Funding Scenario: Need to leverage innovative options for bridging the investment gap

Need to leverage innovative options for bridging the investment gap

The investment requirements of the country’s water and waste management sector are substantial given the current level of inadequate and poor quality services. Public funding has continued to be the principal mode of financing for water and waste projects. However, as funding requirements increase further with the soaring population, rapid urbanisation and industrialisation, the government’s capacity to fund infrastructure development in the sector is expected to become much more constrained.

Thus, it has become important to increase private sector participation through the adoption of new and better public-private partnership (PPP) models. Moreover, it is crucial that the urban local bodies (ULBs) improve their financial health and become self-sustainable by exploring innovative financing mechanisms such as municipal bonds and land monetisation.

Government funding

Water and waste management projects in the country are largely financed through public funds. The central government extends funds for such projects in the form of budgetary support and grants and through schemes such as the Jal Jeevan Mission (JJM), the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Smart Cities Mission (SCM), the Swachh Bharat Mission (SBM) and the Namami Gange programme.

Also, since water supply, sanitation and solid waste management are state subjects, funds are diverted for these sectors in the form of budgetary allocations and devolution of resources and grants to ULBs. In addition, ULBs also use their own resources for implementing such projects. However, the share of internal resources is meagre owing to the poor financial health of municipal bodies.

In Union Budget 2020-21, the central government announced an outlay of Rs 304.78 billion for the Ministry of Jal Shakti, which was formed in 2019 by merging the Ministry of Drinking Water and Sanitation and the Ministry of Water Resources, River Development and Ganga Rejuvenation. Of the total allocation for the water sector, a sum of Rs 115 billion has been outlined for the JJM that aims to ensure access of piped water for every household in India. The Namami Gange programme has received an allocation of Rs 8 billion.

Further, the Ministry of Housing and Urban Affairs (MoHUA), which implements water and waste projects in urban areas, has been allocated Rs 500 billion. While Rs 73 billion has been allocated for the implementation of AMRUT, an outlay of Rs 64.5 billion and Rs 23 billion have been announced for the SCM and SBM (Urban) respectively.

Private investments and PPP experience

Although PPPs in the water and waste sector have been in place for almost two decades, private participation has remained limited as compared to other infrastructure sectors such as power and roads. Moreover, the overall experience has been mixed due to factors such as high revenue risks on account of lower tariffs, high capital costs and lack of central-level regulations for the sector. However, the role of the private sector is evolving and it is expected to increase with the introduction of innovative service delivery mechanisms and new PPP models such as the hybrid annuity model (HAM). The government is working towards attracting private investment in the sector to enhance service delivery and reduce fiscal pressures. Flagship programmes such as the Namami Gange and the SCM are instrumental in increasing private participation.

Over the years, there has been a shift in the PPP models from service contracts to long-term build-own-operate-transfer, design-build-operate, design-build-finance-operate-transfer, and other formats. Further, the type of work awarded in the water supply and sewerage sector has evolved from the upkeep of water and wastewater treatment facilities to their construction, financing and commissioning, implementation of 24×7 water supply projects, setting up of desalination plants, and improvements in efficiency and metering and billing practices. In the waste management sector, private involvement has progressed from activities such as collection and transportation to setting up of waste-to-energy (WtE) plants and implementation of integrated waste management projects.

Further, the introduction of HAM under the Namami Gange programme is expected to be a game changer for the sector. The model will play a crucial role in attracting industry participation and ensuring performance, efficiency and viability of operations. In a HAM-based project, 40 per cent of the project cost is borne by the government while the balance 60 per cent of the funds are arranged by the private player. During the operation and maintenance period of 15 years, the player receives annuity payments from the government  that are linked to performance. A large number of projects are being implemented under HAM and the model has received an encouraging response. Some of the key projects are the setting up of sewage treatment plants in the cities of Varanasi, Kanpur, Haridwar, etc. However, currently, HAM is restricted to the sewerage segment and it is too early to ascertain its success.

Other funding sources

Funding for water and waste projects is also received from multilateral agencies such as the World Bank, the Asian Development Bank and the Japan International Cooperation Agency. These agencies extend funds to the sector in the form of concessional and non-concessional loans, equity investments and grants. Meanwhile, other sources for funding also include public financial institutions such as Housing and Urban Development Corporation Limited, India Infrastructure Finance Company Limited and Infrastructure Development Finance Company Limited. In April 2018, the Power Finance Corporation also forayed into the WtE segment by lending Rs 2.9 billion for the 24 MW Bawana project in Delhi.

Emerging funding mechanisms

In the past few years, greater emphasis has been laid on the need for financial independence of ULBs. Several new government programmes such as AMRUT and the SCM encourage local bodies to raise funds through alternative and innovative financing mechanisms such as collection of user fees, land monetisation, borrowings from financial institutions and issue of municipal bonds.

Various ULBs in the country, including those in cities such as Bengaluru and Pune, have proposed hikes in water and sewage charges to generate better revenue streams. In April 2019, the Nagpur Municipal Corporation increased the water tariff by 5 per cent.  The Delhi Jal Board also hiked water and sewerage tariffs by 20 per cent in 2018. Further, user charges have also been introduced for the management of solid waste. The Trichy Municipal Corporation in Tamil Nadu has levied solid waste management charges across the city to meet at least a portion of the costs incurred towards sanitation and cleanliness initiatives.

Further, raising of funds through the issuance of municipal bonds has also received greater traction from the ULBs in the past three-four years. The government has also taken several measures to develop the municipal bond market. In August 2019, the Securities and Exchange Board of India allowed special purpose vehicles under the SCM to raise funds through the issue of municipal bonds. Earlier, in April 2019, the Reserve Bank of India permitted foreign portfolio investors to invest in municipal bonds. The MoHUA has also launched an incentive plan for ULBs raising funds through such bonds under AMRUT.

Municipal corporations of several cities such as Ahmedabad, Bhopal, Pune, Hyderabad and Indore have raised funds through municipal bonds. The Pune Municipal Corporation aims to raise an additional Rs 2 billion through such bonds in the latter part of 2020 for executing its 24×7 water supply scheme. While these bonds have emerged as innovative financing instruments, issues such as lack of operational efficiency, lack of adequate disclosures, poor creditworthiness of the ULBs, etc. have inhibited their uptake.


Given the gap between the current level of demand and supply of water and waste management services, funding from all the sources combined still falls short of the estimated requirements. Though private participation in the sector is growing, it has been less than desirable. Several factors such as the public service nature of the industry, poor cost recovery and lack of reliable data have led to limited private participation. Further, local bodies continue to be highly dependent on the upper tiers of government, even for meeting operating expenses in some cases.

Thus, there is an urgent need to undertake financing reforms to bridge the investment deficit in the sector. The government needs to create mechanism to address critical risks and share responsibilities for attracting private sector participation. Moreover, financial empowerment of the ULBs is essential to accelerate investment. Local bodies need to generate their own resources through rationalisation of user charges and tapping of innovative financing options.