Final Report

The findings, conclusions and recommendations presented in the report are those of the study team and do not necessarily represent the views of ADB Management, or ADB Board and the governments the Board represents.

March 2014

India: Study on Various Models for Water Supply Service Improvement Projects

Prepared by: Keiichi Tamaki, Senior Urban Specialist, SAUW Sourav Majumder, Associate Project Officer, INRM

Alex Jorgensen, Consultant, SAUW Sanjib Chakraborty, Consultant, SAUW

Study on Various Models for Water Supply Service Improvement Projects

ABBREVIATIONS

ADB – Asian Development Bank BoQ – bill of quantity DBO – design-build-operate DEA – Department of Economic Affairs EPC – engineering procurement construction IBT – increasing block tariff JMC – Jaipur Municipal Corporation JNNURM – Jawaharlal Nehru National Urban Renewal

Mission KUDCEMP – Karnataka Urban Development and Coastal

Environmental Management Project KUIDFC – Karnataka Urban Infrastructure

Development and Finance Corporation KUWASIP – Karnataka Urban Water Supply

Improvement Project NKUSIP – North Karnataka Urban Sector Investment

Program NMC – Nagpur Municipal Corporation NRW – non-revenue water O&M – operation and maintenance PBMC – performance-based management contract PHED – Public Health and Engineering Department PIU – project implementation unit PPP – public-private partnership PSP – private sector participation RUIDP – Rajasthan Urban Infrastructure Project STP – sewage treatment plant TPRM – tripartite portfolio review meeting ULBs – urban local bodies

TABLE OF CONTENTS

Abbreviations

I. Introduction .................................................................................................................... 1

II. Summary of Findings ...................................................................................................... 2

A. Basic Issues ......................................................................................................... 2

B. Alternative Water Supply Service Improvement Models Implemented in India ...... 3

C. Other Recent Reviews .........................................................................................10

D. Summary .............................................................................................................11

1. Systemic ......................................................................................................11

2. Technical .....................................................................................................11

3. Financial ......................................................................................................12

4. Sustainability of 24/7 Projects ......................................................................15

5. KUIDFC Strategy for Financing and Implementation of Future Water Supply Projects .................................................................................16

III. Conclusions ...................................................................................................................18

A. Replicable Models ...............................................................................................19

B. General Recommendations .................................................................................20

Appendices: Appendix 1: Analysis of the Hubli-Dharwad, Belgaum and Gulbarga 24/7 Water Supply

Demonstration Project Appendix 2: Hyderabad Tariff Structure for Commercial and Industrial Consumers Appendix 3: Delhi Jal Board Three PPPs At-a-Glance (Preliminary) Appendix 4: Electricity Cost for Water Supply Operations *Site visit reports are available upon request.

I. INTRODUCTION

1. In response to a request from the Department of Economic Affairs (DEA), Ministry of Finance, India arising from the June 2013 tripartite portfolio review meeting (TPRM), the Asian Development Bank (ADB) is carrying out a technical assistance (TA) to investigate various models for externally financed urban water supply and sewerage service improvement projects in India. India has implemented more than a dozen externally financed projects in the urban sector over the past almost 20 years since the 74th Constitutional Amendment was passed. The Amendment devolved responsibility for the provision of urban services to the states and to their urban local bodies (ULBs). However, while major capital investments have been made in hundreds of cities and towns during that period, the resulting improvement in the levels of water supply services has not reached the levels envisaged or desirable. While most new/rehabilitated/expanded water supply systems have increased their service areas by adding thousands of new customers, the level of services in terms of pressure and hours per day of service have not improved substantially; typically from 2 hours per day to 4 hours per day. 2. In order to address this issue and improve the water supply service levels under already implemented, ongoing and proposed new projects, DEA has requested that ADB review the issues, analyze the data and recommend ways to improve the increasingly critical water services in ULBs across the country. Specifically, the TA reviewed different options, and analyzed approaches already proven workable in India, to provide better water services in the past few years, preferably 24/7 water services on a sustainable basis. The analysis focused on risk allocation between client and contractor in terms of (i) construction of capital works, (ii) operation and maintenance (O&M), (iii) financing, and (iv) sharing of commercial risk. The scope of work and tasks completed under the TA are:

(i) Review of past and ongoing projects including (a) Hubli-Dharwad, Belgaum and Gulbarga 24/7 demonstration (demo) program under the World Bank-financed Karnataka Urban Water Supply Improvement Project (KUWASIP) which is still ongoing through a performance-based management contract (PBMC) or “Operator Consultant” approach; (b) the Ilkal 24/7 scheme under the ADB-financed North Karnataka Urban Sector Investment Program (NKUSIP) which is a build plus O&M, or contractor-cum-operator contract; (c) the Nagpur concession, which is a more significant public-private partnership (PPP)scheme since the private operator is required to invest a reported 30% of the capital works; (d) the Jaipur demo scheme for 24/7 water supply, the Bisalpur build and O&M contract, and the O&M of sewage plants through build-operate contract under the ADB-financed first Rajasthan Urban Infrastructure Project (RUIDP); (e) various 24/7 demos undertaken by the large city corporations including Mumbai and Delhi using contract-based professionals (usually retired staff); (f) the Malkapur and other ULB 24/7 demos; (g) various options for incorporating the private sector in wastewater management such as in Mangalore; and (h) other options found during the TA exercise;

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(ii) Carried out detailed field investigations through visits to each of the above projects/demos to meet with representatives of the beneficiary ULBs, the implementing agencies, the private service providers and the beneficiaries to confirm achievements, problems and lessons learned;

(iii) Review the tariff structure, billing and collection, revenues and operational issues for each project;

(iv) Identified basic prerequisites necessary for success and sustainability of the projects;

(v) Categorized various contractual arrangements with pros and cons of each; (vi) Prepared case study write-ups, analysis, findings and recommendations, as

attached; (vii) Present the findings through power point presentations at the February 2014

TPRM in Bangalore (which did not materialize); and (viii) Make recommendations for water supply service improvement models under

future projects.

II. SUMMARY OF FINDINGS

A. Basic Issues

3. During the TA the consultants reviewed project completion reports for completed projects, the files of ongoing projects, conducted site visits/field investigations to a number of ULBs, met with various municipal corporation officials, KUIDFC and Public Health and Engineering Department (PHED) Rajasthan and interviewed a number of water customers to determine the basic issues. While the major investments have improved the supply side, including the provision of bulk water, the transmission/feeders mains and distribution piping, the level of water supply service in many beneficiary ULBs have not attained the targets envisaged at project formulation. While the hours of water service have improved from 1-2 hours every 2-3 days to 2-4 hours every day in most ULBs, and to 8-12 hours in a few ULBs, the quality/potability of the water and the pressure have not improved much. Similarly, the planned reduction in non-revenue water (NRW) has not achieved intended targets. NRW before the projects averages 40-60% and, while the new capital works do reduce leakage in the transmission and distribution systems, NRW of most of the improved systems is still above 30%. The detailed descriptions of these systems and findings during the site visits are in Appendix 1. 4. The reasons for not meetings service level targets in conventional national and externally-financed projects include:

(i) The condition of the existing water supply systems (before ADB-supported intervention) in most ULBs is very poor; e.g., worn-out equipment in pump stations and water treatment plants, systems 20-30 years old and grossly undersized, corroded and leaking pipes (much of the distribution mains and service connections use galvanized iron (GI) pipes which corrode over time), in many ULBs some 50% of meter are not working and many connections are not metered, many areas of the cities not properly serviced (new subdivisions, slum

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areas, etc.) and subsequent growth rendering the pipe sizes much too small and NRW higher than 50%. The ULBs had been “starved” for investment in the sector for decades and, therefore, there was huge backlog of new capital works required. When the ADB loan was provided, the bulk of the investment went to the most urgently needed major works; e.g., bulk supply augmentation, replacement of pump stations, upsizing of water transmission mains and replacement of the worst corroded/leaking sections of the distribution systems. There were usually no funds left to tackle NRW on a major scale. As a result, there was little reduction in NRW.

