Lee Kuan Yew School of Public Policy. Working Paper Series

Transcription

1 469C Bukit Timah Road Oei Tiong Ham Building Singapore Tel: (65) Fax: (65) Website: Lee Kuan Yew School of Public Policy Working Paper Series Urban Water Sector Reforms in India: Financing Infrastructure Development through Market based Financing and Private Public Partnerships Sonia Ferdous Hoque Research Associate Institute of Water Policy, Lee Kuan Yew School of Public Policy, National University of Singapore. Date: 10 February 2012 Paper No.: PP IWP [This paper is part of the Water Governance: An Evaluation of Alternative Architectures research project] [This paper should be of interest to academics and professionals working in the field of Urban Water Supply Management] Electronic copy available at:

2 Urban Water Sector Reforms in India: Financing Infrastructure Development through Market based Financing and Private Public Partnerships By Sonia Ferdous Hoque Abstract A huge population size, a rapidly growing economy and increasing levels of urbanization, coupled with the dwindling sources of freshwater, have made management of urban water supply one of the most important priorities in the development agenda of India. Water supply in India is mainly a responsibility of the individual state governments which in turn delegate powers to the urban local bodies for provision of water and sanitation services to people at the city level. Water utilities in India are grappling with the problem of poor and ageing infrastructure, high levels of unaccounted-for water, intermittent supplies, poor water quality and low tariff rates. Apart from the dwindling flow of funds from the state governments and external donors, the main source of revenues for the utilities is water tariffs collected from consumers; however, the latter is rarely enough to meet even the operation and management expenses. Hence, faced with the challenge of financing water infrastructure development and eliminating the management deficiencies of water utilities, India has been actively involved in reforming its water governance system since 1990s through revision of its laws and policies. Learning from the experiences of the rest of the world, India has been encouraging private sector participation in its water sector as well as developing innovative means of market-based financing mechanisms. This paper aims to explore the water sector reform in India and uses examples from the states of Karnataka and Tamil Nadu to highlight the use of private-public partnerships and pooled financing mechanisms to augment water supply. Key words: water governance reform, private-public partnerships, pooled financing, urban water supply. Electronic copy available at:

3 1. Introduction With an area of 3.29 million km 2 and a population of 1.17 billion (The World Bank 2010), India occupies one-fiftieth of the world s land mass and about one-sixth of the world s total population. Besides its huge population size that has an annual growth rate of 1.34 percent (The World Bank 2010), India has been attracting the world s attention with its rapid economic development. In 2010, its GDP stood at USD 1476 per capita and the GDP growth rate has remained steadily above 8 percent since 2003, falling only in 2008 due to the global financial crisis (The World Bank 2010). In 1992, the urban population of India accounted for 25 percent of the total of 0.85 billion people; while in 2002, it rose to 28 percent of the total of 1.03 billion. Out of the 28 states in India, the most urbanized states are Tamil Nadu, Maharashtra and Gujarat with urban populations of 43.9 percent, 42.9 percent and 37.4 percent respectively. Not surprisingly, the cities of Mumbai, Delhi and Calcutta are 3 out of the 21 megacities of the world, having populations of 19 million, 15 million and 14 million respectively (The World Bank 2011). Apart from these 3 big cities which account for 14 percent of the Indian urban population, about 9 percent of the urban people live in cities ranging from 5 10 million in size and 27 percent live in areas having million population. The bulk of urban Indians, 181 million or 50 percent, stay in small towns with less than half a million population (Varma 2010). This rapid growth in urban areas is creating increased demand for fresh water supply, making it a very important aspect of India s development agenda. This paper aims to discuss the gradual reforms that have been taking place in the Indian urban water supply sector since the 1990s, with specific reference to changes in legal and institutional frameworks and how these have been incorporated practically in the various forms of water supply projects conducted in the past decade. Using cities from the South Indian States of Tamil Nadu and Karnataka as examples, the paper highlights the various approaches undertaken by the state governments and parastatal agencies to augment water supply in their areas. Two main aspects of project financing the market-based financing mechanism and the development of private public partnerships have been explored in detail through the above mentioned case studies. 2. State of Water Supply Services in India Electronic copy available at:

