Finalized Scope of Work for Preparation of Report on Setting up of Water Supply & Sewerage Board or Company in the State of Madhya Pradesh

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1 Finalized Scope of Work for Preparation of Report on Setting up of Water Supply & Sewerage Board or Company in the State of Madhya Pradesh 1. Background The Government of Madhya Pradesh through the Urban Administration & Development Directorate is actively considering improving water and sanitation services (WSS) in the urban areas in the State. A key component of the sector development plan is to improve the accountability of the service providers within the permissibility of the prevailing legal framework. In the Indian legislative context, provision of urban water supply services is the primary responsibility of the State Government and ULBs. Until the 1990s, urban water supply services in the country were managed largely through State departments and public utilities. The 74th Constitutional Amendment (1992) kickstarted the transfer of responsibility and powers to provide and manage urban water supply services to the ULBs, a process that is still underway. Improvements in the WSS service provider s legal and organizational framework will be required before commencement of the investment program. The role of various stakeholders at state and local city level (policy maker, regulator, financier, asset owner, service operator) needs to be clearly defined in line with the decentralization mandate of the 74th Constitutional Amendment. Initial thinking in the State is in establishing a State Water Board or a Company. In the cities and towns of Madhya Pradesh, the municipal corporations/bodies take care of urban water supply, sewerage and sanitation, storm water sector. A Critical Review by WSP management. These bodies receive the assistance of Public Health Engineering Department in the survey, investigation, preparation and execution of water supply schemes for towns and villages. In Madhya Pradesh, much of the increase in urban population is due to the rapid increase in the number of towns (from 253 in 1981 to 368 in 2001) and not so much due to the growth in the existing urban centres. Of these 368 towns, 227 are small towns (with population of <20000). This shows that unlike the states which have Metro Water Boards catering to large metropolitan cities, Madhya Pradesh requires a state-level body to manage and oversee the expansion of water supply services reaching out to the emerging small towns. State Govt. wants to constitute Water supply and Sewerage Board or Company in the State under ADB sponsored Project Uday and in compliance of decision of 1

2 Hon ble Chief Minister and Manthan World Bank has already conducted a detailed study in the country in this regard. Detailed document/report for the constitution of Water Supply and Sewerage Board or Company is to prepare in the context of Madhya Pradesh for necessary action and decision. 2. Objective The objective of the present assignment is to undertake detailed evaluation of the current institutional structure delivering the water and sewerage services in the urban areas in the State of Madhya Pradesh and analyze the relative strengths and weaknesses and propose suitable accountable service delivery organization arrangement duly analyzing the best practices both in India and abroad. To prepare a report on the constitution of State-level Specialized Agency (SSA) such as Water Supply and Sewerage Board or Company in M.P.(WSSB), which will include the following: Examine the structures and functions of SSAs formed elsewhere in India. Critically analyze the merits of each option available Study the global practices in institution building in urban Water Supply and Sanitation Management in Urban areas. Suggest the best institutional arrangement with a strong justification for Water Supply and Sewerage Board or Company in M.P. Describe administrative structure, working system / key functionaries duties & powers and business rules of board/company. Study and assess existing Municipal Acts-1956 and 1961 and suggest amendments in connection with the formation of WSSB and suggest amendments in these Acts wherever necessary 3. Key Activities and Tasks Examine the structures and functions of SSAs formed in India What is the nature of entity formed? What is the core mission and functions of the entity? What is the network of zonal and district offices like? Distribution of responsibilities within the entity Analysis of merits of an option through test questions : Is the entity. Using modern accounting practices that give better information quality? More efficient in terms of completing engineering projects on time? Less dependent on government for raising funds for its operations? Less affected by the political pressure groups? 2

