The treatment capacity from the sewage generation from Class I cities and Class II towns is less than 30 per cent. About 80 per cent of domestic water goes out as wastewater. The process of collection, treatment and safe disposal of wastewater without polluting existing freshwater supplies, is the most important challenge that is facing urban government bodies. Sasidhar Chidanamarri analyses how this critical delivery system can be augmented through judicious legislations and agreements to ensure bankability of PPP in wasetwater.
The significance of urban sanitation including water and wastewater treatment and solid waste management is embodied in World Bankâ€™s declaration that â€œIndia will face a turbulent water future, unless water management practices are changed, and changed soon, India will face a severe water crisis within the next two decades.â€
As Indian cities continue to be the prime movers of economic growth (contributing 63 per cent of the national GDP in 2006-7 and expected to contribute 75 per cent by 2020-1), special attention is required in the management and governance of urban areas to ease the strain on vital urban infrastructure to make our cities livable, bankable, and competitive. It is no wonder that the 11th Five Year Plan has allocated more than Rs 20 lakh crore to improve infrastructure including water and sanitation, which is about nine per cent of the GDP from the earlier estimates of four to five per cent of GDP. Predictably, there has been a drastic hike in the proposed allocation of funds towards water and sanitation.
Major trends such as the rapid industrial growth and urbanisation have given rise to major problems of mounting solid waste and growing volumes of sewage.
Chart 1.3 illustrates the poor state of sewage management in India. Out of the 38,254 mld of sewage generated in India, only 30 per cent is treated. Adding to the woes is the less-than-optimal performance of sewage treatment plants.
Issues: From policy to execution
A variety of issues are responsible for the poor state of affairs in the wastewater infrastructure in India. Low collection efficiencies due to under-penetration of sewer networks, lack of funds with the urban local bodies, lack of awareness, and lack of skilled and quality workforce to operate and maintain the STPs.
Slow pace of policy implementation:
Red tapism and lack of seriousness in implementing reforms to impart thrust to the industrial and municipal sectors is a glaring challenge. The level of transparency in municipal and public contracts is questionable. Lack of transparency and priority of other basic civic amenities is a hindrance to the development of wastewater and waste management markets.
(Un)Willingness to pay:
Projects under urban infrastructure tend to have viability issues as user charges for sewage, water supply, water treatment, are normally subsidised by the government. The huge subsidies are crippling the efforts of municipalities to raise sufficient money to recover operating costs. Consequently, projects under urban infrastructure require budgetary allocation or viability gap funding (VGF).
Technical expertise in short supply:
Lack of trained manpower in operating and maintaining the sewage treatment plant is reducing the efficacy of the plants. Unscientific ways of maintenance and repair by in-house personnel has increased the downtime and confidence placed in the suppliers is negatively impacted.
L1, L2 syndrome:
The preference for bidders who offer the lowest cost is the norm in India. The cost sensitivity displayed by end users has given rise to several small time players who often quote much lower than organised players in several municipal water and waste management projects. Often times, the projects executed by the lowest bidder face many hurdles as they might not have accounted for any unforeseen rise in cost causing delays in execution. Salient aspects such as usage of energy efficient products, superior technologies, and minimal consideration of total lifecycle cost impacts the treatment efficiency and service delivery.
User charges escalation and collection issues:
Once the project is implemented, the collection of user charges is an issue in projects as the collection agency is the local municipal body. Community reactions over tariff hikes are not that muted, or tariff escalations may not be permitted despite cost increases as some of these services are basic infrastructure provided by the state governments. Consequently, user charges escalations as well as collection issues should be clearly stated in the agreement at the time of the award. The financial ratings of the municipal bodies and water boards may not be healthy, and hence developers can run into huge receivables risk.
In the past, urban infrastructure projects have witnessed considerable execution delays due to issues on acquisition and availability of land in city centres. Moreover, the land clearance process involves approvals from the local taluks, local municipal bodies and state governments. Also, environmental clearances may be required. Therefore, it is quite critical that when a project is identified and the detailed project report (DPR) is being conducted, the possible problems in land acquisition be taken into account.
In order to mitigate these challenges, the 11th Five Year Plan has called for various reform initiatives to address the urban infrastructure difficulties including solid waste management. Some of them are:
â€¢ Strengthening urban local bodies through better financial management
â€¢ Providing self-governance environment for urban local bodies (ULBs)
â€¢ Using technology and innovation
â€¢ Creating conducive atmosphere for private sector participation aimed at full cost recovery
In sum, the 11th Five Year Plan has finally recognised that there is a strong case for bringing in the private sector to invest in wastewater management.
The JNNURM solution
JNNURM was launched in December 2005 to give focused attention to integrated development of urban infrastructure and services in 68 cities. Under this, provision was made for Rs 50,000 over the Missionâ€™s seven-year period beginning from 2005-06. States and urban local bodies shall mobilise a matching amount of Rs 50,000 crore. This scheme was expected to give a fillip to investments in urban water supply and sanitation (WSS). Much of the funding allocation for WSS under the 11th Plan is being routed through the JNNURM.
So far, 527 projects were sanctioned between 2005 and 2010. The breakdown of projects by sector is shown in Chart 1.6. The programme has accorded high priority to water and sewerage projects.
PPP the way forward â€¦ or is it?
