Water Summit 2004

PPP in Urban Water Supply and Sanitation:

Issues in Regulation and Financing

Priya Basu
South Asia Finance & Private Sector Group

World Bank

NewDelhi,November18,2004

REFORM GOALS AND ROAD MAP

Sector Reform Program

Reforming Sector

Current Situation
PPP
Intermittent, poor
quality & inefficient
supply
Inefficient/inequitable
usage
Overstaffing
Low tariffs
High budget
dependence

Universal access
Satisfied customers
24/7 supply of potable
water by efficient and
accountable service
provider
Financial
sustainability with fair
pricing and safety 2
nets

REFORM PATH - MULTILEVEL

State
Policy
Framework

Consumers
Converttocustomers
LiabilityAsset

Legal
Framework

Service
Provider
GovernanceAccountability
Management
HumanResources
PhysicalResources
Water+OtherInputs

Inputs
Engineering&Design
Construction
EquipmentSupply
O&M
ElectricitySupply
BulkWaterSupply

RegulatoryFramework
Economic

Environment
Health/Safety

GUIDELINES FOR SECTOR

REFORM
SUCCESSFUL
Guidelines&
prepared
by the MinistryPPPS
of Urban Development

seek to sensitise the state governments and the ULBs to the

policy and procedural issues that need to be addressed while
reforming the urban water supply and sewerage services.
They also seek to:
-- Embed an evolving role for the private sector into the
broader sector reform;
-- Facilitate a systematic assessment of the issues and
options for successful PSP; and
--Prevent
improperly
designed
and
executed
PSP
transactions
Set the Policy Framework and Implementation
Responsibilities
Create Enabling Conditions for Sustained Reform & PPP
Not all states/cities need to, or will move to PPP
Different forms of PPP likely
Pre-PPP reforms will set stage for PPP and achieve some
improvement which could be built upon through PPP

Selecting, Designing and Executing the PPP Transaction and

Managing the Public-Private Relationship
4

WHERE DOES ONE START?

Change Management Team Reform Facilitation
Team: Government should:
Ensure teams competence, authority and autonomy
Shield team from political interference
Keep stakeholders informed and involved

Defining the vision E.g. Delhi:

Providing universal 24/7 safe water supply and
sewerage services in an equitable, efficient and
sustainable manner by a customer oriented and
accountable service provider

Diagnostics to prepare the implementation plan

to realize the vision (with intermediate targets)
Technical, Institutional, Financial

Building support for vision and implementation

plan
Implement agreed action plan

Prioritizing Objectives
Secure consumer and public support
quick improvements in customer service
transparency in strategic decisions
credible monitoring, evaluation & disclosure
expand coverage (with service)

Reduce fiscal pressures with reasonable tariff

level
Improve operational and investment efficiency
cost reduction, revenue enhancement (billing &
collections)

Restore financial viability

Depoliticize operations and tariff setting
Corporatization/ring-fencing, PPP
Credible regulation
6

Role for Private Sector :

OPTIONS
Option

Asset
Capital Commercial
Ownership O&M Invest.
Risk

Duration

Service Contract

Public

Pub. & Pvt. PublicPublic

1-2 years

Mgmt Contract

Public

Private

3-5 Years

Lease

Public

Private

PublicShared

Concession Public

Private

Private

BOT/BOO
30 Years

Pvt. & Pub.

Private

Divestiture Pvt/P&P Private

PublicPublic
Private

Private

Private

8-15 Years
Private

Private

25-30 Years
20Indefinite

Benefits grow as increasing responsibility & risk transferred to private

partner. In practice, hybrids are more the norm than the exception e.g.
Management contracts where private sector takes some commercial
risks.
Leases in which the private sector is responsible for some investments .
7

THE REGULATION
CHALLENGE
Aspects of regulation
Economic (tariff & QoS)
Health
Environment Technical & Safety Standards
Independent Regulation will be meaningful if there is
PSP
Political will to commercialize & charge cost-based tariff
Even in monopolistic network based UWSS, competition
For the market: bidding for concession
Within the market: competitive procurement of EPC,
O&M etc
Competent regulation to contain abuse of market power &
correct market failures
Sustainable UWSS Efficient & affordable supply
Free state funds
QoS
Short term gains not to compromise the long terms goals
BY CONTRACT or INDEPENDENT REGULATOR
8

THE REGULATION
CHALLENGE
SETTING EXPECTATIONS :
Performance Issues
Issues

Operational efficiency
quality

Coverage and improvements in

Tariff Issues
Do current tariffs cover costs?
Can private sector reasonably boost efficiency to meet service
objectives without tariff increases?
To what extent will consumers be willing to pay higher tariffs?
To what extent is grant finance and/or targeted subsidy
available?

Buy-in of key stakeholders (employees, consumers,

NGOs)
PPP issues
Is private sector comfortable taking commercial risk ? If not,
how can the regime be changed for the same
Is information about utility's assets good enough as a base for
long-term contracts? If not, how soon will better information
9
be there ?

UTILITY REFORMS
1. Vest autonomy, accountability & responsibility
2. Need reliable data
3. Realistic financial strategy, transition path and
regulations
4. Municipal vs. Regional ULB
State policy may

Encourage small towns to consolidate assets & customer bases to

attract the necessary resources

Better positioned to attract PSP in a competitive manner

Better terms for engineering, construction and other services

Offer guidelines on criteria for consolidation, incl. rural coverage

Criteria for clubbing

Large enough population base : scale: Clusters of 1 to 2 million

Manageable overall distance : within a watershed boundary
Voluntary or prescribed

Consider pros and cons of multiple PPP operators /

transactions
10

UTILITY REFORMS:
International Examples
UK : Top Down
(Prescribed)
Economies of scale up
to population of 1
million
10 large utilities with
population of 2-10
million
15 smaller utilities
with population base
of 250,000 to 1.2
million
Jurisdiction based on
watershed boundaries

France : Bottoms
up (Voluntary)
WSS
responsibility of
Local
Governments
Voluntary
Syndicates
15500
undertakings for
37000
municipalities
2/3 per grouping
SEDIF manages

11

SUITABLE LAW & POLICY

Secure projects from risks & challenge
UWSS projects involve public assets, services and
emotive issues
Implement reform and /or PPP on basis of a law, and
not an executive order
PPP may be seen to involve largesse, and can
potentially attract judicial challenges
Competitive bidding process and transparency
Investor concerns on regulatory, commercial and
policy/political risks

12

WHAT SUPPORT IS AVAILABLE

74th Constitutional Amendment & Model
Municipal Act
Guidelines Reform/PPP, Municipal
Accounting
City Challenge Fund (being designed)
Capacity Support
Transitional financing

MoUD
Including own resources, support from WSP,
others

DEA
Viability Gap Fund
13

THE WAY FORWARD

STATE GOVERNMENT
Government commitment,
Create Local
champions/Reform Team
Set service and financial
targets
Adopt policy and enact
law
Build regulatory capacity
Facilitate competition
Finance transition costs
Stakeholder involvement
& consultation pre-PPP

ULBs
Investment plans
Tariff and subsidy
plan
Optimal utility
structure
Governance &
accountability system
Optimal forms of PPP
Hire reputable &
qualified advisers (as
needed)
Adequate and
affordable services to
14
the poor