the indian water supply sector has witnessed several ppp ... › files › file... · estimate...

The Indian water supply sector has witnessed several PPPprojects since the early 1990s. An initiative to address PPP Projectsin water supply has been on-going in the Ministry over severalmonths. A note on strengthening PPPs in urban water supply isenclosed in Annexures. All concerned may please send theirvaluable suggestions and comments for consideration which may beaddressed to Economic Adviser, Ministry of Urban Development,Room No. 219-C Wing, Nirman Bhavan, New Delhi-110 008, thesame may also be [email protected].

Strengthening PPPs in Urban Water Supply

1 Draft_For Feedback Only

Annexure 1: Project Preparation for Water PPP Projects

Reasons for Addressing the Issue

In projects that are executed through the conventional Engineering-Procurement-Construction

(EPC) route, typically a Detailed Project Report (DPR) is prepared by the city / consultant

appointed by the city, detailing, the nature and quantum of works to be undertaken. There is little

room for flexibility in implementation, and (having specified physical infrastructure related

system interventions), the city takes the entire risk of system performance after completion of

works. Often, there is little accountability for performance.

However, in projects executed through PPP, there is a paradigm shift, and service delivery (not

asset construction) is the focus: contract terms explicitly hold the operator responsible for

performance after implementation of works. In such a context, it may be inappropriate for the city

to specify, in too rigid a manner, the nature and quantum of works that the operator is to

undertake, to achieve service delivery improvements, particularly since

(a): adequate data on system characteristics and operations may not be available with the city

(particularly for underground assets – or the distribution network); and whatever is available may

be unreliable.

(b): the consultant appointed by the city to prepare the DPR, typically, may not have operational

experience and thus may not be best placed to advice on how system performance can be

improved or brought about. Also, consultants may not be provided adequate resources and time to

put together the data.

PPP projects in water distribution require a method of preparation that takes cognizance of (a): the

up-front lack of reliable information and (b): the importance of inputs from professionals familiar

with operations (operators)

Current Situation

PPP projects in India tend to prepare detailed project reports, largely relying on incomplete

information, and which include a prescriptive engineering design. In the absence of relevant and

reliable data regarding the existing system, most reports are found to be inadequate once the

operator undertakes his own survey after signing the contract (for eg., Mysore and Khandwa).

From the point of view of project preparation, and given context and capacity limitations, water

operators have suggested that DPRs for water supply PPP projects in India should prioritise

collection of relevant data and information; and allow a degree of flexibility with regards to the

engineering design. They have argued that (a): given their operational expertise, and (b): since

they are held accountable for improved service delivery, they be allowed to finally determine the

interventions necessary to improve system performance; and the associated costs. Moreover, that

they are in a position to do this only after operating the water supply system (for a period of 9 –



12 months) and understanding it’s characteristics. Operators, however, stress the importance of

reliable baseline data, or system information that can help them to gauge a system prior to

operations; or prior to making a price offer for their services, in bidding for a project.

From a public sector perspective also, the requirement is primarily for a project cost estimate

derived through sound processes so that (a): the city may assess financial sustainability, with

regard to resources available to it; and (b): the city may get approval for funding part of the costs

from the Ministry of Urban Development (MoUD), GoI; or through other sources.

The objective or utility of project preparation in a water supply PPP project, from the perspective

of various stakeholders may thus be summarized as:

Providing relevant and reliable data / system information to operators, in order to inform bid

preparation and bid price. The information must cover all aspects relevant to implementation

on a PPP basis

Providing a project cost estimate to the city, in order to assess financial sustainability; and to

serve as a reference for likely price bids. The cost estimate may be based on an engineering

design and estimation of works required, which is amenable to changes by the operator

Providing a project cost estimate to the Ministry for the purposes of project funding. The cost

estimate serves as an envelope for funding purposes, which may vary within pre-established

limits

Proposals

On the basis of the above, the following approach to project preparation for water PPP projects is

proposed. This assumes that cities will make a first level decision on implementation on a PPP

basis – and the nature and objective of the PPP – before starting on project preparation. This has

generally not been the case so far. Many cities prepare the detailed project report and after the

report is ready, take a decision to pursue the PPP.

Project preparation should have much greater focus on providing the required base data /

information, with a reasonable level of reliability. The minimum base level data required to

initiate a water supply PPP will be specified, and the methodology for procuring the

information will be suggested – standard Terms of Reference and scope of work for key

aspects of information will be recommended – so as to enable cities to undertake

information collection at least cost and time, in a reliable manner. MoUD will also support

information collection (surveys, investigations)

The base line data is used to generate a design and investment plan (or DPR) containing (a):

a justification of project needs based on a thorough analysis of gaps in the existing system,

and reasons why it is not performing as originally designed (b): an assessment of the city’s

long term water supply requirements, based on an analysis of growth trends (c): a detailed



assessment of interventions deemed necessary to achieve stated performance objectives (d): a

proposed time frame within which service delivery and performance objectives are proposed

to be met; and (e): a financing plan, based on secured commitments, and demonstration of

the financial sustainability of the proposed project (refer Annexure2 Assessing Project

Financial Sustainability). The DPR will specify non-negotiable parameters such as design

norms for service levels, design horizon for assets, pipe material etc. The DPR will also

indicate aspects of design and cost that are firm; and those that are likely to undergo change,

as they may be based on incomplete information at the time of preparation.

Prior to initiating project preparation, cities will determine the level and nature of private

sector involvement desirable. This may be in the form of (a): a short term contract for

managing the water supply system, and all operations related to service delivery

(management contract), wherein investments are largely made by the city; or (b): a long term

contract also including significant investment from the private operator (concession

contract). Cities opting for a concession contract, must take into account that the Operator

will assume a higher commercial risk. The city will also implicitly protect the rate of return

on the investments of the operator. Therefore, the quality of the baseline data and the design

in the DPR have to be of a greater extent; and assured through adoption of methods

suggested.

The DPR, and the capital investment requirement provided therein (subject to financial

sustainability indicators), along with the proposed project structuring will form the basis on

which the project is bid.

The system related interventions and cost estimate proposed in the DPR will be the basis for

the first level of approval by the Ministry, upon obtaining which the project is assured of

funding. The exact project investment requirement, however, will be finalised only after the

project has been successfully bid out, and the selected operator has prepared a Project

Implementation Plan (refer Annexure 5 Proposed Funding Process). MoUD will finance

its share of cost increase in the Project Implementation Plan up to a maximum of 15% of the

DPR estimate.

Information Requirements

Based on feedback from consultants and water operators the following categories of information

emerge as minimum requirements from the perspective of a DPR for projects implemented on a

PPP basis As mentioned earlier, the methodology for procuring the information will be

suggested, where necessary, in order to ensure a level of reliability. MoUD will provide funding

support for DPR preparation as well as Project Implementation Plan preparation.

I. City level population data

Population data of last 5 decades, population growth rates, No. of households



Ward wise/zone wise distribution of population, No. of households, ward area and

population density as per the last census.

Slum and Urban Poor Profile

- Ward/zone wise distribution of slums, slum population, No. of slum households

- Slum wise data - population, population density, No. of households, No. of BPL

households, legal status (notified/non notified) - as obtained from the consumer survey

undertaken

- Urban poor households living in non-slum locations

II. Other city related information

City Master Plan (latest revision)

Other city specific development plan, if any

Latest GIS maps of city (prepared on the basis of satellite imageries or digitized Google

imagery), with appropriate layers indicating

- Existing municipal and project area boundary, ward boundaries, administrative zone

boundaries, master plan area boundary, urban agglomeration boundary

- Most recent existing land use

- City road network – major and minor

- Contours at 1 meter interval or spot levels of location of source, WTP, Clear Water

Reservoir (CWR), Elevated Storage Reservoir (ESR) all important road junctions within

the city jurisdiction

- Availability and location of vacant government land proposed for water supply

infrastructure

- Information related to water supply infrastructure, as elaborated in section III, sub-section

2.

