wAteR And SAnitAtion pRogRAm: fIeld noTe September 2011 66526 Trends in Private Sector Participation in the Indian Water Sector: A Critical Review The Water and Sanitation Program is a multi-donor partnership administered by the World Bank to support The Water and Sanitation Program is a multi-donor poor people in obtaining affordable, safe, and sustainable partnership administered by the World Bank to support access to water and sanitation services. poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. Trends in Private Sector Participation in the Indian Water Sector A Critical Review This field note is a summarized version of the Report, Trends in Private Sector Participation in the Indian Water Sector: A Critical Review, based on a study undertaken by the Water and Sanitation Program Acknowledgements Task Manager/Team: Vandana Bhatnagar, Heidrun Zeug Consultants: CRISIL; S.R. Ramanujam Peer reviewers: Clive Harris, Manager, World Bank Institute (PPPs): Raghu Kesavan, Senior Infrastructure Specialist, World Bank; Chris Heymans, Consultant, WSP editor: Ananda Swaroop Photographs: WSP design: Write Media Printed by: PS Press Services Pvt. Ltd. WSP is a multi-donor partnership created in 1978 and administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP’s donors include Australia, Austria, Canada, Denmark, Finland, France, the Bill & Melinda Gates Foundation, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. WSP reports are published to communicate the results of WSP’s work to the development community. Some sources cited may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed herein are entirely those of the author and should not be attributed to the World Bank or its affiliated organizations, or to members of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to wsp@worldbank.org. WSP encourages the dissemination of its work and will normally grant permission promptly. For more information, please visit www.wsp.org. © 2011 Water and Sanitation Program 2 Private Sector Participation Trends in Private Sector Participation in the Indian Water Sector A Critical Review Trends in Private Sector Participation in the Indian Water Sector: A Critical Review InTRoduCTIon (PPP) attempts in urban water supply from 1990 till 2009, Since the 1990s, there have been several attempts in India to that have not been abandoned at conceptualization stage involve the private sector in urban water supply services. These (Table 1). Information was collected though consultations and attempts have had mixed outcomes: while several projects interviews with government and private sector stakeholders planned during the initial years were abandoned in the and PPP experts, as well as from publicly available documents development phase, there has been an increase in the number and project case studies. of contracts awarded to the private sector in recent years. There has also been a change in the type of projects developed The term PPP in the Indian urban water sector generally and the role of the private sector in these projects. does not mean provider functions being contracted out in their entirety to a private provider. For the purpose of this Recognizing the changing scope and character of private study, therefore, any project where a private operator delivers sector participation in Indian urban water supply services, services (such as bulk water supply, domestic piped supply the Water and Sanitation Program (WSP) has undertaken a or water treatment) and is remunerated based on output or study to review these projects. This study reviews trends and performance-linked payments from the project sponsor or the the factors that have facilitated or impeded the development and implementation of projects in the sector with private consumer, is termed a PPP project. Such projects may or may sector participation; draws on learning from project design not involve private sector investments. Further, the study is and the transactions; and reflects on future directions. As restricted only to formal PPP arrangements sanctioned by the most such projects are still at early stages, it has not been city/utility. Informal private provisioning of water services, possible to assess their operating or financial performance as is commonly found in low income neighborhoods, is in any depth. The study covers Public Private Partnership therefore not included under this study. www.wsp.org 3 Trends in Private Sector Participation in the Indian Water Sector A Critical Review TAble 1: LiSt of ppp pRojeCtS SeLeCted foR ASSeSSment 1990-2000 2000-04 2005 onward Cauvery Bulk water Supply o&m contract, KUwASip: 24x7 water supply project: Stage iV, phase-ii Sangli (maharashtra) for Belguam, Hubli-dharwad, (Karnataka) and gulbarga (Karnataka) Krishna Raw Bulk water supply water treatment plant, dewas industrial project (Andhra pradesh) Sonia Vihar, delhi water supply (madhya pradesh) tirupur industrial water supply o&m contract for Chennai desalination plant project (tamil nadu) mumbai K east (maharashtra) (tamil nadu) Selaulim Bulk o&m contract for Contract for water