4 The annual average precipitation in India is about 4000 km 3, with wide spatial variations, ranging from 100 mm in Rajasthan to about 10,000 mm in Meghalaya. According to GWI (2009), the available water resources in India was about 1123 km 3 in 2007, of which surface water consisted of 690 km 3 and groundwater comprised of 433 km 3. The current total water use is 634 km 3 per year, of which 83 percent is used for irrigation and the remainder for domestic, industrial and commercial use. In India, groundwater meets nearly 55 percent of irrigation, 85 percent of rural and 50 percent of urban and industrial needs. Statistics from the World s Water (Vol.7), indicates that, in 2008, the access to safe drinking water was about 96 percent in urban areas and 84 percent in rural areas, although numerical figures fail to include other parameters such as water quality, water price and efficiency of service provision. The urban water supply system in Indian suffers from a significant gap between demand and supply and deteriorating financial and technical performance. These problems arise from many factors including old and poorly maintained transmission and distribution networks, which lead to physical losses as high as 25 to 50 percent. Low pressures and intermittent supplies allow back siphoning, resulting in contamination of water in the distribution network. The urban poor, who constitute one-fourth of the urban population, and the slum dwellers, who may range from onethird to half of the population in certain cities, are the worst affected. Intermittent supplies for only two to eight hours place a burden on the women who have to fetch water from public taps. Ensuring equity in distribution of available supplies is one of the key challenges of the urban water supply sector. The 2007 Benchmarking and Data Book of Water Utilities in India by ADB provides information from water utilities in 20 JNNURM cities and is based largely on data. Only the two cities of Chandigarh and Mumbai have 100 percent coverage, while 12 utilities have coverages lower than 80 percent. Interestingly, those with the highest coverage also have the highest tariffs, indicating that people are willing to pay for piped water. Alarmingly, the longest available supply is only 12 hours a day in Chandigarh, followed by Amritsar (11 hours) and Kolkata (8.3 hours) while the average for all utilities is only 4.3 hours supply per day. In terms of low Unaccounted for Water (UFW), the best performers are Jamshedpur (12.8 percent) and Mumbai (13.6 percent) while the worst performers are Nashik (59.6 percent) and Amritsar (57.4 percent). Metering is important to fully account for water production and consumption in reducing UFW. About 5 cities have more than ¾ of their connections metered, while in most

5 other cities the proportion is less than 10 percent. A low operating ratio (less than 1) means revenues from tariffs cover the operation and maintenance costs; and in this case, only one-third of the utilities, including Chennai (0.44), Mumbai (0.49), Jamshedpur (0.62), Nagpur (0.76), Visakhapatnam (0.78), Bangalore (0.80) and Coimbatore (0.82) are able to cover their costs. 3. Water Sector Legal and Institutional Framework India does not have an exclusive and comprehensive water law. Water-related legal provisions are dispersed across various irrigation Acts, central and state laws, constitutional provisions and court decisions. Although the Constitution of India does not explicitly mention water as a human right, Article 21 entitled protection of life and personal liberty states that no person shall be deprived of his life or personal liberty except according to procedure established by law. This notion of right to life has been expanded substantially by the Supreme Court while deciding on various public interest litigations. Under the Constitution, water is primarily a state subject, and the Union comes in only in the case of inter-state river waters. According to Article 246 and Entry 17 of List II of the Seventh Schedule, the Parliament and Legislator of any State has the power to make laws with respect to water supplies, irrigation and canals, drainage and embankments, water storage and water power. Hence, state governments have the primary responsibility for policy formulation, regulation, and execution of water sector projects through their State Public Health Engineering Departments and following the 73 rd and 74 th Amendments of the Constitution, they may endow such responsibilities on local self-governing authorities such as Panchayati Raj institutions (PRIs), Urban Local Bodies (ULBs), or the city level Water Supply and Sanitation Boards. Five Year Plans prepared by the Planning Commission forms the economic basis of India. The national government proposes the focus of each five plans and accordingly formulae sector specific schemes that would best accomplished the stated aim. The Sixth ( ), Seventh ( ) and Eighth ( ) Five Year Plans reveal some similarities in the approach of targeting schemes and in the review of deficiencies. In each of these plans, new schemes aimed to improve coverage and access to water supply and sanitation in cities and towns, by prescribing statistical targets which were often unrealistic. For example, at the end of the Plan period, the Seventh Plan aimed to increase coverage by 100 percent but in reality, it could only achieve 84 percent at the national level. Based on this experience, the Eight Plan set a reduced target of 94

6 percent, which was also not fulfilled. The Ninth ( ), Tenth ( ) and Eleventh ( ) Five Year Plans show a radical change in the language of the documents and in the proposed strategies. Following the Constitutional Amendments of 1992, these plan documents focused on the role of ULBs in improving the development of water supply infrastructures and have assumed an increasingly strident tone, which demands accountability from the state governments for the deficiencies in their development schemes. The Tenth Five Year Plan explicitly mentions water should be managed as an economic asset rather than as a free commodity. It also outlines that rather than focussing on the investment requirements to augment supplies or install additional systems in sanitation and water supply, greater attention must be paid to the critical issues of institutional restructuring, managerial improvement, better and more equitable service to citizens who must have a greater degree of participation. It aims to achieve sustainability of the sector through the adoption of adequate measures in operation and management, the financial health of the utilities through efficiency of operations and levy of user charges, and conservation and augmentation of water sources. It also highlights the necessity of involving the private sector, and institutional/market finance to augment resources and to encourage participatory and innovative management practices (Planning Commission 2002). The Tenth Five Year Plan outlines the steps that can be taken by ULBs to enhance service delivery and it gives them concrete shape by launching three innovative city level schemes: the Urban Reform Incentive Fund, the City Challenge Fund, and the Pooled Finance Development Scheme (Planning Commission 2002). The Eleventh Five Year Plan envisions a more thorough application of reform through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which was launched in 2005 to give focused attention to integrated development of urban infrastructure and services in select 63 cities with emphasis on provision of basic services to the urban poor, including housing, water supply, sanitation, road network, urban transport, development of inner city areas, etc. (Planning Commission 2008). The Eleventh Five Year Plan states that Poor quality of infrastructure seriously limits India s growth potential in the medium term and the Eleventh Plan outlines a comprehensive strategy for development of both rural and urban infrastructure. It estimates that to maintain an average annual growth rate of 9 percent, the investment in infrastructure would have to rise from 5.43

