Roundtable Discussion on Private Sector Participation in Urban Water Supply in India
Materials on Private Sector Participation
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ADB and senior officials from the Government of India met for two days of roundtable discussions on the private sector's role in reforming the country's water supply and sanitation.
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EVENT DETAILS
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| Date
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15-16 June 2005 |
| Venue
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Bangalore, India |
| Contact
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Ellen Pascua |
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RATIONALE FOR PSP
Private sector participation (PSP) or public private participation (PPP) seeks to fuse the skills, expertise and experience from both the public and private sectors to deliver high standard services to customers. The public sector offers expertise in governance, responsibility to the electorate, access to funding, appreciation of local cultural sensitivities as well as a local workforce, many with long years of service. The contribution from the private sector includes operational efficiencies, innovative technologies, international managerial experience, access to additional finance, and risk sharing.
There are several PSP models, but the main ones in order of complexity and risk are Management Contract; Design, Build, Finance, Operate; Lease; Concession; and Divestiture.
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MODEL: MANAGEMENT CONTRACT
- Municipality signs contract with competitively procured Management Contractor (MC)
- Typical contract period 3-10 years, but extendible based on performance
- MC undertakes investment planning and manages program, but funding is provided externally
- Workforce employed by Water Service Agency but under MC supervision
- Performance incentives through specified key performance indicators such as water quality improvement, UFW reduction, billing, etc.
- Typically paid a fixed fee and subject to bonuses and penalties
- Assets remain under Municipality ownership
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MODEL: DESIGN, BUILD, FINANCE, OPERATE (DBFO)
- DBFO contractor procured competitively.
- Contract period 25-50 years
- Assets are typically 'ring fenced' and 'new build'
- Single or small number of off-takers
- Equity investment by DBFO company promotes commitment to city and service provision
- Varying levels of volume and performance risk
- Subject to performance penalties
- Typically little incentive for efficiencies (other than profit/shareholder gain)
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MODEL: LEASE
- Lease Contractor (LC) procured competitively
- Contract period 10-20 years
- LC has responsibility for billing and revenue collection
- LC bears volume and performance risk
- Assets retained by Asset Company (City or Municipality) who are responsible for funding capital investment
- Equity investment by LC promotes commitment to City and service provision
- Workforce transferred to LC (with necessary employee rights)
- Regulated by target levels of service annually, reviewed at say, 3, 5 or10 year intervals
- Subject to performance penalties
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MODEL: CONCESSION
- Concession Contractor (CC) procured competitively.
- Contract period 20-30 years, extendible based on performance
- Full responsibility for billing and revenue collection
- Full responsibility for capital investment and securing funding
- Equity investment by CC promotes commitment to City and service provision
- Workforce transferred to CC (with necessary employee rights)
- Regulated by target levels of service annually, reviewed at say, 3, 5 or10 year intervals
- Subject to performance penalties
- Full volume, performance, funding and data risk transfer
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HYBRID MODEL
Each PSP/PPP model has advantages and disadvantages. To reduce risk and engender confidence in the process, hybrid models can be tailored to meet local requirements. These can progressively move from less risky options to longer-term arrangements as confidence in the process and between the contracting parties is gained.
An example of a hybrid model could be:
- Contractor is awarded a 5-year Management Contract, manages the existing workforce and implements limited institutional changes
- Specified input and output improvements are made from a limited capital investment budget
- Data collected on water & sewerage networks and detailed demand, affordability and willingness to pay studies undertaken, leading to a comprehensive masterplan, with a range of capital investment and tariff scenarios for the following 20 years in 5 year horizons
- Independent assessment of investment plans and agreement of tariff strategy for years 6-10
- Option of awarding full Concession Contract at end of Management Contract + regulation at 5 yearly intervals
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REGULATION
To encourage transparency, monitor contract/ sector performance, and review and set tariffs, it is normal to establish a regulatory body.
The Regulator should be an independent organization with authority to analyze performance and costing data, and to set standards and efficiency targets. Reward to the PSP contractor for achieving efficiency gains encourages innovation, while failure to achieve them should result in penalties.
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