the payment is suspended and the utility may be excluded from the programme. This 9
10 provides strong incentives to properly operate and maintain plants. Between 2001 and 10
11 2007 PRODES leveraged investments of about US$290 million in wastewater treatment 11
12 infrastructure with subsidy commitments of about US$94 million. 12
F
13 13
14 14
15 China 15
16 16
17 Since 2002, the ongoing institutional reforms are modifying the supply-driven water 17
18
19
20
21
22
O
system towards a user-pay market-driven sector. However, the incentives and enforcement
mechanisms in place are weak, because the political system relies on an oversight
system that evaluates municipal leaders on their overall compliance with policies and
achievement of planning targets. An effective incentive system for ensuring sustainable
and efficient delivery of municipal services still has to be developed. Programmes for
18
19
20
21
22
O
23 evaluating and benchmarking urban water utility performance are generally weak at all 23
24 levels of government. Cities and their utilities need to be supervised by a higher level of 24
25 government to ensure compliance with national and provincial policies and standards. 25
26 But, conflicting roles often inhibit the flow of information upward. 26
27 The tendency to increase water tariffs, to extend metering and to use block tariffs more 27
R
28 frequently seems to have contributed to the diffusion of water use efficiency technologies 28
29 within the Chinese domestic market. By inducing market demands, huge efforts have 29
30 already been made to rationalize water use. Cities throughout China have established 30
31 Water Conservation Offices with the mandate to set and enforce plans for domestic, 31
32 commercial and industrial water use. Water conservation statistics are now published by 32
P
33 the Ministry of Housing and Urban–Rural Development. 33

34 Choices about wastewater treatment technology are influenced by relatively high 34
35 national discharge standards. Many cities are also upgrading their water treatment plants 35
36 with advanced and expensive technology to respond to the new National Drinking Water 36
37 Quality Standards. China’s water supply and wastewater standards meet or even exceed 37
38 the highest international standards. In fact, national standards are so high that Bowder 38
39 (2007) argues they were unrealistic and non-enforceable for many cities and proposes the 39
40 implementation of transitional standards that allow for more flexibility. 40
41 41
42 42
43 India 43
44 44
45 Although in 1995 the Central Pollution Control Board provided water quality standards 45
46 for drinking and other urban uses, they do not constitute an integral part of the 46
47 recommendations of the various dedicated committees set for establishment of the 47

1 norms and standards for supply of urban services. Moreover, norms for quantity and 1
2 quality of water supply and sanitation services are infrequently monitored and are often 2
3 unmet when monitored. Even when failures are detected, service quality is not effectively 3
4 enforced. In the words of an Indian expert, ‘fines and penalties do not work because of 4
5 bureaucracy, non-quality assurance and corruption.’ 5
6 6
7 7
8 South Africa 8
9 9
10 According to the surveyed water sector experts, South Africa has one of the best water 10
11 legislations in the world, but it is not being implemented. Existing service standards are high, 11
12 but according to Bluewater Bio, an international firm specialized in wastewater treatment, 12
F
13 out of 1,600 wastewater treatment plants in South Africa at least 60 per cent are not meeting 13
14 regulatory requirements. ‘South Africa is currently experiencing a lack of service delivery 14
15 and in some cases, the wastewater treatment facilities are not operating effectively and/or at 15
16 full capacity to efficiently serve all stakeholders.’ ‘Given the loss of governmental capacity, 16
17 unhealthy relations exist with large firms, who are now capturing government data for 17
18
19
20
21
22
O
private gain; but also selling solutions that are inappropriate.’ Furthermore, ‘Fines are not
implemented because of the Cooperative Governance clause in the national constitution,
which has been interpreted to mean that one government department will never criticize
another government department.’ With the 2008 incentive-based Water Quality Regulation
Strategy, DWA is now starting to put more emphasis on service quality monitoring.
18
19
20
21
22
O
23 23
24 Knowledge diffusion through networks 24
25 25
26 By some scholars this function is considered the overarching function of the IS. Metcalfe 26
27 and Ramlogan (2008) explain how the way knowledge is distributed and the extent to 27
R
28 which knowledge is diffused among individuals in a society influences its growth and 28
29 point to the formation of connections between the components as the necessary step in 29
30 the creation of an IS. Network analysis does provide some indications of its performance. 30
31 The average degree of interaction between the actor types is taken as principal indicator 31
32 for the extent of knowledge flows within the IS. Isolated and disconnected actor types 32
P
33 may indicate serious system failures and diffusion barriers. 33