III. Water supply infrastructure (for city/project area)

1. Water supply system

Raw water capacity

- Details of surface water sources – Name, location, availability of water, allocation, design

capacity of intake well,

- Details of ground water sources – number, location, safe drawl capacity

- Source wise raw water capacity

Water treatment

- Details of Water Treatment Plants (WTP) – number, location, design capacity and

capacity utilization

Water transmission and storage

- Details of Pumping mains - existing pumping machinery and electrical installations at

WTP and booster stations

- Service reservoirs – number, location (ward or zone name) and capacity

- Schematic / Line diagram of the bulk water production and treatment system; transfer to

ESRs indicating capacities of different units, pipe diameters, and water levels (Above

MSL) in different ESRs

Water distribution



- Distribution pipe network details - location, age, pipe diameter, material (as per

methodology suggested)

- Total number of water connections – residential, commercial, industrial, other categories –

as obtained from the consumer survey undertaken

- Details of water connection in respective hydraulic zones – as obtained from the consumer

survey undertaken

- Status of metering – no of metered/unmetered connection, flat rate connections

2. Mapping of infrastructure on digitised city map

Index map showing location of water sources, WTPs, transmission mains, booster stations

Existing water supply distribution network, including location of ESR’s, booster stations,

boundary of different hydraulic distribution zones

Geo-tech details at points where interventions are proposed or along alignment of

proposed pipeline

3. Drawings

Campus plans of all over-ground structures – intake structure, WTP, pumping stations,

reservoirs, electric substations, connecting pipe lines valves etc.

General arrangement drawings of all structures showing piping arrangement, electro-

mechanical installations

IV. Operational data (project area)

Details of raw water production in past three years including raw water produced from

different sources, water quality and raw water transmission losses

Details of treated water production in past 3years including transmission losses

Water transfer to different distribution zones

Supply duration and supply pressure in different distribution zones (zone wise)

Water quality results for chemical and bacteriological analysis, for past one year

Operational efficiency of pumps giving details of existing power supply connections and

power consumption

Availability of power per day during different months

Details of consumables (chemicals, power, fuel) utilized in past 3 years

Details of water supply service delivery to urban poor Hhs and slums under project area

(Based on consumer survey)

Analysis of complaints in past three years in terms of no. of complaints, type of

complaints and time taken for redressal, along with a short description of the complaints

redressal system

Repair history, in past five years (or more, as applicable) of (a): various plant and

machinery (b): transmission and distribution network and (c): leakage repairs

Current status of service delivery against the CPHEEO service level benchmarks

V. Condition Assessment (project area)

Listing of assets under water supply system

Condition assessment including performance assessment of all over ground water supply

infrastructure assets (WTPs, ESRs, pumping stations); and sample condition assessment of



underground network (using recommended methodology), service pipelines, consumer

meters,…etc

VI. Consumer Data (project area)

Registered consumers under different categories along with connection size, type of

connection, status of metering, distribution zone number, etc. derived from data collected

through a consumer survey (as per proposed format).

Consumption estimates based on metering data, if available, or best estimate (ball-park

basis)

VII. On-going works and outsourcing contracts (project area)

Information on on-going works:, extensions to the network, new construction undertaken

in past 5 years.

All outsourcing contract such as for WTP operations, O&M contracts, material supply,

billing and collection, tanker supply, etc

VIII. Operating staff data (city level)

Institutional setup of water supply department of city

Details of O& M staff in terms of number, designation, qualification, experience and

retirement date (for all stages of water supply)

Emoluments and benefits

IX. Financial data (city level)

City Financial data (last 5 years) giving sources of income - own sources, grants;

expenditure; loans and debt servicing

Financial data of water supply operations (last 5 years), including details of operations and

maintenance costs (wages, power, chemicals, repairs/replacements, etc); revenue demand

and collection; No, of bills raised and collected; capital investments made in the system

Water tariff structure in last 5 years for domestic, low income Hhs, commercial,

industrial/other bulk supply connections

X. Other documents

Prevailing water supply rules/bylaws, connection policy including policy for unauthorized

properties

Reports of earlier WSS projects undertaken

Initiatives(including policy adopted) for providing services to urban poor

Master Plans of water supply, etc

Reports on surface water resources and ground water, in the region, if any

Based upon the above information, the city will consider various design options for rehabilitation

and expansion of the system to achieve service level targets; and propose the best suited one. This

will consider a reasonable design horizon of 15 to 30 years for various components, while making

optimum use of the existing assets. Optimization is to be done by striking a balance between

capital expenditure, O&M expenditure and NRW levels.



The city’s DPR will contain the following:

I. Analysis of System Gaps and Shortcomings of Existing System (resulting in non-

performance)

Targeted performance objectives for service delivery and service efficiency against

existing levels (and CPHEEO benchmarks)

Measures proposed to be addressed to achieve continuous supply

II. Design Period – initial stage, intermediate stage and Ultimate stage; and target for

project

III. Population projection (city/project area)

Master Plan horizon

Population growth rate adopted

Demographic method adopted and justification

Population projection – year wise for the project period; and for a longer horizon of 25 to

30 years thereafter.

Ward-wise population projection - initial, intermediate and ultimate stages

Total projected population to be accommodated in existing municipal boundary / project

area

IV. Water demand (city/project area)

Proposed norms for average per capita water supply and upper limit of system losses

Gross water demand and net water demand at initial, intermediate and ultimate stages

Existing water availability and gap for city/project area

V. Design Components as applicable

Intake structure – design period for civil structure and electro mechanical works under the

project

Water treatment plan – Design period, design capacity, shortfall in capacity if any

Tube wells – number of tube wells proposed, yield of each tube well and drawl of water

Details of the proposed DMAs

Pumping main/raising mains and Feeder mains–

- Design period

- Stand by for Pump sets

- Total no. of pumping/rising mains

- Average flow considered in different pumping mains

- Pumping hours considered

- Pumping efficiency considered

- Capacity of pumps proposed for different pumping mains

Service reservoirs (SR)(Details as derived from hydraulic modeling)

- Design period

- SRs to be utilized in the proposed (existing & new) system - number, capacity and height

of SRs



Distribution network

- Design period

- Total length of roads in city

- Total length of roads in project area

- Additional new pipe network proposed – length, diameter, material

- Rehabilitation of existing pipe network proposed – length, diameter, material

- Residual head in distribution network (minimum residual head and range of available

pressure)

- Maximum velocity in distribution network

- Peak flow from the outlet of service reservoirs as per the design (layout wise/DMA

wise/zone wise) and total peak flow from all ESRs

- Proposed number of total water connections – domestic, commercial, industrial

VI. Maps showing the detailed proposed design including marking of land sites for proposed

infrastructure

VII. Land requirements

for WTP, Tube wells, SRs, Pumping stations, Laying pumping mains, distribution mains

and transmission mains

Status of the identified land sites for proposed infrastructure as marked in the land use

plan along with related provisions made in the city master plan

VIII. Bill of Quantities and cost estimates of individual components prepared as per

Schedule of Rates

IX. Financial Projections

Assumptions made for financial projections

Proposed tariff structure (on completion of project)

Provisions made for urban poor in the proposed tariff structure and water connection

policy

Projection of operating subsidies, if envisaged

Projection of revenue and expenditure during rehabilitation period and O&M period,

indicating projected tariff revisions (if any) and related measures to improve recovery of

operational expenditure

Projection of capital investments including for expansions (raw water capacity, bulk water

supply, network expansion, expansion of service area)

Projection of periodic replacements of assets

Financing plan for initial capital investments (including grants, city contribution in the

form of loan and/or grant, operator investments)

Estimate of applicable project viability indicators such as cost recovery, project IRR, debt

service coverage ratio, etc

X. Other related information

Proposed SCADA arrangement



Proposed Management Information System (MIS)

Complaints redressal system

Proposed staffing and plan for deployment of government staff

As mentioned earlier, the designs prepared and interventions proposed by the city shall be flexible to

change by the operator (once appointed), to the extent it follows the design standards/specifications

specified by the city in the DPR. The Project Implementation Plan (PIP) prepared by the operator will

provide the basis for actual implementation.