3 Study global practices in institution building in urban WSS sector: What makes a best practice Able to operate successfully with a small workforce? Strong working partnerships with private players? Fewer water leakages, water-borne diseases, supply interruptions? Cost of water supply or sewage treatment has gone down? Perceptions of water users usually positive? Countries reported as having strong WSS institutions: such as Iran, Mexico, Egypt, Chile, Spain, Morocco, and Australia etc. Suggest the best option on the basis of the above review: What distinguishes an option as the best is that it incorporates the key elements of good governance helps the state meet its commitment to guarantee basic services can be implemented with fewer challenges of change management helps eliminate the overlap of roles and responsibilities Describe the proposed SSA: Composition, legal status, divisions and functional relationships AGMs, elections/ appointments, tenure, voting, authority, processes Staffing, eligibility, pay, welfare policies, powers, etc Study the existing Municipal Acts in connection with the SSA: Key Points of Study Areas in which urban local bodies must remain ultimate authorities How to facilitate the transfer of capital assets to the new entity Removing the duplication in taxes and duties 4. Strategies Examine SSAs formed elsewhere in India: Desk research of available literature On-site interviews with officials/ ex-officials of SSAs Study good practices in urban WSS sector: Desk research of available literature Study of websites of WSS institutions selected as best cases/ concerned govt. Suggest the best option to the client: Based on the above research study Specify structure, duties, powers and rules: Expert Panel discussions: Engineers, CSOs, Policy Experts, HR&OD Experts 3

4 Study the existing Municipal Acts in connection with the SSA: Expert Panel discussions: Urban governance experts, lawyers, tax experts Suggest tenure or duration for which Corporate Body shall function smoothly. Agreements among the constituent agencies or the structure of corporate body shall be revised or need revision, as the case may be. Study successful models on PPP involvement in the corporate body in India or overseas. Suggest the synergy among the various agencies, if in PPP mode of corporate body. Suggest mandate and charter of the proposed company/board. Sources of Secondary Data to be used Proposed Company s HR setup and employee s governing rules. Constitution/ preamble of entity (to know its basic objects) Vision-cum-mission document and strategy documents Minutes of Governing Body meetings Annual reports Organograms Formats used to record the employee performance (CRs etc) Annual budgets/ financial plans/ implementation plans Reports of past studies on OD aspects (e.g. SWOT analysis) 5. Approach and Methodology The approach and methodology in undertaking the scope of services are grouped into following four parts: 5.1 Institutional Review Assessment of accountability in service provision and review of institutional structure in Water Supply and Sanitation Review the current institutional structure for WSS delivery in the State of Madhya Pradesh and determine the strengths and weaknesses Review the current human resources available in PHED and the inter relationships between PHED and ULBs Analyze the relative merits and risks of different institutional models for their relevance and appropriateness in Madhya Pradesh Review the ongoing initiatives by the State in introducing PPP 4

5 structures for service delivery Develop and recommend options for improving the accountability Identify planned, ongoing, and completed initiatives of corporatization or similar reform of public entities in the WSS sector. Review existing literature on international good practices on creating corporate WSS entities. Identify the main elements conditioning successful reforms and the achievement of improvement in the corporatized WSS entities. Discuss the applicability of the models reviewed and the lessons for the Madhya Pradesh context. 5.2 Legal Review General review of the legal issues related to corporatization in the Indian water sector Review the existing legal framework and the existing institutional models for the delivery of WSS services, Specifically discuss the difference between the legal framework of statutory bodies and companies under the Companies Act, 1956 and the implication of these differences on the governance and procedures in the two models. Confirm whether such entities can enter into contracts with the private sector to deliver parts or all of their service Assess any amendments required for enabling the establishment of the Board or Company both in terms of general state laws, municipal corporation acts and civil service rules 5.3 Financial Review Review of experience of corporatization of public sector entities in the power, and other, sectors in India Identify successful and less successful cases of corporatization of public sector entities in India (especially in the water and power sector) Analyze in detail a small number of corporatized service providers (expected to be mainly drawn from the recent experience in the power sector) with a focus on the link between: (i) the content, context, and timing of legal and organizational reforms on one side, and (ii) the improvement or lack thereof in the performance of the reformed entities on the other side. 5