7 percent of the GDP in to 9.34 percent by Most importantly, the plan notes that an increase in magnitude of investment of such a scale cannot be achieved through public sector finance alone, and states that Since various social sector and livelihood support programmes for the poor will have the first charge on public resources, the strategy for infrastructure development has been designed to rely as much as possible on private sector investment through various forms of PPPs. According to the Plan, of the 9.34 percent of GDP investment in , around 6.45 percent will come from public resources, while the rest 2.89 percent will be acquired from private sector (Planning Commission 2008). Currently, there are three primary institutional set-ups engaged in the provision and delivery of water supply and sanitation services in India. In the first set-up, which is common in large urban cities and municipal corporations, the entire value chain of services of the water supply and sanitation sector is undertaken fully by one of the agencies, i.e. the municipal government or a parastatal agency or by the state government. For examples, in the cities of Mumbai, Pune, and Ahmedabad, the respective municipal corporations manage all the activities in the sector including capital investment and are also largely involved in the designing and planning of source development. In the second set-up, as in the case of large metropolises, parastatal agencies at the state level or at the city level oversee the entire value chain of water supply and sewage services. For instance in cities of Delhi, Chennai, Hyderabad, and Bangalore water supply and sanitation boards have been set up to develop and manage water supply and sanitation services. In the third form of institutional arrangement, the activities of source development and capital investment for network development are managed by the state department, mostly, the Public Health Engineering Department, while the management of distribution network, operation and maintenance and revenue collection are overseen by the municipal government (GoI-ADB 2009). 4. Evolution of Market based Financing for Urban Infrastructure in India The majority of urban infrastructure projects undertaken by ULBs depend on subsidized funds from state governments and semi-public financial institutions that lend to ULBs relying on state government guarantees. However, the declining availability of state funds and the Reserve Bank of India s endeavor to discipline lending against state guarantees has limited the flow of funds to

8 ULBs for infrastructure projects and compelled them to explore alternative sources and methods of funding. The Tenth Five year Plan states that Urban infrastructure cannot be funded by budgetary support alone. While market borrowings are not yet a viable source of financing for urban infrastructure in most instances, a beginning has to be made for building up creditworthiness in ULBs. If this cannot be done for ULBs as a whole, then it should be attempted at least for individual sectors such as water supply, and wherever else user charges and the general resource position makes for it feasible to use debt funds to supplement grants or own resources. (Section ) Since 1994, the Indo-US Financial Institution Reform and Expansion (FIRE-D) project is working with national, state and local governments in India to develop a market-based bond market. In 1995, the FIRE-D project supported the Credit Rating Information Services of India Limited (CRISIL) to develop a methodology for carrying out municipal credit ratings based on careful study of ULBs in India and international experience. This methodology was applied for Ahmedabad city and in 1996, Ahmedabad became the first city to received a rating from CRISIL for a bond offering. In 1998, Ahmedabad Municipal Corporation issued Rs.1,000 million in Taxable Municipal Bonds and in 2002, it issued 10-year tax-free bonds with an annual interest rate of 9.00 percent to finance its water supply and sewerage projects. Since 1998, other cities that have accessed the capital markets through municipal bonds without state government guarantee include Nashik, Nagpur, Ludhiana, and Madurai. India s private financial community started regarding the municipal credit rating system as a solid indicator of a city s performance and competitiveness. Over the past decade, four rating agencies have provided ratings for municipal and municipal enterprise bond offerings and the process of credit rating of ULBs has gained wide acceptance with more than forty towns and cities seeking credit rating from one of these agencies. The Ministry of Urban Development (MOUD) launched an initiative for the institutional credit rating of 47 ULBs by the Security and Exchange Board of India certified agencies, and this initiative is envisaged to contribute towards improved financial management of ULBs and financing urban infrastructure projects. However, only financially strong, large municipal corporations are in a position to directly access capital markets, while most small and medium ULBs are not able to access capital

