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September 12, 2012

India’s PPPs stand up to media needling – GWI Magazine

India’s PPPs stand up to media needling

The ultimate success of PPPs in Nagpur and Khandwa will set the tone for a broader acceptance of private sector participation in the country’s water market. GWI’s Rama Rastogi separates the myth from the reality.

Nagpur’s water PPP received a degree of unwanted attention in the Indian media this month, amid mum-blings of a widening financial deficit at contracting authority Nagpur Municipal Corporation (NMC) caused by concession payments.

Speculation about the cause of a delay to the start of the contract period did not help matters, while recent tariff increases have — perhaps inevitably — been blamed on the private operator.

Despite the criticism in the main-stream Indian press, both NMC and con-cessionaire Orange City Water (OCW), a JV between Veolia and Vishvaraj Infrastruc-ture, agree that the concession is off to a good start. “All is well with the contract,” Dinesh Rathi, who heads up the project management division at NMC, confirmed to GWI.

The contract mobilisation period — dur-ing which management and operating control was transferred to OCW — started in March, three months later than origi-nally planned. “This was due to certain local events, including general elections for the new local body,” Arun Lakhani, chair-man of Vishvaraj Infrastructure, explained to GWI. “The concession now runs for 25 years from March 2012 instead of Decem-ber 2011, which is not significant in the long-term context,” he emphasised.

“The teams are gearing up and have started the rehabilitation programme on the ground, but the challenges are mam-moth in size, so organising it takes time,” Lakhani told us. Putting this message across to the public effectively is also likely to present a hefty challenge.

On the issue of NMC’s deficit, both NMC and OCW acknowledge that costs on the public side will initially exceed rev-enues. Under the contract, NMC pays the concessionaire INR7.9 o ($0.14) for each cubic metre of water billed and delivered, subject to a minimum monthly payment of INR59 million ($1.1 million), equiva-lent to 250,000m3/d. At the moment, only 24o,000m3id of water is being billed to consumers.

Under the contract, OCW is required to invest at least INRI.2 billion ($22.8 million) in capital works, and to raise billed and collected volumes steadily, bringing NRW down from Go% to 40% within five years. NMC, meanwhile, is responsible for covering raw water and electricity costs, which have escalated in the last few months as the state-level electricity company raised prices.

On the revenue side, it is NMC rather than the concessionaire which is responsi-ble for collecting tariffs from consumers. Based on revenue and expenditure figures from NMC, the average tariff-realised today is about INR8.8o/m3 ($0.16/m3), and the municipal government has committed to raise this by 5% a year until it reaches at least operating cost recovery level.

As a result of the contractual structure, costs will increase for NMC in the short term. “There will be a period of about two or three years when NMC will face finan-cial stress as increases in efficiency and water tariffs will be limited, while pay-ments to the operator will continue,” Rathi explained. “As the number of connections goes up and NRW falls, the revenues of the utility will steadily increase in comparison to expenditure.”

Nagpur is not the only PPP in the firing line. In Khandwa (Madhya Pradesh), the media picked up on protests and petitions against the 25-year water supply PPP being implemented by Hyderabad-based infra-structure development company Vishwa Infrastructure. Local non-government groups argued that tariff increases would make water unaffordable for residents.

However, both the government and the company are convinced that the contract can work, despite the significant commer-cial risk loaded onto the private side. Chan-drakant Misra, the Khandwa Municipal Corporation officer in charge of the PPP contract, told GWI that KMC is fully sup-portive of the arrangement. “In order to increase acceptance of the private developer, we have been running a number of public awareness programmes to educate custom-ers about the potential benefits,” he said.

KMC will also provide operational sup-port. “Revenue collection is the responsibil-ity of the concessionaire, but KMC will help Vishwa to recover 25% of the revenue from existing customers by deploying its own staff.”

Under the Khandwa contract, Vishwa will receive a water tariff of INR11.95/m3 ($0.21/m3) from domestic consumers, higher tariffs from commercial and institu-tional customers, and will also retain most of the revenue from new connection charg-es. Meanwhile, Vishwa is responsible for raw water and electricity charges — unlike in the Nagpur contract — and is putting up about INRioo million ($1.8 million) in capex.

“We are very confident of the success of the project,” said M.L. Sridhar Reddy, executive director of Vishwa Infrastruc-ture. “People in the city who are paying INR800-1,000 ($14.54-$18.18) a month for water supply through tankers are willing to pay INR25o ($4.54) a month for piped water supplied by us,” he told GWI. Vishwa expects to increase the total number of con-nections from 15,400 to 29,000 in the ini-tial years of the contract.

Works on a new water treatment plant and supply intake are expected to be com-pleted at the end of the year, and the con-cession period will start in January 2013.

Although the Nagpur contract struc-ture is more robust than that in Khandwa, both are playing a pioneering role in Indian water PPPs amid a climate of public opin-ion that is often hostile to private opera-tors. It will be vital to the success not just of these early contracts, but of future PPP contracts in India, that they are able to demonstrate efficiency improvements and to communicate the benefits effectively to their customers.

In the meantime, other cities are keep-ing their PPP experiments as low-key as possible. Private players are being brought in under consultancy and O&M-type con-tracts in order to take advantage of private sector efficiencies while avoiding the stig-ma of ‘privatisation.’

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