supply water Supply (goa) 21 pilot zones in delhi system, Sector V, Salt Lake, Kolkata (west Bengal) water supply and sewerage o&m contract for 2 pilot zones in o&m contract for pilot zone, project, pune (maharashtra) Bengaluru under BwSSB (Karnataka) nagpur (maharashtra) - o&m contract for 8 municipal councils in management contract for o&m, Bengaluru under BwSSB (Karnataka) Latur (maharashtra) - Visakhapatnam industrial water Supply industrial water supply project (Andhra pradesh) contract, Haldia (west Bengal) - o&m for Chandrapur (maharashtra) Bulk water supply project, Bhiwandi nizampur city (maharashtra) - - o&m contract for water supply system, mysore (Karnataka) - - o&m contract for water supply system, madurai (tamil nadu) - - Concession agreement distribution system, Khandwa (madhya pradesh) - - Concession agreement: distribution system, Shivpuri (madhya pradesh) - - Bot agreement: bulk water supply, naya Raipur (Chhattisgarh) BWSSB: Bangalore Water Supply and Sewerage Board; BOT: Build Operate Transfer; KUWASIP: Karnataka Urban Water Sector Improvement Project; O&M: operation and maintenance 4 Private Sector Participation Trends in Private Sector Participation in the Indian Water Sector A Critical Review ConTexT transfers for urban infrastructure to institutional reforms at state and city levels. Among the sector challenges identified Official estimates show that over 90 percent of urban in the program documents is leveraging private-sector capital households in India have access to water supply services. and skills. The JNNURM accordingly encourages states and Hidden within this figure, however, are numerous indicators cities to engage the private sector to improve services. of poor quality of access, low reliability of supply, poor water quality, high loss levels, and low cost recovery. No Indian The National Water Policy of 2002 and the Planning city receives 24x7 piped water supply. Piped water is never Commission’s 11th Five Year Plan also encourage private distributed for more than a few hours per day. Coverage sector participation as a means to improve services. levels of water supply and sanitation services have increased considerably, but this has not necessarily translated into emeRgIng TRendS In uRbAn WATeR improved services that are safe and reliable. SuPPly PPPs Based on the assessment of PPP projects initiated in the Recognizing the need for institutional reform, the major urban water supply sector since the 1990s, a few trends Government of India urban programs—the Jawaharlal appear to be emerging. These indicate a shift in the profile Nehru National Urban Renewal Mission (JNNURM) and of contracts being developed, and the role of stakeholders the Urban Infrastructure Development Scheme for Small involved. A summary of PPP activity across this period is and Medium Towns (UIDSSMT)—have linked national provided in Table 2. TAble 2: SUmmARy of ppp pRojeCtS in tHe indiAn URBAn wAteR SUppLy SeCtoR Parameters 1990s 2000-04 2005 onward number of PPP 5 8 13 projects attempted Contracts 1 3 13 awarded Current status 1 operational 2 operational 12 projects are under various stages of contracts of implementation/operation; 1 project awarded is currently stalled. Project scope 100% � bulk water supply 75% � distribution o&m 38% � distribution o&m 13% � bulk water supply 31% � distribution investment + o&m 12% water treatment � 8% treatment + system rehabilitation/ � upgradation + distribution o&m 15% bulk system investment + o&m � 8% desalination � PPP model 100% � Bot/Boot 75% � management contracts 38% � management contracts 25% � Bot/Boot 62% � Bot/dBfot and similar Private 100% � international 65% � international 65% � domestic operator mix 35% domestic � 21% � international 14% local/regional � BOOT: Build Own Operate Transfer; DBFOT: Design Build Finance Operate Transfer; O&M: operation and maintenance www.wsp.org 5 Trends in Private Sector Participation in the Indian Water Sector A Critical Review Increase in the number of PPP projects reaching contract award stage Since the 1990s, there has been an increase in the number of PPP projects initiated or awarded. Whereas only four PPP contracts were awarded before 2004, another 13 were awarded since 2005. Before 2004, only 40 percent of the initiated projects were successfully awarded, whereas since 2005, all the projects initiated were awarded. Some 5 million1 people in urban areas now obtain water supply through projects or institutional arrangements that involve the private sector. The year-wise increase in the population of cities with active PPP contracts is presented in Figure 1. Shift in the geographic concentration of PPPs There has been a gradual broadening of states and cities where PPPs have been undertaken in the water sector. In the 1990s, such initiatives were largely concentrated in the southern states of Tamil Nadu, Karnataka, and Andhra Pradesh. fIguRe 1: timeLine of popULAtion of CitieS witH ACtiVe ppp ContRACtS 1. Estimate based on population figures in cities with PPP projects. For pilot projects, the entire city population has been taken. 