Innovative Financing: New funding options being explored but still a long way to go

New funding options being explored but still a long way to go

Given the gap between the supply and demand for water and related services in the country, the investment requirements of the sector are rather high. Most of the funding needs at present are met through government sources, and private sector participation, though increasing gradually, still remains much lower than desirable. The role of other funding sources such as multilateral aid and financial institutions has also increased over the years.

Many factors are responsible for this investor diffidence towards water and wastewater projects. These include the public service nature of the industry, poorly articulated tariff policies, and lack of reliable data hindering proper project structuring.

Public funding: A key source

Government funds have always been the main source of finance for water supply and sanitation projects in the country. These funds are extended in the form of budgetary support and grants, and through schemes such as the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Smart Cities Mission (SCM), the Swachh Bharat Mission (SBM) and the Namami Gange programme.

Further, since municipal water supply is a state subject, most of the funding for such projects comes from the state government. Funds to urban local bodies (ULBs) are extended through state transfers and grants-in-aid. In addition, ULBs use their own resources for meeting capital expenditure on urban water and sanitation infrastructure.

In Union Budget 2019-20, the government has announced a central outlay of Rs 480.32 billion for the Ministry of Housing and Urban Affairs (MoHUA). Of this, around 40.7 per cent (Rs 195.44 billion) has been allocated towards the capital expenditure component. Besides, huge allocations have been made for urban infrastructure development programmes – Rs 27.5 billion for the SBM (Urban), Rs 73 billion for AMRUT, Rs 66 billion for the SCM, and Rs 19.7 billion for the Namami Gange programme and the National River Conservation Plan.

Water and waste water projects in India also receive sizeable funding from international financing agencies such as the World Bank, the Asian Development Bank and the Japan International Cooperation Agency. These multilateral agencies provide financial support to the sector in the form of concessional/ non-concessional loans, equity investments, grants and loan guarantees. Between January 2018 and January 2019, multilateral agencies granted funds worth $7 billion for various water supply and sewerage projects.

Funds for water and related projects are also provided through financing institutions such as Housing and Urban Development Corporation Limited, India Infrastructure Finance Company Limited and Infrastructure Development Finance Company Limited.

PPP experience

Various public-private partnership (PPP) formats are being used by agencies involved in the development of the water and sewerage sector. These include service contracts, management or performance-based contracts, or those on a build-own-operate (BOT), design-build-operate (DBO), design-build-finance-operate-transfer, build-operate-transfer and design-build-own-operate basis.

In the past five-seven years, attempts have been made to leverage the technical expertise and financial contribution of the private sector through PPP arrangements. The government is promoting PPPs in the water supply and sewerage sector through various centrally sponsored projects/schemes. In addition, state governments are undertaking PPP projects with financial assistance from multilateral agencies.

Over the past two decades or so, PPP formats and models in the water supply and sewerage sector have evolved from simple operations and maintenance (O&M) or asset management contracts to long-term BOT and DBO contracts. New PPP models, such as hybrid annuity models (HAM), are also being used to execute and develop water supply, sanitation and sewerage projects. A large number of projects have been proposed for implementation on a HAM basis under the Namami Gange programme. Meanwhile, O&M activities are being proposed to be taken up by private players, ensuring viability and efficiency in the water distribution and waste management segments.

Further, various initiatives have been taken to attract private investments and ensure private sector participation in the water supply and sanitation segment. The Power Finance Corporation (PFC) is providing funds for undertaking PPP projects involving production of low-cost treated waste water and electricity. In April 2018, PFC forayed into the waste-to-energy (WtE) segment by providing financial assistance of Rs 2.9 billion for the Delhi WtE project. In July 2018, the corporation extended assistance of Rs 193 billion to the Nagpur waste water management project. Besides, various companies have now started to come forward to develop sewage treatment plants and waste management projects at their own cost.

Adopting innovative mechanisms

With the recent explosion in the number of water supply and sewerage projects under a slew of urban-focused schemes, there has been a renewed emphasis on financing reforms in the sector. Schemes such as AMRUT and the SCM not only focus on the creation of huge urban infrastructure facilities but also lay equal emphasis on the need for financial independence of ULBs. As a result, the municipalities have started looking for alternative and innovative funding mechanisms to achieve financial autonomy.

A number of municipal corporations are now resorting to raising funds by floating municipal bonds, with lucrative returns. Over a short period of time, municipal bonds have become one of the most effective methods of mobilising funds for ULBs in meeting their expenditures towards developing urban infrastructure facilities.

Recently, in January 2019, the Ahmedabad Municipal Corporation raised funds worth Rs 2 billion by issuing municipal bonds. The bonds, offering an interest rate of 8.7 per cent, received an overwhelming response in the capital market and the issue was oversubscribed by more than 10 times.

In the past one and a half years, municipal corporations of various cities, including New Delhi, Pune, Amravati, Hyderabad, Indore and Bhopal, have also issued municipal bonds to raise funds.

In addition, ULBs are also proposing tariff hikes in water and sewerage charges levied on consumers to increase their revenues in order to meet their expenditure obligations. In March 2018, the Pimpri-Chinchwad Municipal Corporation approved a 100 per cent tariff hike in water charges. Water consumption charges were increased to Rs 8 per 1,000 litres from the existing rate of Rs 4 per 1,000 litres for water consumption from 6,001 to 15,000 litres. Besides, in 2018, the Delhi Jal Board also hiked water and sewerage tariffs by 20 per cent.

Other emerging financing options include land value capturing, leveraging borrowings from financial institutions and mobilising private funds through PPP arrangements.

Conclusion

The investment requirements of the water supply and sewerage sector are substantial, and the current level of investment leaves much to be desired. The fundamental problem lies in the lack of attractiveness of the sector due to various issues, owing to which private players have been cautious in investing their funds. The situation is further exacerbated by the poor financial health of ULBs that are still struggling to garner funds for meeting their expenditure requirements.

There is thus an urgent need for improving municipal finances, especially as the success of PPP projects will be largely determined by the financial health of the ULBs. To this end, measures such as the devolution of powers to ULBs and rationaliation of user charges to meet O&M costs will be helpful. Further, a comprehensive PPP concession agreement with clear and well-defined risks and responsibilities for the ULB and the private player, automated business processes, a transparent and up-to-date urban infrastructure database and skill development and training of manpower of ULBs will help strengthen the financial health of the local bodies and improve investor confidence.