Sector Review: Big investments, bigger plans

Big investments, bigger plans

Over the past two decades, the urban infrastructure sector has emerged as a key focus area for the government. The sector has witnessed a surge in activity in terms of policy and regulations, programmes and schemes, and project uptake over this period. While a huge demand-supply gap still exists, rising government expenditure and increasing private sector interest have provided the much-needed impetus to the sector.

The operationalisation of the Delhi metro rail system in 2002 was the biggest development in the urban transport segment. The success story of the Delhi metro encouraged several other cities to set up metro systems. Today, metro rail systems have been developed in 10 cities, while bus rapid transit (BRT) systems  have been set up in 11 cities. Initiatives have been taken for the adoption of public-private partnerships (PPPs) in various schemes to give a fillip to investment and create avenues for private sector participation (PSP). Greater use of information technology (IT) is being made for citizen engagement.

In contrast, urban local bodies (ULBs) are still mired in the same old issues. Despite several initiatives, the operational and financial health of ULBs continues to be poor. This is primarily a result of the large service-level gaps, years of underinvestment and unstable revenue streams.

Indian Infrastructure takes a look at the significant trends and developments in the urban infrastructure sector in the past 20 years…

Rapid urbanisation: India, the world’s second largest urban system

Accelerating urbanisation in the country has put tremendous pressure on civic infrastructure. The rate of increase in urban population over the past two decades is almost double that of the overall population. While the latter increased from 846.3 million in 1991 to 1.21 billion in 2011 (census figures) and further to 1.34 billion in 2017 (unofficial figures), urban population which constituted 25 per cent (217.61 million) of the total in 1991 increased to 31 per cent (377.1 billion) in 2011 (census figures) and to 33 per cent in 2017 (440 billion; unofficial figures).

The number of towns increased from 3,351 in 1991 to 7,935 in 2011, while the number of cities with a population higher than 1 million increased from 23 in 1991 to 53 in 2011. Among metropolitan cities, Ahmedabad, Pune and Surat have joined the rank of cities with a population of over 5 million (other such cities include Mumbai, Delhi, Kolkata, Chennai, Hyderabad and Bengaluru).

Water supply and sewage generation coverage: Improvements visible but inherent issues remain

Total water supply in Class I and Class II cities increased from 22,543 million litres per day (mld) in 1994-95 to 93,775 mld in 2016-17, registering a compound annual growth rate (CAGR) of 6.69 per cent.

Increased water consumption has also led to an increase in sewage generation, which increased from 18,312 mld in 1994-95 to 75,020 mld in 2016-17 (a CAGR of 6.62 per cent). During the same period, sewage treatment capacity increased from 4,099 mld (Class I and II cities) to 26,020 mld. The widening gap between sewage generation and treatment highlights the lower-than-required investment in treatment infrastructure. Earlier, water supply and sewerage infrastructure in most cities was characterised by intermittent water supply, high non-revenue water (NRW), insufficient treatment capacity, etc. The situation, however, has changed slowly with specific measures being taken to replace pipelines, reduce leakages and set up new treatment capacity.

Solid waste generation: Collection and transportation improved but disposal still a key issue

Solid waste generation in urban areas increased from 30,058 tonnes per day (tpd) in 2000 to 143,558 tpd in 2017. Segregation of waste at source is currently being practised in a few big cities such as Chennai, Mumbai and Bengaluru. This was almost non-existent in the 1990s and early 2000s. A little over 33 per cent of the total waste generated is being scientifically processed. Collection efficiency has improved to 70-90 per cent in metros from less than 50 per cent in the 1990s and early 2000s. Further, a capacity of 66 MW of power generation from waste has been installed in the country (till June 2018).

