VIABILITY GAP FUNDING

A Case Study in

Kolhapur, Maharashtra

Hon’ble Municipal Commissioner, Kolhapur

NJS Engineers India Pvt. Ltd

kolhapur

South-west part of Maharashtra

Area: 66.82Sq.Km

Projected Population

549283 (Census 2011) 601360 (Year 2015)

805991 (Year 2030) 1029967 (Year 2045)

Historic city and named as “Dakshin Kashi” and bears ancient heritage

Centre of the great Maratha Kingdom ruled by Chatrapati Shahu Maharaj- an architect

and founder of modern Kolhapur

Is famous tourist place and has moderate climate, fertile soil, ample amount of water

leading to flourishing agriculture and allied business, industries and cooperative sector

Attracts over 30 Lakhs of tourists every year

Well known for Jaggery, leather goods, Shoes, Jewelry and promoting Culture

Industries are thriving in areas like Shivaji Udyamnagar, Shiroli MIDC, Gokul

Shirgaon MIDC Kagal (five star MIDC)

Existing Water Supply Schemes (Total 119MLD)

◦ Balinga water works : 43 MLD

◦ Bavada water works : 20 MLD

◦ Kalamba Water Works : 06 MLD

◦ Puikhadi Water Works : 50 MLD

Augmentation of water supply scheme (230MLD) by Kalammawadi direct Water Supply

scheme is recently approved and is at tendering stage

Water Demand Projected Population

◦ Year 2015 : 130 MLD (601360)

◦ Year 2030 : 180 MLD (805991)

◦ Year 2045 : 230 MLD (1029967)

Sewage Treatment

◦ Dhudhali sewerage Zone

17MLD STP under tendering stage on PPP Model

◦ Jayanti Nalla, Line Bazar and Bapat Camp Sewerage Zones

76 MLD STP under implementation on PPP model

45 MLD Primary treatment plant is functioning

Partial/untreated sewage is being presently disposed into the

Panchganga River

Pollution levels have crossed allowable limits - reports of dead fish

and epidemic breakout in past

Pollution Control Board (MPCB) issued notice and filed criminal case

against Kolhapur Municipal Corporation (KMC) for not controlling the

quality of sewage discharged into the river

76 MLD Capacity STP for treating flows from Jayanti Nalla, Line

Bazar and Bapat Camp Sewerage Zones is under implementation for

which grant from National River Conservation Directorate

Another 17 MLD capacity STP is approved under Maharashtra

Suvarna Jayanti Nagorathan Maha Abhiyan (MSJNMA) to treat the

sewage collected in the Dudhali nallah basin

KMC’s revenue surplus

averaged Rs. 15 crores

Project Cost was estimated to

be Rs. 75 crores for 76MLD

STP and Rs. 23 crores for

17MLD STP

KMC had a number of critical

projects on ground e.g.

Roads, Slum Housing, water

supply, etc.

6

KMC Financial Snapshot (Rs. Crores)

VGF enabled KMC to implement the project without causing stress to its

financials.

96

109

130

117

122

81

93 93

98

111

2004-05 2005-06 2006-07 2007-08 2008-09

Revenue Income Revenue Expenses

Source: KMC and Crisil Analysis

KMC decided to use Public Private Partnerships to fund the balance of the Project Cost.

7

100%

50% 50%

Project cost MSJNMA ???

17 MLD STP Dudhali

100%70%

30%

Project

cost

NRCD Grant ???

76 MLD STP

Kasba Bawda

OPTIONS for Government:

Implement a project conventionally, funded ex-budget

or with loans against Govt. guarantee;

OR

Implement project as a PPP

Asset Ownership : Public

Operation and Maintenance : Private

Capital Investment : Public + Private

Commercial Risk : Private

Concession period : 2 yrs implementation

13 yrs O&M

During O&M fixed and variable payments to private

concessionaire

12

AnnuityCapital

Grant

Performance

standards

for operating

STP

The above three clauses were designed to align Developer and KMC

interests.

Kolhapur Municipal Corporation

◦ Provide land free of cost to the successful bidder for construction of the STP and Pumping stations

◦ Provide right of way for laying pipelines to carry the sewage from pumping stations

◦ Assist in obtaining necessary approvals for the project

◦ Provide predefined contribution on the project cost

◦ Transport sewage generated in the city to the identified pumping stations

Private Developer

Obligations

◦ Design, Finance, Construct, Operate and Maintain of STP

◦ Construct I&D structures, pumping stations and rising mains in catchment area

◦ Meet specified treated water quality norms during the O&M period

Rights

◦ Allowed 15 years of concession period including 2 years of construction period

◦ Generate revenue from use/sale of the treated water and other material obtained during the treatment of the sewage

KMC and VISPL entered into the concession agreement on 4th

November 2010

Cost distribution

◦ Contribution from KMC : 39.9 Crs

◦ Contribution by VISPL : 17.1 Crs

◦ Total Project cost : 57 Crs.

Project Management Consultants

◦ NJS Engineers India Pvt. Ltd.

Payment of treatment charges :-

The treatment charges shall comprise of

1. Fixed charges

2. Variable charges

1. Fixed Charges :-

A. The non escalable fixed rate Rs.34,00,000/- P.A.

B. The escalable fixed rate Rs. 32,50,000/- P.A.

Non escalable fixed charge is a payment towards

capital cost.

