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It Takes Two To Tango – The failure of Public-private partnerships

- partnerships are the trend. But the jury’s out on their success

Moyna

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Public-private partnerships () are touted as the answer to increasing infrastructure access — be it roads or piped water. However, project proponents are struggling with red-tapism and public ire, especially when it comes to water.

In 2011, Arun Lakhani, chairman and managing director of Vishvaraj Infrastructure, and the Nagpur Municipal Corporation set up a joint venture called Orange City Water. The goal: improve the quality and supply of water to Nagpur.

The orange city had been toying with the idea of privatising water supply for almost a decade before the project actually took off. The demand-supply gap was increasing, and was projected to rise to 464 million litres per day by 2031. Also, the feeling was that the municipality would not be able to improve the water supply infrastructure on its own.

A couple of years down the line, the jury is still out on whether Orange City Water is a success. Lakhani, though, believes his firm has done great work, given the problems and infrastructure he inherited. Critics feel Orange City Water has been a disappointment, not keeping either its 24-hour water supply commitment or improving quality, despite having hiked the charges significantly.

“There are some issues. They are bound to crop up in a project dealing with a commodity as political as water. But we believe that in just a year, we have decreased inefficiencies in the municipal corporation’s systems,” counters Lakhani. On the other hand, Nagpur Congress District Committee president Jaiprakash Gupta says, “People have been cheated. The company has made ridiculous mistakes. For instance, it started supply from a tank without cleaning it first, with the result that some 20 sacks of rubbish left in the tank found its way into the pipeline, stopping water supply for 15 days.”

The Nagpur Municipal Corporation, Lakhani’s partner, admits that there are problems but says things have improved. According to the chief engineer, Water Supply Department, of the corporation, “The problems being faced are just initial hiccups and also problems that the corporation transferred to the private company.”

There are about a dozen projects that can be dubbed PPP projects in the water sector across the country, though only a couple of them are actually operational. The operational projects include the Nagpur city project as well as the one that supplies fluoride-free water to seven districts of Karnataka.  There are others (see Joint Initiative) in various stages of implementation.  Not all can be termed pureplay PPPs as some are essentially management contracts where the private partner simply tries to bring in efficiency as a contractor.

And, as with almost any project in India, PPP projects in the water sector have both trenchant critics as well as die-hard supporters. The supporters say PPPs are the only way forward if India is to meet its water demand. PPP models envisage charging for water, disconnecting free connections and reducing wastage. On the other hand, critics claim that while some marginal improvements do take place under PPP, essentially the private partner just uses the venture to make money.

Watering Revenues
The PPP model was first mooted when it was realised that most of the water supplied in the country was unaccounted for. The end beneficiary was not known and, hence, the water supplied failed to generate revenues. In small cities and towns, the situation is worse — with as much as 70 per cent of the water being classified as non-revenue generating.

Highlighting the other problem areas, Lakhani says, “We spend crores on asset creation but forget about operation and maintenance.” For example, Nagpur’s population is close to 5 lakh, but only 3.5 lakh houses own a metered connection, half of which are non-operational.

“The negative cycle of inefficient systems, leading to revenue and water loss and resulting in non-upgradation and maintenance of the water supply infrastructure needs to be broken,” insists Lakhani. He believes that since change in water tariff is politically motivated, sustainable use of water can be achieved only by reducing non-revenue water to 25 per cent. “The international norm is around 15 per cent, but in our country, given the social, cultural and political influences, 25 per cent is a reasonable target.”

Srinivas Chary, director,Centre for Energy, Environment and Urban Governance, Administrative Staff College of India, instrumental in carrying out the first analysis of supply and availability of water in Nagpur, says the PPP project saves the municipal corporation close to Rs 75 crore annually. Till a year ago, of the 640 million litres supplied every day, only 160 million litres was accounted for. Today, it has gone up to 210 million litres. The project has helped reduce contamination and loss and improved billing and returns for the government, he says.

Chary also believes it is easy to iron out creases in the system by including people in the structural set-ups, unlike what happens in the name of PPP projects in India. “Ownership and the right to fix tariff remain with the government, and the private sector’s role is more of operations and maintenance.”

A Quick Fix
There are PPP projects that have achieved more within a year of their inception than a city or state administration has in decades. For instance, potable water has become a reality for the residents of seven districts in Karnataka — a huge change from the fluoride-contaminated water available to them until two years ago.

“Over 30 per cent of the people of the selected districts were consuming non-potable or chemically contaminated water. The fluoride content was more than five times the permissible limit, making the water unsuitable for drinking,” says G.R. Chintala, chief general manager, NABARD.

MESSAGE IN A BOOTLE
Inarguably, those who spotted the business opportunity in water — the bottled water and purifier companies — are reaping benefits. Bottled water entered the Indian market back in 1995-96 and is considered one of the fastest growing sectors. From multi-national brands like Kinley (Coca-Cola) and Aquafina (PepsiCo) to the domestic Bisleris and Kingfishers, the players have only been increasing in number. The thriving market has even spurred government agencies like the Railways to enter the sector — Rail Neer. As of 2014, there are over 200 known brands. The size of the packaged water industry is expected to touch Rs 15,000 crore by 2017, growing at an average of 19 per cent annually. Individual water purification systems have also grown exponentially, with a market study suggesting a growth of 229 per cent between 2012 and 2017. What started over 15 years ago with Eureka Forbes’s Aquaguard, has now burgeoned into a market with around a dozen brands. Today, in this segment, entry-level purifiers are available for as low as Rs 499, while high-end products sell for over Rs 40,000.
The situation has improved immensely after Hyderabad-based SMAAT India and the Karnataka’s Rural Development and Panchayat Raj (RDPR) Department came together to supply potable water. SMAAT India received Rs 6.3 crore from NABARD for 10 years, at the end of which it will hand over the project to the RDPR. As per the contract, it will get 20 paise per litre of water sold for the first three years, 30 paise for the next three years and 40 paise in the last four years of the project.

Striking A Balance
According to industry experts, political problems need to be sorted out for PPP ventures in water supply to succeed. Girija Bharat, fellow, Water Resources, at The Energy Resources Institute, believes that political ambitions and uncertainty hurt the private sector and consumers. “Stable governments are an absolute must for private participation to work.” The only way to move forward is through building consensus at the community level while resolving tariff concerns at the policy level, she says. “The need for treated water is greater than any other in parts of our country, but the mindset of the population unwilling to pay for water will always be a hindrance,” she adds.

For city- or town-level projects, the biggest hurdle is return on investment, say industry players. “Unless the price of water, which covers operation and maintenance, (O&M) plus investment by the developer, is accounted for, no project is viable,” says Ranen Banerjee, partner, PwC. He believes guaranteed offtake and building of investor confidence will increase private participation.

Jaijit Bhattacharya, partner, KPMG India, believes bringing in private participation will help in attracting the required capital as well as state of the art water supply management practices. “However, the option has to be exercised on a case-to-case basis,” he says, adding that the sector needs to be made financially viable. “Financial viability can be brought in by (a) increasing water charges,  (b) providing viability gap funding for one-time capital, (c) providing viability gap funding for operations, and (d) a combination of the above three. Given that water is a sensitive issue, any mechanism adopted has to be crafted with care and due diligence, with active participation of relevant stakeholders and also, perhaps, by including the stakeholders in the final solution by making them co-responsible for water supply.”

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(This story was published in BW | Businessworld Issue Dated 28-07-2014)

– See more at: http://www.businessworld.in/news/corporate/it-takes-two-to-tango-1/1435038/page-0.html#sthash.I1dpgzu7.dpuf

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