Greater focus on expanding metro rail network

The country’s operational metro rail network increased from 16.5 km in 1995 to 466.16 km in 2018, a CAGR of 15.63 per cent. At present, metro projects are operational in Bengaluru, Chennai, Delhi, Gurugram, Hyderabad, Jaipur, Kochi, Kolkata, Lucknow and Mumbai. About 231 km of metro rail network was operationalised between 2014-15 and 2017-18, as compared to only 199 km during the period between 2004-05 and 2013-14. The average daily ridership on rail-based systems has been consistently rising, keeping pace with the growth in the operational network. It increased from about 0.9 million in 2006 to over 4 million in 2017.

The first BRT system, spanning a total length of 14.8 km, was operationalised in 2006 in Pune. Since then, about 273.4 km of BRT network has been operationalised in Ahmedabad, Amritsar, Bhopal, Indore, Jaipur, Naya Raipur, Pimpri Chinchwad, Rajkot, Surat and Vijayawada. During 2006-18, the network increased at a CAGR of 28.07 per cent, and of this about 54 per cent was added between 2014 and 2017.

Massive investments through government programmes

The government approved a number of programmes and schemes to step up investments in the urban infrastructure sector over the past two decades. The biggest initiative was the launch of the Jawaharlal Nehru National Urban Renewal Mission [JNNURM (2005)], which was a game changer in recognising that cities held India’s future. Despite the fact that the programme was not a big success due to project implementation delays, lack of ULB capacity to implement projects, slow disbursal of funds, etc., it brought the urban sector on the radar and provided an impetus to PPP projects in the water and sanitation sector.

Until 2014, the JNNURM had been the single most important instrument for the overall transformation of the urban infrastructure sector. Between 2014 and 2015, the government launched five new schemes to expedite urban infrastructure development and service provision and replaced the JNNURM. The Smart Cities Mission, the Atal Mission for Rejuvenation and Urban Transformation, the Swachh Bharat Mission (Urban) (SBM), the Heritage City Development and Augmentation Yojana and the Housing for All Scheme (Pradhan Mantri Awas Yojana) were approved with a total investment requirement of over Rs 6.35 trillion, the highest in over 15 years. Most of these programmes are in the early stages of implementation and offer massive opportunities to various stakeholders.

The government for the first time conducted three swachhta surveys in 2016, 2017 and 2018 to assess progress made under the SBM. Also, the ‘Ease of Living Index’, the first-ever index to assess the quality of life in cities was released by the government on August 13, 2018 with Pune, Navi Mumbai and Greater Mumbai being the top three liveable places in the country (of the 111 cities surveyed).

Further, in the past three to four years, the government also announced massive plans for expanding the country’s metro rail network. About 630 km of metro rail network is at different stages of construction, while another 700 km is under planning in various cities.

Total central assistance approved for the urban infrastructure sector increased from Rs 957.54 billion during the period 2004-05 to 2013-14 to Rs 2,331.22 billion in the past four years (2014-15 to 2017-18). Central assistance approved for basic infrastructure segments such as water supply, sewerage, solid waste, and stormwater drainage, increased from Rs 362.79 billion (2004-05 to 2013-14) to Rs 1,131 billion (2014-15 to 2017-18). During the same period, central assistance for urban transport increased from Rs 345 billion to Rs 447.5 billion.

Policy landscape

With respect to the policy framework, most of the policies governing the sector are quite old, approved in the 1970s and 1980s. It was only after 2000 that the government started taking fresh policy measures to revive private interest in the sector. During 2000-06, a number of policy measures were introduced. The biggest initiative was the National Water Policy, 2002, which supported a PPP framework for the water sector. In 2003, Model Municipal Laws were formulated to supplement the urban reform agenda, assist ULBs in the area of accounting reforms and promote PPPs. This was followed by a National Environment Policy in 2006 which focused on developing and implementing private partnership models for setting up and operating effluent and sewage treatment plants. The National Urban Transport Policy was also approved in 2006 with the objective of improving the state of public transport in urban areas.

