Study on Models for Water Supply Service Improvement

Projects for Indian Cities

Findings and Recommendations

Water CoP Catchment Series

8 May 2014

Keiichi Tamaki

SAUW/SARD

Typical Spaghetti Connections Supply is intermittent, if at all, and water quality is questionable…

Metered 24/7 Supply (Example of low-income household connections under World Bank-Funded KUWASIP 24/7 Pilot)

But there is an issue of “lucky few” vs the rest…

Is the Ground Reality Any different Now and 10 Years Ago?

• Water Supply Services are at the Bottom of Downward Spiral

Poor Services Limited Willingness to Pay even the current

low tariff (as a result of government’s lack of Willingness to Charge realistic sustainable tariff) Insufficient Revenues Insufficient Investments and O&M Poor Services

• Water Utility/Department Staff in Small ULBs Receive Only Low Salaries (relative to market rates for similar professionals in the private sector)

Little motivation to do the job right to satisfy customers by delivering the services they want

• Heavy Reliance on Large Consultancy Contracts and Large Civil Works Contracts

In-house capacity has yet to be built up

Precedents in India • KUWASIP Pilot

24/7 Operator Consultant, or a Performance-Based Management Contract (PBMC; original contract completed with 2-year O&M; WB)

• Ilkal Construct+O&M with performance-based bonuses for 4-year O&M

Small town of about 10,000 connections under NKUSIP (contract ongoing; ADB) No “Sequencing of Improvements” issue

• Bisalpur Jaipur Water Supply Project (BJWSP) [Bulk Supply]

O&M added to bulk water transmission CW (“stretching” defect liability period to hold contractor accountable longer for 3-year O&M)

• Jaipur STP Construct+O&M at Delawas [Bulk Treatment]

Risk of failure to do proper O&M after the expiration of contract

• Mangalore O&M of 3 STPs [Bulk Treatment]

Construction of effluent conveyance system and tertiary STP, and 70% O&M

• Nagpur Concession

25-year contract (electricity and raw water costs are subsidized)

• Malkapur

More information needed

• Tirupur BOOT (primarily industrial)

Precedents in India

Overall Assessment • Capacities of ULBs widely differ – from Municipal

Corporation of Greater Mumbai (MCGC), which has been operating well (like ordinary developed country water utility), to small ULBs, which have no practical capacity (and poor facilities) for modern water supply services

• Some metropolitan water utilities employ professional staff on contract basis (including experienced retired staff), which could be seen as a small civil service reform

• Many water utilities appear to be not ready for significant large-scale, long-term PPP contracts (in particular for immediate future)

• While services must be improved first to reverse vicious circle, proper cost recovery (e.g., tariff reform, tariff escalation, electricity and raw water cost recovery, if applicable) must follow promptly to ensure sustainability

Models Theoretically Possible

• Conventional (Consultancy+CW+In-house O&M)

• Service Contract/Outsourcing

• Performance-Based Management Contract (PBMC) or “Operator Consultant” Model

• “Construct+O&M” Contract or “Contractor-cum-Operator” Model

with performance-based bonus provisions

• Lease/Affermage/Performance-Based Deferred Payment Structure (PBDPS) Contract

• Concession *Note that these models are not mutually exclusive (combination possibility)

Models Proven Workable • PPP originally emerged to reverse the vicious circle under

public utility support model, which has not been successful in providing decent services at most ULBs in India, which are weak

• So far, PBMC and “Construct+O&M” Contract (both with bonus provisions) are only ones that have been proven workable at weak ULBs in India

• Lease contract model being attempted at Nagpur is rather exceptional and may not be used as a replicable model under ADB (or other donor) assistance

• Incidentally, public utility support model has been working for years at a few advanced ULBs (e.g., MCGM although it suffers from a very high NRW of 30%). Staff (in particular retired staff) of such ULBs are valuable assets for India

Service Contract/Outsourcing

ULB’s Water Utility/Water Department

WTP Transmission Distribution Metering

Decision-Making Body (Board) of

ULB’s Water Utility/Water Department

Operator Consultant/Management Contractor

(Procurement Agent)

Employees of

ULB’s Water Utilitiy/Water Department

CWs Contractor Goods Supplier Service Provider

Technical Auditor/Independent

Engineer

Performance-Based Management Contract (PBMC)

or “Operator Consultant” Model

Performance-Based Management Contract (PBMC)

or “Operator Consultant” Model

Recruitment of “Operator Consultant”

DED Procurement of CWs and

Goods

CW contract(s)

Goods contract(s)

