Indian Initiatives: Experiments in water and sanitation

Two decades back, urban infrastructure projects were typically undertaken by the public sector, with limited or no participation by private players. The scenario has changed considerably since then with private sector companies also throwing their hat into the ring. In a guest article published in Indian Infrastructure (September 1998), V. Suresh, then chairman and managing director, HUDCO, discussed potential models for private participation, some of which have found success over the years…

Urban infrastructure projects, typically, are capital intensive and have long gestation periods. For this reason, it is generally believed that the private sector would not be interested in participating in urban infrastructure. There are also doubts about the desirability of allowing full private sector monopolies in this crucial sector.

However, apprehension about the successful association of the private sector in water supply and sanitation may be misconceived. It probably stems from concern that the supply of water could become a monopolistic proposition. But with strong demand, a well-managed private enterprise with an appropriate tariff structure and effective collection mechanism could work quite well. It could even cater to the needs of low-income households with the help of internalised transparent subsidies. In fact, there are successful examples of public-private partnerships in water supply in many developing countries, with options ranging from large-scale trucking and formation of water corporations to water vending kiosks, door-to-door service and coin operated meters.

Traditionally, the public sector had a monopoly in the development and distribution of water supply and sanitation systems in India, probably in view of the perceived problems in permitting the private sector to participate in public welfare.

However, it is increasingly recognised that in view of institutional and financial weakness and the policies of structural adjustments, it is beyond the capacity of the private sector to take up the expansion of this urban environmental infrastructure at a desirable level. At the same time, the adequacy of urban environmental infrastructure (particularly the supply of water) has become increasingly crucial in determining the satisfaction of residents in urban areas. It is in this context that the need to involve the private sector in the provision of water supply and sanitation is gaining considerable significance.

The path to privatisation of services in India cannot be expected to be smooth and different levels of private involvement in water supply and sanitation need to be followed, depending on how prepared the institutions involved are for full privatisation. The various options available for involving the private sector in urban infrastructure development in the increasing order of private stake in the project are:

Service Contracts-limited benefits

Service contracts secure private sector assistance for performing specific tasks, such as installing and reading meters, monitoring losses, repairing pipes, and collecting accounts. They are typically for short periods, from six months to two years. Their main benefit is that they take advantage of private sector expertise for technical tasks or open these tasks to competition. They leave the responsibility for coordinating these tasks with the public utility managers. They also leave the responsibility for investment with the public sector.

Service contracts are being widely used. In India, Madras Metro Water has contracted services ranging from the provision of staff cars to the operation and maintenance of sewage pumping stations.

Management Contracts

Management contracts transfer responsibility for the operation and maintenance of government-owned businesses to the private sector. These contracts are generally for three to five years. The simplest involve paying a private firm a fixed fee for performing managerial tasks. More sophisticated management contracts can introduce greater incentives for efficiency, by defining performance targets and basing remuneration at least in part on their fulfilment. To be worthwhile, these more complex management contracts must produce efficiency gains large enough to offset the regulatory costs of establishing targets and monitoring performance against them.

Leases – a way to shift commercial risk

Under this arrangement, a private firm leases the assets of a utility from the government and takes on the responsibility for operating and maintaining them. Because the lessor effectively buys the rights to the income stream from the utility’s operations, it assumes much of the commercial risk of the operations. Under a well-structured contract, the lessor’s profitability will depend on how much it can reduce costs (while still meeting the quality standards in the lease contract) so, it has incentives to improve operating efficiency.

Concessions- the first step to private participation

A concession gives the private partner responsibility not only for the operation and maintenance of a utility’s assets but also for investments. Asset ownership remains with the government, however, and full use rights to all the assets, including those created by the private partner, revert to the government when the contract ends, usually after 25 to 30 years. Concessions are often bid by price: the bidder who proposes to operate the utility and meet the investment targets for the lowest tariffs wins the concession. The concession is governed by a contract that sets out conditions such as the main performance targets (coverage,quality), performance standards, arrangements for capital investment, mechanism for adjusting tariffs and arrangements for arbitrating disputes.