9 markets simply on the strength of their balance sheets. Hence, in 2006, MOUD formulated the Pooled Finance Development Fund Guidelines to help small- and medium-sized ULBs access market funds for their infrastructure projects and to encourage municipalities undertake fiscal, financial and institutional reforms required to create efficient and equitable urban centers. (Vaidya, C. and Vaidya, H. 2008). 5. Evolution of Private-Public Partnerships in the Water Sector in India The development trend of Private-Public Partnerships (PPP) in the water sector in India can be categorized into three phases. During the mid 1990s, several international water supply projects were taken up in India but due to their failures, the pace of PPP in the water and sanitation sector subsided around the year Since 2000, the private sector is getting more involved in setting up Water Treatment Plants (WTP) and Sewerage Treatment Plants (STP) and not just investing in basic water utilities. Post 2005, some projects have started to demonstrate their success and the sector has started to gain momentum, with several new projects coming up every year (DEA 2009). Mid to late 1990s: During this period, few PPP initiatives were attempted in the cities of Goa, Pune, Hyderabad, and Bangalore; however, these initiatives mostly failed due to multiple factors. For example, in Goa, a PPP was attempted for the development of a bulk water supply system, in which the private operator was to be responsible for investment, design, construction and operation and maintenance. However, the project was abandoned after bidding, due to high bulk tariff proposed by the private party and also low political will. A similar project in bulk supply value chain was proposed in Bangalore, where again on account of unaffordable tariff levels and other controversies, the project was abandoned. This phase of PPP initiatives in the country was thereby largely unsuccessful due to issues of tariff setting and lack of political support (GoI- ADB 2009). Around 2000: Fewer projects were attempted on a PPP mode around this time, noteworthy being the development of a WTP in Sonia Vihar, Delhi, and two other projects in Sangli- Miraj city of Maharashtra and in Bangalore. The Sonia Vihar project sought PPP for design, construction and operation and maintenance of a WTP. The project has been implemented successfully largely due to balanced allocation of risks between the Water Supply Board (Delhi Jal Board) and the private developer. In Sangli though, the PPP was called for the Operation and Maintenance

10 (O&M) of bulk water supply and treatment and distribution operations only; but lack of political support led to the project being abandoned (GoI-ADB 2009). Post 2005: In the current phase of the decade, the country has seen several PPP initiatives being implemented successfully. These include PPP-based projects in the cities of Latur, Chandrapur, Chennai, Kolkata, Mysore, Madurai, Haldia, and Nagpur, some of which have been discussed in detail in the following sections. 6. Exploring Market based Financing and Private Sector Participation in two States 6.1 The State of Karnataka Located in the southern part of India, Karnataka is the eighth largest state by area and ninth largest in terms of population. Apart from the capital city of Bangalore, water supply and sanitation in Karnataka is under the jurisdiction of the Karnataka Urban Water Supply and Drainage Board. Since the mid-1990s, Karnataka has been one of the most active proponents of urban sector investments and reforms. In Karnataka, deteriorating state finances coupled with low capacity of municipalities to invest in infrastructure have in turn propelled interest in cost recovery, external funding, and private sector participation. In particular, urban water supply and sanitation have witnessed a surge of interest from reform proponents such as the World Bank, the United States Agency for International Development (USAID) and the Asian Development Bank. In order to enhance water supply services in the state, Government of Karnataka (GoK) issued the Karnataka Urban Drinking Water and Sanitation Policy 2002, which articulated the need for full cost recovery of services, volumetric pricing, and gradual PSP in service delivery. Performance Contracts in Belgaum, Gulbarga and Hubli-Dharwad Cities In 2005, with assistance from the World Bank, the GoK launched the Karnataka Urban Water Supply Improvement Project (KUWASIP) to demonstrate, in small areas, an efficient and commercially viable 24x7 urban water supply system through PPP. The project involved investing to improve bulk water supply, establishing a 24x7 water supply in the demo zones and contracting a private operator to construct-operate manage the system for 2 years. 10 wards in Belgaum, 11 wards in Gulbarga and 8 wards in Hubli-Dharwad were identified as demo zones covering 0.22 million people and 30 percent of households from lower income stratum. Following international competitive bidding which required bidders to specify the management

11 fee, the contract was awarded to a joint venture of Compagnie Generale Des Eaux and Veolia with the demo zones handed over in According to the management contract, 60 percent of total remuneration is the quarterly fixed payment and the remaining 40 percent is linked to achieving performance targets in the preparatory and O&M periods. While tariff rationalization was needed for better cost recovery and conservation of scarce water resources, the GoK announced a pro-poor policy providing tariff concessions to the urban poor under the KUWASIP. The policy included defining urban poor as those living in houses less than 600 sft., waiver of one time connection charge for 24x7 supply but no waiver for meter cost (about Rs.900), fixing lifeline consumption at 8 m 3 per household per month, and provision of water to public kiosks for vulnerable sections free of charge. A one-time payment of pro-rata charges to recover costs of priority investments was introduced to replace the earlier connection charges (about Rs.2000). The new pro-rata charge was about Rs. 76 per m 2 of plinth area for residential consumers with a concession of 50 percent for the poor in slums and full waiver for consumers with annual income less than Rs.10,000. According to the new progressive tariffs, the lowest consumption slab was defined as 8 m 3 compared to the earlier 15 m 3 and the minimum monthly charges have been cut to Rs.48 from the previous Rs.90. On the other hand, the tariff has been raised for the next consumption bracket 8 m 3 to 15 m 3 from Rs.118 per month compared to Rs.90 in non-demo zones. Although for the first 6 months existing flat monthly tariffs were charged, dummy bills with volumetric tariffs were issued to sensitize consumers to the new tariff regime. Notwithstanding initial apprehensions, the project has demonstrated a reasonable degree of success, as evidenced from the improvements on all performance parameters. One of the key successes is the reduction in losses from 50 percent to 7 percent due to improvements in transmission and distribution network and better metering. The 24x7 supply to all connected consumers in the demo zones is now a reality from April The residents in non-demo zones have requested the ULBs to scale up the project to the entire city. In August 2009 the project was conferred the first prize in the PPP category of the National Urban Water Awards 2009 of the Ministry of Urban Development (Policy Group Quarterly 2009). Management Contract in Mysore City In December 2008, Jamshedpur Utilities & Services Company Ltd (JUSCO), a subsidiary of the TATA group, entered into a tripartite contract agreement with Mysore City Corporation (MCC) and Karnataka Urban Water Supply and Drainage Board (KUWSDB) for the largest PPP based