Annexure 2: Assessing Project Financial Sustainability


Financial sustainability of WSS service providers 1 specifically refers to the adequacy of

revenues for meeting O&M costs and capital costs during the life cycle of the project.

In conventional city (or other public owned) operations, the availability of finances is a

constraint. To cope with inadequate finances, cities reduced O & M expenditure to match

available finances. Capital investments were deferred and limited to the extent of grants

available. Service levels and asset quality deteriorated as a result. Though the system was not

financially sustainable, cities maintained a low level equilibrium in service quality.

Water PPP projects do not have this option. Operators are responsible for a set of service

delivery parameters and for meeting related costs. Operators need to spend routinely on asset

maintenance and operations. Major refurbishment of assets is also required to maintain service

standards. Some PPP contracts require the operator to undertake new capital expenditure and

also to replace assets whose useful life expires within the contract period. Therefore, the city

needs to assure that it has adequate financial resources to meet (a): initial capital costs (b):

contingencies (c): O & M expenses (d): expansions. Assessing the financial sustainability of

water PPP projects upfront is therefore relevant.

Current Situation

Several water PPP projects have faced financial stress. For eg., while Khandwa and Latur

targeted operational sustainability through user charges, they ignored changes in scope and

future expansions. Nagpur and Aurangabad sought to access private finance partly and improve

the cost recovery situation partly. Mysore focussed neither on operational sustainability nor on

future expansions. Poor financial condition of the cities created a stalemate in Mysore and

Khandwa.

Thus, the PPP projects in the cities focussed only on service delivery improvements; financial

sustainability has not been addressed. Cities such as Mysore, Khandwa and Latur also did not

assess if they would be able to absorb any financial contingencies.

The financial difficulties that water PPPs have encountered are related to the underlying poor

financial status of WSS sector. Operating cost recovery is poor. Tariff is low and is not revised

regularly. Most cities rely on grants from State and national Governments for capital

1 Achieving financial sustainability and recovering costs in bank financed water supply and sanitation and irrigation

projects, Alexander McPhail, Alian R. Locussol, Chris Perry, 2012, Water Partnerships Programme



investments. As a result, when they take up a project, even though it is supported by a grant, they

are not financially capable of meeting increased O & M liabilities of improved and augmented

services; or uncertainties. The grants are limited to a share of approved capital costs and do not

meet cost escalations or change in scope. When a PPP project encounters a financial challenge

(loss of revenue, increase in costs or change in scope), an easy resolution is not possible since the

city is not financially strong and is reluctant to revise tariff to meet costs.

Analysis

Cities have attempted PPP projects in the background of poor operational cost recovery. The

following table summarises how the project design and the PPP contract addressed financial

issues in five projects.

Table 1 – Financial Summary of five PPP Projects

Khandwa Aurangabad Nagpur Latur Mysore

1. Project is concurrent with

tariff revision to improve cost

recovery

Yes Yes Yes Yes No

2. User charges are an integral

part of the revenue model of

the operator

Yes Part user

charges, part

subsidy

Distinct from

user charges Yes Distinct

from user

charges

3. Project eliminates need for

operating cost subsidy from

the city

Yes No, but

subsidy is

capped

No; will

require

operating

subsidy

Yes No

4. Project (pvt. operator)finances

part of initial capital costs

10% 50% 30% of

distribution

network

No No

5. Project design includes a

solution for financing of

change in scope in initial cap-

ex

No No No NA No



future expansions

No No No No No

Khandwa focussed on achieving long term operational sustainability by linking the operator’s

revenue to user charges. There is no additional subsidy from the city to the Operator.However,

the project remains vulnerable to changes in scope since the city is responsible for financing

change in scope of work and expansions, and did not have the financial strength to meet these

costs.

In Aurangabad, the Operator is compensated partly by user charges (which were fixed prior to

bidding) and partly by a yearly operating subsidy (bidding parameter). The operating subsidy is

25% of the annual revenue of the city. As a result, the project carries significant revenue risks.



Additionally, the city’s ability to finance change in scope or future expansions, which remain it’s

responsibility, is untested

In Nagpur, the operator receives a fixed rate or fee per unit of water billed and collected. This

rate is delinked from the water tariff. The water tariff does not meet the entire water supply costs,

which continues to be dependent on city finances for sustainability. The city is responsible for

any change in scope and for future expansions. Thus the project neither addressed operational

sustainability nor future expansions.

In Latur, the Operator is fully responsible for meeting operating costs through user charges, as in

Khandwa. However, unlike Khandwa, capital investments were not considered in project

preparation. Major capital expenditure was the responsibility of one of the contract counterparts,

the parastatal agency; but the parastatal does not have a revenue base. The second counterpart to

the contract, the city Government, was financially weak and could not support operations or

capital investments. Thus, while the PPP project considered operational sustainability, it ignored

capital investments and future expansions.

In Mysore, the operator is compensated by a fee paid by the city which is higher than current

tariff levels. The gap between the water supply revenue and the operator payments is met from

the general budget of the city. Identified capital investments are fully financed by JNNURM

grants and a small share from the city Government. However, the contract does not clearly assign

responsibility for changes in scope. Further, there is no clear framework for financial

sustainability for the future. Thus the project neither addressed operational sustainability nor

future expansions.

All five projects have attempted to improve their WSS financial situation only partly,

highlighting the need to assess financial sustainability upfront and with regard to all stakeholders

involved.

This requirement is important irrespective of whether the project is initially grant funded or not.

PPP projects should have clear solutions for meeting

a) Capital costs including unforeseen cost escalations or change in scope of work

b) Operational costs whether paid for by the city or by the operator

c) Future capital investments

Corrective Measures

Financial sustainability can be improved only through a carefully planned and phased cost

recovery plan and through committed long term support from cities to WSS sector. The required

measures are well recognised and are part of the municipal and WSS reform agenda. However,

these are long term measures and the current situation will continue to be vulnerable. Therefore

cities that are pursuing PPP projects have to ensure that



a) Financial requirements are carefully assessed

b) The PPP contract assigns clear responsibilities for financing capital expenditure, operating

expenditure, contingencies and expansions

c) The stakeholders understand their respective financial strength relative to their obligations

d) The stakeholders understand the residual financial risks so that they can manage them better.

Proposals

A financial sustainability assessment tool has been developed for this purpose, and is proposed to

be integrated into PPP decision making processes. This tool will be a diagnostic tool which will

assess if the PPP project design ensures availability of finances for sustained service delivery.