(ii) Despite the increased bulk supply and delivery system resulting from the capital investments, local utilities are reluctant to operate the system for more than a few hours per day. Most systems use pumping to pressurize the system and more hours of operation would result in increased electricity costs and higher volume of leakage, as NRW is still more than 30%which can stress the bulk water supply system. There is also a “culture” of thinking that water is not required for more than a few hours per day since households store water for later use;

(iii) The intermittent supply, whether 2 or 20 hours per day, causes contamination of the water distribution systems, especially in higher zones of the systems as vacuum conditions result when the pipe is drained. This causes contamination from surrounding groundwater and drainage being sucked in through cracks in corroded/damaged pipes, old joints and service connections, which are usually not replaced due to high cost, with perceived less efficiency gain.(Note: there is a common assumption that leakage from service connections is only a small component of overall physical leakage. However, many studies indicate that such leakage, though small in volume on a unit basis, can be a major component of total system leakage, as there are hundreds of thousands of connections in a large ULB. (See Nagpur site report) The intermittent supply means that there is no chlorine residual in the system and customers do not “trust” that the water is safe for potable use and therefore still purchase bottled water or boil supplied piped water for drinking and cooking; and

(iv) As the capital works have not made substantial improvements in the level of services, customers are reluctant to pay higher tariffs and the water utility does not have sufficient funds to properly operate and maintain the system or to make further improvements to reduce NRW and improve services. A vicious cycle!

B. Alternative Water Supply Service Improvement Models Implemented in India

5. In order to address the issues associated with the conventional engineering/procurement/construction (EPC) approach packaging each element separately that was traditionally used in India, various forms of performance-based contracting, public-private

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partnership (PPP) and private sector participation (PSP)1 options were introduced to improve O&M and levels of water supply services of new systems. These included:

(i) Engineering procurement construction (EPC): this is the conventional approach used in most water supply and sewerage projects in India including those financed by ADB;

(ii) Performance-based management contract (PBMC): such as the Hubli-Dharwad 24/7 water service demo project implemented by KUIDFC, whereby an “Operator Consultant” was recruited to design the new system, prepare drawings, specifications, bills of quantity, contract documents and tender documents. He was paid for these services on a monthly basis, subject to meeting time-based performance criteria. The Operator Consultant, on behalf of KUIDFC, then procured a contractor for each of the capital improvements on a conventional bill of quantity (BoQ) basis financed by the World Bank loan and the State. The PBMC Operator Consultant supervised construction and then became responsible for the O&M of the new system for a specified period for which he was paid a performance-based fee subject to meeting a number of specified operational criteria; 24/7 supply, operating pressure, water quality/chlorine residual, response to customer problems within 24 hours, repair of leaks within 7 days and timely meter reading and billing. The O&M part of the contract is paid by the ULB. The study found that after three years of operation of the 30,000 connections being provided 24/7 water supply under the PBMC Hubli-Dharwad model, the demonstration project is a success;

Figure 1: PBMC or “Operator Consultant” Model – Institutional Structure

Figure 2: PBMC or “Operator Consultant” Model – Implementation Sequence

1 The Ministry of Finance defines public-private partnership (PPP) as those options where the private sector does

provide investment and defines private sector participation (PSP) as those options where the private sector does not provide any investment. ADB defines most options with private sector involvement as public-private partnership (PPP) but excludes construction contracts with extended warranties and/or maintenance provisions of, for example, up to 5 years post-completion from PPP.

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(iii) Performance-based contractor-cum-operator model, an alternative to the PBMC model is being implemented by KUIDFC at the Ilkal ULB under the ADB-financed NKUSIP project. KUIDFC recruited an engineering consultant to plan and design the water system improvements, BoQ and prepared the performance-based contractor-cum-operator contract documents. KUIDFC then procured the contractor-cum-operator to construct (on a BoQ basis) the new water supply system within 18 months (financed by ADB and the State) and then provide O&M services for four years paid by the ULB. The contractor can earn an early completion bonus above his bid price, if he completes all aspects of the works earlier than18 months. As of December 2013, he was on schedule to achieve this time frame. During the O&M period, he will be paid subject to meeting O&M criteria similar to those in the Hubli-Dharwad contract;

Figure 3: Construct + O&M Contract or Contractor-cum-Operator Model –

Institutional Structure

Figure 4: Construct + O&M Contract or Contractor-cum-Operator Model –

Implementation Sequence

(iv) Construct and operate model: a simplest form of PSP was used in the first ADB-financed RUIDP project for constructing and operating Phase I of the Delawas sewage treatment plant (STP) in Jaipur. The contract included part A to construct the plant on a BoQ basis financed by the ADB loan, followed by 5 years of contract operations funded by the Jaipur Municipal Corporation (JMC). A similar option was later used by RUIDP to construct and operate the Bisalpur bulk water supply system, though that operating contract was only for 3 years. Recently the same model was followed by RUIDP to construct and operate the Phase II Delawas STP in Jaipur;2 and

Please note that none of the above PSP options require any investment from the private operator or contractor, though he can lose bonuses or be penalized for not meeting performance criteria.

2 Unfortunately, the Phase I operations contract which lapsed 18 months ago has yet to be renewed by JMC. Since there are no O&M funds, the Phase I STP is not operating and there are very serious odour and corrosion problems at the STP and surrounding areas. A number of other STPs have been constructed and operated in same manner in India.

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(v) Wastewater effluent reuse, this option was followed by Mangalore Municipal Corporation under the ADB-financed Karnataka Urban Development and Coastal Environmental Management Project (KUDCEMP) implemented by KUIDFC. Under KUDCEMP, Mangalore constructed a new sewerage system which included 3 STPs. However, due to low water tariffs and even lower sewage tariffs, compounded by a lack of human capacity, Mangalore was unable to carry out O&M of these STPs. Concurrently the new Mangalore Economic Development Zone was under construction, and had applied for water extraction licences from local rivers and streams. However, Mangalore is a water-scarce area, and there was no water available for the economic zone. KUIDFC initiated discussions between Mangalore and the new economic zone, to have the operators of the economic zone carry out O&M of the Mangalore STPs in return for the sewage effluent. The economic zone built the connecting piping and tertiary STP and now operates the Mangalore STP, with only 30% of the O&M costs being borne by the ULB. Similarly, arrangements have been made elsewhere in India, for example in Surat, with a number of others in various stages of development.

6. Another approach to improve water supply services being implemented by Mumbai and Jaipur Municipal Corporations is demos of 24/7 water supply by the municipal corporations themselves, without PPP or PSP. In Mumbai this involved isolating a designated low-density area, installing dedicated water delivery pipe system and individual connection meters and then providing 24/7 bulk supply through a dedicated supply line. Mumbai did conduct leakage detection and repair of major water mains. However, Mumbai did not replace street mains and service connections, with the result that an estimated more-than-30% NRW continues in the 24/7 areas. However, since Mumbai has no shortage of bulk water, which is fed by gravity, the increased water loss is not yet an issue, and electricity costs are not an issue either 7. In Jaipur, a 24/7 demo area was set up in 2010 with an isolated water supply main with system meters. However, not all service connections were replaced, though leakage detection and repairs were carried out. While most of the connections were metered, many of these were not working properly and the demo relied on the system meters to estimate demands and losses. The system was operated by the PHED. There was a major increase in consumption during the first few weeks of operation; the average per capita consumption increased from an average of more than 200 liters per capita per day (lpcd) to more than 600 lpcd. The reasons for the increase in consumption included:

(i) Leakage in the house/building plumbing which caused high losses and damage to buildings;

(ii) Lack of understanding by customers of the need to close the water taps; people were used to leaving the taps open to fill containers whenever the water came for a couple of hours, as the normal monthly user fee was not consumption related; and

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(iii) Continuation of the practice of filling numerous containers, used with the intermittent supply, thereby wasting many liters due to lack of trust in the system.