12 water supply project in India. The project, which is a performance based Management Contract for 6 years, is aimed to ensure equitable distribution of Cauvery water treated at Hongalli and Melapur treatment plants to the consumers through a network of about 1,200 km from 28 small and large reservoirs, gradually increasing the hours of supply to 24 hours a day. The project consists of three phases: the first phase of twelve months involves complete hydraulic remodeling of the present system and preparation of capital investment plan; the second phase of three years, involves rehabilitating the distribution network to reduce water losses and gradually increase various service standards; and the third and final phase of two years involves providing 24x7 water supply in the entire city ensuring sustainability of achieved service standards. Under the agreement, JUSCO will be paid Rs. 162 million annually, which is about half the money spent by MCC before the contract. Pooled Financing in Bangalore City Bangalore is situated in the central part of peninsular India, with a world-wide reputation as the Silicon Valley of India. With a population of around million people, the pressure on Bangalore s water resources is steadily increasing. This is partly due to the great influx of people migrants settling down as well as business people staying for shorter periods and partly because the supply is decreasing both in quality and quantity. In 2007, the core city area was merged with its eight surrounding municipalities and 110 villages, creating the Greater Bangalore Municipality Corporation or the Bruhat Bangalore Mahanagara Palike. The responsibility of providing water supply and sanitation services to these areas is under the Bangalore Water Supply and Sewerage Board (BWSSB), a parastatal agency with functional autonomy, constituted in Bangalore s water needs are met from three main sources: 1) Ground water Pumped from wells dug in individual backyards to supplement piped water supply, 2) Reservoirs or Tanks Small and large rainfed interconnected reservoirs, many of which have disappeared due to illegal encroachment or have become waste sinks, 3) River water Cauvery River, which meet 80 percent of the piped water supply by BWSSB and the Arkavathi River, which meets the rest 20 percent (Gopakumar 2012). Since 1974, under Cauvery Water Supply Schemes (CWSS), BWSSB has been executing a series of sophisticated technical projects to withdraw water from the river and pump it 600 m uphill to the city, which requires large expenditure of energy. Four

13 stages have been constructed so far to augment the supply of water from the reservoir, built at a village called Thorekadanahalli, located south of Bangalore at a distance of 90 km. The average aggregate supply from Cauvery is 810 million litres per day (MLD) of treated water. BWSSB has implemented the Cauvery Water Supply Scheme- Stage I, II, III, & IV phase I and is currently working on Cauvery Stage IV-Phase II to implement another 510 MLD capacity by 2012 (BWSSB 2011). The Greater Bangalore Water and Sanitation Project (GBWASP) an ambitious project to connect people living on the outskirts of Bangalore to piped water and sanitation - was initiated in 1998 to distribute Cauvery River water by laying new distribution pipelines in the periphery. After initial abandonment, the project was resumed in 2003 when the state government recruited FIRE-D to develop a market-based financing framework for GBWASP. In order to make the project bankable, FIRE D designed an innovative model of pooled finance in which capital for the project was to be collected through beneficiary capital contributions (BCC), state loans, grants and debt raised through municipal bonds. A debt fund called the Karnataka Water and Sanitation Pooled Fund (KWSPF) was established under the Indian Trust Act to access the capital market by issuing a bond on behalf of the participating ULBs. The total cost of water supply component of the project has been estimated to be Rs crores, of which Rs crores has been sourced from future customers through upfront payments, starting from , Rs. 100 crores has been collected through Tax Free Municipal Bonds, Rs crores have been received as grants from GoK and Rs crores have been obtained from mega city loan schemes. After couple of revisions, the final BCC scheme had been designed such that poor households, classified as those living in dwelling size of less than 600 sft., had been given a full waiver, while residential plots of sft., sft. and above 2400 sft. has to pay Rs. 5000, Rs. 10,000 and Rs. 15,000 respectively. Moreover, there had been a system of monthly penalties for late payments. From an equity standpoint, charging peripheral customers for capital costs may not seem justified because the core customers, who have never had to incur any such costs, are receiving water from the same source. In addition, remote areas are likely to get connections much later than others and this has been substantiated by the fact that even after the completion of the distribution pipelines, only approximately 1,00,000 connections have been provided as against a total estimated potential of 4,50,000 in the periphery. However, the main