Wastewater sector is an appropriate case for involving public-private partnerships (PPPs). Rapid improvements and capacity additions to the wastewater infrastructure are essential for growth. Public sector agencies and urban local bodies suffer from lack of vital technological expertise, qualified staff, and necessary funds to meet 100 per cent coverage for water supply and sanitation under the United Nationâ€™s Millennium Development Goals (MDG). Realising that the share of private investment has to go up, the government is encouraging private investment in infrastructure through PPP. In a PPP model, a private player can develop the infrastructure and provide services to the general public at a specified cost. PPP in water and wastewater is still in an incipient stage of development. Not many projects have been awarded in this sector to test the efficacy of the different PPP variants and their inherent challenges, unlike in the roads sector. According to the Department of Economic Affairs, there are about 660 PPP projects that are operational or in the elementary stages (due for bids or have reached construction stage). A majority of PPPs are seen in roads (50 per cent), urban infrastructure (20 per cent) and ports (nine per cent) sectors.
Within urban infrastructure, there are only 13 projects related to water and wastewater, while a majority are related to solid waste management and mass transportation projects. The reasons for low penetration are due to the constraints and challenges associated with PPPs in general. The essential role of the Government in all forms of PPPs is to define the scope of business, to specify priorities and outputs, and set the stage (through contracts, regulatory agencies, laws, market tools, etc) for success. Experience shows that when legal and institutional frameworks are lacking or too complex and incoherent, the quality and reliability of provision of services may be at risk and public-private partnerships may fail.
Also, for private companies, return on investments in the water sector is crucial because investments are high and irreversible with long gestation periods. Further, there is no â€œone size fits allâ€ approach and the choice of a particular form of partnership (performance-based service contract, management contract for operations and maintenance (O&M) or build-operate-transfer (BOT) contract) should depend on the local context and its feasibility. Once PPP projects are implemented, they need to be regulated to provide incentives to the private sector and to protect consumers from monopoly abuse, which can be a costly task.
Moreover, the private sector usually restricts access to information, which the spectre of high levels of transparency and accountability. Finally, the different interests of consumers, investors, and governments usually lead to conflicts. Governments have broader objectives (environmental and social) than the private sector, whose main objective is to maximise profit. Periodic bargaining and negotiations over allocation of risks and price setting will be part of the relationship. Furthermore, investments in low-income and scattered areas are too risky for private firms if they have no guarantees. Governments face a trade-off between making investment attractive for private firms and increasing their own risk. Issues are further compounded when the government acts as a participant and arbitrator and raises issues of conflict of interest, which might lead to improper allocation of risks and revenue loss for the private sector.
When the opportunities in PPP projects are just beginning to emerge, it is heartening to see the success of PPPs in the water and wastewater sector. The Alandur Sewerage Project (Chennai) was the first project in the municipal water sector to have followed the PPP model in India. Chart 1.7 provides specifications of the project.
Tirupur Water and Wastewater Treatment Project, also in Tamil Nadu, stands as testimony to the success of PPP in the water and wastewater sector.
The model of the project is illustrated in Chart 1.8.
Other successful projects in the water sector include the two desalination projects in Chennai and the salt lake water supply and sewage disposal system.
What lies at the core of these projectsâ€™ success is:
â€¢ Better coordination among the involved entities: Public agencies, private consortium, and financiers
â€¢ Rigorous structuring of the project and model concession agreements to make it bankable
â€¢ Ensuring transparency in all dealings
What it means to the private sector
The private sector recognises the enormous business opportunity of PPP in India and has welcomed the Government of Indiaâ€™s (GoI) PPP initiatives. PPPs can be one of the solutions to meet the wastewater infrastructure gaps in India where creation of infrastructure is fraught with challenges. PPPs present a good investment opportunity for the private sector with an attractive return on investments. The governmentâ€™s emphasis on private sector investment is a welcome initiative but it has to ensure that institutional capacities at central, state, and municipal levels are built and enable legislations to generate a pipeline of bankable PPP projects in the wastewater sector. At the same time, the government has to take steps to educate and create awareness among people who believe that water is a free source and that the entry of private sector could result in the â€œcommoditisationâ€ of water. After all, the job is only half done with the creation of urban infrastructure. Equally important is offering, extending, and maintaining services to a growing population with improved governance and efficient delivery mechanisms. Private sector companies have to identify BOT and BOOT based projects as a strategic growth option. In order to benefit out of this newer and promising growth opportunity, private sector companies have to possess adequate technological expertise to offer the right kind of solution. Concession periods of 15-30 years mean that energy efficiency in products such as pumps, aerators, mixers, agitators, and blowers will be important. The usage of low power consuming products and use of energy recovery devices, or the use of solar power to run the treatment plant, shall assist in lowering operational costs over the lifecycle of the project, besides earning possible carbon credits. Sourcing of products from local suppliers and value engineering will help in quoting or seeking lower viability gap funding (VGF) than the rest of the competitors. Finding the right partner who can offer the relevant technology and help in achieving financial closure is one of the key competitive factors in such PPP projects. Quality of the technology and solutions adopted, conformation to international standards and completing it on time without cost overruns will add to the long-term viability of the project. Such success will not only justify the Governmentâ€™s push to bring in private participation but also lay to rest any doubts harbored by citizenry with respect to unreasonable tariff hikes and other issues.
Hence, finding a project that is bankable, structuring it rigorously, clarifying the incentives and concessions, standardising the competitive bidding procedures, maintaining transparency at all stages of project cycle, and safeguarding the interests of consumers, private sector, and public sector are paramount to the success of PPPs in India.
It is pertinent to mention that the Government of India has designed PPP guidelines to sensitise state governments and urban local bodies to the policy and procedural issues that need to be addressed so as to reform urban water supply and sewerage issues.
The author is Industry Managerâ€”Environment Technologies Practice, South Asia, Middle East & North Africa, Frost & Sullivan.