8. Over time, customers learned better practices and repaired their internal plumbing. The demand eventually dropped to below prior-demo levels. 9. The study also evaluated the Nagpur concession option, which is similar to the Manila water supply concessions and, as such, is an example of how such PPP option could work in India. In Nagpur, the private sector concessionaire is a joint venture between a local contractor/investor and Veolia India Ltd. The Nagpur Municipal Corporation (NMC) would retain the ownership of the assets. The concessionaire was tendered and while the specific details of the contract were not made available, due to confidentiality of the contract, the following general aspects are known:

(i) Technical audit of the existing water supply system indicated very poor performance; high physical losses, high administrative losses (business efficiency was only 32%, i.e., amount of treated water pumped divided by amount of water paid for, raw water canal lost 25% of pumped raw water, administrative losses (theft, non-working or no meters, lack of billing) was 40% of treated water pumped; and non collection of water bills was 10% of the treated water pumped; and

(ii) It was determined that the losses from service connections was more than 50% of distribution system losses; Energy efficiency of pumping stations was only 40-45%.

10. The existing situation in Nagpur is representative of most ULBs across India prior to service improvement projects, in the case of Nagpur under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), and is summarized as follows:

(i) Non-working meters and unmeasured consumption: nearly 225,000 recorded water supply connections of which 156,000 were metered but only 35,000 of these meters were working. The balance of 69,000 unmetered connections were billed a flat monthly charges;

(ii) The accuracy of the few working meters is a major concern due to poor quality and aging of meters. Study of 1,333 working meters shows that 18% of these were under-recording consumption;

(iii) In the test zones, 17% of connections were found to be illegal; 80% of such connections were in slum areas. Only 69% of the 4,133 connections in the 53 test zones were issued regular bills by the water department;

(iv) The inefficient billing system and limited IT application meant poor follow-up and collection efficiency. 13% of the customers with legal connections in the test zones were not receiving bills;

(v) Absence of structured customer service centers resulted in a large number of disputed and unpaid bills; and

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(vi) It was determined that the poor cost recovery mechanism encouraged illegal tampering of meters and corrupt practices.

11. The bid document required that the selected concessionaire invest 30% of the capital works expenditures as well as O&M expenditures for the water system. Such a major commitment by a private investor/concessionaire would require guarantees for reasonable return on investment. However, within the legal framework of the City of Nagpur Corporation Act NMC’s receivables/revenues cannot be escrowed and sovereign powers cannot be transferred to a private operator. With these restrictions it was not possible to attract private operators. This problem, which is common to most ULBs in India, was addressed through creation of a Special Purpose Vehicle (SPV) as follows:

(i) formation of 100% owned company of NMC for development and O&M of water supply services;

(ii) approval of the SPV by the state government; (iii) SPV was registered as NAGPUR ENVIRONMENTAL SERVICES LTD.(NESL) by

Registrar of Companies under companies act-1956; (iv) NMC subsequently entered into an agreement with NESL for management of the

municipal water supply assets, preparation of a sector development plan based on the existing master plan for water supply including any investments as identified in the master plan and subsequent updates;

(v) NESL was developed into an independent, accountable organization or special purpose company (SPC) to fulfil the mandatory obligation of water supply services to all citizens of Nagpur at affordable cost based on transparency, accountability and operational efficiency through private enterprise principles. But NMC will retain ownership of all fixed assets;

(vi) The Nagpur Environmental Services Limited (NESL) will operate, maintain, repair, refurbish and provide for replacing any granted facilities from source to connections, and will deliver water supply services to customers according to committed service level targets; and

(vii) Consideration should be given to changing the regulations in India to simplify private sector participation. As can be surmised, the above complicated legal steps could discourage private entities from investing.

12. General conditions of the contract include:

(i) A 5-year investment program, of which 70% from JNNURM funds and 30% from

the concessionaire/operator, to be recovered from the operating cash flow generated over a 25-year water supply service contract;

(ii) The concessionaire/operator shall cover all costs of running the system and maintaining NMC’s water supply infrastructure in adequate condition of functioning in return for a fee (referred to as the “operator’s fee”), calculated on the basis of an Operator’s Rate applied to the volume of water delivered to and paid by eligible customers. While the details of the contract were not made

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available for this study, a bidding parameter must have been specified billing and collection efficiency. Similarly, the operator’s fee should be adjusted based on annual inflation and other considerations such as a lessening of electricity subsidies, etc. This Operator’s Rate is the parameter that the bidders compete on by offering a discount on the maximum Rate referred to in the tender documents, deemed to be affordable by NMC. The operator’s remuneration includes built-in incentive in order to improve operational efficiency;

(iii) NMC shall provide for raw water supply from the Irrigation Department and electricity from the Maharashtra State Electricity Distribution Company Limited (MSEDCL) as both service providers are committed to subsidized services to ULBs. The raw water supply and pumping costs are provided free of charge to the operator. Under the proposed PPP arrangement, the operator receives the raw water at elevated points, but he will treat the water and supply by gravity to authorized customers in Nagpur City. This subsidy should be fully transparent in the contract and the operator’s fee should be set to ensure that the benefits of these subsidies accrue to the Nagpur water consumers;

(iv) The operator will issue bills directly to customers and collect the water charges on behalf of the NMC. These will be deposited in the water supply and sewerage fund account of NMC. In respect of this account, an escrow arrangement shall be put in place to ensure adequate ring fencing of the water charges in accordance with the provisions of the PPP arrangement; and

(v) The transaction structure is in the Nagpur site report.

13. Based on feedback from the Head of Water Works Department of the Nagpur Municipal Corporation, the concessionaire is operating properly to date. One worrying aspects is that the cost of electricity for the O&M is subsidized as urban electricity charges are paid by the state on behalf of ULBs. It is hoped that the related savings (about 70% of total cost of O&M) accrue to NMC not to the concessionaire.

Figure 5: Design-Build-Operate (DBO) Contract – Institutional Structure

Figure 6: Design-Build-Operate (DBO) Contract – Implementation Sequence

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14. Another option not yet used in India (at least to our knowledge) is the design-build-operate (DBO) option, whereby the client procures a contract to design, build and operate a new facility. ADB has financed/is financing a number of build-and-operate sewage treatment plants as well as water treatment plants. The logic for the build operate option is that since the contractor knows that he will be responsible for the O&M of the new plant, it is in his interest to ensure good quality works and high efficiencies of various equipment. However, this does require that the O&M contract has detailed criteria specifying efficiencies, responsibility for repair/replacement/spare parts and consumables and putting onus on contractor for these. ADB has also financed/is financing design-build contracts, where the contractor designs and builds the new plant to physical and performance criteria, but after the commissioning/testing/training period, the client takes over O&M. This type of contract requires capable/strong monitoring to ensure specifications, third party inspections and detailed in-situ as-constructed testing of equipment, since once plant has been accepted there is no “hold” on the contractor. Full DBOs require even more monitoring, testing and control of the contractor, which can only be provided by an experienced and technically sophisticated client. Furthermore, water distribution (as opposed to bulk supply/treatment) would involve more complexities and thus not be amenable to DBO option unless it is a green-field (as opposed to brown-field) schemes such as new town development. In the case of private sector involvement in bulk supply/treatment, careful consideration must be given to contract conditions, in particular “take or pay” contract, as this type of contract can lead to serious issues under a rising tariff scenario over time, which, in turn, can lead to a significant reduction in consumption (a common aspect of public utilities with a high percentage of low-income consumers). C. Other Recent Reviews

15. In addition to the review of ADB project files, the TA also reviewed the findings of a number of other papers and workshop proceedings on PSP/PPP conducted by various organizations involved in the Indian urban water sector. These included:

(i) ADB-SAUW Brainstorming Session on India Water Supply-internal analysis by ADB staff-August 2013, which set the starting point for this study;

(ii) National Conference on Potential Strategies for PPPs in Urban Water Sector-Session on “Policy Framework and Governance”-Making PPPs Work, by ICRA Management Consulting Services Limited, 20 March 2012;

(iii) National Conference on Potential Strategies for PPPs in Urban Water Sector- Implementing PPPs in the Water Sector: Some Insights from the Indian Experience-Dr. Ashwin Mahalingam, IIT Madras, 20 March 2012;

(iv) Workshop on Wastewater Reuse and Recycle-PPP in Wastewater Reuse, ICRA, 18 April 2012;

(v) IWWA/IWA Utility Leaders Workshop, Strategic Approach to NRW Reduction, Management Options for Utilities, ICRA, February 2010; and

(vi) Review of the Hyderabad Metropolitan Water Supply and Sewerage Board’s recent (February 2014) update of their water tariff structure (Appendix 2). This document indicates that “Due to the increase in the cost of electricity, the

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production cost of water has increased from Rs25.50 to 43.50 per KL since December 2011, and hence the operational deficit has been increasing without any corresponding increase in the revenue of the Board, necessitating this tariff structure update”. Water tariffs in Hyderabad do include the cost of electricity; i.e., unlike many ULBs in India.