14 reasons that caused discontent and unrest among the periphery population were that apart from paying upfront costs for a project that failed to meet its deadline for water supply, the poor households also had to pay daily coping costs for purchasing water from vendors. Moreover, while the consumers were penalized for delay in payments, the government was never penalized for delaying the project itself. Hence, in order to ease political pressure and gain confidence from the residents, in 2007, BWSSB allowed households to make BCC payments in installments and also decided to connect those regardless of BCC payment (Ranganathan, Kamath and Baindur 2009). According to the initial plans of GBWASP, 135 MLD of water was to be provided to the peripheral areas upon the completion of Cauvery Stage IV (Phase I); however, due to increased demands by the existing city population, this water is being provided to the core city area instead. To make up for this lost water, the BWSSB is using JNNURM funds to supply an additional 100 MLD of Cauvery Water by installing booster pumps on the transmission mains. In 2008, the Government order to collect BCC was challenged in the High Court of Karnataka, on the ground that it was not supported by Law. Following this petition, the state government amended the Bangalore Water Supply and Sewerage Act, 1964 (Article 89A) to empower the Government to issue directions to BWSSB to levy and collect the BCC through ULBs for water supply and sanitation projects and also to validate the BCC collected from January Moreover, in another recent amendment (Article 72A) passed in 2011, every owner or occupier of a building having site area greater than 2400 sft. or every owner proposing to construct a building on a site area greater than 1200 sft. is required to construct rain water harvesting structure for storage for use or for ground water recharge within December The State of Tamil Nadu Located at the southern most part of the Indian peninsula, Tamil Nadu is the eleventh largest state by area and the most urbanised state in India. Except for the capital city of Chennai, water Supply and Sanitation in Tamil Nadu is the responsibility of the Tamil Nadu Water Supply and Drainage Board (TWAD), a public agency formed in The reform process in Tamil Nadu can be traced back to the entry of the World Bank into funding for the urban sector in the mid- 1970s; it continued in 1994 with the passing of the state-level legislation in conformity with the 74th Constitutional Amendment and culminated in 2005 with the launch of the JNNURM.

15 Pooled Financing by 14 small municipalities In 2003, the Tamil Nadu Urban Development Fund issued a bond by pooling 14 municipalities for commercially viable water and sewerage infrastructure projects. A special purpose vehicle, the Water and Sanitation Pooled Fund (WSPF), was set up to issue the municipal bonds. The FIRE-D project supported the efforts of WSPF to structure a Rs.304 million bond issue whose proceeds financed small water and sanitation projects in the 14 small ULBs. The Trust vehicle enabled the local bodies to participate in the capital market without increasing the contingent liabilities of the state and to channelize private financial resources into infrastructure investments. This was the first municipal pooled issue. It had a fifteen-year maturity and an annual interest rate of 9.20 percent. While the bonds were unsecured, a multi-layered credit enhancement mechanism was set up. The ULBs agreed to set apart monthly payments equal to one-ninth of their annual payments into escrow accounts and transfer the same during the tenth month into the WSPF s escrow account. Besides the strong escrow mechanism and government intercept, a key to the bond s success was that all the pooled projects demonstrated strong collection of user charges and/or fixed upfront contribution from citizens. USAID provided a backup guarantee of 50 percent of the bond s principal through the Development Credit Authority mechanism. The issue demonstrated a successful model of pooled financing in India. It threw open the possibility of enabling smaller and medium municipalities to access capital market funds at competitive rates (Vaidya, C. and Vaidya, H. 2008). Design, Build, Own, Operate and Transfer (DBOOT) Contract in Chennai City For water supply, Chennai is almost entirely dependent on an average annual precipitation of 1250 mm, most of which occurs during October to December. This very little and unpredictable rainfall is responsible for replenishing the ground water as well as the surface waters in the reservoirs. Chennai s water system consists of three main reservoirs Red Hills Reservoir, Cholavaram Tank and Poondi Reservoir which provide a safe yield of 200 MLD. In addition, 100 MLD are extracted from a string of immensely productive aquifers located on the north and north-west of the city (Gopakumar 2012). From 1996, following completion of the construction works under the Krishna Water Supply Scheme, water from Kandaleru Reservoir in Andhra Pradesh flows through 152 km long open canal water to Poondi Reservoir, from where it is transferred to Redhills and Chembarambakkam Lakes through Feeder canals and supplied to city