Cities would do a self-assessment; appraisal agencies at the state and central level could use this

tool as a part of the appraisal process. The financial sustainability assessment tool is intended to

be used at different stages of the project:

a) At the project concept stage when broad project costs are available. The diagnostic tool will

help the city make a summary assessment of the suitability of the PPP approach, given the

costs, existing tariff and city finances.

b) After the Detailed Project Report (DPR) has been prepared and a financial analysis is

available, a more detailed assessment can be made. At this stage, the ability of the city to

meet the capital and operating subsidies can be assessed. The probability for variations in

project cost can also be assessed based on the quality of preparation underlying the DPR.

c) In the review, appraisal and approval stage, the tool can be used to develop alterative

scenarios to improve project quality. For example, various options related to financing mix

and tariff assumptions can be undertaken. If required, technical preparation can also be

revised to improve project quality.

d) Further assessment can be done after the PPP structure is finalised and a risk sharing

framework is designed. Normally this will occur after the preparation of the Request for

Proposal document for the selection of private operator. This assessment will indicate if the

risk sharing terms are aggravating the financial risks.

e) This assessment can be regularly updated in further stages of the PPP project. For example,

after the Operator prepares a detailed investment plan, the assessment can be updated to

reflect the data gathered by the Operator and the final investment plan.

The tool is not a substitute for financial modelling and instead relies on the outputs of the

financial model and the Detailed Project Report. To illustrate, the financial model will determine

the project returns (say project IRR and equity IRR) given a certain set of assumptions. The

financial assessment tool will indicate whether the assumptions are realistic and what is the

likelihood of the project being vulnerable.



This tool is not intended to asses a) value for money or b) efficiency in investment planning or

c) competitiveness in procurement, which are to be assured separately. Each of these factors may

indirectly impact financial sustainability. For example, if the project intends to replace the entire

distribution network or overprovides for bulk water, the approach may not be efficient in

investment planning. However, it may still be financially sustainable IF the municipal finance or

user charges are adequate to meet these higher costs. The tool will only highlight if the available

finances are adequate.

Financial Sustainability Assessment Tool

Design

The tool assesses financial sustainability with the help of three sets of indicators (Figure 1).

The first set of indicators called Key Indicators, measure the financial impact of the project on the stakeholders and their

ability to bear the impact. These indicators are quantitative. The tool assesses the impact on a) project b) operator, c)

lender, d) consumer and e) city. There are seventeen key indicators (

a) Figure 2). Five of these indicators can be calculated at project concept stage itself, with

minimal information.

b) The second set of indicators measure quality of Risk Allocation in PPP design to assess if all

known costs and revenue risks have been addressed. It assesses how the risk allocation

affects the availability of finances at different stages of the project (development and

construction; revenue; operating cost changes and expansions). This assessment will be

carried out after the project structuring has been completed and risk sharing principles have

been finalised.

c) The third set of indicators measure the quality of Project Preparation to assess the level of

detail underlying cost and revenue estimates and if assumptions are realistic. Eight areas of

project preparation are assessed. This assessment can be carried out on completion of the

DPR and after a financial model is available.



Figure 1 – Summary of the Financial Sustainability Assessment Tool

Overall, through a grading of the indicators, the tool helps assess

a) Which stakeholder is vulnerable to financial impacts?

b) What is the quality of risk allocation and which stages of the project are vulnerable?

c) Which areas of project preparation are weak; and therefore what are the revenue and cost

risks that stakeholders should be conscious of?

The following sections discuss the indicators used and the grading methodology.

Indicators

First Set – Key Indicators

The Key Indicators measure the impact on five key stakeholders. The indicators marked “1” can

be assessed with minimum information, generally at stage of conceptualising the project. The

indicators marked “2” will require additional information, generally available only after Detailed

Project Report, PPP risk sharing principles and financial modelling are available. The two

indicators marked “C” are relevant only for situations where the private operator is financing a

part of the capital investments.

Index TabsProject PreparationRisk AllocationKey IndicatorsSummary

Project Preparation Project SustainabilityInstitutional StrengthInstitutional Strength

Institutional StrengthKey Indicators

Project PreparationProject Preparation

Risk AllocationProject Sustainability

Project SustainabilityProject Preparation

What is the financial impact of the project on key stakeholders?

What is their ability to bear the impact?

How are the key project risks allocated?

How does it impact the availability of finances during various stages of the project?

Covers construction risks, revenue risks, operating costs escalations and expansions

What is the level of detail underlying the cost and revenue estimates?

Are the assumptionsrealistic?

Covers construction, revenue, operating parameters , operating ostsand escalation, expansion and financing



Figure 2 – Key Indicators

Second Set - Risk Allocation

These indicators assess quality of risk allocation in four stages of the project a) development and

construction, b) revenue, c) costs and d) expansions.

Key Indicators

Project

User Charge-----------

Water Supply Costs

Key Indicators related to impact on

Developer Lenders Users ULB

Project IRR post tax


Operator Revenue

Equity IRR post tax

% of revenue linked to O & M

performance

% of capexreimbursement

linked to performance

Debt-----------

Revenue Surplus

Minimum DSCR

Average DSCR

Source to customer

responsibility

Average monthly bill for households

Tariff in Rs/KL

Recovery of connection

charges

Own contribution------------------------Revenue Surplus

Municipal Subsidy-------------------------Revenue Surplus

Project Cost-------------------------

Total Revenue

Tariff structure and revision

2

2

1 1 1

1

C

2

2

12

2

C

2

2

2

2



Figure 3 –Indicators – Risk allocation

Third Set - Project Preparation

The third set of indicators assess the key assumptions and level of detail underlying project

preparation - a) development and construction assumptions, b) demand, c) revenue, d) operating

parameters, e) operating costs, f) operating cost escalations, g) provision for expansion and h)

financing. Over fifty indicators related to project preparation are assessed. For example, under

Construction and Development, the following indicators are assessed.

1. Capital costs for bulk and treatment assets

2. Estimates of pipe length

3. Estimates of number of connections

Index Tabs Risk Allocation

Development and

ConstructionRevenue

Operating Cost Changes Expansions

1. % conversion per year

2. Preparatory period3. Operator

implemented capex4. Capex payments


5. Change in pipe length

6. Change in number of connections

7. Change in % of assets replaced

8. Design changes9. Price escalation

1. Estimated connections

2. Consumption per connection

3. Population growth4. Revenue collection

1. Staff cost escalation2. Power costs3. Chemical costs4. Other repairs and

maintenance5. Raw water costs

1. Residual capacity of bulk supply

2. Design period for distribution network

3. Demand increase4. Increase in

connections5. Increase in service

area6. Increase in network

length



4. Percentage of pipes to be replaced

5. Percentage of house service connections to be replaced

6. Percentage of meters to be replaced

7. Escalations

8. Physical contingencies

9. Basis for unit cost estimates

Grading

Each indicator is graded in four categories,

“Weak” indicated by red grade;

“Vulnerable” indicated by yellow grade;

“Acceptable” indicated by blue grade; and

“Sound” indicated by green grade. A template provides guidance on how to grade the

indicator as sound or acceptable or vulnerable or weak.

Though the individual areas are graded in four categories, the tool does not envisage making an

overall grade for a project – since indicators are linked, and a weak grading in one may be

compensated for by a sound grading in another (reflecting city context and priorities). Also, such

a summary grade will divert attention from individual areas that are weak and may affect a

particular stakeholder significantly (or) may affect one aspect of the project strongly. However,

given their critical nature – all of them have the potential to derail a project – the key indicators

for any project must be sound (green grade), or at the very least, acceptable (blue grade).

A grading sheet (refer Financial Sustainability Template attached) provides guidance to grade

each indicator. Some grading criteria are illustrated below:

1. If “Total User Charges” as a proportion of “Total Water Supply Operational Costs” (based on

the projected costs after completion for project) is between 40% to 60%, the project is graded

“Vulnerable” (Yellow grade) since it would rely on significant operational subsidies from the

City Government.

