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PPP Models for Water Supply

PPP Models for Water Supply

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Published by BrowneandMohan
This white paper presents the economic viability of Public Private Partnership models pursued for Water supply in Indian context.
This white paper presents the economic viability of Public Private Partnership models pursued for Water supply in Indian context.

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Published by: BrowneandMohan on Apr 09, 2012
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 PPP Models for Water Supply: an evaluation
This report is based on Pankaj Chandak internship under the guidance of Browne & Mohan consultants.© Browne & Mohan, 2010. All rights reserved Printed in India
Water is an important input for economic development. Sincewater sources in the country are limited, there is an urgentneed to focus attention on development of water sources anduse of water efficient technologies to source and recharge thevarious water sources. The exploitation and development of various sources of water and making water available at
affordable rates is one of India’s major th
rust areas.Water supply requires a huge amount of capital investment ininfrastructure such as pipe networks, pumping stations andwater treatment works. It is estimated that Organization forEconomic Co-operation and Development (OECD) nationsneed to invest at least USD 200 billion per year to replaceaging water infrastructure to guarantee supply, reduceleakage rates and protect water quality. Once infrastructure isin place, operating water supply systems entails significantongoing costs to cover personnel, energy, chemicals,maintenance and other expenses. The sources of money tomeet these capital and operational costs are essentially eitheruser fees, public funds or some combination of the two.But this is where the economics of water management startto become extremely complex as they intersect with socialand broader economic policy. The basic information aboutwater availability and water use are, nevertheless, highlyrelevant to understanding how critical water issues will affectbusiness and industry in terms of both risks andopportunities.Public-Private Partnership (PPP) describes a governmentservice or private business venture which is funded andoperated through a partnership of government and one ormore private sector companies. These schemes aresometimes referred to as PPP or P3.The PPP models for water supply vary from short-term simplemanagement contracts (with or without investmentrequirements) to long-term and very complex BOT form, todivestiture.These models vary mainly by:
Ownership of capital assets
Responsibility for investment
Assumption of risks, and
Duration of contractA brief summary of some of the types are given as following:-
Management Contracts
A management contract is a contractual arrangement forthe management of a part or whole of a public enterpriseby the private sector.Management contracts allow private sector skills to bebrought into service design and delivery, operational control,labor management and equipment procurement. However,the public sector retains the ownership of facility andequipment. The private sector is provided specifiedresponsibilities concerning a service and is generally notasked to assume commercial risk. The private contractor ispaid a fee to manage and operate services. Normally,payment of such fees is performance-based.Usually, the contract period is short, typically two to fiveyears. But longer period may be used for large and complexoperational facilities. In this form of PPP, the Governmentdefines and grants specific rights to an entity (usually aprivate company) to build and operate a facility for a fixedperiod of time. The Government may retain the ultimateownership of the facility and/or right to supply the services. Inconcessions, payments can take place both ways:concessionaire pays to government for the concession rightsand the government may also pay the concessionaire, whichit provides under the agreement to meet certain specificconditions. Usually such payments by government may benecessary to make projects commercially viable and/orreduce the level of commercial risk taken by the privatesector, particularly in the initial years of a PPP programme ina country when the private sector may not have enoughconfidence in undertaking such a commercial venture. Typicalconcession periods range between 5 to 50 years.
(BOOT) is a form of projectfinancing, wherein a private entity receives a concession fromthe private or public sector to finance, design, construct, andoperate a facility stated in the concession contract. Thisenables the project proponent to recover its investment,operating and maintenance expenses in the project. Due tothe long-term nature of the arrangement, the fees are usuallyraised during the concession period. The rate of increase isoften tied to a combination of internal and external variables,allowing the proponent to reach a satisfactory internal rate of return for its investment.