D. Summary

16. The conclusions reached by this study, including the above reviews, with respect to difficulties encountered in the use of various “models” for improving the water/sewerage services can be summarized in three broad categories as follows:

1. Systemic

(i) Culture of “water is free” or “almost free” is still prevalent among customers (lack of willingness to pay) and politicians (lack of willingness to charge and use of tariffs for political expediency). While most willingness to pay studies do indicate willingness to pay, this is limited to a few percentage points increase to current low charges/tariffs, basically limited to annual inflation. But because tariffs have historically been very low, such minor increases do little to “catch up” with actual costs of providing good water services, as demonstrated by the Hyderabad water tariff which is several times as high as most other ULBs, but does incorporate all costs including electricity;

(ii) With respect to collection, treatment and proper disposal of wastewater, there is a lack of commitment to wastewater collection and disposal and many new wastewater related facilities are neglected and allowed to fall into disrepair, especially the STPs as they have high power costs (e.g., no renewal of Jaipur Delawas STP’s O&M contract);

(iii) ULB water departments tend to have a culture that provision of intermittent water supply for a few hours twice per day is sufficient, even after substantial investment in new facilities enables much longer hours of operation; and

(iv) Lack of trust between public and private sectors. 2. Technical

(i) Investment is insufficient in reduction of leakage/non-revenue water (NRW).While all water sector projects include a component to address NRW, this does not normally include complete replacement of the distribution system, which is usually required to achieve NRW below 15%. In Hubli-Dharwad, NRW was reduced to less than 12% through the use of high density poly-ethylene (HDPE) pipe using butt welding for fusing joints in pipes, which are larger than 200 millimeters (mm) diameter and electro-fusion welding for less-than-200mm diameter pipes. While this type of joint fusing does require sophisticated equipment, such new systems virtually have no leakage, no corrosion and long operating life;

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(ii) The lack of investment in NRW, or the use of lower quality piping and poor installation, leads to major water losses as water systems increase pressure and hours of operation. Leakage occurs over many hours instead of just a few, requiring higher volumes of bulk water, which is wasteful, especially in water-scarce areas; and

(iii) Due to lack of public sector capacity, many ULBs have not operated modern facilities prior to their new projects. Therefore, their staff require training and capacity building. While all new projects incorporate capacity building, this often amounts to only token levels of a few months. Learning to properly carry out O&M of modern water and wastewater infrastructure takes years of hands-on experience. There are no formal training programs for water and sewage system operators in India.

3. Financial

(i) Sector-wide tariffs for water supply and wastewater management are low. In most cases, they are insufficient even for basic O&M. Extensive subsidies are required from general tax revenues; (see the Hyderabad tariff structure)

(ii) Lack of private sector’s appetite for PPPs due to non-sustainable cost recovery; (iii) Some involvement in PSP options for water service delivery through

performance-based contracts now occurring, but heavily subsidized in most cases;

(iv) There is general lack of understanding of the real cost of wastewater management. While most ULBs do now have a surcharge or line item on the water bill for wastewater, these are usually in the range of 20-60%, compared to the real cost which is in the range of 150%.As a result, O&M of sewage systems is underfunded; and

(v) There are some successes with investment-based PPPs in sewerage subsector in water-scarce areas; e.g., reuse of domestic sewage effluent as bulk water source for industrial parks.

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Table 1: Tariff Table of the Various Options Reviewed ULB Hubli-Dharwal/

Ilkal Nagpur Mumbai Delhi

Tariff Schedule Type IBT (Telescopic) IBT (Telescopic) (Simple) Volumetric IBT (Telescopic)

Res

iden

tial

Initial (Lowest Tariff) Block 8m3 20m3 n/a 10m3 Initial (Lowest) Tariff (Rs) per m3 7 5.79 8.00 2.66

Tariff (Rs) for Initial Block 56 115.71 n/a 93 Tariff (Rs) for 10m3 74 58 80 93

Tariff (Rs) for 20m3 174 116 160 200

Tariff (Rs) for 30m3 294 208 240 466

Tariff (Rs) for 40m3 424 336 320 865

Tariff (Rs) for 50m3 554 463 400 1,198

Com

mer

cial

Initial (Lowest Tariff) Block 8m3 20m3 n/a 10m3 Initial (Lowest) Tariff (Rs) per m3 28 28.94 48.00 13.31

Tariff (Rs) for Initial Block 224 578.76 n/a 666 Tariff (Rs) for 10m3 296 289 480 666

Tariff (Rs) for 20m3 696 579 960 1,192

Tariff (Rs) for 30m3 1,176 984 1,440 1,788

Tariff (Rs) for 40m3 1,696 1,389 1,920 2,453

Tariff (Rs) for 50m3 2,216 1,794 2,400 3,119

Basis for Cost Recovery O&M excl. electricity and raw

water

O&M excl. electricity and raw

water

O&M (excl. electricity for pumping raw water) plus some

CapEx

O&M excl. electricity and raw

water

IBT = increasing block tariff, O&M = operation and maintenance, Rs = Indian Rupees.

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17. The PSP and PPP involvements in the water supply and wastewater sector in India are still in an early stage. To date, only the Hubli-Dharwad 24/7 water supply PSP option has a successful operating history. It is expected that the Ilkal approach will also be successful but it is still under construction. The various 24/7 water supply demos by municipal corporations (Mumbai, Delhi and Jaipur) may not be sustainable as they have not reduced NRW nor substantially increased revenues, and more operating data/experience is required for thorough evaluation. The “construct and operate” contracts of bulk supply/treatment facilities are working but as exemplified in Jaipur need commitment by the ULBs to raise substantial funds required to continue the operations. The sewage effluent reuse option in Mangalore is successful, mainly because it is in a water-scarce area where access to water sources, either surface or ground water, is not possible or is more costly than the reuse of the sewage effluent. Therefore, it is not replicable across the sector. 18. The concession option, such as Nagpur, with major private sector investment in the water supply sector is not likely replicable in most ULBs, where 40-60% of the customers are low-income. It is difficult to cross subsidize such a large percentage of base-slab customers provided that a typical increasing block tariff (IBT) is adopted for the PPP scheme. KUIDFC’s proposed financing of the next Hubli-Dharwad project, may be the best approach in the short to medium term as in Table 2.

Table 2: Model Comparison

Hubli-Dharwal Ilkal Nagpur

Type PBMC or Operator Consultant

Construct+O&M or Contractor-cum-Operator

Concession

Detailed Engineering Design Yes No Yes Construction/Equipment No Yes Yes Construction Supervision Yes Yes Yes O&M Yes Yes Yes Technical Auditor’s Involvement

Yes Yes Yes

Bonus for Construction Yes Yes Yes Bonus for O&M Yes Yes Yes Capital Investment by Contractor

No No Yes

Contract Duration DED +Construction

+2 years

Construction +4 years

25 years

O&M = operation and maintenance, PBMC = performance-based management contract. 19. One of the issues common to all the various options was that current ULB staff were not willing to join the private service provider. Reasons cited included concerns about remuneration and benefits and long term security. The private sector in India is not known for its good treatment of labour. Though civil servants of the ULBs knew that there would be salary

15

increases, these were insufficient (10-15%) to make up for the loss of security. In India there is a “culture” of thinking that civil service jobs are the best. In Hubli-Dharwad the operating staff of Operator Consultant are seconded/on loan from ULB staff, but continue to be paid by the ULB.