In 2012, the government formulated a new National Water Policy focusing on categorising the use of water for different purposes and encouraging the recycling and reuse of wastewater. In another major development, in 2017, the government amended the Environment (Protection) Rules, 1986, after a gap of almost 30 years, to relax discharge standards for treated wastewater from upcoming STPs.

One of the biggest policy developments in the solid waste segment was the formulation of the new Municipal Solid Waste (Management and Handling) Rules in 2016 after a gap of almost 16 years. The rules apply to every ULB, including outgrowths of urban areas, and areas under railways and airports and also mandate waste segregation at source.

Another turning point for the sector came with the launch of the first ever Metro Rail Policy in August 2017, opening a window of opportunity for private investments across a range of metro operations.

PSP: Slow but steady

Traditional funding sources for urban infrastructure projects are confined to the budgets of the central, state and local governments. However, with the investment needs growing with demand, traditional funding sources are becoming insufficient. Thus, ULBs are exploring innovative funding methods by roping in the private sector.

The PSP experience in the sector has not been very encouraging. The first project, the Tiruppur Industrial Water Supply Project (Tamil Nadu) was started in 1994. The project elicited substantial interest from private players in the water sector. Although most of the other PPP projects attempted in the 1990s had failed to take off, the role of the private sector in improving the overall service delivery and maintenance of assets became firmly established. The key reasons for the failure were the ULBs’ lack of stable revenue streams and in accurate data systems. Since the late 2000s, there have been some notable changes in the type of PPP formats being used. A mix of PPP models are being used including build-operate-transfer (BOT), long-term concession agreements and management/performance-based contracts.

The government also experimented with 24×7 water supply projects, and demonstration projects were executed on a PPP basis. In fact, the Nagpur 24x7water supply project remains, to date the most successful example of a PPP in the water sector. A new PPP format, the hybrid annuity model, which is a mix of engineering, procurement and construction (EPC) and BOT, is also being experimented with in the sewerage sector.

Unlike the water supply and sewerage segments, PSP in the waste management segment has been fairly successful. PPPs in managing solid waste started in the 1990s with street sweeping contracts. The scope of PPP contracts has gradually widened and the private sector is now involved in the entire value chain of solid waste management.

The success of PPP-based projects in the urban rail segment is still debatable. On the one hand, there are failed PPP examples of the Delhi Metro Airport Express and Mumbai VAG Corridor Lines where the developer withdrew from the contract. On the other hand, the Gurugram Rapid Metro, which is completely privately funded, has witnessed a jump in total revenues. However, the company’s losses have also gone up. The Hyderabad metro project, which recently commenced partial operations, is believed to have changed the perception of PPP being a failed model of operation. One of the key reasons for its success is the flexibility given to the developer with respect to innovation and design. Nevertheless, the financial viability of metro rail projects is questionable given the social pressures of low fares and inadequate sources of non-fare revenue. In the urban bus segment, on the other hand, only a few cities such as Ahmedabad, Bhopal, Indore, Rajkot, Surat and Visakhapatnam have been able to mobilise private funds.

Capacity building of ULBs: Much remains to be done

The 73rd and 74th Constitutional Amendment Acts, enacted in 1992, have played a significant role in the evolution of local governments in the country. Constitutional status was conferred on urban local governments for the better provision of services. However, even after 25 years, ULBs have neither the fiscal and functional autonomy nor the capacity to deliver civic services. This set-up is often cited as the main factor resulting in the poor state of civic services in the country.

It was only post 2005, particularly after the launch of the JNNURM, that the government’s focus shifted to capacity building of ULBs. A number of initiatives were introduced for improving the operational and financial performance of ULBs through manpower training and technical assistance. In fact, a few big ULBs resorted to outsourcing some of their online operations such as revenue management and bill payment, as well as operating citizen facilitation centres, etc., to private agencies. However, smaller ULBs have not made much progress in this field.