(BROT) arrangement, aprivate developer builds an add-on to an existing facility orcompletes a partially built facility and rehabilitates existingassets, then operates and maintains the facility at its own riskfor the contract period. BROT is a popular form of PPP in thewater sector.
(DBFO) arrangement, thepublic sector comes in contract with a private party to design,build, operate & finance a facility for a defined period, afterwhich the facility reverts to the public sector
 The facility is owned by the private sector for the contractperiod and it recovers costs through public subvention. Thekey driver is the utilization of private finance & transfer of design, construction & operating risk. It suit to projects thatinvolve a significant operating content particularly suited towater & waste projects.
Some key water supply PPP projects
Tirupur Water Supply and Sewerage Project
The Tirupur region has an extensively developed garmentindustry with large export earnings of about Rs. 5,000 croresper year through the export of Ready Made Garments(RMGs). Tirupur is a major center of knitwear industry inSouth India situated at about 56 km from Coimbatore. InTirupur, the demand for water and sanitation was especially
high. This Tamil Nadu town of a little over 500,000 is India’s
largest cotton knitwear centre, accounting for 90% of the
country’s exports in the sector. Clean water
- crucial fordyeing and bleaching - was being supplied through tankers,employing thousands of Lorries to make several trips daily, inorder to supply water for textile processing. In fact, manyfarmers resorted to selling ground water to the localindustries, adversely affecting the water source foragricultural purposes. Groundwater over-extraction andcontamination posed enormous challenges for local publicauthorities. There was no dedicated waste water collectionand treatment facility; the municipality lacked a sewagecollection and treatment system, and slum areas lackedadequate sanitation facilities. Moreover, domestic watersupply was limited to two hours on alternate days.
PPP Features
The Tirupur Area Development Project (TADP) was set up as aPPP by three partners - the Tamil Nadu Corporation forIndustrial Infrastructure Development (TACID), mandated bythe Government of Tamil Nadu to identify infrastructuralprojects to enhance export potential; the Tirupur ExportersAssociation (TEA), and the Infrastructure Leasing and FinancialServices (IL&FS). Together, they created the New Tirupur AreaDevelopment Corporation (NTADCL) as a special purposevehicle (SPV) through which to access commercial fundingand manage the risks associated with the project. TheGovernment of Tamil Nadu and Tirupur Municipality grantedNTADCL a concession to develop a water supply system onstrictly commercial principles and on an integrated basis.The project was split into three separate contracts, twoawarded on an Engineer, Procure, and Construct (EPC) basis,and one to Operate and Maintain (O&M) the finished waterand sewage treatment facilities. The EPC1 contractor wasresponsible for building a river intake, well, and pumpingstation; a water treatment plant and booster pumpingstation; a transmission main, and a master balancingreservoir. The EPC2 contractor was responsible for threefeeder mains, water distribution stations, distributionnetworks, a sewerage system, and low cost sanitation.NTADCL chose this consortium through a transparentinternational competitive bidding process. Marketingstrategies succeeded in generating positive responses,including 40 domestic and international formal expressions of interest. In several contracts drawn up, successful privatesector companies were bound to the followingresponsibilities:
Off take, treatment, and transmission of water
Distribution of water to industries and the municipality(domestic consumption)
Collected sewage treatment
Maintenance of sewage treatment plants
Financing involved a mixture of debt and equity taken on bygovernment, various commercial interests, financialinstitutions, and international funding agencies. Thisinnovative structure facilitated the repayment of funds raisedin international and domestic markets, while balancing theinterests of shareholders. Infrastructure Leasing and FinancialServices (IL&FS) and USAID provided loan guarantees over 30years for US$ 25 million. The World Bank provided a line of credit to IL&FS. In addition, the Asian Development Bankthrough its private arm has a 27% stake in the project.Although ownership of the project assets lay exclusively withNTADCL in its capacity as concessionaire, the consortium hasan equity share in NTADCL. The return on equity amounts to20% per annum, and the average cost of debt 17%. Mostimportantly for the government, implementation of theproject leveraged its investment by about 100 times.
Financing structure

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