4. Sustainability of 24/7 Projects

20. As confirmed by more than 3 years of successful operation in Hubli-Dharwad, 24/7 water supply is possible as long as the capital investments are provided as a grant from higher-level governments, and as long as the charges for the bulk water supply do not include either capital investments or electricity costs. In addition, the Operator Consultant is paid for his services through a contract with guaranteed payment without requiring him to make any capital investments or risk his own funds to support the O&M. This form of PSP is replicable in all areas. 21. In India, the urban sector has been provided with funding on a grant basis from higher-level governments for major capital investments, with no form of direct repayment. Similarly, subsidization of water board electricity costs is common for many states and has become ingrained in the “culture” of urban water supply projects. ULBs and their customers have become used to these subsidies and resist major tariff increases, which would be necessary if such subsidies are taken away. States are facing a major challenge to increase water tariffs to reduce ULBs’ reliance on these subsidies over time. The introduction of so-called telescopic tariff (or increasing block tariff) structures has enabled increase of the tariff for higher volume users substantially. However, low-income users, which make up more than 50% of household in most cities, tend to restrict their consumption to the base slab, the tariff for which is less than half the actual O&M cost. Also, middle-class customers tend to watch their consumption to minimize their water bills so that their average tariff is below sustainable levels. This leaves only a small percentage of high volume users paying the higher tariffs and this is insufficient to cross-subsidize the majority of water customers, forcing the ULB to subsidize O&M cost of water supply from general tax revenues. 22. These facts are well known to potential PPP investors; i.e., private sector companies who states would like to invest in the urban water supply sector. However, current tariff structures are not sustainable on a city-wide basis if the PPP operator has to recover electricity costs or if the concessionaire has to recover both his capital investment and electricity costs. This may explain the lack of interest by the private sector, except in wealthy or industrial areas where water tariffs are not really an issue. Private investors, however, would prefer to invest in bulk water supply and sewage treatment, usually under “take or pay” contracts as a condition. 23. The actual cost of providing water supply, including capital investments and electricity, is 200-300% higher than the current average tariffs in most states. This fact is becoming accepted by a growing number of administrations in India. In Mumbai and Delhi, the base tariff for ongoing/proposed 24/7 projects is in the range of Rs11/KL and Rs16/KL, respectively and those for higher volume users are more than double that. The Public Health and Engineering Department in Rajasthan has estimated that the cost of providing water from the Bisalpur

16

project is Rs24/KL, without capital investment cost recovery and only providing 2-4 hours of service per day.

5. KUIDFC Strategy for Financing and Implementation of Future Water Supply Projects

24. KUIDFC is processing a new project with World Bank financing to expand the 24/7 water supply demo in Hubli-Dharwad, Belgaum and Gulbarga, to all of the more than 150,000 customers in the 3 cities. However, unlike the ongoing project where 100% of the capital cost was provided as a grant from the State, the ULBs will have to contribute to the capital investments. This is in accordance with the 74thConstitutional Amendment which devolves responsibility for provision of basic urban services to the local government/ULB level. KUIDFC has developed a financial (and associated contractual)model that will require the ULBs to be responsible for a cumulative 50% of the capital investment over the longer term (30 years) as well as the full O&M costs. The model will provide substantial help to the ULBs in the short to medium term by providing the bulk of initial capital investments. KUIDFC expects this model to be in place for the long term (i.e., 2016-2046). A summary of the general financial model is as follows:

Table 3: Summary of General Financial Model

Name of the Plan State %

ULB% Years up to which Investment will take

place

Purpose of investment

Owner of the Asset

Initial Investment 70 30 4(Construct)+8(O&M) Ilkal Model

Build and Operate

ULB

Mid-term Investment Nil 100 After 12 years Update, refurbish and expand the system

ULB

O&M = operation and maintenance, ULB = urban local body.

(i) This formula will vary among the ULBs as per local requirements and constraints. For example, the actual share of initial capital investment for the proposed Hubli-Dharwad, Belgaum and Gulbarga project is planned to be 67% World Bank (WB) loan, 5% State/KUIDFC and 28% from the ULBs.;

(ii) ULB’s share will be raised with support from KUIDFC following a pool-based mechanism for funding.3KUIDFC will set up a special purpose vehicle (SPV) with a dedicated escrow account into which the ULB’s share of the loan repayments will accrue. KUIDFC will underwrite the ULB’s repayments, basically using the transfer payments as collateral. The ULB would use its tariff revenues, building/property tax and annual/regular budget allocation/transfers from the State Municipal Finance Commission as financial sources for repayments. Note: based on information from the ongoing Hubli-Dharwad project, the ULB expects

3 A generally understood definition of pool-based mechanism is “two or more donors jointly finance a program or

action on the basis of commonly-agreed objectives and reporting formats. The program would be managed by one of the donors or a third party.”

17

that the ULB’s share will all come from the State Municipal Finance Commission transfer payments (i.e., a portion of which would be diverted to repay the loan);

(iii) 100% of additional capital investment that will be/may be required after the initial 12-year period is expected to be raised by the ULB. After that much time, it should have improved its financial situation sufficiently to access funds on its own, assuming it adopts and implements the tariff/cost recovery strategy included in the project plan; and

(iv) Funding approval procedure in Karnataka would be as follows.

Figure 7: Funding Approval Procedure in Karnataka

25. KUIDFC is expecting that this financial model will encourage the ULBs to increase tariffs and property taxes to make the annual repayments on the loan that the ULB will need to take in order to meet its 30% share requirement of the capital investments. The terms of the loan are still to be determined by KUIDFC. The ULBs would have to agree to the implementation of the State’s tariff policies, with regular/annual increments to meet inflation and begin to accumulate funds to reduce their reliance on higher-level governments for provision of basic services. 26. For smaller ULBs, construction and O&M would follow the ongoing performance-based contractor-cum-operator (i.e., Ilkal) model although for five years after completion of construction, rather than the current four years’ O&M contract element. The ULB could then decide to renew or retender or take over operation by itself at the end of the six-years-and-half(18 months construction followed by five years of O&M) contract period. Larger ULBs could follow the same contractor-cum-operator model or the KUWASIP/Hubli-Dharwad PBMC (Operator Consultant) model, but with a 12-year (4 years of phased construction followed by 8 years of O&M) contract period. 27. While this option could be realistic, practical and sustainable for water supply, it still relies on subsidized capital investments, by tapping the transfer payments instead of providing straight grants from the state. This approach will ease the burden of capital investments for water supply for the state, but the use of the transfer payments to subsidize water services will take these funds away from other important investments the ULB should be making in other infrastructure, such as roads, wastewater management, solid waste management, parks and various other programs. Water services will be greatly improved but quite possibly at the expense of many other services. Therefore this approach may not be sensible or sustainable in

18

the longer term. Unless the ULBs do increase revenues from the water supply through tariffs, true sustainable water supply cannot be achieved.

III. CONCLUSIONS

28. In India, subsidization of urban water supply, regardless of the level of services (2-24 hours/day), is likely to continue for the foreseeable future unless ULBs start to accept that the real cost of supplying water services is substantially higher than their current tariffs as demonstrated by the Hyderabad example. The full/unsubsidized cost of water supply based on international data is in the range of Rs40-54/KL ($0.70-0.90/KL), depending on capacity, source, level of treatment required and extent of pumping required. In general, capital investments’ share is considered to be about 50% of that and O&M’s share is about 50%, which could vary depending on source, treatment and pumping requirements. With only a certain amount of annual budget available for water supply, policy makers just need to be cognizant that the speed of water supply service improvement is inversely related to the extent of subsidization for the capital investment. In other words, the affordability and the extent of wait for better services must be carefully balanced out. PHED Rajasthan’s estimate of Rs24/KL ($0.40) for O&M is in line with the international data as is Hyderabad’s tariff structure. There is a prevailing (false) belief that the cost of water supply in a developing country should be substantially lower than that in a developed country due to lower labour costs. However, in today’s capital-intensive construction industry and automated operating systems internationally, labour is only 10-12% of the total cost of constructing and operating a water system. On the other hand, electricity, chemical and other consumables are often more costly in a developing country, offsetting most if not all of any labour cost savings. 29. With respect to wastewater management, the need for subsidies is even higher, as the cost of wastewater disposal is generally 100-150% of the cost of water supply. This is particularly the case in developing countries where land for low-cost lagoon treatment is generally not available (with one prominent exception, which is Kolkata) and treatment has to be with mechanized systems which all require high power input. This is exacerbated by the fact that most ULBs in India only allow for a wastewater tariff of 20-60% of the water tariff. In addition, there is less “commitment” by residents and local governments to pay for wastewater management, as the benefits are not directly noticeable or known. Many sewage treatment plants are being constructed but many of them are not properly operated due to the reluctance of ULB councils to pay for the high electricity cost; e.g., Jaipur Municipal Corporation’s delay in renewing the Delawas O&M contract. 30. The cost of water supply will vary substantially from city to city depending on the number of users. Generally, there are economies of scale in water systems and the more connections the lower the cost per connection. Capital investment and O&M costs will also vary depending on water source, level of treatment, extent of pumping required and condition of existing infrastructure. ULBs should therefore be allowed to set their own tariffs, within the overall guidelines of the state water tariff policies. In the past when the state water boards constructed and operated most of the water systems, a “one tariff fits all” approach was justified. But now

