Public-Private Partnerships for rural water service in India

For MPL 144

Kumar Sourav

2000295LLM

TERI-SAS

Table of Contents

1. Introduction

2. Why Public-Private Partnerships?

3. PPP in rural water service

4. Challenges faced by PPP in rural water service

5. Conclusion

Introduction

Public-Private Partnerships of PPPs are often used for public service delivery to the
general population. Rapid economic development, that is being envisioned for the country,
cannot be achieved without there being proportionate investment in the infrastructure of the
country. Basic public service infrastructure is essential to unlock the workforce and economic
potential of the country and encourage private investment to accelerate the development of
public services. PPPs have proven exceptional in ensuring private investment into
infrastructure development as they offer cost effectiveness and operational efficiency of such
projects while delivering such public services in lieu of the government.
 Water supply is the 17th entry in the state list under the 7th schedule of the constitution
of India1 giving state governments the power to legislate over water supply within their
respective states. The 73rd amendment to the constitution of India further gave gram
panchayats the responsibility of their water supply in an effort of decentralization of power.
While gram panchayats have the legal responsibility of enforcing their own water supply
policy, they are very much dependent on the funds allocated by the state and central
government and are constrained by their lack of technical abilities and any other source of
financing.2

Public services are one of the key responsibilities of the government and ensuring
sustainable, and affordable water supply withing rural areas is one of the key challenges for
state governments within the country. Rural water supply projects are not particularly
attractive for private entities under the PPP model because of the lack of commercial
viability. According to a report by the World Bank3 although the central and state
governments in India spend over $2 billion p.a., providing water for 91% of the rural
population, there are prevalent quality and quantity issues along with poor O&M standards
which have led to reliability issues in the Rural Water Supply and Sanitation (RWSS)
schemes.

Why Public-Private Partnerships?

Public-Private Partnerships are long term projects created through a long-term

contract or concession agreement. Government or a public sector entity enters into a long-
term contract/ concession agreement with a private sector entity for providing infrastructure
services and charge users for using that service. These concession agreements are specifically
created to cater to the financing and designing needs of the project as well as implementing
and operating the infrastructure services. Although the operation of such services is overseen
by the private sector entity, the accountability for quality of service, price, and cost
effectiveness remains with the government. There is reduction in liability or accountability on
the part of the government.

1
Constitution of India, 7th Schedule, https://legislative.gov.in/sites/default/files/COI_1.pdf.
2
A.J. James, Lessons for Rural Water Supply: India- Assessing progress towards sustainable service delivery,
2011, The Hague: IRC International Water and Sanitation Centre and Delhi: iMaCS.
3
The World Bank, India Rural Water Supply, Sep. 2011,
https://www.worldbank.org/en/news/feature/2011/09/23/india-rural-water-supply.
 The public sector entity or the government’s role is that of a facilitator and enabler
who assumes social, environmental, and political risks of the project while the private sector
entity is responsible for financing, building, and operating the service facilities. Only the
commercial and construction risk lies with the private entity. Since the private sector takes up
the risk of non-performance of the project and can only realize its returns if the project
performs, the private sector entities are much more careful in cost estimation which creates
sound investments.

PPPs have led to better and faster implementation of projects while reducing lifetime
cost of the projects which improves the efficiency of the project and maintains a benchmark
in service that are delivered. India has seen a rise in PPP projects with airports and seaports
being built under model concession agreements. Although majority of PPP projects in India
are targeted towards creating road infrastructure there has been a positive trend of
implementing PPP projects in other infrastructure related areas too. To encourage PPP, the
Department of Economic Affairs has been providing technical assistance to private entities as
well as public sector entities. The department even offers an online PPP toolkit through its
website pppinindia.com which has the required technical content and methodology that
public sector entities may need during the different phases of a PPP project.4

The government even offers a Viability Gap Funding scheme for PPP projects that are
needed for social and economic development but have no commercial viability. Any private
entity is eligible for a financial help under VGF if the entity is selected through the process of
an open competitive bidding.