2. If the project viability measures in terms of post tax project IRR is less than 10%, the project

is termed very weak (red grade); commercial borrowing would be difficult under these

circumstances.

3. If estimates of pipe length (proposed) are based only on available surveys of road length

(which may be dated/inaccurate), then it is graded as “vulnerable.” If it is based on a current

survey of road length and also includes ongoing road developments, it is graded as

“acceptable.” If the pipe length estimates are based on covering the entire the service area

based on the master plan road length, it is termed as “sound.”



The grading scale that has been proposed is indicative and is being refined further by

carrying out sample assessments of water supply projects that have been proposed for

funding under JNNURM.

Figure 4 – Illustration of grading

Guidance

Brief remarks on the indicator, source of data and suggested approach for calculation are

included in the template itself. A detailed user manual will be separately provided.

Sample Assessment

This section summarises the financial assessment of an on-going PPP project, wherein the city

engaged a private operator on the basis of a limited period management contract. All investments

in network rehabilitation and construction, as estimated in the DPR, were borne by the city. The

operator is responsible for rehabilitating the network, and achieving performance improvements,

and is remunerated through a fixed management fee, and a performance linked fee. The key

indicators are summarized below.

Category Indicator Sound Acceptable Vulnerable Very Weak

1 Key Indicators

Project

Sustainability through tariff

revenues

User Charge/ Water Supply

Costs > 80% 60% to 80% 40% to 60% < 40%

Project Viability Post tax project IRR >15 % 13% to 15% 10% to 13% <10%

Developer

Dependability of revenue

model

User Charge/ Revenue to

Operator > 80% 60% to 80% 40% to 60% < 40%

Project Viability Post tax equity IRR >20% 15% to 20% 12% to 15% <12%

Revenue risk due to non

performance

% of operator revenue linked

to O & M performance <5% or incentive 5% to 15% 15% to 25% >25%

Capex risk due to non

performance

% of capex reimbursement to

operator linked to

performance <5% or incentive 5% to 10% 10% to 15% >15%

Key for grading



Figure 5 –Key indicators of financial sustainability for a sample city

a) Some key indicators are in the vulnerable category; user charges do not cover operational

costs (column 1). As a result, the city will need to subsidise the operations. However, the

municipal subsidy as a proportion of revenue surplus of the city is at an acceptable level

(column 4).

b) The Developer is vulnerable since a very high proportion of the capital expenditure payments

as well as O & M revenue are linked to performance. The Operator does not have source to

customer responsibility; this increases operational risks.

c) There is no interface with lenders since the project is fully grant funded.

d) Consumers are well placed since tariff levels are low and have not been revised.

Index Tabs Project PreparationRisk AllocationKey IndicatorsSummary

Project


Water Supply Costs





Operator Revenue

Equity IRR post tax


performance



Debt-----------

Revenue Surplus

Minimum DSCR

Average DSCR

Source to customer

responsibility


Tariff in Rs/KL


charges


Project Cost-------------------------

Total Revenue



Grading sheet follows



e) The city too is relatively well placed. Tariff structure is poor and has not been revised.

However, the city is financially in an acceptable position to meet the operating subsidies. Its

share of capital expenditure compared to its revenue surplus is also reasonable.



Poor risk allocation makes the project vulnerable:

a) The development and construction stage risks are poorly allocated. The Operator bears a high

degree of development and construction risk. A very high proportion of capital expenditure

related payments are related to performance.

b) The operator is protected from revenue risks which are borne by the city. Due to the short

term nature of the contract, cost escalation risks are not significant. Future expansions are

clearly not in the scope of the operator, but are capable of being borne by the city.

Figure 6 – Assessment of risk allocation in the PPP structure of a sample city


Development and

ConstructionRevenue




















length



Project preparation is poor which makes the project vulnerable. The assumptions and

methodology related to construction cost estimates, operating cost estimates, operating parameter

specifications are poor and make the project vulnerable. The project is short term in nature and

therefore the assumptions related to demand, revenue, cost escalations and expansion are not

critical. Where applicable, assumptions in these areas are acceptable. The project is fully grant

financed.

Figure 7 – Quality of project preparation in a sample city

Overall, while the city seems to have adequate financial strength to manage the PPP project, the

project has been made vulnerable due to controllable factors – a) poor project preparation, b)

poor risk allocation in construction stage and c) excessive revenue risk to the operator.

Such an assessment, if available at the stage of project approval, would fcailitate the approving

entities to request a rework of risk allocation and a more elaborate project preparation.

Using the Tool

As explained earlier, the assessment can be done at various stages of the project. The tool can

provide inputs to improve project preparation and PPP design. It also is also meant to be used as

an appraisal tool by State and national Government agencies.


Development and Construction Demand Revenue

Operating Parameters Operating costs Operating cost

escalation

Provision for Expansion Financing



In the project preparation stage, the tool can be used to standardize key assumptions. The

approach for estimating costs and technical preparation can be validated. If the project is termed

weak or vulnerable, the project size can be optimized to reduce the risk.

In the review, appraisal and approval stage, the tool can be used to develop alterative scenarios to

improve project quality. For example various options related to financing mix and tariff

assumption can be undertaken. If required, technical preparation can also be revised to improve

project quality. Approving agencies can also set covenants for grant disbursal, based on

commitments from the city to improve project sustainability.

At the PPP design stage, the tool can help choose the appropriate PPP model so that the risk on

stakeholders is optimized. It can help set appropriate risk sharing. Depending on the strength of

the project, it can help target the right profile of developers. For example, if a project is deemed

vulnerable on operations cost control, developers with strong operations experience may be

preferred. If a project is termed weak on its impact on consumers, developers with a proven track

record of managing civil society (or) with experience in low income countries could be targeted.

Even if the assessment is done after award of the PPP contract, the tool can help identify

vulnerable areas. This can help in strengthening the monitoring and risk mitigation mechanisms.

Review, Appraisal and approval stage

PPP design stage

Post Facto

Project Preparation Stage

• Standardising assumptions

• Validating approach for estimates, technical preparation

• Optimising investments to improve sustainability

• Iterations with various financing mix, tariff assumptions

• Overall assessment of sustainability

• Revising technical preparation

• Setting covenants for disbursal

• Choosing appropriate PPP models and targettingdevelopers matching quality of preparation and financial impact

• Balancing risk allocation and financial impact on stakeholders

• Recognise vulnerabilities

• Design monitoring and risk mitigation mechanisms



Annexure 3, Part I: Performance Targets, Phasing & Linking Performance with

Operator Revenue


Cities undertaking water supply PPPs must target significant improvements in service delivery as an

objective and justification for engaging private sector. The private sector partner would be

responsible for delivering on all (pre-determined) performance parameters. Therefore, having clear

performance targets for private partners is imperative to objectively assess the success of the private

partner at the end of any time period of the contract (not only at the end of the contract period). To

enable a regular assessment, time-wise phasing of targets is critical, i.e., what should the private

partner have achieved at the end of the first year or third year of its operations on (for eg.), 24 x 7

supply or on reducing NRW or on any other parameter. Also, if these targets are not realistic, this

discourages bidders and makes enforcement difficult, in either case, a clear recipe for failure of the

PPP. Moreover, once realistic targets are determined and an appropriate phasing is put in place, the

private operator should be incentivised or penalised for the achievement or non-achievement of

these performance targets. This combination of factors results in getting serious operators to be

interested in such projects, and also ensures that the operator brings in its entire expertise to deliver

on the project.