19

that ULBs have more autonomy, they should be encouraged/required to set their own tariffs based on the actual cost of their own water supply system. This will also encourage good stewardship of new facilities as lower future rehabilitation costs would translate into lower tariff increases. A. Replicable Models

31. With respect to water supply, the introduction of private sector efficiencies through performance-based contracts both for construction and O&M, as described above, can bring major benefits for the customers, the ULBs and the states, and it is recommended that the various 24/7 demo projects be expanded to include the total areas of ULBs and then be replicated to ongoing and future projects. In the water supply sector, the Hubli-Dharwad model has proven success. While it does not yet have an operating history, the Ilkal model should be similar to the Hubli-Dharwad model. For majority of ULBs in India, these two models would be safe, partly because there will be an automatic opportunity for “course adjustment” at the end of initial contract. Other 24/7 demo projects in Jaipur, Mumbai and Delhi (Appendix 3) should be monitored and once confirmed as sustainable, could be replicated. 32. For ULBs to attract concessions, water tariffs have to be sufficiently high to cover the full cost of provision of water. However, in India, it would be difficult to charge the full cost due to affordability issues for low-income customers and also due to the lack of willingness to pay among higher-income customers. The concession would have to provide full coverage to low-income areas equally along with higher-income areas. If external financing were sought from ADB or the World Bank, recruitment/procurement of a concessionaire would have to be based on a transparent and competitive basis, with all related subsidies fully disclosed, with mechanism for handling possible future reductions of electricity or other subsidized inputs (Appendix 4). 33. With respect to wastewater management, the Mangalore and Surat approach to reuse sewage effluent involves either PPP or PSP and should be replicable in water-scarce areas with heavy industrial or irrigation water demand. The Jaipur construct-and-operate approach also works but may be problematic in terms of funding when renewing O&M contracts after ADB and the implementing agencies are no longer involved. 34. ULBs which are not yet ready for comprehensive service improvement may still wish to initiate bulk supply/treatment/transmission (as opposed to distribution/retailing) and/or green-field (as opposed to brown-field) development under Service Contract/Outsourcing/DBO/other significant PPP schemes (e.g., BOT/BOOT), which would be safer and more straightforward. Off-taker risks, however, must be mitigated properly for bulk supply schemes. Similarly, for sewage treatment plant (STP), which is a bulk treatment scheme, sufficient volume of sewage must reach the STP. These can be generalized as risks of creating idling bulk supply/treatment over-capacity, which was already mentioned by referring to “take or pay” contracts. (Paras 14 and 22) Such ULBs may also wish to consider contracting out specific scope of the operations (e.g., metering) to a private contractor.

20

35. As indicated, subsidies would continue to be required for the foreseeable future. Most ULBs in India consist of 40-60% low-income or poor households who cannot pay the full cost of provision of water and disposal of related wastewater. Regardless of the form of these subsidies, consideration should be given to clearly delineating these; i.e., making them fully transparent. A national water supply policy should be put in place, which can be adopted by states who do not yet have a specific policy in place. Both the national and state level policies should be implemented through an independent regulator to take urban water tariffs and the related subsidies out of the political arena. This would enable a long-term approach to rationalizing water tariffs to be put in place. The resulting stable financial aspects of the sector will make it possible to attract more private investors and enable state and local governments better able to adopt new models to improve water supply services. 36. Regardless of the model a state or ULB wants to implement, subsidies should be clearly addressed and incorporated in the financial planning. Transparent listing of electricity and other inherent subsidies are particularly important for concession-type PPPs, as subsidies from higher-level governments such as electricity and wages of seconded ULB staff should form a part of any agreement ensuring that the subsidies accrue to the end users, not to the private investor/operator. 37. Whichever water supply model is selected, 24/7 water supply service should be incorporated. There are major advantages with 24/7 as follows:

(i) long-term benefits to public health; (ii) reduced consumption and water savings, and major reductions in NRW; (iii) lower cost for low-volume/poor/low-income/slum customers; (iv) equitable charges based on metering; and (v) higher revenues.

38. All of these will eventually help attract more private sector investors. However, to get the full benefits of 24/7 service, the ULB does have to make major investment in replacement of most if not all street mains and service connections. B. General Recommendations

39. The following are general recommendations that states and ULBs may wish to consider for next updating of the water tariff structures and by-laws:

(i) Transparency is an essential element for the success of the overall tariff strategy. This will also help build confidence in the state authority on the part of both the ULBs and the customers. Given the sensitive nature of water tariffs, an extensive public process involving dialogue among the ULBs, state authority and the different categories of customers should be undertaken. This will go a long way

21

in increasing the acceptability of the eventual tariff policy, including regular increases to reflect inflation;

(ii) This transparency and interaction should include a gradual clarification as to the many obvious and hidden subsidies currently used to keep water tariffs at such a low level. Concurrently, educate the public that while such subsidies are necessary in the medium term, eventually as the levels of urban poverty decrease, tariffs will need to be adjusted upward to begin reducing the dependence on these subsidies;

(iii) In order to have financial and physical sustainability, the water charges from various uses should be set in such a way that they at least cover the operation and maintenance charges for providing service initially and a part of capital costs subsequently. These rates should be directly linked with the quality of service provided with a view to moving to 24/7 services over the medium term;

(iv) Tariff mechanism should also provide for addressing reliability (timeliness and quantity) of the service. New tariff mechanisms should reduce human involvement in measurement, billing and collection processes. Instead, automatic processes should be promoted. We suggest that, to begin with, performance benchmarks may be developed to measure the performance of the ULBs. Till such time performance benchmarks are defined properly, baselines developed and monitoring systems installed, tariffs should not be linked with the benchmarks. However, provision for linking the same should be made in the Tariff Regulations;

(v) The state and local politicians should also be educated and sensitized to the various subsidies currently inherent in water tariffs. As can be seen from this study, household tariffs are very low in most ULBs, but commercial and industrial tariffs are much higher. However, since 40-70% of water consumers in most major cities and larger ULBs in India are low income or poor, cross subsidization from high commercial and industrial tariffs is not enough to support the very low tariffs. While such practices are popular at election time, over charging of commercial and industrial establishments can lead to “tariff and tax revolt”, which leads the large water consumers to opt out from municipal water supply find alternate sources; and

(vi) There is a need for national urban water supply policy and framework that should be adopted by all states and ULBs, as a condition for any financial support. Concurrently, the various laws and regulations governing ULBs should be streamlined, which can be seen to facilitate involvement of private sector investors (to avoid the complicated legal steps in Nagpur). The state and local aspects of such a framework would include public awareness and meaningful interaction with stakeholders (rather than having decisions imposed from above).

