Changing Dynamics: Government initiatives and schemes bring new opportunities for private players

Government initiatives and schemes bring new opportunities for private players

The government, over the past few years, has stimulated the process of reviving the water supply and waste management segments through programmes such as the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) (the erstwhile Jawaharlal Nehru National Urban Renewal Mission [JNNURM])  and the Swachh Bharat Mission (SBM). The sector has witnessed some important trends. The uptake of projects has increased, urban local body (ULB) capability has been strengthened, the government is making concerted efforts to adopt scientific waste management and disposal as well as waste water recycling and reuse practices, new technologies and solutions are being adopted, and the involvement of private sector has increased.

However, issues such as inadequate ULB capacity and expertise, low private investment, biased concession agreements, lack of renegotiation provisions, time and cost overruns, and absence of revenue models and tariff reforms continue to adversely impact project implementation and management.

At the India Infrastructure Forum 2019, a panel discussion was held to discuss the current state of the water and waste sector, experience of private players, issues and challenges faced in implementation of projects and the next steps for the government…

Current state of affairs

The current state of service delivery in the water supply and waste management segments is highly inefficient. There is lack of adequate capacity and expertise to address the inherent water and sanitation issues. Lack of coordination between the multiple authorities and departments involved in the water and waste sector is another major issue of concern. Lack of adequate technical investigations and performance measuring criteria in water supply and waste management contracts have created many issues in the past. There is no detailed, careful investigation of parameters such as water consumption patterns, pipeline networks, sewer length, recycle and reuse of waste water and waste, non-revenue water, etc. As a result, the existing infrastructure is not optimally utilised and the biggest issue of operational inefficiency remains unaddressed. In addition, an inefficient revenue management system, poor collection efficiency and high unaccounted-for water therefore continue to deteriorate the financial position of ULBs.

Another major challenge is the lack of expertise and funds to adopt cutting-edge technologies such as plasma gasification for waste management. The majority of the ULBs still use conventional technologies such as incineration for waste treatment.

Private sector experience and potential

Almost a decade ago, private sector funding was largely absent and public investments dominated the landscape. In the past few years, the introduction of big-ticket programmes such as AMRUT, the SBM, the Smart Cities Mission and the Namami Gange Mission has opened up a plethora of new funding sources for the sector. There has been greater private sector interest in projects related to network rehabilitation, capacity augmentation and construction of new infrastructure. New private sector participation models such as the hybrid annuity model are being tested for setting up sewage treatment plants.

Despite a number of dedicated initiatives to revive public-private partnerships (PPPs) in the sector, issues related to uncertainty in obtaining financial closure and lack of bankable concession agreements continue to act as entry barriers for a number of potential private players. To address some of these issues, many ULBs are preparing tailor-made contracts and concession agreements for award under AMRUT. Nevertheless, there is still ambiguity around critical aspects such as the extent of liability on the concessionaire and the roles and responsibilities of the stakeholders.

Further, the process for getting clearances from multiple state agencies and departments is very time-consuming and often results in cost and time overruns. Some of the PPP projects that have faced issues include the 24×7 water supply project in Nagpur and the project for revamping water distribution in the Nangloi command area. The concession agreements for these projects lacked a standard mechanism to account for cost escalations. The realisation of grants from the government was also not continuous, thereby halting progress. In the case of the Nagpur water supply project, the transition from JNNURM to AMRUT took about two years resulting in cost and time overruns.

The L1 model of awarding contracts too has its shortcomings. It has been a common practice that contractors bid at such a low price (so as to win the project) that achieving financial closure becomes near impossible. As a result, the contracts have to subsequently be retendered.

With regard to waste-to-energy projects, the treatment technology accounts for a major chunk of the capital investment. Given the low profitability and bankability of these projects, private players are averse to the sector. Private sector participation models with stable revenue streams and markets for waste by-products (such as methane) are therefore urgently required.

Innovative financing mechanism

With respect to financing, innovative funding mechanisms such as municipal bonds have not witnessed very high rates of adoption. Only a handful of cities such as Pune, Ahmedabad, Indore, Amaravati and Hyderabad have been successful in mobilising funds through this route. Smaller cities with poor credit ratings and uncertain revenue streams from fundamental sources such as taxes and government transfers cannot rely on such funding mechanisms for meeting their requirements.

Further, the internal funding sources of ULBs such as property taxes, user charges and transfers from the central and state governments are insufficient. At present, about Rs 150 billion is being collected from property taxes which is less than 0.1 per cent of GDP.

Recommendations and the way forward

The next two-three years are crucial for the water sector in India. Despite some notable and encouraging initiatives, the service backlog has not yet been reduced. The focus on service outcomes needs to be mainstreamed and the financial and operational capabilities of ULBs strengthened.

Rising demand for water supply and waste management services as a result of industrial development and rapid population growth has to be properly addressed with innovative incentive mechanisms for mobilising new investments in water and waste as well as increasing sector efficiency. The government could consider large-scale implementation of the innovative funding structure suggested by the fourteenth finance commission. As part of the funding structure, the finance commission allocated Rs 488 per capita as grant to the municipal body. Of this, 80 per cent is allocated directly while the remaining 20 per cent is provided based on performance of the ULB in achieving milestones. With such huge allocations and strict performance parameters, the problem of lack of capacity in ULBs can be resolved. Given the huge opportunities that the water and waste management segments offer for private players, there is a requirement for more performance-based contracts. For instance, the Karnataka government recently floated tenders for provision of 24×7 water supply in the four cities of Hubbali, Dharwad, Belgaum and Gulbarga. As part of the tender conditions, the private sector is not required to make investments. Instead, multilateral agencies are to provide the funds. The performance of the operator is to be judged only on the basis of capital expenditure utilisation. Such bidding conditions are necessary to ensure successful contracts.

Further, the government should develop a profitable revenue model for solid waste management projects. At present, private operators rely on the energy generated (which itself has low calorific value) from waste treatment plants to earn revenues. Therefore, economic drivers such as user charges based on waste generated are required to be put in place.

Also, for deployment of new-age technologies, increased participation of private players and technology providers is imperative. But for the private sector to invest huge sums of money, the right incentives from the government have to be in place. For instance, under the Namami Gange Programme, an environment technology verification platform has been created through which new technologies are tested and, if proven successful, private players are reimbursed for the investments made. Similar measures ought to be replicated across the water supply and waste management segments.

At the same time, it has to be understood that private players can only supplement the public sector and the entire project should not be handed over to the private concessionaire. For successful contracts, a proper pre-qualification process is required. There should also be a clause for renegotiation of contracts and risk sharing. Moreover, targets set for achievement must be realistic and the amount of capital allocated must be adequate to meet the targets.

Over the next year or so, focus on recycling and reuse of waste water, and rainwater harvesting projects will gain prominence. The challenge will lie in expanding coverage, and encouraging a large number of civic agencies and industrial units to implement these initiatives. Investment in the sector will be directed towards improving water use efficiency and adopting new techniques for waste management. Consequently, projects on installing leak detection devices, metering and automation systems, undertaking waste segregation, conducting water audits, promoting recycling and reuse, etc., will gain traction. Nonetheless, for a major shift to occur, issues such as absence of waste segregation at source, financial constraints, shortage of skilled manpower and lack of technical and professional expertise of municipal agencies should be addressed in a time-bound manner.