Current Situation

The water supply sector in India has witnessed a limited number of operational PPP projects as yet.

An evaluation of these projects reveals

poor baseline data making the establishment of realistic targets and their phasing difficult

clearly defined performance parameters; but the phasing of the targets either too liberal or too

stringent

Moreover, the performance targets, even for water distribution projects incorporate disproportionate

focus on front ended project construction targets. Further, in terms of incentives and penalties,

linkage of performance to operator revenues is either too weak or too stringent, which resulted in

not too many operators bidding for these projects or disputes during implementation. Very few, if

any, PPP projects has seen a set of balanced performance targets and a clear linkage to operator

revenue, which is significant enough to incentivise operator performance, yet not too stringent.

Analysis

In most Indian cities, improvement of coverage and service delivery entails significant

rehabilitation and augmentation of the network, since existing assets are badly degraded, and / or

inadequate. A large construction component is thus incorporated in to the PPP arrangement. Since a

large investment is proposed ULBs also expect rapid improvement in service standards.

Consequently, while intended to support achievement of service level benchmarks, the construction

component has tended to take centre stage. This has resulted in



Pre-determined construction milestones becoming the first critical benchmark during

implementation

A disregard for the Operator’s expertise and inadequate room for the Operator to suggest

alternative investment approaches which may optimise investments required

It is also evident that a part of the reason for such stringent time frames for construction and

performance delivery is also driven by the need to show significant impact through PPP, to justify

private sector involvement.

Thus, one of the early rehabilitation and O & M PPP projects, Karnataka Urban Water Supply

Improvement Project (KUWASIP), was implemented as a three year contract, in the first 12 months

of which the operator was required to study the system, provide the implementation plan and

complete construction as per the proposed & approved designs. About 30% of the total incentive

available to the operator through the life of the contracts was based on successful completion of this

construction, resulting in providing 24 x 7 water in the 12th

month of the contract. While the

number of connections in each one of the three cities that comprised KUWASIP was not very large,

(a total of 26,045 house service connections across all cities) 100% of the under-ground distribution

pipeline was replaced as part of the system rehabilitation – due, in part, to the poor quality of

existing PE pipes, but also to the stringent time frames to achieve performance standards. Similarly

in the case of Delhi Jal Board’s O & M project in Malviya Nagar (42,000 connections & a

population of 4,00,000), the private operator is given the first 18 months to complete the entire

rehabilitation of the water supply distribution system; and operates the system for a period of eight

years thereafter. In the case of the 25 year concession contract in Aurangabad city in

Maharashtra(about 1,50,000 connections & a population of 12,00,000), the concessionaire is given

barely three years from the date of signing the agreement for completing construction and

rehabilitation of the distribution network for the entire city.



It is evident that cities are focusing disproportionately on rehabilitation and network augmentation,

and front ending these in the initial few years. A shift in focus towards operations and improved

consumer service delivery is required, through ensuring that these are achieved simultaneously with

construction, particularly as these constitute the key justification for engaging in the PPP.

The next significant issue is that of phasing of performance targets. Cities expect private operators

to deliver results (including 24 x 7 water at the requisite pressure; meter, bill and collect over 90%

of water provided for; and establish a redressal system that resolves more than 80% of consumer

complaints within 24 hours, and more) - all virtually immediately upon contract award, and a

limited construction period. As a result, the Operator has little incentive to study the system and

attempt to optimise interventions. He is more likely to over-compensate for performance risk in the

price bid; or seek additional investment for system replacement, in order to meet performance

standards within a short time.

This issue needs to be addressed by first providing relevant and reliable base line data of the project

area, consumers and water supply system, either by (a): bringing in credible, agencies to develop

this on behalf of the cities; or (b): by providing the selected operator an initial period to develop this

baseline data of the system. Once this baseline is credibly established, , PPP contracts need to offer

private operators adequate time to achieve pre-established end objectives. Realistic phasing of

performance targets during rehabilitation is essential, not only for attracting more private operators

to bid for water supply distribution PPPs, but also to ensure that many more PPP projects in the

sector achieve the objectives that are stated to be pursued.

It has been observed that PPP contracts either have very weak linkages between achieving

performance targets and operator revenue; or have very stringent performance targets and related

penalties. Both these extremes are not very conducive to achievement of service delivery objectives.

For eg., in the case of the Nagpur concession, the penalties for not adhering to performance

parameters are capped at 5% of total revenue; moreover, there seems to be virtually guaranteed

revenue for the first five years of the concessionaire’s operations, with very limited service

improvement targets. On the other hand, Mysore provided the operator 12 months to operate and

study the system since accurate baseline data was lacking at the time of bidding. However,

thereafter, the operator was required to meet stringent six-monthly performance targets, and 50% of

the management fees and 70% of the operational costs were liable to be entirely forfeited in case of

non-achievement of targets (i.e., payments were not calibrated to extent of performance).

Neither of the above scenarios is conducive to sustaining well operating PPP projects. In the first

one, the ULB has limited recourse in case of underperformance by operator, whereas in the second

case, disputes are inevitable with adverse impact on consumers.

In contrast to the above, it has been observed that internationally, water supply projects are focussed

on improvement of the consumer service. Given the nature of underground network assets, and poor

data base, utilities have opted to hand over services to the selected private operator, who studies the

existing system over the first year and establishes baseline data on all service parameters. The

operator then evolves an investment plan, based on his experience of operating the system for the

first year; understanding of consumer needs and the utility’s ultimate service delivery objectives;



and within the constraints of resources available to the city. This plan is then implemented over a 3-

4 year period, constantly ensuring that the capital investment is (a) used only if it is imperative and

(b) used in areas where the capital gives the maximum results.

Secondly, while the end-target objective of the service level is established and clear, and since the

operator has established the baseline data, the achievement of these targets are then phased, so as to

provide the private operator adequate time to design and provide the most optimal solutions to

address the gaps in service level.

Table 1 - Phasing of performance standards in an international water PPP contract

Finally, the incentives and penalties are linked to very objective measures/ metrics with respect to

each parameter, and are to a certain extent proportional to achievement of annual targets, i.e., it is

not a situation in which the operator either achieves the target and gets 100% of the incentive or

does not achieve the target and does not get incentive at all (as in the case of the Mysore project). In

fact the incentive works in a manner wherein, if the operator delivers performance above a certain

base level, he is entitled to getting a proportional level of incentive.

Such a structure enables the utility to leverage the expertise and experience of the operator and also

builds in adequate incentives to motivate the operator to deliver on the performance targets.

Suggested Interventions

The interventions proposed seek to strengthen the following key principles:

Greater focus on service delivery performance targets as compared to construction targets

Developing a system that enables objective performance target setting and measurement.

Realistic linkage between operator’s achievement on performance targets with his revenue

Maximising utility of exiting assets, by developing a plan to optimise capital investment,

leveraging private operator’s expertise in water operations, design and engineering



Adequate time for implementation of construction and rehabilitation works to further strengthen

the above objective

It is proposed that MoUD recommend (a) the key performance parameters; (b) the targeted

benchmarks for each one of these performance parameters; (c) the phasing of achievement of these

benchmarks, by the private operator; and finally, (d) the mechanism by which the operator’s

revenue is linked to his performance, for all water PPPs. .

Proposals

It is proposed that cities adopt the MoUD specified service level benchmarks as the

performance targets for all water PPP projects which include water distribution.