40. The state and ULB framework for such a policy may be similar to the one adopted by Maharashtra and Mumbai, respectively, as shown below:

22

Figure 8

Figure 9

Appendix 1 23

Appendix 1: Analysis of the Hubli-Dharwad, Belgaum and Gulbarga 24/7 Water Supply Demonstration Project

A. Overview

1. In order to address the poor service improvements, despite major investments in bulk water supply, KUIDFC in consultation with the Hubli-Dharwad, Belgaum and Gulbarga ULBs, decided to implement a demo project with a total of 30,000 service connections under the KUWASIP project. Under this intervention, typical urban areas with a mix of low-income and middle-class residential and commercial customers were isolated in each of the three participating towns. The water mains, distribution system, service connections and meters were largely replaced in the demo areas. All the new pipes were HDPE installed with butt-welded joints for larger-than-200mm-diameter and electro-fusion for smaller pipes. The demo project was implemented by an Operator Consultant under a PBMC contract in order to address the various weaknesses of the conventional EPC approach including poor quality materials and quality of construction. The Operator Consultant knew he would be responsible for the O&M of the new system so that he had a strong stake in ensuring that the contractors of the new works met specifications and practised good quality control of new works. 2. The initial O&M contract element was for 2 years, after which the O&M contract was retendered for another 2 years. This second contract was won by the same Operator Consultant and the demo has been successfully operating for a total of 3 years. Many customers initially used much higher water volumes than anticipated due to poor quality internal house/building plumbing, which leaked badly. These customers had to upgrade their plumbing and in the interim would close the main valve for the piped water supply overnight and when not at home to reduce the internal leakage. The pilot area is mixed residential and small commercial customers, with 35% being low-income. Another problem that caused initial high consumption was those customers who did not receive a new connection or illegal connections, which did not get connected to the new meter. These kept leaking continuously for 24/7 which led to high consumption. The Operator Consultant was eventually able to replace the missed service connections and sort out all these start-up problems and within the first year of operation, the average consumption dropped as much as 20-30% in 24/7 water service demo areas. The overall NRW for the 24/7 demo zones have reduced from 54% before the project to 12% afterward. This has resulted in hundreds of tons of water conservation every day, reducing stress on local water resources and KUWSDB’s intake, pumping, treatment and storage facilities. 3. The operational criteria included in the contract for the performance-based payments for O&M include:

(i) Water quality control; water quality is guaranteed by KUWSDB but it is the responsibility of the Operator Consultant to test and monitor the quality, with emphasis on maintaining a minimum chlorine residual of 0.2 milligrams/liter, even in the outer edges of the demo area. The Operator Consultant tests for chlorine residual daily at random locations throughout the system. Should the chlorine

24 Appendix 1

residual fall below the prescribed level, the Operator Consultant has his own chlorine applicator which can add chlorine to the dedicated water supply main for the demo area;

(ii) Likewise the Operator Consultant must maintain a maximum and a minimum pressure throughout the systems. In Hubli, this requires the use of pressure reducing valves to allow for major elevation changes from the bulk water reservoir, and the establishment of a number of pressure zones controlled by the pressure reducing valves. Pressure is monitored by automated gauges located in each pressure zones and the records are kept on a computer. Any unusual drops in pressure would indicate a leak or perhaps a large valve or hydrant having been left open;

(iii) The various pressure zones are also monitored by system meters so that any unusual increase in flow can be checked and corrected immediately; and

(iv) The contract requires that the Operator Consultant provides 24/7 monitoring, including a dedicated complaint hot line for customers, and that these be responded to within 24 hours. Any resulting corrections or repairs must be completed as soon as possible but in any case within 5 days.

B. Benefits of 24/7 Water Supply

4. The above requirements ensures that the customers receive continuous good service, which in turn leads to trust in the customers that the water will be there when they turn on their taps, which eventually leads to elimination of the water storage and on-site pumping equipment, resulting in major reduction of consumption and major savings for the customers. The computerized records of the customer meters enables the operator to identify and respond to changes in consumption patterns at any connection; leakage in the house connection, leakage in the building plumbing, improper closure of household taps, illegal connections, dysfunctional meter or other problems. 5. Benefits of the 24/7 water supply services to customers include:

(i) Guaranteed water quality as constant pressure in the distribution system prevents contamination of the water from the surrounding ground (as is the case with intermittent supply), which prevents waterborne illnesses, and hence lowers public health costs;

(ii) Electricity savings since in-house pumps are not required. Customers often reported Rs 200/month in savings;

(iii) In-house storage is not required, thereby reducing water demand (unused stored water tends to be discarded/wasted);

(iv) Based on records kept by KUIDFC’s project implementation unit (PIU), school attendance improved over the 4 years when the 24/7 services have been in operation from 83% to 95%; and

(v) Improved quality of life especially for women and girls, who are usually tasked with getting up early in the morning to collect water during the 1-2 hours of

Appendix 1 25

intermittent supply. Consumption records indicate that peak consumption hours changed from 4-6 AM, to 7-10 AM after the 24/7 services. More opportunity for income generating activities and school attendance.

6. Benefits of the 24/7 water supply services for the bulk supply and the ULB include:

(i) 30% reduction in water consumption, less stress on bulk supply and KUWSDB facilities, extending life of current bulk water systems;

(ii) Major cost savings for the ULB as NRW dropped from 57% to 12%, which means that they save more than half the current bulk water cost;

(iii) Major improvements in cash flow for the ULB as the collections rose from 60% to more than 95%;

(iv) ULB will be able to increase tariffs thanks to the better water services, making system more sustainable;

(v) Enables expansion of the 24/7 demo areas to include entire urban areas of the three cities for a total of more than 140,000 connections, expanding the above benefits to all the residents, KUWSDB and the ULBs; and

(vi) Improved quality of life and public health for the residents, especially the 35% of low-income residents in the current 24/7 demo areas.

C. Financial Aspects of Hubli-Dharwad 24/7 Demo Project

7. The connections in the 24/7 demonstration zone were charged, based on meter readings, as agreed between the State, KUIDFC and the ULBs. KUIDFC set up subsidiary escrow accounts for each ULB to ensure that all revenues collected from the 24/7 connections/customers were credited to the water supply services accounts. The tariff structure is in Table 4 below:

Table 4: Tariff Structure

Customer Category

Volumetric Tariff approved by Hubli-Dharwad Municipal Corporation

Minimum Charge per connection

(Rs/month) Tariff block (KL/month)

Tariff rate

Domestic

Min Max (Rs/KL)

48 0 8 6 8 25 8 25 40 12

Above 40 20 Non-Domestic 0 25 16

128 25 40 24 Above 40 40

Commercial/ Industrial

0 25 32 256 25 40 48

Above 40 80 Rs = Indian Rupees.

26 Appendix 1

8. The Operator Consultant reads the meters and issues the monthly water bills, but the ULBs collect the payments through collection centers conveniently located in the cities. Currently, the collection efficiency is 95%, but the ULBs do have a mechanism to disconnect non-paying customers, fine them and charge them to be reconnected, the cost of which is quite high. Only a few connections have had to be disconnected so far. These tariff revenues are paid into a subsidiary escrow account for each city, and from there are transferred to a central escrow account for KUIDFC. KUIDFC then pays the Operator Consultant for the O&M and KUWSDB for the bulk water every 6 months subject to meeting the various operating criteria delineated in the contract. The collection and payment process is summarized in the Figure 10 below.

Figure 10: Summary of Collection and Payment Process

9. KUIDFC buys the bulk water for the 24/7 demo zone for Rs3.46/KL from KUWSDB and pays KUWSDB from the escrow account. KUIDFC then reimburses the Operator Consultant based on his contract, and retains any excess in the central escrow account. Note: under current tariff structure there are no “profits”. But if and as tariffs increase, and subject to future contract conditions, there could be additional revenues which could be used to fund future improvements and expansion projects. The Operator Consultant did indicate that there often were delays in his payments from KUIDFC. 10. While the Hubli-Dharwad 24/7 demo water supply project can be considered a success from the operational point of view, has obvious benefits to the customers, and seems sustainable from the ULBs’ perspective in the sense that the tariff collected raise sufficient revenue to pay the Operator Consultant and KUWSDB, the demo project is in fact heavily subsidized as follows:

Appendix 1 27

(i) The cost of the capital investments in the demo areas was provided as a100%

grant from the State through KUIDFC. There is no repayment requirement; (ii) The cost of the various bulk water facilities developed by KUWSDB, including

raw water intake, raw water pumping, water treatment plant, clear well storage and pumping and elevated reservoirs were also funded by the state, and KUWSDB does not include the capital costs for these facilities in its bulk water charges to the demo project; and

(iii) The cost of the electricity to pump and operate the water treatment plant is not included in the bulk water charges as this is paid by the State Municipal Finance Commission. Electricity constitutes 60-70% of the cost of operation and maintenance of bulk water systems. The demo project is being charged for less than half of KUWSDB’s actual cost to produce the water.