PPPs are preferred other modes of service delivery in infrastructure projects because
of the many advantages they provide against a public entity overseeing an infrastructure
project. Some of the advantages are discussed below:

 Efficiency: PPPs are particularly attractive for the private entities because of the
lucrative concession agreements. Private entities who enter a PPP bring with them
sector specific experience, expert, and skilled manpower along with the required
advanced technological tools and knowledge that gives them the edge in the
competitive market beyond the scope of the PPP. The risk allocation and performance

4
Dept. of Economic Affairs, PPP Guide for Practitioners, Apr. 2016,
https://www.pppinindia.gov.in/documents/20181/33749/PPP+Guide+for+Practitioners/e3853cb9-ac07-4092-
b8ac-60a8c4d4ed35.
 rewards further incentivize cost, construction, and operational efficiency of the
projects.
 Lifecycle costs: Private entities responsible for the construction of an infrastructure
project are often also given the charge of operation and maintenance for the duration
of the concession agreement. The private entities thus consider the lifecycle cost of
the project and work to reduce such costs as much as possible so that they can earn
revenue as soon as possible. This leads to low maintenance costs over the long period
of time as per the concession agreement and as such when the project is handed over
to the public sector entity, these projects are not plagued with high maintenance costs.
 Transparency: PPP projects in India are allocated by a competitive bidding process.
This ensures fairness of the bidding process and brings transparency to the
procurement process as well as the PPP project. The operation and maintenance
(O&M) of the project is also overseen by the responsible public sector entity to ensure
fair and affordable delivery of public services as per the concession agreement which
further adds accountability on both parties.
 Financing: Inviting private entities to invest in an infrastructure project under a PPP
model shifts the onus of raising funds for the project from the public sector entity to
the private entity. The private entity is then responsible for generating the funds
required for the completion of the project.5

PPP in Rural Water Service

Only 73% of the rural population in India have access to safe drinking water. 6 While
the Government of India has come up with the National Rural Drinking Water Programme
(NRDWP) to provide the required technical and financial assistance to state governments for
rural water supply, increasing slippage has not allowed the programme to achieve its intended
targets. Adding to it, ground water contamination has further added to the already stressed
water availability in rural India. It is in response to this that rural India has seen the rise of
Community Safe Water Solutions and Small Water Enterprises.

Community Safe Water Solution:

5
Id.
6
Safe Water Network (2018), India Sector Review: Small Water Enterprises to mitigate the drinking water
challenge, p.3, https://www.safewaternetwork.org/sites/default/files/SWN_India_Sector_Review_2018_0.pdf.
 These CSWSs operate in 3 broad categories consisting of PPPs, Community Managed
Systems, and Private models. For the purpose of this essay, we are concerned with the
CSWSs operated under the PPP model. As is the issue with PPP investments in rural areas,
there is little to no commercial viability for such projects and it has proven difficult to recover
capital expenses, generate revenue, and keep the CSWSs affordable for the rural population.
Although there are cases wherein O&M costs have been recovered. As of now, under the
CSWSs there are 4 private entities who are involved in providing rural water services across
various states under the PPP model: namely, Naandi foundation 7, Rite Water, Waterlife, and
WHI.

The 11th 5-year plan promoted the usage of PPP for water supply and sanitation
projects.8 The projects either follow a B-O-T model or a B-O-O-T model. Under the BOT
model, after the end of the term specified under the concession agreement, the ownership is
transferred to the respective Gram Panchayat. These PPP projects run the risk of generating
less revenue than their O&M costs and as such rely on Viability Gap Funding or private
donors or funding from corporates and government agencies to continue functioning.

Waterlife operates like a conventional vendor in a PPP project wherein it charges a

tariff prescribed by the government, operates the CSWSs plant for the duration of the
concession agreement and then transfers the ownership to the local governing body 9. On the
other hand, Rite Water does not charge any tariff for providing drinking water, rather depends
on financial support from the government and private donors. 10 Water supply services under
PPPs have proven immensely beneficial by eliminating the risk of contaminated water in
villages and panchayats wherein safe drinking water is available at highly affordable rates.11

Small Water Enterprises:

7
Danone Communities, Nandi Community Water Services, https://www.danonecommunities.com/naandi-
community-water-services/.
8
NITI Aayog (2008), Eleventh Five Year Plan (2007-2012), 1,
https://niti.gov.in/planningcommission.gov.in/docs/plans/planrel/fiveyr/11th/11_v1/11th_vol1.pdf
9
World Bank Group, Waterlife: Improving access to safe drinking water in India, Apr. 2017,
https://openknowledge.worldbank.org/bitstream/handle/10986/27664/115133-WP-P152203-PUBLIC-17-5-
2017-12-28-1-WaterlifeCaseApril.pdf.
10
Safe Water Network (2014), Community Safe Water Solutions: India Sector Review, p.34,
https://www.safewaternetwork.org/sites/default/files/SWN_India%20Sector%20Review_Sept
%202014_Full_Report.pdf.
11
Punya Priya Mitra, Panchayat launches drinking water through PPP model, HINDUSTAN TIMES (Oct. 25,
2017), https://www.hindustantimes.com/bhopal/panchayat-launches-drinking-water-through-ppp-model/story-
rOgrC1PR9XTqanjRPpRvoK.html.
 SWEs are low-cost, decentralized and easily adaptable systems that can be setup to
extract, treat and distribute water in rural and remote areas. Water ATMs and solar powered
water treatment plants are some of the innovations of SWEs have brought down the costs of
water purification and distribution and provided affordable safe drinking water to the rural
and poor masses. Naandi12, Rite Water, and Sarvajal India are operating SWEs under PPPs
across various states in the country.

SWEs also follow similar PPP models and operational practices as CSWSs.
Traditional PPP models in rural water service do not offer enough risk mitigation for private
entities to fully commit and as such smaller companies are walking away with concession
agreements with razor thin margins or no margins at all.

This has called for the use of specialized PPP models like EPC (Engineering,
Procurement, and Construction) and HAM (Hybrid Annuity Model). While EPCs and HAMs
are often used for road infrastructure projects, the SWEs are also a good area for
implementation as the private are exposed much lower risk factors and are assured recovery
of investment.

Under EPC, the private entities are only responsible for construction, operation, and
management of the SWE plants and need not look for any funding as it is a fully government
funded project. The Hybrid Annuity Model is a hybrid of the EPC and BOT Annuity models
of PPP. Under HAM, the private entities take up a lot less risk and thus are more willing to
enter into concession agreements even if the commercial viability of the project is in
question. Under HAM, the project development costs are split 60 (private)-40 (government)
between the developer and the government which significantly reduces the amount of
financing the private entity needs to raise. This 40% financing from the government is more
than any VGF funding the project can qualify for, 13 thus making HAM much more attractive
to private entities. Under HAM operated SWEs or CSWSs, the user fee will be collected by
the government while the private entity will receive fixed annuity payments for O&M.

Challenges Faced by PPP in rural water service

12
Naandi, Impact Investing: A Naandi Report 2017, p.50,
https://www.naandi.org/images/d6874e3fe241bfb8acc3a481b4c627ef.pdf.
13
VGF is capped at 30% of the Total Project Cost, MoF, https://www.pib.gov.in/PressReleasePage.aspx?
PRID=1671914.
 PPP projects in rural water service all face some common challenges which have
hindered the sustainability and scalability of these projects as well as their long-term
reliability. Some of the major challenges faced by PPPs is rural water service are:

 Economic viability: Whether it is CSWSs or SWEs, PPPs in both modals suffer from
lack of economic viability. Since the target service group are poor and rural
households, there is not much hope for recovering the capital investments put into the
project. Generating enough revenue to cover O&M expenses is already considered
very good and as such there is little scope for scalability and commercial viability of
the project which discourages private entities from continuing to pour money into the
projects.
 Demand: The biggest issue rural water service PPPs face is the low demand due to
lack of users in the target area. And if the community is unwilling to pay for the
service, it gets even harder for private entities to justify continuing operation of the
project. There is often little awareness regarding the importance of clean water and
contamination of surrounding sources of water in a rural and remote area.
 Scalability: Lack of demand leads to lack of scalability which lead to lack of
scalability of the water service projects. These projects are installed in isolated areas.
If the project is barely managing to cover its operation costs, there is little chance for
the project to scale up, hoping for an increase in revenue.

Conclusion

Rural water service is one of the key issues for state governments and central
government in India. With increasing contamination and gradual decrease in the sources of
safe drinking water, the rural population is at risk of serious health issues rising from
consumption of contaminated water. PPPs in rural water service projects may seem the right
way to go with numerous foundations and organizations working diligently to resolve the
drinking water crisis in rural India, without commercial viability, they run the risk of running
out of funds as most of these organizations are dependent on government funds through VGF
or donations.

Introduction of new models of PPPs to reduce the risk involved for the private sector
while ensuring easy financing and recovery of capital investment just might be the best
chance for the government to attract commercial investment in the rural water service sector
and solve the drinking water problem in rural India.