6 Private Sector Participation Trends in Private Sector Participation in the Indian Water Sector A Critical Review Between 2000 and 2004, projects were being proposed in bulk water supply augmentation and O&M of the entire Karnataka, Delhi, Maharashtra, and Andhra Pradesh, and water supply system (Figure 2). since 2005, elsewhere, including Madhya Pradesh and West Bengal. The availability of public funding under schemes The type of PPP arrangements has also changed. During such as JNNURM has enabled a wider cross-section of the 1990s, the trend was primarily Build Operate Transfer states and cities to initiate projects on their own. Positive (BOT) with 100 percent private financing. The majority of experiences with national PPPs in other infrastructure sectors the O&M improvements since 2000 involved management —especially energy—have also stimulated interest in water contracts, with the public sector providing most of the supply PPPs. investment. Learning from the failure of the earlier large- scale BOT projects, state governments, and international More PPPs for distribution improvements funding agencies encouraged the management contract model Most of the water supply PPP projects during the 1990s to emulate the managerial efficiencies of the private sector, were aimed at augmentation of bulk water supply systems. while minimizing the risks and costs associated with previous Since the early 2000s, however, 80 percent of the projects project structures. that attempted to bring in the private sector were aimed at operation and maintenance (O&M) improvements of the Today, the operational contracts are a mix of concession distribution system. Today, approximately 60 percent of PPP agreements, BOT projects, and management contracts. projects address O&M improvements, 30 percent focus on There are variations in the BOT models implemented, with bulk water supply augmentation, and the rest include both a few of them requiring partial to full private financing. The fIguRe 2: foCUS AReA of wAteR ppps CURRentLy in pRogReSS www.wsp.org 7 Trends in Private Sector Participation in the Indian Water Sector A Critical Review fIguRe 3: mix of ppp ARRAngementS illustration in Figure 3 represents the shift in the type of PPP Increased share of public financing arrangements since the 1990s in PPP projects In line with the policy directions of economic liberalization Possibly as a reflection of this shift in scope and type of PPPs, in the 1990s, the earlier PPPs envisaged private financing, the time taken between project initiation and the award of but since 2005, a growing number of urban water supply contract has become much shorter. Up to 2000, the average PPP projects have been developed on the basis of substantial time to reach the contract award stage was four years; since public funding. At present, 50 percent of projects have been 2005 the time taken between project initiation and awarding developed with financial support from the central government. PPP contracts has been two-and-a-half years on average. The capital injection from schemes such as JNNURM and The reduced private investment component and absence of UIDSSMT has been a major driver of this shift. Public tariff implications may have contributed to a shorter project funding for PPP projects in progress within the JNNURM development period. framework (including the UIDSSMT component) covers approximately 60-70 percent of the escalated project cost. Reduced reliance on multilateral Moreover, JNNURM has created an impetus for private funding for PPPs sector participation. The additional funding lowers the cost of The attempted early water supply PPPs followed strong PPPs, and the appraisal process under the program encourages advocacy by multilateral funding agencies and, up to the PPP-based projects. mid-2000s, several depended heavily on financial assistance from these agencies to meet capital costs. However, since Given the high risk perceptions about water PPPs in India, 2005, most water PPP projects have been initiated by the the share of private investment is likely to remain limited, and project-sponsoring authority itself, such as Urban Local reliance on public funding substantial. Moreover, given the Bodies (ULBs) and state departments. weak financial health of ULBs, most public funding would need to come from state and central government sources, rather than ULBs. 8 Private Sector Participation Trends in Private Sector Participation in the Indian Water Sector A Critical Review More domestic private operators private operators. These private operators are mostly Indian During the 1990s, water supply PPPs mostly involved engineering, procurement and construction companies international private operators. Of the five water supply PPP or other business houses which have added water service projects initiated at the time, three involved international provision to their business lines. Sector participants suggest private operators directly, that is, the Cauvery Bulk Water that domestic operators may be able to mitigate risk to Supply Project of the Bangalore Water Supply