MAKING PPPS WORK FOR EFFICIENT URBAN WATER SUPPLY by India Water Week

PUBLIC PRIVATE PARTNERSHIP (PPP) FOR EFFICIENT WATER MANAGEMENT IN URBAN AND RURAL AREAS

MAKING PPPS WORK FOR EFFICIENT URBAN WATER SUPPLY

PAVAN KUMAR ANKINAPALLI INDIA WATER WEEK 2013 8-12 April, 2013 Vigyan Bhawan, New Delhi “Efficient Water Management: Challenges and Opportunities”

Sector Challenges and Context  Policy, Institutional and Governance weaknesses... o Weak accountability/capacity → ‘reactive’ and ‘constrained’ planning → Always been a catch up game → Investments (whatever little) made on an ad hoc basis o Build – Neglect – Rebuild syndrome → Focus on Individual Projects and Asset Creation rather than Improved Service Delivery o Poor Service + rent seeking + populism → poor recovery of costs

 …have translated to o Inequitable Access, Intermittent Supply, Unreliable Quality o Dilapidated ‘Invisible’ Networks o No last mile connectivity o NRW up to 50 per cent o High ‘Coping costs’

 …Challenge reaching crisis levels o Huge infrastructure deficits; growing demand for better services o Growing financial gaps → large investment needs and very less investments

PPPs in urban water sector in India Signs of success A few projects grounded

Momentum subsided Onset of pessimism

Way Ahead?

Now Mid to Late 90s

Mid decade Around 2000

First initiatives High international interest Poor results

WSP (2011); Ramanujam (2009)

Efforts to prepare PPP projects

Many ongoing initiatives

High NGO opposition

Waiting for first commercial results

High profile projects run aground

PPP interest at tipping point 3

Key Questions

 How to ensure successful implementation of PPP projects in Water Supply?  Why do different projects have different levels of success with PPPs?  What are the key factors that contribute to the success/failure of PPPs in Water Projects?

Analytical Framework Success/Failure of the Project

Project Structuring/Contractual Governance (Demand side factors) •Payments to Operator •Project Modalities •Commercial Risk Mitigation – Revenue and Capital •Political Risk Guarantee and insurance

Local Conditions (supply side factors) •Fiscal Space/autonomy •Political Will •Social acceptance •Tariff sustainability •Institutional Capacity •Citizen Engagement

Project Structuring/contractual Governance  Payments to the operator  One of the key factors for the success of PPP projects  viability depends on water tariffs;  EPC payments are made by cities (e.g. Mysore) to reduce the risk

 Project Modalities  Lease and Management contracts fared better (Nagpur, Belguam, HubliDharwad, and Gulbarga) than concessions  However, few projects experimented with JNNURM grants (Shipuri and Khandwa, and Salt Lake City)

 Risk Mitigation – Capital and Revenue  Reimbursements for cost over runs (e.g. Mysore) to mitigate capital risk  Safe guards against defaults in customer payments (Khandwa and Shivpuri); fixed management fee and additional Performance linked incentives (Belgaum, Hubli-Dharwar and Gulbarga) 6

Project Structuring/contractual Governance  Political Risk Guarantee and Insurance  problem of moral hazard – where the behavior of political environment alters opportunistically at the expense of the other in the knowledge that the losing party is unlikely to withdraw the agreement.  E.g. TNUDF withdrew from Alandur Project midway  Municipality questioned the readiness of STP; newly elected mayor refused to connect the households to sewer line  Refusal of payment to the operator by the municipality  Resulted arbitration

Local Conditions (supply side factors)  Fiscal Space and Autonomy  Decentralization ; impact of grants and subsidies  Alandur – project was financed by grants and loans; Ability of users to pay upfront  Availability of JNNURM funds – Shivpuri, Nagpur and three cities in Karnataka  Political Will  Water and Sanitation - public good nature; need for a strong political will  Alandur project – Political Champion  Pune Water Supply Project – political opposition  Social Acceptance  Heterogeneous groups with different initial conditions and interests  Conflicts during the project period – tariffs, coverage, service levels etc.  Demonstrations against the PPP projects and contractual agreements create difficulties in implementation of PPP projects (Mahalingam, 2010)  Latur – Opposition Committee; Delhi Jal Board – Parivartan’s campaign 8

Local Conditions (supply side factors)  Tariff Sustainability  Ability to pay; willingness to pay; willingness to charge – crucial elements  Soft money available - JNNURM funds ; no substantial efforts are made in this front, except few cases  Innovative arrangements in few cases – negotiated tariffs (Salt Lake City Project); upfront contributions and membership register and monthly payments for services (Alandur)  Nagpur Water Supply Project – widespread protest against high tariffs ; subsequent withdrawal  Institutional Capacity  A major critical factor – can have huge cost and time implications  Withdrawal of TNUDF from Alandur – lack of capacity at ULB level  Citizen Engagement  Successful PPP projects – epitomes of citizen involvement and engagement  Aggressive campaigns and Citizen Committees (Alandur) – success factors  Failed attempts in Delhi and Hyderabad – strong political champions are not enough

Conclusion  Wide diversity of outcomes in water PPP projects; identifying key factors for success/failure is challenging  Yet, some patterns emerge from the cases  Combination of a variety of factors – lead to turbulence and difficulties  Grants from JNNURM can help cities to take up PPP projects  Effective communication Strategy - critical factor for success  Finally Infrastructure Business is not about creating physical assets within estimates of time and budget  But about delivering services overtime in a sustainable manner  Thus, success is not about signing contracts; but delivering the service to customer at an affordable price !

Thank you Pavan Kumar Ankinapalli Email: pavan.ankinapalli@idfc.com