The government has also been incentivising and encouraging ULBs to become self-sufficient and mobilise resources through instruments such as municipal bonds. About two decades ago, in 1997, India’s first municipal bond was issued by the Bruhat Bengaluru Mahanagara Palike. The Ahmedabad Municipal Corporation was next with a notable bond issue of Rs 1 billion in early 1998. This was a remarkable achievement, as it was the first municipal bond issue without a state guarantee. But after the initial momentum, the ULBs were not able to achieve much success in raising funds from the capital markets. According to data provided by Moody’s, India has seen only 30 municipal bond issues (till May 2018) from 14 ULBs. Only Rs 15 billion has been raised through such issues. However, there has been some headway in the past two years with municipal corporations in Pune and Hyderabad raising funds through successfully issuing municipal bonds of Rs 2 billion (one tranche) and Rs 4 billion (two tranches) respectively.

User charges: Continues to remain a critical issue

Urban water pricing continues to be highly subsidised and has resulted in low cost recovery. The latter is attributable to the poor collection efficiency and high incidence of illegal connections. Despite several dedicated efforts, municipalities still lack proper mechanisms to enforce appropriate differential pricing systems that could reward or penalise industries for freshwater use. Further, tariff revision proposals are not taken up regularly and are carried out only every five to 10 years.

With regard to metro rail systems, there is heavy dependence on fare box revenues to recoup a significant part of the investment. With restrictions on the number and extent of fare revisions, a number of metro rail systems are finding it difficult to meet their working capital needs. In the past couple of years, metro rail corporations have started to explore innovative financing instruments such as land monetisation, advertisement and parking rights. However, until now, only a few projects such as the Delhi, Bengaluru, Hyderabad and Gurugram metro systems have managed to partially exploit these non-fare box revenue sources.

Digitalisation: Large-scale e-governance and m-governance initiatives being taken

Till as late as 2005, most of the ULBs in the country were following old methods of accounting and had no computerised system to provide online services to the public. It was only after the launch of the JNNURM that the use and penetration of IT started growing with the deployment of innovative e-governance solutions. ULBs have deployed advanced technologies and solutions such as double-entry systems of accounting, leakage detection systems and grievance redressal systems, as well as those for online bill payment, digital mapping, mobile governance, etc., to improve service delivery. Besides, metro and BRT systems have deployed advanced systems such as communications-based train control system, real-time passenger information systems, automated fare collection systems and online payment mechanisms for better services.

Rejuvenation of freshwater bodies and recycling and reuse of wastewater gaining attention

Since the 1990s, the central government has been supplementing the efforts of the state governments in the abatement of pollution on identified stretches of various rivers. The National River Conservation Plan (excluding the Ganga river and its tributaries) was launched in 1995 to clean polluted stretches of 32 rivers in 76 towns at a sanctioned cost of Rs 45.8 billion. A sewage treatment capacity of 2,446.43 mld was created under the programme. Besides, under the Namami Gange Mission (NGM), approved in June 2014, a total of 187 projects worth Rs 165.65 billion have been sanctioned for cleaning the Ganga river. About 278 mld has been created under the NGM.

It was only after 2012 that the focus of the government shifted to encouraging the judicious use of treated wastewater. A number of incentives and policy structures were promulgated by the municipal agencies as well as state governments to encourage different stakeholders to recycle and reuse wastewater. Cities such as Delhi, Surat, Pune, Bengaluru and Nagpur have set up tertiary treatment facilities to reuse treated wastewater for various non-potable purposes. At least 645 mld of tertiary treatment facilities have been set up in these cities in the past five years.

Conclusion

In summary, India’s urban infrastructure sector is maturing quite gradually. The investment requirement is huge and the sector presents sizeable opportunities. The government has  stimulated the process of reviving the sector through its programmes. However, greater stress needs to be laid on capacity building and manpower training. The private sector is expected to play a larger role going forward. Inherent challenges such as an absence of data, poor financial health of ULBs, poor project structuring, inefficiencies in user charges, etc., will, however, need a proactive approach.

Nikita Chhabra