and Sewerage a greater extent than international firms because their Board (BWSSB); the Selaulim Bulk Water Supply Project local knowledge enables them to navigate through the in Goa; and the Krishna Bulk Water Supply Project of local project environment, which tends to be politically the Hyderabad Metro Water Supply and Sewerage Board challenging in the water supply sector. Domestic operators (HMWSSB). While several projects planned during the have therefore become more prevalent, either on their own early part of 2000 continued to anticipate the presence of or as consortium partners alongside international operators. international operators, for project awarded since 2005, Figure 4 puts the growth of the domestic private sector in domestic operators have emerged as the most important perspective. Among these are several domestic operators who category of private players in India’s water supply sector. have a provincial presence, as in the case of the Khandwa water supply PPP project which was awarded to Hyderabad- In as many as 75 percent of PPP contracts since 2005, the based EPC 2 firm, Vishwa Infrastructure and Services bidding consortia have been led by national-level domestic Private Limited. fIguRe 4: SHift in pRiVAte opeRAtoR mix in wAteR ppps in indiA 2. Engineering, procurement and construction. www.wsp.org 9 Trends in Private Sector Participation in the Indian Water Sector A Critical Review Over the years, there has also been a shift in the international CRITICAl fACToRS fACIlITATIng And operators who have been interested in the Indian water ConSTRAInIng PPP PRojeCTS In uRbAn supply PPP market. In the 1990s, the dominant international WATeR SuPPly SeCToR players were United Kingdom (UK)-based operators such It is too early to come to a conclusion about the success as Bi Water, Thames Water, and Anglian Water, and French or failure of private sector participation in urban water in operators such as Suez Environment and Veolia Water. Today, terms of outcomes. It is possible, however, to obtain an however, while the French and UK-based operators have a insight about factors that have contributed to or constrained limited presence, there is increasing interest by South-East the progress of anticipated PPPs to the point of contracts Asian water supply utilities in the Indian water PPP market. being awarded. These include Ranhill Utilities Berhard (Malaysia), Manila Water Company (Philippines), among others. In the analysis below, the terms ‘success’ and ‘failure’ are used with reference to the award of contract and do not encompass performance outcomes of the PPP project. Constraints Most anticipated water PPPs that did not move to contracting stage, failed to do so because of cost concerns, and the limited financial and technical capacity of utilities. As a result, political and administrative support has remained tenuous for these projects. It is worth analyzing these constraints in greater detail. • Inconsistent and inadequate local stakeholder support: Lack of stakeholder support for water PPP projects has been a significant reason for several PPPs not moving forward. This has blocked some high- profile attempted PPPs, such as the proposed Cauvery How does India compare with Bulk Water Supply and Selaulim Bulk Water Supply international experience? Projects, and a water and sewerage PPP planned in Several trends described above mirror those observed in other Delhi. Stakeholder groups that did not support the developing country contexts. A recent global study by the projects have included local political parties, civil World Bank3 of PPPs since the 1990s reveals increased public society groups and utility or municipal employees funding, fewer full concessions, and a growing presence of of the public water utilities. The lack of support has domestic operators (accompanied by withdrawal of large been largely due to perceived threats to the specific international operators). The Indian experience at this early interests of some of these stakeholder groups, and a stage appears to be mirroring the trends observed in other view of water as a public good. Much of the debate parts of the developing world. has been quite emotive, with any form of private sector participation made out to be “privatization�, which dramatizes the notion of a public good being used at the behest of private profiteers. • Weak financial capacity to implement water PPPs and lack of mechanisms to address tariffs: Financial risk perceptions have prevented several 3. Marin, P. 2009. Public-private partnerships for urban water utilities: a review of experiences in developing countries. Report. The World Bank. 10 Private Sector Participation Trends in Private Sector Participation in the Indian Water Sector A Critical Review planned PPPs from moving forward. Most water Facilitative factors PPPs proposed in the 1990s were to be highly Where PPP contracts have been awarded, one or more of the capital-intensive and dependent on 100 percent following facilitative factors seemed to have been present: private financing. The implementing agencies for most of