16 after treatment. This source provides around 930 MLD and to further augment water supply, the Veeranam Water Supply Project was commissioned in 2004 to supply 180 MLD of water to Chennai City by drawing water from Veeranam Lake. This lake receives water from Cauvery River system through Kollidam, Lower Anicut and Vadavar Canal besides rainwater from its own catchment area (Chennai Metro Water 2011). Apart from these sources, for drinking water purposes, the Chennai population heavily depends on bottled water supplied by the private water vendors. According to the Tamil Nadu Packaged Drinking Water Manufacturers Associations, there are about 150 water packaging plants which pump out subsurface water, treat and bottle them. Upper income residents purchase this water in the form of 20 litres bubble cap cans or litres jerry cans on a regular basis. Moreover, private water tankers having capacities of 9,000 to 12,000 litres transport untreated water from agricultural wells in the peri-urban areas to large residential and commercial users (Gopakumar, 2012). However, escalating demands for water supply in the growing city of Chennai compelled the government to look for alternative sources such as desalination, given Chennai s proximity to the Bay of Bengal. In 2005, the Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) awarded a 25 year Design Build Own Operate and Transfer (DBOOT) contract to Chennai Water Desalination Ltd (CWDL), a SPV floated by IVRCL Infrastructures & Projects and Befesa Agua for the construction of a 100 MLD desalination plant in Minjur, about 35km north from Chennai. CMWSSB also signed a bulk water purchase agreement with CWDL to purchase water from the 100 MLD Minjur Desalination plant at a cost of Rs /m³ to be sold to industries at a rate of Rs. 60/m³. Built on a 60-acre site in Kattupalli, the plant will produce potable water using Reverse Osmosis technology and will serve an estimated population of 500,000 in Chennai. The plant has been inaugurated in July 2010 (The Hindu 2010). The city's second desalination plant is to be constructed at Nemmeli on 40 acres of land allocated by the government on the East Coast Road. A 10 year Design, Build, Operate (DBO) contract has been awarded to VA Tech Wabag, which has entered into a JV (70:30) with the Israel-based IDE Technologies (Times of India 2010). Recently, the GoTN has proposed to set up a third seawater desalination plant with an installed capacity of 200 MLD at Pattipulam village in Chennai. Together, the second and the third plant will guarantee water supply to the IT corridor

17 and southern suburbs, which are seeing a boom in new housing construction (Mariappan 2011). At the time of writing, the private operator and project structure are still to be decided. Concession Agreement in Tirupur Town Tirupur, a municipal town located about 50 km east of the city of Coimbatore in Tamil Nadu, is located on the banks of the Noyyal River, a tributary of the Cauvery. The town is renowned as India s leading cotton knitwear centre, accounting for over 90 percent of the country s exports in this sector. Water to the Tirupur town is supplied from River Bhavani situated at Mettupalayam, 54 km away from the city. A total of MLD is supplied by the two schemes from Mettupalayam head works. The first scheme, maintained by the Tirupur Municipality (TM), with a capacity of 7 MLD supplies to the Tirupur City, the second scheme, maintained by thetwad, with a capacity of 45 MLD supplies 24 MLD to the town. The remaining water is supplied to 44 wayside village panchayats. Prior to the concession agreement in 1995, the water needs of the textile industry were being met by the supply of water through tankers, drawing water from open and bore wells in the surrounding taluks such as Avanashi, Palladam, Annur, Kangeyam and other taluks of Erode district. About 2,000-3,000 lorries with a capacity to transport 10,000 to 12,000 litres/trip were plying around 7 to 10 trips daily to supply clean water for the textile wet processing (Madhav 2008). In 1995, the special vehicle New Tirupur Area Development Corporation Limited (NTADCL) was set up as public limited company, with equity holders consisting of Government of Tamil Nadu, Tamil Nadu Corporation for Industrial Infrastructure Development, Tirupur Exporters Association and Infrastructure Leasing & Financial Services. Floated as the first public-private partnership in the water sector, this Build Own Operate Transfer (BOOT) experiment has been operational since August The project primarily seeks to address the water needs of the industrial area in Tirupur, with bulk of the water being supplied to the industry. According to the contract NTADCL is allowed to abstract upto a maximum of 250 MLD of raw water from river Cauvery, of which MLD should be allocated for domestic and non domestic purposes within the TM, upto a maximum of 165 MLD for industrial units for non-domestic purposes outside TM in the service area and up to a maximum of MLD of raw water should be provided for domestic purposes to wayside panchayat unions alongside the main water transmission line and villages in the Tirupur Local Planning Area (Madhav 2008).

