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India
ADB Review [ December 2006 - January 2007 ]

An interesting thing happened recently in Karnataka State as ADB went looking for ways to increase investment in watersector projects: government officials there expressed an interest in private-sector involvement.

Renowned in past decades for its hostility to intrusion on government turf, Indian governments, state and federal, for decades shunned the capital-rich private sector, throwing up legal and regulatory hurdles. In the 1990s, then Finance Minister Manmohan Singh (now Prime Minister) helped kick-start reforms that have cleared room for the new economy to emerge and made way for visionary politicians in places like Karnataka.

INDIA Constructing an irrigation canal (above); women in Gujarat (right) have to walk 3–4 kilometers to fetch their day’s water supply

"It was a pleasant surprise," says Keiichi Tamaki, who works in ADB's South Asia Department, of the new interest in the private sector. However, he notes that Indian governments are realizing they are in a "furious competition" for investment with countries such as the PRC and, to retain the interest they have already attracted, they need to attend with greater urgency to infrastructure.

India is making good progress increasing infrastructure for water supply and sanitation in urban and rural areas. However, it is still lagging behind other countries in expanding services that are reliable and sustainable. The water supply in most cities is still intermittent, mostly between 2 and 4 hours a day.

"In India, we see lots of publicity about IT and the difference it is making in the economy but when we look at the groundlevel reality in infrastructure, such as water supply, it is in a deplorable state," says Mr. Tamaki.

And with 14% of the world's population, the country has only 4% of the total average annual river run-off. A number of areas are already in crisis, including in the most populated and economically productive parts of the country. Estimates reveal that by 2020, India's demand for water will exceed all sources of supply.

At the same time, 70% of India's irrigation needs and 80% of its domestic water supplies come from groundwater—in the past a successful practice—but that has lowered groundwater tables and depleted aquifers. It is no longer sustainable. The picture is further muddied by unclear rules governing the allocation of water rights of the country's interstate rivers, which drain some 90% of India's territory.

Funds are available for meeting these challenges. For example, ADB is supporting India's Jawaharlal Nehru National Urban Renewal Mission, a national fund created to encourage sustainable urban development and expected to invest about 11 billion equivalent in developing infrastructure in 63 of the largest cities in India over the next 7 years. ADB's support will help build capacity for identifying and preparing projects, among others. "We have the WFP and they have JNNURM. We can take advantage of that," notes Mr. Kim.

The main barrier now to increased investment, Mr. Kim and Mr. Tamaki say, is the difficulty of linking funds available to viable investment projects. "Indian towns and cities are not yet creditworthy. The commercial banks are not ready to help them and they need support in conceptualizing and producing a project," says Mr. Kim.

What is missing, says Mr. Tamaki, is a workable model that can connect available funds with projects and be replicated in other parts of the country, or region. In steps Karnataka where rapid urbanization and underinvestment in infrastructure have created serious environmental and health problems, as elsewhere in India's cities. The majority of urban households, particularly the poor, have limited access to potable water, sanitation, and drainage facilities and services.

The situation is even more pronounced in the so-called urban local bodies (ULBs) of North Karnataka where rapid urbanization is yet to start. In these ULBs, water supply may be as infrequent as once a week. Only a few have piped water for 1–2 hours each day, and the quality is usually poor. This deficiency is a serious impediment to economic development.

To address the imbalance between communities in the northern and southern parts of the state, the Government asked ADB for financing totaling $270 million through the newly created MFF. Serving as something like a line of credit, the funds will be drawn down over an 8-year period to finance an overhaul of the infrastructure and institutions governing the state's water supply.

It will improve urban services for 4.3 million people in 25 ULBs, improve and sustain infrastructure services, and promote private-sector participation in selected subsectors, with the aim of bringing in a proper incentive framework for efficient and equitable service provision.

To involve the private sector, companies will be invited to bid for either a 10-year lease-style contract (on water utilities), in which the contractor is expected to put up some funds itself, or a shorterterm management contract sending a private management team to a water utility.

The first requires private contractors to bring partial bridge financing for the construction, and operation and maintenance costs of subprojects in exchange for annuity-like and performance-based payments over a 10-year period. The second recognizes that the risks of the first may dissuade prospective private companies, and the companies are instead invited to bid for a so-called "performance-based management contract," under which the contractor is responsible for overall management and provision of services, typically over a 5 to 6-year period.

"Our money," says Mr. Tamaki, "is attempting to create a demonstration effect. We hope that through it there will be a continuous flow of money, which is already available in India and looking for decent investment opportunities, into these and other utilities." However, Mr. Tamaki admits that ADB funds are just a "drop in the bucket."

Learn more about ADB's support for the Jawaharlal Nehru National Urban Renewal Mission in India

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