these projects could, however, not provide • Availability of public funding: Water PPPs in the guarantees required by the private water recent years have benefited from public funding more operators, and lacked the financial capacity and than in earlier years when private investment was internal revenues to pay bulk charges. Opposition anticipated to be the major source of financing. The developed towards these PPP projects, as consumers JNNURM has made a new form of public funding expected water tariff escalation. available which has enabled ULBs to pursue PPP approaches, unlike in the past when the use of public • Limited awareness and technical capacity to funds required public procurement. In Salt Lake undertake PPPs: The lack of experience and City (Kolkata), and Shivpuri and Khandwa (Madhya limited understanding of water PPPs resulted Pradesh), public funding covered 50-60 percent of in implementing agencies not satisfactorily project costs, which has reduced the financial burden addressing the risk concerns of private operators on the private operator, thus lowering projects costs and the demands of project structuring. Inadequate and pressure for tariff increases. baseline information, lack of clarity on risk sharing, and weaknesses in the procurement processes • Improved mechanisms to address tariff concerns: contributed to difficulties in getting these PPPs off In some recent water PPP projects, measures have the ground. been built in to minimize the tariff and revenue www.wsp.org 11 Trends in Private Sector Participation in the Indian Water Sector A Critical Review sector participation as there was a strong demand for better services. The turnaround in services delivered through the KUWASIP project further strengthened faith in the private sector’s ability to provide viable options for service improvements. • Strong project ownership and expertise: An important success factor has been strong project ownership and expertise in the project initiating authority. In the KUWASIP project, the state infrastructure financing agency, Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC), played an active role in project conceptualization, feasibility studies, stakeholder consultations, and procurement. Similarly, PPP projects in Madhya Pradesh, risk of the private operator. In the Naya Raipur Kolkata, Haldia, Naya Raipur, and Latur have project, costs outside the concessionaire’s control benefited from project management expertise in (especially power and chemicals) are subsidized by state governments departments or agencies. the public sector. In the Khandwa and Shivpuri PPP projects, safeguards are provided against defaults in • Growth in domestic private sector interest: In customer payments. several recent projects, domestic operators have been the dominant players. They have typically • Increased attention to stakeholder support: exhibited high risk-taking appetite, and the ability Recent projects have benefited from improved to manage their costs better. Higher participation stakeholder consultation at an early stage of the by bidders has also contributed to the increase in project (for example, Karnataka Urban Water contract awards. Sector Improvement Project [KUWASIP], Salt Lake City). In several of these projects, the need for In summary, successful contract awards in water PPPs have intervention was substantiated and articulated to been based on a platform of well structured public funding, stakeholders. For instance, against the backdrop of which helped address tariff concerns and thereby gain acute water shortage, unreliable supply, and financial stakeholder support. The trend has been further supported losses, stakeholders in Chandrapur, Khandwa, and by a rise in domestic private operator interest, and improved Shivpuri were more receptive to exploring private project ownership and expertise in state agencies. 12 Private Sector Participation Trends in Private Sector Participation in the Indian Water Sector A Critical Review emeRgIng ISSueS ThAT hAve An ImPACT WAy foRWARd And on WATeR SeCToR PPPs PoSSIble InTeRvenTIonS Recent trends in urban water supply PPPs indicate that the Four aspects will be relevant to achieve successful sector has moved in a positive direction. However, there are water PPPs: some emerging issues that could hamper progress of water PPPs in the future. Create enablers to widen the current project-specific approach into a Current progress is still at a project level, sector trend rather than sector wide A clearly articulated stand from the national government will In other infrastructure sectors (such as power, highways), PPP enable stakeholders and utilities to strengthen their position has been adopted as a sector strategy and sector-level enablers with respect to PPPs in the water sector. Given the substantial have been created (such as model concession agreements, the investment gap and weak financial health of utilities/ULBs, new Electricity Act). Compared to this, PPP momentum in public funding from the central and state governments will the water sector has been a project-level