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While Chennai city was implementing several water conservation measures, the scarcity in availability of water had to be addressed through augmentation of supply. It was in this context that the city turned to an alternative source - sea water, writes Ranen Banerjee with inputs from Gaurav Sahdev. Chennai, a city with a population of over four million, is one of the most water stressed cities of India. Rapid population growth along with increasing pace of urbanisation has exacerbated the gap between supply and demand of water. The water needs of the city are met primarily from surface water resources from reservoirs and lakes and supplemented through ground water. As per estimates by Chennai Metro Water Supply and Sewerage Board (CMWSSB), despite implementation of the Telugu Ganga Stage II, there was likely to be a gap of 405 MLD by 2011-12 (approximately 27 per cent of the demand). While Chennai city was implementing several water conservation measures, the scarcity in availability of water had to be addressed through augmentation of supply. It was in this context that the city turned to an alternative source - sea water. Given the geographical location along the Bay of Bengal, Chennai is well placed to utilise this resource. The desalination project was announced by Government of Tamil Nadu in 2003 and CMWSSB was tasked with the responsibility to undertake this project. CMWSSB is responsible for water supply and sewerage services in Chennai. The initial cost was estimated at Rs 1,500 crore for a 100 MLD treatment plant. CMWSSB decided to set up a 100 MLD desalination plant at Minjur some 35 km north of Chennai on a Design Build Own Operate and Transfer (DBOOT) basis. After a prolonged bidding process which was conducted thrice, the project was finally awarded to the consortium consisting of IVRCL Infrastructures & Projects, (IVRCL) and Befesa Construccion Y Tecnologia Ambiental SAU (Befesa CTA) for a period of 25 years. CMWSSB conducted an International Competitive Bidding (ICB) process based on the criteria of lowest levelized tariff rate quoted for 1 KL for supplying desalinated water. It took almost two years to the award the project. The tenders were invited twice in 2003. In the first instance, though 26 firms purchased tender applications, only two submitted the documents. These were found to be deficient in terms of the procedural requirements as they were not accompanied by Earnest Money Deposit (EMD). During the second time around, while three bids were received, two of those could not be opened due to absence of EMD and the third bid was also rejected after scrutiny. This led to inviting tenders for the third time. Besides, the two stage bidding process was made more exhaustive by CMWSSB employing the services of an external agency to manage the bid process. There were delays on part of the state government too in terms of finalisation of the tender proposals. The bidders were pre-qualified on the basis of technical and financial strength. IVRCL-BEFESA consortium was the lowest bidder with a quote at Rs 48.68 per KL. Other bidders included following consortium Shriram-Hyflux, IMC-Caramondani, Reliance-IDE Technologies and L&T Degremont. IVRCL is a BSE listed technology, engineering and construction company and Befesa CTA is a wholly owned subsidiary of Befesa Medio Ambiente S.A (Befesa), an engineering & construction company listed with the Madrid Stock Exchange. They jointly promoted a Special Purpose Vehicle (SPV) Chennai Water Desalination (CWDL) for developing the 100 MLD sea water desalination plant on 60 acre land leased by CMWSSB at Kattupalli village in Minjur. The financial closure for the project was obtained in January 2007. The financial details of the project: Given the huge cost of the project, grant under JNNURM as well as interest free loan was required to reduce the upfront capital expenditure to be financed and to enhance the viability. The construction commenced from May 2007. The scope of the project was that 237 MLD of water would be drawn in to generate 100 MLD of desalinated water, with recovery rate of about 45 per cent. A pipeline of about 23.3 km was planned to be laid by CMWSSB from the plant site to Madhavaram booster station and bridges carrying the pipes was planned to be constructed across Kosasthalaiyar River and Buckingham Canal. An underground tank (UGT) with a capacity of 2.5 million litre (ML) was to be constructed at the Manali booster station. The desalination plant was proposed to be completed in two phases. While Phase I envisaged water supply of 15 MLD, the same was scheduled to rise by 85 MLD under Phase II, taking the cumulative water supply from the project to 100 MLD. As per the Bulk Water Purchase Agreement (BWPA), CMWSSB is to purchase water from the CWDL at a cost of Rs 48.66 per cu m which will be sold to industries at a rate of Rs 60 per cu m. At the end of the 25-year agreement, the plant will be transferred to the state government. Structure of the SPV: The project also included infrastructure for the collection of seawater. A 110 kV/22 kV sub-station was set up by the Tamil Nadu Electricity Board for uninterrupted power supply to the desalination plant. A thorough environmental impact assessment study was conducted to establish the effect of the plant on the livelihoods of fishermen and other communities. Studies were also conducted on the impact of high saline discharge on the fisheries and turtle nesting before the construction of the plant through an independent consultant. The desalination plant was to be commissioned in 2008, but the rough sea condition posed difficulties during the laying of the pipelines to draw raw water and let out the wastewater. The work on the plant was delayed due to Cyclone Nisha in October 2008. The cyclone had damaged a portion of the completed marine works and also destroyed the cofferdam used for installation of transition pipes. Nearly one year was lost in resolving the problem. Prior to this, about eight months were spent in getting additional clearance from the Union Ministry of Environment and Forest. As a result of the delays, the project cost went up which was met through equity of the promoters as per the financial agreement. Finally, the much awaited desalination plant was inaugurated on 31 July, 2010. Being the largest desalination plant in India (as well as in South Asia) and Chennai's first seawater desalination facility, several initiatives were taken to make it a successful venture. Since water is a politically "sensitive" issue, one of the major risks involved for the private developer was commercial risk and ability to generate sufficient revenues to cover the project costs. Thus, to make the project commercially viable and generate private interest, the project was awarded on the annuity model. One of the key features of the Bulk Water Purchase Agreement (BWPA) is that for all the activities undertaken by the concessionaire, it is assured of a minimum guaranteed offtake of 95 MLD by CMWSSB. The concessionaire will receive income through fixed and variable payment modes, with the variable charge being linked to wholesale price index (WPI). Also, the project has three-tiered payment security mechanism, including an escrow agreement and a state support agreement from the Tamil Nadu Government. Way Forward.... The successful implementation of the desalination plant at Minjur has encouraged the Tamil Nadu government to implement more similar projects. A desalination plant at Nemmeli (developed by VA Tech Wabag and IDE Technologies, Israel) is under construction and feasibility study is underway for another plant near Kanchipuram. This development augurs well and goes to show that in water starved regions of the country, desalination could definitely be a feasible, albeit costly option. Wherever there are industrial and commercial consumers available, it may be possible to reduce the final cost to the domestic consumers. Another aspect to bear in mind is that, if the model has to be replicable, the need for state support will have to be minimised and one of the means for doing it would be to have realistic tariff increase and to alter the subsidy mechanisms to direct transfer of subsidy. While there could be arguments against pricing of water as a purely commercial commodity, it is time that the scarcity value of water is reflected in tariffs. Details Amount (Rs Crore) Equity 122 IVRCL (76%) 93 BEFESA (24%) 29 DEBT (Canara, UBI , 378 IOB, DEG Germany) Funded through JNNURM for Product water Conveyance (CMWSSB scope) GoI share grant 65.85 GoTN Share 9.87 Interest free loan 19.06 CMWSSB (Rs. crore tied with TUFIDCO for loan@6% ASIOE funds 3.72 Total Others 98.50 Debt: Equity 60%:40% Government Equity: Private Equity 20%:80% VGF by Sponsoring Authority 60 Total Means of Finance 658.50 Source: pppindiadatabase The authors are with PwC India. Ranen Banerjee is Executive Director, and Gaurav Sahdev, Manager, Government Reforms and Infrastructure Development.