BOT/BOO-direct private investment

Build-operate-transfer (BOT) arrangements resemble concessions for providing bulk services but are normally used for greenfield projects such as a water or wastewater treatment plant. In a typical BOT arrangement, a private firm might undertake construction of a new dam and water treatment plant, operate them for a number of years, and at the end of the contract relinquish all rights to them to the public utility. The government or the distribution utility would pay the BOT partner for water from the project, at a price calculated over the life of the contract to cover its construction and operating costs and provide a reasonable return.

The contract between the BOT concessionaire and the utility is usually on a take-or-pay basis, obligating the utility to pay for a specified quantity of water whether or not that quantity is consumed. This places all the demand risk on the utility. Alternatively, the utility might pay a capacity charge and a consumption charge, an arrangement that divides the demand risk between the utility and the BOT concessionaire.

Divestiture-another route to full-fledged private participation

Divestiture of water and sewerage assets-through a sale of assets or share or through a management buy-out – can be partial or complete. A complete divestiture, like a concession, gives the private sector full responsibility for operations, maintenance and investment. But unlike a concession, divestiture transfers ownership of the assets to the private sector, so the nature of the public-private partnership differs slightly. A concession assigns the government two primary tasks: to ensure that the utility’s assets, which the government continues to own, are used well and returned in good condition at the end of the end of the concession and, through regulation, to protect consumers from monopolistic pricing and poor service. A divestiture leaves the government only the task of regulation since, in theory, the private company should be concerned about maintaining its asset base.

Many progressive cities like Pune, Belgaum, Dewas, Bangalore and Tiruppur have come up with various shades of privatisation of water supply and sanitation. However, the learning process is taking longer due to the initial steps needed to ensure prudence in selection, interests of people and accountability.

Tiruppur water supply and sewerage project

The project consists of supply of water to industries in and around. Timonur, domestic water supply and sewerage within municipal limits, treatment of effluents and land development. The project is being developed by IL&FS, the Tiruppur Exporters Association and Tamil Nadu Corporation for Infrastructure Development. It is expected to cost around Rs 5 billion.

The cost recovery will be through water charges with cross subsidisation from industrial users. The project received significant support from the state government for both development and financing. It will be implemented by a special purpose vehicle, which will enter into a construction and operations contract with an international private water company. Negotiations are underway with the bidder to finalise the contracts. The construction is expected to begin soon.

Pune water supply and sewerage project

The project being developed by the Pune Municipal Corporation (PMC) aims at improving water and sewerage services in Pune, a fast-emerging centre for the services sector. The project cost is estimated to be around Rs 7.5 billion. The project envisages private sector participation in construction, management of operation and maintenance, and billing and collection of water charges. Six international firms have prequalified at this stage.

The state government of Maharashtra is playing a key role in the development of the project. Hudco has also taken a proactive role in its development and financing. In addition, many other institutions such as IL&FS, ICICI, HDFC, IDFC and Bank of Maharashtra are expected to play a significant role in making the project a success. The shortlisted companies include such well-known names as Anglian Water, Black & Veatch, Thames Water, L&T, Skanska International, Tatas and Hyundai.

Bangalore water supply project

This project is being developed on BOOT lines and aims to bring into the city about 500 million litres per day. Private sector input has been incorporated in the proposal. The companies approached include the Mahindra-Bechtel Group, GVK Group Kvaerner-John Brown-Trafalgar House, the Thames Water International Group and Larsen & Toubro.

Two other significant projects involving tertiary water and sewerage treatment facilities are being implemented in Bangalore with financial assistance from Hudco. An important aspect of these projects is the involvement of industrial units in the area who would bear part of the cost.

Chennai Metro Water

The Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) has made a significant advance in privatising the operation and maintenance of water supply and sewerage systems in the city. Out of the 110 sewerage pumping stations existing in the city, 70 have so far been given to private contractors for operation and maintenance. The system is working very well. The original contract period has been increased from one year to five years.

CMWSSB has also privatised seven wells to extract water and supply to the city. In addition, Hindustan Dorr Oliver Ltd, which constructed the water treatment plant at Red Hills, has been retained to operate and maintain the 300 mld water treatment plant.

Future Ahead   

Many new initiatives for private participation in water and sanitation are under experimentation in India. The private sector, which has till now been hesitant to enter this area, is waiting to see the performance of ongoing initiatives before taking the plunge.

V. Suresh, Chairman and Managing Director, Housing and Urban Development Corp. Ltd.