initiative. Stakeholder continue to be necessary to support PPPs, for example, support for water PPPs tends to be tactical and opportunistic, through JNNURM-type funding. often aimed at trying to maximize a temporary public funding opportunity. Moreover, the dependence on public funding Pricing would become more realistic if quantitative and inadequate movement on tariff reform raise questions analysis of sector viability is improved, and guidance on on the long-term sustainability of projects. tariff structures and subsidies become clearer. Widespread adoption of the Ministry of Urban Development’s Service Project preparation, structuring, and risk Level Benchmarking program would strengthen the drivers sharing remain patchy for private sector participation and will also improve The current project preparation process tends to be rushed, project development. due to short timeframes for submission of proposals for grant programs and the short tenures of decision makers. The result Help cities follow well established and is weak information baselines and hurried procurement, poor accepted principles to increase the chance quality proposals, and high risk perception by operators. In of success of PPPs several performance-based O&M contracts for distribution To reduce unrealistic performance expectations from improvement, performance expectations from private private operators, a practical framework is required to phase operators are unrealistic with respect to both standards set capital investments and achieve desired service levels over a and timeframes. Risk sharing is not widely adopted, so that period of time. A framework to address common issues in operators often bear risks related to costs not under their water PPPs can provide a much desired uniformity across control (for example, raw water, electricity). water PPPs. This would include connection policies, tariff collection procedures, disconnection policies, and payment Cities lack the capacity to design, security mechanisms as well as a common set of risk implement, and monitor PPPs sharing principles. The commitment to PPP is often restricted to the higher levels of the decision-making body and not matched by technical Build cities’ implementation and capacity at the operating level. Given their prior focus on asset monitoring capacity creation, the implementing agencies usually lack the capacity Even as external enablers are activated, cities’ capacity to to monitor and oversee contracts and service standards. They engage in PPP needs to be enhanced. Funding assistance for also lack the skills and flexibility to engage in dialogue on project preparation from the national level (for example, the contractual and financial terms in the course of the project. India Infrastructure Project Development Fund) can help Lastly, employee acceptance of private operators remains cities devote the required resources in this very important, uncertain, especially for contracts that require existing and often expensive, activity. To accelerate knowledge employees to be absorbed by the latter. transfer, a forum of administrators from utilities, ULBs www.wsp.org 13 Trends in Private Sector Participation in the Indian Water Sector A Critical Review and states, who have successfully implemented water private sources, and facilitate improved project design PPP projects, can be created to share lessons with other and implementation through PPP structures. The cities. State governments and nodal agencies could play introduction of sector regulation, however, needs to be also an important role in creating an enabling environment accompanied by other enablers such as rationalized public (for example, public funding, tariff policies, as well funding, tariff frameworks, increased role clarity, and as supporting and mentoring project development stakeholder participation. and implementation). In summary, recent trends indicate a growing interest in Develop sector regulation water PPPs, with more projects reaching the contracting stage, as a long-term measure supported largely by increased availability of public funding for The presence of a regulator can strengthen the performance water PPPs. If the private sector is to play a significant role in orientation of local bodies and provide an objective basis addressing the investment and service backlogs in the sector, for tariff setting and targeted subsidies. In doing so, it can suitable interventions are necessary to scale up this momentum help create a more transparent and predictable environment while ensuring projects that deliver the desired service outcomes for attracting investment into the sector, including from on a sustainable basis. 14 Private Sector Participation Water and Sanitation Program 55 Lodi Estate New Delhi 110 003, India The Water and Sanitation Program is a multi-donor Phone: (91-11) 24690488, 24690489 partnership administered by the World Bank to support Fax: (91-11) 24628250 poor people in obtaining affordable, safe, and sustainable E-mail: wspsa@worldbank.org access to water and sanitation services. Web site: www.wsp.org