O&M

Supervision

“Construct+O&M” Contract or “Contractor-cum-Operator” Model

Decision-Making Body (Board) of

ULB’s Water Utility/Water Department

CWs Goods Services

Contractor-cum-Operator

Employees of

ULB’s Water Utilitiy/Water Department

Technical Auditor/Independent

Engineer

“Construct+O&M” Contract or “Contractor-cum-Operator” Model

Recruitment of DED

Consultant DED

Recruitment of

Contractor-cum-

Operator

CWs

Goods

O&M

Design-Build-Operate (DBO) Contract

Decision-Making Body (Board) of

ULB’s Water Utility/Water Department

DED CWs Goods services

DBO Contractor

Employees of

ULB’s Water Utilitiy/Water Department

Technical Auditor/Independent

Engineer

Lease/Affermage/Performance-Based Deferred Payment Structure (PBDPS)

Contract

Asset-Owning and Policy-Making Body

of ULB’s Water Services

Lease/Affermage/PBDPS Contractor

Technical Auditor/Independent

Engineer

Design-Build-Operate (DBO) Contract

Lease/Affermage/Performance-Based Deferred Payment Structure (PBDPS)

Contract

Preliminary Design

(Due Diligence)

Recruitment of

Contractor DED

CWs

Goods

O&M

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

ULB Hubli-Dharwal/

Ilkal

Nagpur Mumbai Delhi

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

Volumetric

IBT (Telescopic)

Re

sid

en

tia

l

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

Co

mm

erc

ial

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

Full O&M plus some

CapEx

O&M excl. electricity

and raw water

Water Tariff Comparison

Additional Observations • As far as convenience is concerned, 24/7 water supply may

not be so critical for a city like Mumbai where buildings are mostly high-rise and, therefore, storage and pumping are necessary anyway within each building. But MCGM still tries to carefully keep sufficient pressure, if not 24/7 water supply, for avoiding contamination of water

• On the other hand, 24/7 water supply will make a big difference for low-rise high-density neighborhoods such as slums regarding both convenience and water quality (and even improve girls’ school attendance)

• But transition from intermittent to 24/7 water supply must be handled carefully (e.g., current MCGM strategy as well as water-saving campaign at household level)

• “Sequencing of Improvements” issue must be addressed for large schemes, including possible use of differentiated tariff schedules (i.e., higher tariffs for better services)

Additional Observations (contd.) • Consider how to treat the ULB staff in relation to the

implementation of the models (secondment/deputation)

• Ensuring sufficient revenue is critical for sustainable service provision

• Real cost of water service provision should be considered (incl. how to deal with electricity and raw water cost subsidies) when designing tariffs

• Aggressive revenue generation efforts are made at some advanced ULBs. For example, MCGM is generating revenue of Rs 90 crores outside usual water tariff collection (including charge for water supply that any civil works contractor within MCGM has to pay)

• MCGM has a surplus budget for water supply

• MCGM appointed CRISIL to explore alternative mechanism to generate even more revenues

Recommendations

• Some ULBs, such as MCGM, have been providing decent WS for decades while many other ULBs are constrained by their technical and managerial capacities, and existing facilities. So, assessment must be carried out properly up front on subject ULB

• Cost of WS in developing country like India cannot be substantially lower than that in developed country because WS is capital-intensive with a typical labor cost element of about 10-12% of total cost. Indeed, electricity, chemical and other consumables are often more expensive in developing country, offsetting most, if not all, of any labor cost savings

• International rule of thumb of full cost (CapEx+OpEx) recovery is $1/m3 for WS only, and $2+/m3 for WS+S

Recommendations (contd.)

• ULBs which are not yet ready for comprehensive improvement may still wish to initiate bulk supply/ treatment (as opposed to distribution) and/or green-field (as opposed to brown-field) development under Service Contract/Outsourcing/DBO/other significant PPP schemes, which are safer and more straightforward

• While service improvement must come first to reverse the vicious circle, proper tariff reform (e.g., metering, tariff escalation, electricity and raw water cost recovery, if applicable) must be considered carefully in advance and actions followed promptly to ensure sustainability

Recommendations (contd.)

• For majority of ULBs, PBMC and “Construct+O&M” Contract would be safe models, partly because there will be an automatic opportunity for “course adjustment” at the end of initial contract

• Bidder profile/tie-up arrangements (operator, contractor, consultant; firm, individual) should be anticipated for each model and properly conditioned in tender document

• Larger ULBs intending to use the above models will have to address the “Sequencing of Improvements” issue, e.g., by means of proper phasing and differentiated tariff schedules (i.e., higher tariffs for better services)

• ULBs with strong political commitment may wish to consider significant long-term PPP schemes (e.g., concession) but must be aware that it would be irreversible

Thanks

Build-Operate Option at Delawas STP in Jaipur, Rajasthan Phase I (ADB-financed): Biogas is used for Self-Power Generation (Rs1.5M/mo. cost savings but currently under repair) Phase II (JNNURM-financed): Biogas is sold to Private Party (starting)

East Kolkata Wetlands, West Bengal

Ramsar wetland for its wise use, in particular sewage treatment, fish farming and agricultural irrigation CO2eq 20,000 tonnes/annum of GHG savings