Table 2: Proposed Performance Targets for Water Distribution PPPs

Indicator Benchmark

Coverage (percentage of households connected) 100%

Extent of metering (%) 100

Extent of non-revenue water (%) 20%

Continuity of water supply (hours per day)** 24 X 7

Quality of water supplied (%) 100%

Efficiency in addressing customer complaints within 24 hrs

(%)

80%

Efficiency in collection of water supply-related charges (%) 90%

Note 1: ** It is proposed that continuity of supply be measured through availability of minimum pressure (7-

18 m) at pre identified critical points in the distribution system.

Note 2: The operator will not be held accountable for supply less than 135 lpcd if the demand is on lower

side even with 24x7 pressurised supply. However, overall system planning and capacity will be for 135 lpcd.

At the bidding stage, it is proposed that cities establish a) the requisite baseline data1 on all the

service parameters, b) the overall time frame allowed for rehabilitation / augmentation and c)

the intermediate targets within the rehabilitation period.

The private operator validates this baseline data in the initial 9-12 months of the contract. The

validated baseline data is used to revise the intermediate targets, if required.

Subsequent to this, it is proposed that 4-6 years be provided for construction, rehabilitation and

conversion of the entire project area (depending on the size of the project, completion time for

1 for the year immediately preceding the year in which they propose to bid out the PPP project



bulk water facilities, complexity of rehabilitation etc). Providing adequate time for rehabilitation

is necessary to avoid undue focus on rapid construction.

Performance targets may be measured differently during the rehabilitation period as illustrated

below. This difference is necessary till the time the entire service area is converted to

continuous supply.

Table 3: Proposed Performance Targets during Construction / Rehabilitation Period

Indicator Benchmark Performance targets

during rehabilitation

period

Performance targets

during O & M period

(after conversion)

Coverage (percentage of

households connected)

100% Minimum percentage of

connections to be covered

at the end of each year

100% in each year

Extent of metering (%) 100 As above 100% for each year

Extent of non-revenue water (%) 20% Not linked to operator

revenue

Internalised within

operator revenue

Continuity of water supply (hours

per day)**

24 X 7 Percentage of connections

to be covered with

continuous pressurised

supply at the end of each

year

24 X 7 for all

connection in all years

Quality of water supplied (%) 100% 100% of samples 100% of samples

Efficiency in addressing customer

complaints within 24 hrs (%)

80% 80% of complaints related

to surface leaks and billing

errors

80% of all complaints to

be addressed within 24

hours

Efficiency in collection of water

supply-related charges (%)

90% At the current level Internalised within

operator revenue

Since the construction would be phased, it is envisaged that after 18 months or so of the start of

construction, the Operator may convert about 20% of the total number of connections to

continuous supply (24 x 7) connections. This conversion would be the key performance

parameter of the Operator in the rehabilitation period. In a management contract the Operator’s

fees during this period would be linked to progress in conversion2.

2 Please note that the Operator will not directly or through any of its associates, undertake construction; but would

be responsible for tendering and supervising the construction through third part construction contractors procured through a transparent competitive bidding process, as outlined by the respective state Governments. This is detailed further in the Note on Optimising Capital Investments.



The following time-line graphically depicts the preparatory and construction / rehabilitation

periods, in number of months. Please note that the time line presented hereunder is indicative

and each project’s time lines may vary depending on the preparatory period and/or the number

of connections. The ULB would determine at the bid stage the number of months within which

the Operator has to complete the construction / rehabilitation of the entire water supply system.

Preparatory period of 1 year Conversion of 20%

connections to 24x7

0 9 12 16 30 36 42 48 54

Signing of 40% 60% 80% 100%

Contract connections connections

Proposed Fee Structure for a Management Contract: As mentioned (refer Framework Note), in

most cities, Operators will be compensated through a fee arrangement, unrelated to prevailing tariff

/ user charges, since the tariff may not be at cost recovery levels at start of project.

In a management contract, it is proposed that during the Construction / rehabilitation period, the

Operator be paid a Fixed Management Fee and a fee per kilo-litre of water pumped into the

distribution system, (as measured at the Water Treatment Plant(s)). These fees would be as finalised

through the bid process and detailed in the Management Contract.

It is proposed that from a predetermined milestone (say the 30th month onwards in the illustration

above), the Operator would only be paid 90% of his Management Fee, and the balance 10% of his

Management Fee would be based on the actual percentage of user connections that have been

converted to 24 x 7, against the targeted percentage of connections in the same time period. From

the 36th month, this variable component of the Management Fee would increase to 20%; further to

30% from the 42nd month and so on, such that in the last 6 months of rehabilitation / construction

period, a maximum of 50% of the Management Fee is based on performance against the target. The

other component of the fee (per KL of water pumped into the network) would remain the same.

After completion of the rehabilitation / construction period, the Management Contract enters the

operations period, during which the Operator is remunerated based on a Fixed Management Fee and

a fee per kilo-litre of water billed and collected from users. In this fee structure the operator will

bear all the actual costs of raw water, water treatment, including chemicals, energy costs etc. This

fee structure is effective and appropriately balanced, and also ensures that the private operator’s

interests are aligned to that of the ULB. To illustrate, if the NRW is high, the Operator

automatically bears the cost of increased raw water consumption, since he is remunerated only for

the water that is billed and collected.

Linkage between performance and Operator revenue: During the Operations period, up to 50%

of the fixed management fee would be linked to performance targets. The revenue adjustment is



proposed to be calculated based on a weighted average performance on each one of the performance

parameters, against its annual target. The performance parameters and their proposed weightages

are as follows:

Table 4: Illustrative weightages of Performance Parameters during Operations Period

Performance Parameter Weightage

Customer Coverage 25%

Continuous Supply 30%

Water Pressure 30%

Customer complaint redressal 15%

Extent of NRW (%) Revenue adjustment is in-built in the operator remuneration

mechanism

Billing & Collection Revenue adjustment is in-built in the operator remuneration

mechanism

Water Quality Performance below 100% compliance to CPHEEO norms, on

more than “x” occasions, would result in start of termination

process

Based on the achievement, or the lack of it, the operator would be allotted a score between 1 and 5,

where he would be scored 1 if the operator has achieved the target for that parameter, a score of 2 if

the operator has under-achieved the target by, say, 2% and so on, as depicted in the table hereunder.

So a score of 1 is “Excellent”, 2 is “Very good”, 3 is “Good”, 4 is “Fair” and 5 is “Poor”.

Table 5: Operations Period: Rating of Performance



The operator’s annual revenue adjustment would be calculated based on the following formula:

Annual revenue adjustment= Weighted average Composite score - 2 x (Max. Annual revenue adjustment)

3

The revenue adjustment would be to the extent of non-performance, but with a cap of about 50% of

the operator’s Fixed Management Fee.

In the case of a concession, the performance parameters during the Operations Period would be the

same as those outlined above for a Management Contract. The manner of evaluating performance,

the weightage attributed to the performance parameters and rating performance would also remain

the same as in the case of a Management Contract.

However, the concessionaire’s annual revenue adjustment would be calculated as follows:

Annual revenue adjustment = 3-Weighted average Composite score x10% of concessionaire revenue

2

This variance in the mechanism of linking Concessionaire revenue to operating performance,

compared to that in Management Contract is due to the fact that the revenue of the Concessionaire

would be entirely based on a fee per kilo litre of water billed and collected.



Annexure 3, Part II: Optimising Capital Investments


Most water PPP contracts in India to date, have been structured as construction and operations &

management contracts, wherein the private sector operator is incentivised to deliver targeted service

levels and operational efficiency. But, none of the performance parameters seem to have included

optimising capital investments. This has resulted in most operators tending to recommend complete

replacement of the under-ground distribution system.

