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Public- private participation in Water

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Deepto Roy

This article was published on mylaw.net on April 25, 2011. The link is http://mylaw.net/Article/Publicprivate_participation_in_water/

During a recent visit to Jaipur, I had the opportunity to meet the Principal Secretaries of several departments in the Government of Rajasthan in relation to private-public partnerships (“PPPs”). In response to the question of which sector in Rajasthan required the maximum impetus in terms of private participation, the unequivocal response was ‘water’.

Rajasthan promulgated a Draft Water Policy (“the Draft Policy“) in 2009. The Draft Policy describes the water crisis in Rajasthan in great detail. Rajasthan is the largest state in India and covers more than ten per cent of its land area. It also supports 5.5% of the population. In contrast, the surface water in Rajasthan is only 1.16% of the total surface water of India and two-thirds of the state is a desert. The state suffers from a growing mismatch in the demand and supply of water because of the depletion of water resources and the State Government simply does not have the funds to meet the increased capital expenditure to develop water resources in the state. The Draft Policy therefore advocates the adoption of Integrated Water Resource Management (“IWRM”) and states the goal of the Rajasthan government to involve private parties in the development, operation, and management of water resources.

Rajasthan, however, is not unique: it reflects the status of water management in India. The existing water infrastructure in India is dismal. Only about fifty per cent of people are connected to the water distribution network. The collection of operation and maintenance charges is also dismal, in the region of twenty to thirty per cent. This means that even at the Central Government level, there is impetus on private participation in the water sector.

The implementation of the Draft Policy and of PPP in IWRM is however, facing significant public opposition.

Advantages and challenges of privatisation

More than any other infrastructure area, the subject of private participation in water projects is challenging and controversial. The reason for this is, of course, the unique nature of water, which is not only a precious natural resource but is in a sense, a human entitlement and the foundation of life. Since the Dublin Principles of 1992, access to water has received growing recognition as a human right, which was confirmed by the United Nations General Assembly in July 2010. Given this status, privatisation of water resources almost always invokes strong opposition.

The rationale for privatisation in water is the same as for any other PPP sector – that is, increased efficiency, better delivery standards, mobilisation of additional funds, and access to innovation and technical expertise.

The problem is that the existing international experience on PPP in the water sector does not empirically support the conclusion that private participation would necessarily improve efficiencies in water supply and management.

At the same time, the sector has some fundamental characteristics that make private participation challenging. There is a high investment requirement, which results in sunk costs, and economies of scale that result in a natural monopoly. Externalities in relation to public health and the environment also have to be taken care of.

Types of PPP

In effect, two different types of PPP exist in the water sector, the English model of full privatisation, where ownership and management is entirely private, and the French model of delegated management (concessions), which is the model preferred by the World Bank. The most common formats are as follows:

Performance Based Management Contract: The private developer will carry out the activity of operation and maintenance of the entire water supply system including the metering, billing, and collection of revenue. All major capital costs are borne by the Urban Local Body (“the ULB”). The private developer will collect the charges set by the ULB, and shall either pass them on to the ULB and be paid a licence fee or retain the charges and pay a fixed fee to the ULB.

Concession Agreement for Water Supply and Sanitation Services: The private developer would undertake investments and create the assets, and then carry out their operation and maintenance. The obligation to design, construct, and finance the assets is with the private developer. The developer incurs all capital expenditure, as well as those that are operation and maintenance-related. The developer charges the users a usage fee determined by the ULB.

Concession Agreement for Construction, Operation, and Maintenance of Bulk Water Supply Systems: In this case, the private developer designs, finances, builds, and operates the asset. The developer supplies the treated water to the reservoir and the responsibility for distribution will be with the ULB. To compensate for the capital investment made by the developer, the ULB pays a water charge to the developer.

Service Management Contract for metering, billing, and collection: The developer will provide only specific services; for instance, the installation of meters, the oversight and maintenance of the meters, and the generation and collection of bills at a tariff determined by the ULB. The ULB pays a fee to the developer based on the performance of the developer.

India and PPP in water

PPP in water resources management in India has a chequered history.

The first phase of water PPPs was in the late 1990s, all of which were almost overwhelming failures. For example, the PPP initiatives in Goa and Bangalore to develop bulk water supply systems were abandoned because of concerns over high bulk tariff demanded by the developer. This trend continued in the mid 2000s, and several large-scale PPP initiatives had to be abandoned because of strong public and political opposition.

The late 2000s, however, saw a number of PPP projects being implemented more or less successfully. In most of these projects, the private parties were involved in investment, design, and construction. In some cases they were also involved in design and collection. For example, in Latur and Chandrapur, a distribution-cum-revenue-collection model was followed. The public utility made the necessary investment for the capacity augmentation of the bulk water supply system. After such augmentation, the entire distribution system from source to distribution to collection was handed to the private operator.

The contracts awarded to the private entity provide for specific service standards. The private developer has the right to levy the tariff set by the public authority and retain the same. The bid is awarded on the basis of the highest license fee offered to the public authority.

In Salt Lake, Kolkata, a Build-Operate-Transfer model (“BOT”) was followed for the private sector participation for the development of an underground network for water supply and sanitation services through a concession agreement. The private party was responsible for the construction of physical infrastructure. The private party was entitled to levy usage charges directly on the users as well as a one-time connection charges. The bidding criteria were the lowest user charges that would be levied.

To PPP or not to PPP

Before deciding whether a project can be developed on a PPP basis, the Government needs to be satisfied that the project can be viably developed on a PPP basis. This is particularly relevant if the project is as sensitive as a water project.

The first criterion that needs to be looked at is whether the project incentivises the private developer. If there is no economic incentive for the private developer, the project is likely to fail. In such cases, the possibility of Viability Gap Funding (“VGF”) by the government should be considered.

The second criterion is to determine whether there are tangible efficiencies associated with the project and whether there will be a cost saving for the government.

The third criterion is whether the relevant ULB has the expertise to monitor the project and ensure that it is viable from a public interest standpoint.

Finally, for PPP in water to succeed, public stakeholders should be involved in the process from the beginning to increase public trust. Drafts of the contracts (or at least a summery of the key contractual terms) may be made available to the public before they are signed.

It may also be worthwhile to evaluate the possibility of having an independent regulator in the water sector, which shall fix tariffs, monitor implementation, and adjudicate on disputes.

Therefore, private participation in water should not be an automatic choice, but should, rather, be an alternative that is pursued only if the parameters for successful PPP are met. It should not be that the government is merely promoting PPP because it does not have funds available and not because it believes that PPP will improve things. In such cases the government will be better off promoting PPP in other areas so that it can free up funds for investment in water infrastructure.


2 Comments

  1. Amit Kumar says:

    Incisive..

  2. Amit Kumar says:

    Woul want some insight on the following :

    What is it that is currently stopping the Govt from increasing the private participation in its planning commission provisions (11th-12th Five year plans) ?

    In your view, is the PPP sector in India likely to take off in a big way in the near future?

    And if it does, which companies in your opinion are most suited to reap the benefits of the opening of the flood gates ?

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