34 Special importance is also given to the integration of water users in the sectoral 34
35 system since user–producer linkages are generally considered to be a success factor for 35
36 innovation development. Lundvall (1988) and Fagerberg (1995) present theoretical and 36
37 empirical evidence that stable relationships between domestic users and producers of 37
38 technology have a positive impact on technological progress. Related to this, the policy 38
39 of stakeholder participation may be judged based on both the provision of necessary 39
40 information to enable stakeholders to actively participate in decision making and 40
41 their actual involvement. Another important link refers to the university–industry 41
42 collaboration, which is a main channel of exchange of information about demanded 42
43 solutions and market requirements on the one side and existing solutions and new 43
44 technological knowledge on the other. The centrality and interactivity of social and 44
45 environmental organizations and particularly their linkage to public planners, standard- 45
46 setting organizations and regulating agencies may be highlighted as indicators for the 46
47 pressure towards sustainable technological solutions. 47

1 From the previous section it has become clear that Brazil and China have urban 1
2 water IS with strongly developed networks of actors, while Indian and South African 2
3 actors show little interaction (see Figure 7.4). Brazil has a well-developed water industry. 3
4 User–producer linkages are strong with water users playing a central role in the IS, 4
5 while the integration of the academic sector is relatively weak. China’s central actors 5
6 are the regulatory agencies. User–producer and university–industry linkages are also well 6
7 developed. A weakness is the actual stakeholder involvement due to a lack of transparency 7
8 and information. India’s IS is dominated by NGOs and research organizations that 8
9 through grassroot projects effectively involve stakeholders in the sector development, 9
10 while the water industry is relatively weak. Linkages of infrastructure operators to water 10
11 users or to universities are virtually absent. South Africa in contrast, has a relatively well- 11
12 integrated water industry with operators and suppliers playing central roles in the IS, but 12
F
13 water users are actually left apart, although there are efforts to increase information and 13
14 transparency to stakeholders. 14
15 15
16 16
17 Conclusion 17
18
19
20
21
22
O
Parting from the assumption of essential systemic functions, this chapter presented a
comparative framework for the analysis of sectoral innovation potentials in developing
countries and applies it to the case of sustainable urban water technologies, as a field with
a most pressing need for technological change and a resulting window-of-opportunity
18
19
20
21
22
O
23 for innovation. In this attempt, the IS function approach has proven to be a valuable 23
24 instrument for structuring the analysis. Although reliable hard data has been scarce, 24
25 many indicators could be found to illustrate function performances and complement the 25
26 experts’ survey, so that eventually consistent pictures of the SIS emerged. 26
27 The findings can be summarized by country profiles (see Figure 7.11) which indicate 27
R
28 the national potential for the development of sustainable urban water technologies and 28
29 allow an easy comparison of function fulfillment within and across countries in order to 29
30 identify relative strengths and critical weaknesses of the SIS. 30
31 Brazil and China show the greatest potentials for sustainable water innovations, as 31
32 basic system functions perform satisfactorily in their urban water and sanitation sectors. 32
P
33 Brazil shows especially strong performances concerning the functions of knowledge 33

34 creation and market formation. Accordingly, its largest water service providers are reportedly 34
35 already starting to enter foreign markets and offering technology transfer to neighbouring 35
36 countries. China performs particularly well at legitimation and guidance of search. The 36
37 building-up of indigenous innovation capabilities in the water and sanitation sector has 37
38 there been recognized by the Government as an important part of the national strategy 38
39 for economic growth and catching-up. 39
40 In contrast, the study reveals significant weaknesses of the urban water and sanitation 40
41 IS in India and South Africa. Both sectors suffer seriously from a lack of guidance of search 41
42 as well as a lack of knowledge diffusion activities. It turns out that South Africa’s historically 42
43 strong water industry and relatively well-developed research system has been largely 43
44 affected by the dramatic loss of skilled human resources. This transversal malfunction 44
45 impacts on all the other system function performances, hampering the innovation process 45
46 from restricting the R&D output over limiting sector policy formulation up to hindering 46
47 the right application of the relatively rich financial resources provided to the sector. In 47

1 Brazilian Urban Chinese Urban Water Indian Urban Water South African Urban 1
Water and Sanitaon and Sanitaon and Sanitaon Water and Sanitaon
2 Innovaon System Innovaon System Innovaon System Innovaon System
2
3 3
4 • Knowledge Creaon • Legimaon • Knowledge Creaon 4
5 Strong Funcons of the • Resource • Guidance of Search • (Financial) Resource 5
• Knowledge Creaon
Sectoral Innovaon System Mobilizaon Mobilizaon
6 • Resource
6
7 • Market Formaon Mobilizaon • Market Formaon 7
8 8
• Resource
9 Mobilizaon • (Human) Resource 9
Mobilizaon
10 • Guidance of Search
10
11 • Guidance of Search 11
Weak Funcons of the • Entrepreneurial
12 Sectoral Innovaon System
• Market Formaon
Experimentaon • Entrepreneurial 12
F
13 Experimentaon 13
• Market Formaon
14 • Kowledge Diffusion 14
• Knowledge Diffusion through Networks
15 through Networks
15
16 16
17 Great potenal for 17
18
19
20
21
22
Potenal for sustainable
innovaons in the urban
water and sanitaon sector
development and
applicaon of
O
sustainable water
innovaons
Promissing sector
strategy, yet to be
effecvely
implemented
Figure 7.11 Comparison of urban water and sanitation innovation systems

