PPPs in Urban Sector

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PPPs in Urban Sector

• September 2006

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Why do we need PPP in the urban sector?
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1. The financing gap
Excludes investment needs for a) housing for
urban poor and b)urban transport. Investment
needs equate to approximately 50 of current
combined capital investment of Central and State
Governments.
Source Financing municipalities and sub-national
Governments in India, Jt Secy, MOUD
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The magnitude of challenge is immense
Required Investment Rs 6700 Crores
Investment requirements for water supply and
underground drainage for 128 towns with total
population of 1.1 Crores
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2. Skill and strength gap
Sample of towns with a population of above 1
lakh in a State. Only gaps in key functions are
summarised.
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Many technologies are new to local bodies
Sewage treatment plants
lt 25
Solid waste disposal
lt 10
Less than 25 of the towns in the sample state
have sewage treatment plants. Less than 10 of
the towns have scientific facilities for solid
waste disposal. As a result these towns are not
familiar with these technologies.
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3. Accountability gap
Combined revenue efficiency of 43
Data from a sample town of population around 9
lakhs. Most of the legal connections are metered.
The actual percentage of functioning meters is
not known.
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What are the appropriate forms of PPP for the
urban sector?
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In which areas are these applicable
Limited in local body context (80 of current
revenues are in taxes and grants) Urban
transport Service to institutional, commercial
areas
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Example Water Treatment
A 10 year Design Build Operate Contract The
operator is paid in full for successful
construction Operator undertakes to supply
treated water for ten years at firm price The
operator is selected based on lowest life cycle
cost
Bulk water provided by local body
630 mld water treatment plant
Provides Treated water
Is paid O M fee
Local Body
Supplies water to citizens Through existing
network
Citizens
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Example Roads Sector
5 Lakh population Project Cost Rs. 400
Crores Developer responsible for toll
collection at city entry points Potential
recovery Rs. 280 Crores Petrol cess to be passed
on to Developer Rs 30 Crores Upfront
viability gap funding of Rs 100 Crores by local
body 8 10 year project duration
Financing and accountability solution
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Examples Road sector

• 13 Lakh population
• Local body is strong in financials
• Project cost of Rs 800 crores
• Implemented under annuity model
• Project duration of 9 years

Accountability solution
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Example Water distribution
Local Body
Supplies bulk water and regulates retail price
Private sector
Provides Water and sewerage services
Recovers investment through user charges
Commercial customers
Location Salt Lake sector V in Kolkata,
Selection process ongoing
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PPP in Urban Sector

• The need is immediate
• Several variants are possible
• Several projects are already underway
• Scaling up depends on local body revenue growth

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The importance of revenue growth
Revenues need to double to sustain investments
Current Financial position
Projected financial position after investments
Additional O M
Regular expenses
Regular expenses
Surplus
Servicing commercial debt
Sample date from state level, multi town water
and sanitation initiative
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Key initiatives required on revenue improvement

• Reforming property tax
• Less than 50 revenue efficiency at present
• Water charge policy
• Only one third O M recovery at present
• No model for financing capital investments at
  local body level
• Sewerage and solid waste
• Introducing cost recovery

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Summary PPP in urban sector

• PPPs are needed and are possible
• Still early days for private sector to take cost
  recovery risk
• PPPs can still deliver substantial improvement in
  performance and accountability
• Sluggishness in revenue growth can constrain
  scaling up of PPPs

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