28 Appendix 2

Appendix 2: Hyderabad Tariff Structure for Commercial and Industrial Consumers

Appendix 2 29

30 Appendix 2

Appendix 3 31

Appendix 3: Delhi Jal Board Three PPPs At-a-Glance (Preliminary)

Nangloi Malviya Nagar Mehrauli & Vasant Vihar

1 Short title of the project Improvement and revamping of the existing water supply system

Efficient water distribution in Malviya Nagar UGR command area

Improving service in Mehrauli and Vasant Vihar

2 Work required Civil constn + O&M Rehab of Bawana raw water feeder, automation of WTP, etc.

O&M (+ construction of an underground reservoir, a pump station and pipeline rehabilitation)

Mehrauli O&M;Vasant Vihar O&M

3 Selected Bidder/ Confirming Party

Veolia Veolia HaGihon (Israel)

4 Main company of the consortium

Veolia Water Services India Suez (subsidiary of Veolia) HaGihon (Israel)

5 Indian partner Nangloi Water Services India P. Ltd. (Veolia + SWACH)

Malviya Nagar Water Services P. Ltd. (Suez + SPML)

MVV Water Utility P. Ltd. (HaGihon + SPML + Tahal)

6 Registration date of Indian Partner

4-Feb-2013 19-Sep-2012 4-Sep-2012

7 LOA issued on 18-Jan-2013 13-Aug-2012 6-Sep-20128 Contract signed on 28-Mar-2013 ?-Oct-2012 12-Sep-20129 Target area Nangloi, Najafgarh-A,

Najafgarh-B, Mohan Garden, Mundka, (450 colonies and 23 villages)

Malviya Ngr UGR command area

IIT, Qutub M, Aurobindo Marg, Chhatarpur. Rai Pithora Qila, etc.

Target area size (sq. km) 14Target area population 1,072,000 300,000 Target area population density (persons per ha)

214

10 Contract duration 15 years 12 years Mehrauli 8 year;Vasant Vihar 10 years

11 Contract value Rs. 687.92 cr. (Rs. 458.38 cr. for civil constn + road constn)

Rs. 347.45 cr. Rs. 201 cr. for service improvement

12 Project cost Rs. 171.62 cr. incl. Rs. 83.04 for road constn

Mehrauli: Rs. 74.90 cr./Vst Vhr: Rs. 27.46 cr.Total: Rs. 102.36 cr. (incl. road const)

13 Contract to be properly functional

3 years from the appointed date

24 months from appointed date (within 3 months of the Agreement)

24 months from appointed date (within 3 months of the Agreement)

14 Provision for termination of contract

Yes, for reasons beyond control

Yes, for reasons beyond control

Yes, for reasons beyond control

15 Failure to achieve benchmarks

Penalty - No termination of contract

Penalty - No termination of contract

Penalty - No termination of contract

16 Any reward for performance?

Incentives for1. reducing NRW,2. efficient billing and recovery,3. achieving benchmarks

Incentives for1. reducing NRW,2. efficient billing and recovery,3. achieving benchmarks

Incentives for1. reducing NRW,2. efficient billing and recovery,3. achieving benchmarks

17 Responsibility (financial - DJB)

70% investment as grant to the company

70% investment as grant to the company

100% cost for Rehab and Development in Mehrauli segment

DJB Water Distribution Service: Three PPPs At a Glance

PPP Project

32 Appendix 3

Nangloi Malviya Nagar Mehrauli & Vasant Vihar

18 Responsibility (financial - company)

30% investment 30% investment Nil

19 Responsibility (other - DJB) to bear the cost of energy and raw water. Energy cost inflation-adjusted

to bear for first 2 yrs cost of energy and raw water. Energy base charge Rs. 5.25 (inflation-adjusted)

to bear for first 2 yrs cost of energy and raw water. Energy base charge Rs. 5.25 (inflation-adjusted)

20 Responsibility (other - company)

Civil construction material, road construction, chemicals

Chemicals, establishment and DJB assigned staff cost.

Chemicals, establishment and DJB assigned staff cost.

21 DJB Assigned employees Total 106, including 2 EEs, 6 AEs, 6 JEs

Total 30, including 1 EE, 2 AEs, 2 JEs

Total 30, including 1 EE, 2 AEs, 2 JEs

22 Grievance mechanism 24X7 Call Centre. 'no water'/ 'water quality' immediately

24X7 Call Centre. 'no water'/ 'water quality' immediately

24X7 Call Centre. 'no water'/ 'water quality' immediately

23 Average cost of water distribution DJB

Rs. 4.86/KL Rs. 8.54/KL Not shown

24 Base Rate as per bidding proposal

Rs. 15.35/KL Rs. 10.94/KL Rs. 4.11/KL + Management Fee

25 Contracted NOR (Net Operator Rate)

Rs. 14.97/KL Rs. 10.64/KL Rs.4.11/KL + Management Fee (not based on NOR)

26 Gross Operator Rate (GOR) Based on NOR (Raw water free for the contract period)

Direct Payment by DJB (Raw water Rs. 1/KL to be deducted after first two years from Operator Remuneration)

Direct Payment by DJB (Raw water Rs. 1/KL to be deducted after first two years from Operator Remuneration)

27 Management Fee, if any No No Rs. 4.11/KL billed plus Management fee: Rs. 46.94 cr. (Mehrl) and Rs. 1.1 cr. (Vst. Vhr)

28 Per capita water supply 48-151/LPCD 286/LPCD 150-200/LPCDExisting water connections 81,000 32,000 Existing water supply duration

3-8 hours per day

29 Existing Metering of water connections

31% (49%?) of the potential of the area

41% Unclear

30 Bill collection efficiency 22% 81% Details not available31 Non-Revenue Water (NRW) 79% 65-70% 38%

32 Managing Tubewells O&M by DJB till phased out by the Operator

O&M by DJB till phased out by the Operator

O&M by DJB till phased out by the Operator

33 Owner of the assets DJB DJB DJB34 Escalating of Contract/ Cost

possible?Yes - mutual understanding or other reasons - price escalation, etc.

Yes - mutual understanding or other reasons - price escalation, etc.

Yes - mutual understanding or other reasons - price escalation, etc.

PPP Project

DJB Water Distribution Service: Three PPPs At a Glance

Appendix 4 33

Appendix 4: Electricity Cost for Water Supply Operations

Proportion of electricity cost for overall municipal water supply operations (including bulk supply and distribution) varies widely from municipality to municipality depending on its topography, distance from raw water source(s), etc. Where water is provided by gravity flow, as in Pune, Nasik, Varanasi and Kolkata, power costs are relatively low. On the other hand, in cities like Hyderabad, Bangalore and Indore, a considerable amount of electricity consumption is involved (for pumping). Hence, proportion of electricity cost is much higher for these cities.

Structure of Costs for Water Supply Operations (% of Total Cost) 1995/96

Cost Item Agra Allahabad

Bangalore Pune Vadodara Establishment Cost 50.2 65.

7 17.7 22.1 18.0

Electricity 18.8 4.0

56.9 44.6 20.4 Chemicals 13.7 10.

4 - 2.2 -

General Repairs 4.3 8.5

7.8 10.0 29.8 Raw Water - - - 16.4 - Interest Payments - - 17.6 4.6 31.4 Others 13.1 11.

3 - - 0.4

Total 100.0 100.0

100.0 100.0 100.0

Structure of Costs for Water Supply Operations (% of Total Cost)

1999/00

Structure Agra Allahabad Bangalore Pune Vadodara Establishment Cost 48.6 78.7 20.1 19.0 24.2 Electricity 14.8 1.2 59.5 47.8 48.5 Chemicals 19.5 4.5 - 1.9 - General Repairs 2.3 9.6 7.6 8.8 13.9 Raw Water - - - 16.3 - Interest Payments - - 12.8 6.2 13.3 Others 14.9 6.1 - - 0.1 Total 100.0 100.0 100.0 100.0 100.0

Current Handling of Electric Tariff for Water Supply Operations

Heads Bangalore

Hyderabad Indore Power Tariff (subsidized or paid) Full Recovery Full Recovery Full Recovery Unit Rate of Electricity (per kWh) Rs.3.80 Rs.5.87 Rs.3.71 Annual Cost of Electricity Rs.360 cr Rs.660 cr Rs.80 cr Total Revenue from Water Services

Rs.480 cr Rs.756 cr Rs.90 cr