Despite impressive
knowledge creaon,
low sustainable water
innovaon potenal
Impairment of
innovave potenal,
because of loss of
human capital
18
19
20
21
22
O
23 23
24 India, insufficient human and financial resource mobilization to urban water and sanitation 24
25 has for a long time been the result of various factors as the lack of clear jurisdiction, non- 25
26 recognition of responsibility, adverse incentives and inadequately low water prices with 26
27 the consequent absence of private investments in public service provision and so on. This 27
R
28 has led to a situation in which the unawareness of citizens concerning their rights and 28
29 the lock-in into private coping strategies have curbed the political pressures to change, 29
30 despite a disastrous state of many urban water and sanitation services. 30
31 The study demonstrates the complex interdependence of systemic functions and 31
32 the consequent difficulty of building-up a functioning SIS. Although the needs to 32
P
33 improve urban water and sanitation services in all the analyzed countries are evident, 33
34 the technological paradigm shift to sustainable innovations has not yet been completed. 34
35 With a few exceptions, these countries have up till now shown little success in establishing 35
36 market environments that give the right incentives to develop and diffuse sustainable 36
37 technologies in the water sector. While in general the political determination is growing 37
38 and a respective indigenous knowledge stock is beginning to build up, it remains to be 38
39 seen whether a broad implementation of sustainable water technologies will be achieved. 39
40 40
41 41
42 References 42
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7

Urban Water Innovation

Case Studies of Brazil,

34 population without access to improved drinking water and sanitation by 2015. 34

Siyanbola_Book.indb 119 7/4/2012 12:05:05 PM

28 giving an overall evaluation of the innovation performance potential. 28

Siyanbola_Book.indb 120 7/4/2012 12:05:05 PM

1 Nelson, 2011), a number of international comparative studies have been conducted to 1

28 System and Sanitaon and Sanitaon and Sanitaon and Sanitaon 28

Siyanbola_Book.indb 121 7/4/2012 12:05:05 PM

Siyanbola_Book.indb 122 7/4/2012 12:05:06 PM

28 organizaons (ORG) financial instuons 28

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Siyanbola_Book.indb 124 7/4/2012 12:05:06 PM

Siyanbola_Book.indb 125 7/4/2012 12:05:06 PM

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1 separated the responsibility for wastewater between government drainage departments 1

33 effective participation of all stakeholders. According to Shen (2004), participation is the 33

Siyanbola_Book.indb 127 7/4/2012 12:05:06 PM

Siyanbola_Book.indb 128 7/4/2012 12:05:06 PM

1 Unlike in other decentralized countries, there are no autonomous regulatory agencies 1

28 water for drinking, installation of household water purification systems or purchase of 28

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28 In 2001 the Brazilian Government created the instrument of sectoral funds to 28

33 management. An important outcome of this innovative financing instrument is the 33

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33 in water supply and wastewater technologies. This specialization continues to be most 33

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Long-term sector policies and stable regulaons

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1 fundamental principles of Integrated Water Resource Management by creating institutions 1

28 legally weak, functionally disjoint, sectorally biased and regionally uncoordinated. A 28

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28 private investment remains low for South Africa and India. 28

Brazil China India South Africa 30

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2005 and Sanita on

Brazilian Urban Water

28 Figure 7.10 Market formation 28

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33 the Ministry of Housing and Urban–Rural Development. 33

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33 may indicate serious system failures and diffusion barriers. 33

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33 Brazil shows especially strong performances concerning the functions of knowledge 33

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Figure 7.11 Comparison of urban water and sanitation innovation systems

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33 Geels, F. W. (2002). Technological transitions as evolutionary reconfiguration processes: a multilevel 33

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1 Lundvall, B.-Å. (1988). Innovation as an Interactive Process – from User-Producer Interaction to 1

28 Performance Reviews: China. Paris: OECD Publishing. 28

33 Planning Commission (2008). 11th Five-Year-Plan 2007–2012. 33

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Long-term sector policies and stable regulaons