Escalable fixed charge is a payment towards fixed

operation costs (Manpower & Maintenance) & shall

escalate at the rate of 6% per annum

2. Variable charges :-

Compensates the concessionaire for the electricity and consumable

cost incurred in treating sewage

Variable charges is fixed rate of Rs.1411.80 per Million Ltr of

treated sewage for the first year. It comprises of cost for

Electricity cost (80% weightage)

Chemical consumption cost (20% weightage)

The quantum of variable charge payable to concessionaire will vary

with the volume of sewage treated

Variable charge to be revised annually on 1st Apr

Particulars

Year

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Total

Revenue

Capital contribution by KMC

(70% 0f 57Cr) 12.0 27.9 39.9

Variable charge payment (@

0.01412/Ml)

3.4 3.5 3.7 3.9 4.2 4.4 4.6 4.9 5.2 5.4 5.7 6.0 6.3 61.2

Fixed Charge- Non escalable 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 4.4

Fixed Charge_Escalable 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.6 0.7 6.1

Profit on Selling treated water

(considered as Rs 3 per cum

upper limit of 10mld)

Escalated @6%

1.1 1.2 1.2 1.3 1.4 1.5 1.6 1.6 1.7 1.8 2.0 2.1 2.2

Profit from construction

(assumed @12%) 2.1 4.8

Expenditure

Capital investment (57Cr)

quoted by bidder (17.1) (39.9) (57.0)

O&M cost (Variable charge

Pmt+Fixed Charge Escalable) (3.7) (3.9) (4.1) (4.3) (4.6) (4.8) (5.1) (5.4) (5.7) (6.0) (6.3) (6.7) (6.9)

Cash flow (3.1) (7.2) 1.4 1.5 1.6 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 14.8

IRR 13.4

%

All numbers are INR Crores

Positive cash flow for the concessionaire begins after 7.5 years

CASH FLOW AND IRR STATEMENT

KMC and LCES entered into the concession agreement on

Capital Cost distribution

◦ Contribution from KMC : 10.75 Crs

◦ Contribution by LCES : 10.75 Crs

◦ Total Project cost : 21.5 Crs.

Project Management Consultants

◦ NJS Engineers India Pvt. Ltd.

Payment of treatment charges :-

The treatment charges shall comprise of

1. Fixed charges

2. Variable charges

1. Fixed Charges :-

A. The non-escalable fixed rate is Rs.1,75,000/- per year

B. The escalable fixed rate Rs. 60,00,000/- for first year

Non escalable fixed charge is a payment towards

capital cost.

Escalable fixed charge is a payment towards fixed

operation costs (Manpower & Maintenance) & shall

escalate at the rate of 6% per annum

2. Variable charges :-

Compensates the concessionaire for the electricity and consumable

cost incurred in treating sewage

Variable charges is fixed rate of Rs.1590 per Million Liter of

treated sewage for the first year. It comprises of cost for

Electricity cost (80% weightage)

Chemical consumption cost (20% weightage)

The quantum of variable charge payable to concessionaire will

vary with the volume of sewage treated

Variable charge to be revised annually on 1st Apr

Particulars

Year

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total

Revenue

Capital contribution by

KMC (50% 0f 21.5Cr)322.5 752.5 1075.0

Variable charge

payment (@0.0159/Ml)98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.7 1282.6

Fixed Charge- Non

escalable175.0 175.0 175.0 175.0 175.0 175.0 175.0 175.0 175.0 175.0 175.0 175.0 175.0 2275.0

Fixed

Charge_Escalable(6%60.0 63.6 67.4 71.5 75.7 80.3 85.1 90.2 95.6 101.4 107.5 113.9 120.7 1132.9

Profit on Selling

treated water

(considered as Rs 3

per cum upper limit of

5mld) Escalated @6%

54.8 54.8 54.8 54.8 54.8 54.8 54.8 54.8 54.8 54.8 54.8 54.8 657.0

Profit from construction

(assumed @10%)64.5 150.5 ` 215.0

Expenditure

Capital cost quoted by

contractor-645.0 -1505.0 -2150.0

O&M cost (Variable

charge Pmt+Fixed

Charge Escalable)

-273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -273.7 -3557.6

Cash flow -258.0 -602.0 60.0 118.4 122.2 126.2 130.5 135.0 139.9 145.0 150.4 156.1 162.2 168.6 175.5

Cummulative cashflow -258.0 -860.0 -800.0 -681.7 -559.5 -433.3 -302.8 -167.7 -27.9 117.1 267.5 423.6 585.8 754.4 929.9

IRR 10.48%

All numbers are INR in Lakhs

Cashflow becomes positive only in the 10th year of contract

• Viability Gap Funding is feasible option for public infrastructure

projects with potential for long term high economic returns but

immediate low financial returns

• It is typically provided for competitive bid projects which are

implemented on PPP mode

• Current projects under SUCCESSFUL implementation on PPP in

Kolhapur:

– 76 MLD STP at Kasba Bawda

– 17 MLD STP at Dudhali

THANK YOU