6 Discuss the link between the formal aspects of corporatization such as legal framework, ownership, and governance structure, and the expected outcomes such as: (i) Improved decision making and information systems, (ii) Improved financial management, (iii) increased customer orientation, (iv) improved HR management and personnel incentives, etc. Staff salary and annual pay hike (increments) model in case of PPP involvement in Corporate Body/ Company and financial arrangement to meet out the increased financial requirements every year. Propose a series of lessons learned that can be applied to the WSS sector 5.4 Establishing Corporate Entity (CoE) Following approval from the Directorate and State Government the activities envisaged for implementation are as follows. a) Form of the Corporate Entity (CoE) the structure could be a statutory body or a company incorporated under The Companies Act, 1956, as amended. This will ensure that many of good governance practices, accounting standards to be followed, disclosure norms, roles and responsibilities of directors etc. are followed by the company b) Ownership Various options on shareholder s mix should be evaluated such as ULBs, ULBs + GoMP or ULB+ GoMP+ Investor etc. c) Internal process in ULB/ GoMP on creation timeline should accordingly be built in for piloting of the scheme through administration/ finance/ legal departments in GoMP and resolution in the council of ULBs etc. d) Timing of creation budgeting for activities such as time for name search, process of filing, clearance from Registrar of companies, structuring the Memorandum and Articles of Association and obtaining certificate for commencement of business. e) Initial Equity this can be nominal to get the company registered which then can be increased when a final decision on the valuation/ transfer of existing business is taken. f) Transfer of existing business in case the transaction structure concludes to house the entire business (existing and new) in the Corporate Entity, so that it is completely ring fenced, then it would require careful valuation and capital structuring in a way that reflects the economic value of the business rather than mere historical book value transfers. Thus, it would cover 6

7 Geography of operations (and may be increase there to, if the city expands horizontally) Proper identification of fixed assets (physical list and financial values), current assets, liabilities (long and short term) Valuation to be used using various methodologies like Net depreciated replacement value, Economic valuation, historical valuation and the justification for using one of the selected method payment of stamp duty, in transferring the ownership, to be discussed with GoMP capital structuring equity for the new company cut-off date when the actual transfer should be effected audit of business upto the cut-off date from the beginning of appropriate financial year scheme of transfer of existing staff, if any proposed, their terms and conditions of transfer, treatment of their terminal benefits liability upto the time of transfer Treatment of rights and responsibilities of creditors/ ULB etc (in case, it requires court approval, then the timeline should include such process). In case there is no transfer of existing business, then the chronology of the creation could be closer to announcement of winning bidder. In any case, the Corporate Entity should be in a position to enter contractual relationship with the winning bidder. g) Monetization of investment from ULBs whether the ULBs would invest additional cash or treat the transfer of existing business as it equity value. h) Structuring of the Management Board the bidding process should look into the structure and composition of the Board and the positions to be shared between ULBs and GoMP. i) Staffing policies the organization structure of the new entity should be carefully prepared. This would require identification of key managerial positions required for running a successful entity. Flexibility should be built in to allow changes when the private operator steps in. Detailing is also required to see whether CoE should follow ULB/ Government guidelines and the implications thereof. In case of transfer of existing employees, their terms and condition of employment, deputation versus transfer etc needs 7

8 to be studied in detail. j) Capital expenditure and procurement rules The CoE would get significant investment from ULB/ Government both as capital and also for operations (transfer of SFC grant for a long term). Thus, current guidelines of procurement in ULB/ GoMP, any draft bills proposed by GoI (which would set precedence and cannot be ignored, even though it may not be applicable), transparency acts to be compiled should be studied and implications should be set out clearly. k) Mechanism for transfer of money from ULB, GoMP for capital as well as SFC grants (for committed expenditure) annually l) Regulatory compliance if the transaction proposes a regulatory arrangement, then details required for such regulatory arrangement should be set out. Licensing, if any area (including provision for growth or not), franchise operations (customers) financial viability of operations treatment of financial flows from ULB, GoMP and SFC grants bulk water procurement (allocation rights, pricing) presentation of annual statements for regulatory oversight inclusion or exclusion of tariff from regulatory purview etc m) Detailed review pros and cons of the partnership mode in each sector on roles and responsibilities with respect to the following: i. Policy framing ii. Projects planning and design iii. Execution and implementation iv. Governance and monitoring v. Project funding vi. Revenue collection vii. Profit sharing if in PPP mode. viii. Public complaint redressal ix. Legal aspects beside arbitration and dispute resolution among the partner agencies. n) Suggest Scope of work of the proposed entity including preparation of State water policy and business plan beside other obligations. 8

9 6. Time Schedule Inception Report : 1 Month Institution Report : 2 Months Strategic Options : 3 Months Draft Report : 4 Months Final Report : 5 Months (30 days after receiving comments /observations on draft report from department)