18 Under the agreement, GoTN and TM granted to NTADCL the right and entitlement to determine the price of potable water and the price of sewage treatment, connection fee and security deposit in accordance with the terms of this Agreement. The project seeks to cross-subsidize the water supply for domestic purposes with the water charges obtained from industry and hence, the charges had been fixed as Rs. 3/m 3 for villages, Rs. 5/m 3 for domestic use in the TM and Rs. 45/m 3 for industrial and commercial consumers. The latter had been reduced to Rs. 23/m , as the demand for water and offtake by the industry was very poor. However, the water being supplied by NTADCL, which comes only once in 15 days and lasts for about 3 to 4 days, does not satisfy the needs of a large section of people in Tirupur. Moreover, according to the contract, even if water use by the industries decline, NTADCL is not bound to use the available excess water for the water starved populations of the town and surrounding areas. This provision is highly equity considerations and is also leading to wastage of potable water, in a scenario where water is so precious (Madhav 2008). Moreover, although the project envisaged low-cost sanitation programs for households, it had not integrated the effluent treatment of industrial discharge which was crucial to preventing further damage to the water bodies and the environment. The large concentration of bleaching and dyeing industries in Tirupur generate between 100 to 120 MLD of effluents, which are being discharged into the River Noyyal that flows downstream to be stored at the Orathupalayam reservoir, which in turn impacts the agricultural lands irrigated by these waters. In 2003, the Noyyal River Ayacutdars Protection Association filed a writ petition at the Madras High Court against the polluting industries. In 2006, The Tamil Nadu Pollution Control Board and the High Court have directed the industries to implement zero discharge facilities within a stipulated period or face the threat of closure of the industries. It has also ordered the dyeing industries to pay 6 crores for the reclamation of the Orthupalayam dam and another 140 crores as compensation to farmers downstream of the Noyyal River (Madhav 2008). However, despite the claims of the factory owners of having invested heavily in effluent treatment plants and bearing significant high capital costs, the water pollution continues. In February 2011, following further petitions from the farmers association, the Madras High Court ordered closure of more than 700 bleaching and dyeing units, and effluent treatment plants in Tirupur and asked the state government to disconnect electricity supply to the units in the hosiery town that failed to comply with its earlier order to achieve zero liquid discharge of effluents (The Economic Times 2011).

19 7. Conclusion With enormous natural resources, a growing economy and the second largest pool of technical and scientific personnel in the world, India has emerged as an important developing nation. In terms of water resources development, India has achieved significant improvement since its independence in However, still today Indian cities are plagued with problems of inadequate coverage, intermittent supplies, low pressure, and poor quality of water supply. With rapid increase in urban population and continuing expansion of city limits, the challenge of delivering water in Indian cities is growing rapidly. Many large Indian cities have to source water from long distances ranging from 50 to 200 km due to exhaustion or pollution of nearby sources. This increases the cost of raw water and enhances the possibility of leakage during transmission. The brunt of the burden of poor quality of water delivery is borne by the poor, who typically have to rely on market sources to access water at a higher price. Although water supply is basically a municipal function, to be executed by the ULBs or PRIs, being capital intensive, water supply schemes are usually financed from the state budget, borrowings from financial institutions or the external funding agencies. Moreover, central government provides assistance through a few centrally sponsored schemes such as the JNNURM. For water utilities, the two main sources of revenue are water tax based on property values and water charges based on water consumption. However, water tariffs are generally ridiculously low and revenue collection efficiency is very poor. Different methods are used for collecting tariff, which range from flat rates, slab rates to volumetric rates. The minimum tariff is set by the state and the ULBs have to seek the approval for all proposed increases. Few ULBs generate sufficient revenues, while most of the medium and small towns do not even cover operation and maintenance costs. Some ULBs have initiated innovative cost recovery mechanisms such as advance registration charges, connection charges, water tax, application of general revenues etc., though such cases are few. However, along with the central government of India, some of the state governments have also been actively pursuing governance reforms in the water sector through changes in policy and plan documents. Although there few early initiatives for PPPs in the water sector have been abandoned, PPPs have gained momentum in the recent years. Instead of making big leaps by awarding long-term concessions to private operators, many utilities are taking small steps by

20 handing out service and management contracts and undertaking pilot projects in small demo areas. Moreover, in competition with foreign companies, local private operators are being more active in the market and based on their experience and maturity in handling projects, these local companies are now bagging in large contracts. In order to cope with dwindling state and external funds, the cities are trying out innovative market based mechanisms to finance their water infrastructure development. Like PPPs, such mechanisms have also faced public resistance; however, proper design and implementation can make these initiatives successful.

21 References Asian Development Bank (ADB) and Ministry of Urban Development, Government of India The 2007 Benchmarking and Data Book of Water Utilities in India. Accessed May 02, Utilities-in-India/2007-Indian-Water-Utilities-Data-Book.pdf Bangalore Water Supply and Sewerage Board Official Website. Accessed November 10, Chennai Metro Water Official Website. Accessed November 10, Department of Economic Affairs (DEA) The Water and Sanitation Sector in India. Ministry of Finance, Government of India. Accessed November 10, Department of Parliamentary Affairs and Legislation The Bangalore Water Supply and Sewerage (Amendment) Act, Karnataka Act No. 32 of Accessed November 10, Department of Parliamentary Affairs and Legislation The Bangalore Water Supply and Sewerage (Amendment) Act, Karnataka Act No. 05 of Accessed November 10, Global Water Intelligence Water Market India Accessed November 10, Gopakumar, G Transforming Urban Water Supplies in India. London and New York: Routledge. Government of India and Asian Development Bank (GoI-ADB) Toolkit for Public Private Partnership in Urban Water Supply for the State of Maharashtra Volume- 1. Accessed November 10, Government of India Ministry of Law and Justice The Constitution of India. Accessed 10 November Jamshedpur Utilities and Services Company (JUSCO) Experience on PPP in Urban Water Supply and Sanitation Sector. Presentation to the Working Group on Urban & Industrial Water Supply for 12th Five Year Plan ( ), Delhi, on March 18, 2011.