Projects through PPP were on top of the agenda for the Sheila Dikishit-led Delhi Government. This project is an ideal case study for effective financial closure, as it gave more importance to to the key risk elements, rather than going through the motions to keep a social promise.
Taking another step towards the privatisation of the water sector, the Delhi Government awarded a 15-year Design-Built-Finance-Operate-Transfer (DBFOT) contract for 24x7 water supply at Nangloi area in Delhi, to a consortium comprising Veolia Water India Private Limited (VWI) and Swach Environment Private Limited (Swach).
After a competitive tendering process, the Nangloi Water Supply Project (NWSP) was awarded in October 2012 through statutory body, Delhi Jal Board (DJB). The project emerged as the largest ever Public-Private Partnership (PPP) in terms of scale and tenure, which is unprecedented in the water sector in India. A special purpose vehicle (SPV) in the name of Nangloi Water Services Private Limited (NWSPL) has been formed by VWI (51 per cent) and Swach (49 per cent).
The project covers rehabilitation and expansion of the water supply, transmission, and distribution network within 129 sq km area at Nangloi along with revamping the existing Nangloi water treatment plant. The process would involve repair and construction of UGRs/BPS/Tubewells and restoration of associated roads and house connectors. The project would ensure 24x7 water supply to the marked region, and operation and maintenance including metering, billing, collection etc. for the concession period of 15 years. The service area is situated in West Delhi, covering an area of about 129 sq km with an existing population of around 10,72,000 and about 68,000 registered connections.
The Nangloi neighbourhood is part of an initial pilot phase for the improvement of the drinking water service in the Indian capital. It will also serve as a test before rolling out the service across greater New Delhi.
The joint venture between VWI and Swach achieved financial closure on 16 August 2013. The overall cost of the project was expected to be Rs 653 crore, of which 70 per cent of construction costs would be covered by DJB, with the remaining 30 per cent coming from private parties, with a 75:25 debt to equity split. The project cost to Srei was Rs 245.90 crore.
Reasons that facilitated the financial closure
The SPV, Nangloi Water Services Private Limited, availed a term loan of Rs 184.40 crore from the consortium of Srei and Bank of India. NWSPL has also taken a bank guarantee of Rs 33 crore and a cash credit limit of Rs 2.90 crore from Bank of India. The project was financed on a debt-equity ratio of 3:1, with a debt of Rs 184.4 crore and equity comprising Rs 61.5 crore. Furthermore, the equity ratio was shared by Swach and Veolia in the ratio of 49:51 and Swach and VWI had so far infused equity of Rs 42 crore.
Healthy credit rating
The prime criteria for any project is a healthy credit rating. It helps a project to get assistance from financial institutions. In case of this project, it received a healthy credit rating of 'BBB' from Brickwork Ratings (BWR). In addition the investment grade rating showed 'moderate safety' and rating outlook was 'stable'.
Credible joint venture
The project was undertaken by Swach, an initiative of Srei, and Veolia Water India Private Limited, the world leader in water and waste water services, which has successfully executed similar projects in Karnataka and Maharashtra. Moreover, liability on account of non-performance is appropriately capped.
Low economic risk
Portable drinking water business has high demand inelasticity and remains unaffected by inflation, recession, interest rate fluctuations and change in taste of consumers. Unlike other infrastructure sectors, the demand for water remains stable. Thus, revenue projections of the said project are easily achievable.
Support from DJB
DJB would pay grant on capital expenditure for water infrastructure @70 per cent and for related road restoration works @100 per cent including escalation arising from inflation along with operator fees @ Rs14.99/KL (plus escalation) of water billed for a concession period of 15 years. In addition, DJB would provide guaranteed payments to the operator for 35,000 KL/Day for the first three years.
VWI is a subsidiary of the French major Veolia Water, a leading global player in water and wastewater services, with a turnover of $12.6 billion, and operations in 69 countries. The company specialises in outsourcing services for municipal authorities, industrial and service companies. The consortium partner, Swach, is an environmental business entity of Srei Infrastructure Finance Limited, a holistic infrastructure institution diversified into sectors such as power, roads, logistics, ports, telecom, environment, rural infrastructure, etc. With consolidated assets under management of Rs 34,400 crore, Srei has been a pioneer in infrastructure financing and holds Public Finance Institution (PFI) status. It has significant experience in PPP projects.
Details of the debt arrangements