Evidently, on a national scale such complete replacement of networks is neither feasible nor

desirable. Refurbishment of the under-ground distribution network to the extent required to deliver

on the targeted performance parameters is what is sustainable, as well as desirable. This section

addresses this issue in the case of management contracts.

Current Situation

Most water PPP contracts in India, to date, have been accompanied with significant capital

investments to improve water supply assets.3. Given the current status of water supply

infrastructure, it is expected that such large scale investment would be required by almost all cities.

In a context of unreliable data on existing assets and pressure to show results, private operators

have, more often than not, tended to recommend that cities undertake complete replacement of the

water distribution infrastructure to ensure that they can deliver on the performance targets. Thus,

while cities would want to maximise performance with the least capital investment, private

operators are focussed only on achieving the performance targets on each of the parameters,

irrespective of the capital investment required. For a successful PPP to operate, it is imperative to

align the interests of both the parties in such contracts.

Analysis

In most PPPs, (eg.: Mysore, Aurangabad, Khandwa, Patna and others) the Detailed Project Report

(DPR) developed by consultants is not oriented towards PPP. Often, inadequate time and resources

preclude undertaking requisite in-depth surveys to bridge information gaps. Notwithstanding this,

interventions required are identified, and costs estimated on this basis, in order to secure funding.

Projects are bid out based on these DPRs. Given the nature of PPP agreements, once an operator has

won a bid, it then becomes very difficult subsequently to alter the DPR or the associated project

cost. As a result, recommended designs /interventions do not leverage the operator’s expertise

towards optimising capital investments. The current process for procuring MoUD funding, which

requires up-front statement of project costs thus limits the city’s ability to maximize the potential of

the PPP arrangement.

This process also very often results in projects being stalled, as operators indicate the funding

procured to be inadequate to achieve stated performance targets – as, for eg, in Mysore and

3 including, clear water reservoirs, elevated service reservoirs, pumping stations, pipeline network, house service

connections and water meters



Khandwa, where operators have recommended almost 100% replacement of the under-ground

distribution network4. KUWASIP also had a complete replacement of under-ground distribution

network, though the contract had a built-in an incentive to the private operator for reducing the

investment. DJB’s Malviya Nagar contract provides for replacement of 50% of the under-ground

distribution network, though the details of assets to be replaced would be decided by the private

operator in the initial six months when the private operator is responsible for operating the system.

Such a tendency has encouraged private operators to focus on delivering on performance targets and

not on reducing capital investment through painstakingly refurbishing underground assets, rather

than take the easier option of replacing all under-ground assets. Other than the KUWASIP project,

virtually none of the projects has any incentive to the private operator to reduce capital investment.

To a certain extent, the easy availability of grant funds has also made cities insensitive to the issue

of cost optimisation in delivering improved services. Further, in many of the PPP projects, even the

ULB’s contribution towards the project has been sought from the private operator, thereby not

exerting any capital financial burden for the project on the ULB. For eg., in the case of Khandwa,

the city had a UIDSSMT grant approval for about Rs.90 crores and bid out the concession based on

providing this fund to the project and the balance amount to complete the project was to be funded

by the private concessionaire. Therefore, the financial pressure on the ULB to try and reduce capital

investment was also vitiated.

There is thus a strong case for designing PPP processes and structures that enable cities to

effectively leverage private operator expertise to maximise system efficiency while striking an

optimum project cost. Allowing adequate time for implementation is critical to this. As noted

briefly in the earlier section, a practice of phased implementation is observed in international water

projects, wherein

Phase 1 is a preparatory period, typically 9-12 months (depending on the number of

connections or the size of the distribution network) in which the private operator takes over

the water distribution system and validates information regarding gaps in performance of the

distribution assets; consumption patterns; consumer metering and billing systems;

consumer’s paying habits, etc. This is used to develop a project implementation plan for

construction and rehabilitation to deliver on the targeted performance objectives. This plan

is submitted to the city for concurrence and approval.

Phase 2 is an implementation period, again depending on the number of connections under

the contract, wherein the operator implements the agreed project implementation plan and

also begins to deliver on the target performance parameters. This is a relatively longer

period, which enables the operator to maximise refurbishment of the existing system, i.e.,

minimise capital investment. This is usually incentivised by the city.

Phase 3 is the operations phase, where the operator delivers on the city’s and consumer’s

expectations across all aspects of operations. This phase is usually 3-5 years, in order that

sustained improvements may be demonstrated

4 This is also related to unrealistic phasing of performance targets, such that operators are unable to meet them in

the absence of complete system replacement.



Similarly, a study of probably the only private sector water management company in India, JUSCO,

in Jamshedpur, when it was corporatized, shows that JUSCO did not undertake its entire capital

investment program within 12 or 24 months, but did so over a period of 5 years, gradually studying

and replacing or refurbishing the network to deliver the desired results. This resulted both in adding

to the total number of connections, and also, over time, in reducing water tariffs and improving the

operating ratios.

Thus, if a poorly-informed, pre-determined capital investment plan is not forced through in the first

12-24 months of signing the PPP contract, a PPP contract could be structured to achieve capital

optimisation, while achieving the performance targets.

Suggested Areas of Intervention

The process of project preparation and selection of water operator, (refer Note on RfQ for Water

Distribution Projects) are proposed to be revised to address the following issues:

a) MoUD’s evaluation and approval process for PPP projects; and the manner in which the

financial support is disbursed.

b) PPP contracts that enable ULBs to draw upon the private operator’s expertise and build in an

incentive for the private operators to minimise the capital investment required to deliver on the

service level benchmarks.

Proposals

Project preparation: Please refer the Note on Project Preparation, for elaboration of proposals

regarding this aspect.



MoUD funding approval process: It is evident that in the foreseeable future water supply

distribution projects will require grant fund support. Therefore, a distinct approval process for

JnNURM / UIDSSMT funding support for PPP projects is proposed. This approval process will

provide for a 9-12 month period to the private operator to propose his final Project

Implementation Plan, in which interventions identified may differ from those in the DPR

(Please refer the Note on Proposed Process for Funding Water PPP Projects for further

elaboration of proposals under this aspect). This addresses the current reluctance of cities to

modify the approved DPR, and enables the Operator to optimise investments.

Moreover, the Ministry is considering the option of offering the same absolute quantum of grant

for a project (as per initial city DPR project cost), in case the PIP project cost is lower than the

initial city DPR project cost. The city would effectively receive a higher percentage of project

cost as MoUD’s contribution.

Project Implementation & incentive for capital optimisation: The contract should encourage

operators to prioritise focus on performance with construction activities being undertaken to

support this. To optimise investments it is also necessary that the operator (or any direct

associate) does not directly benefit from increased construction scope. Therefore, it is proposed

that the selected private operator should develop the project implementation and investment

plan, but implement it through third party contractors. The Operator would remain responsible

for the design, engineering, project management and construction supervision, but would follow

the ULB’s or the state’s competitive bidding process to procure services of third party

construction contractors to undertake construction activities. The construction cost would be

met by the ULB. The private operator will also be offered a financial incentive to reduce the

project cost from the initial city DPR cost. This could be in the range of up to15% of the saving

that they can bring about, where saving is determined as the difference between the

implemented capital cost and the initial city DPR cost.

It is believed that the combination of the initial city DPR cost; the non-negotiable

specification of key design parameters in the city DPR; third party construction and the

financial incentive for capital cost optimisation should result in optimising capital costs.

Finally, the project implementation should be permitted to be made over a period of 4-6 years,

to ensure that the capital is invested in the most efficient manner, with respect to performance.


1

Draft_For Feedback Only

Annexure 4: Developing a Request for Proposal (RfQ) for Water Supply

Distribution Projects


High bidder interest is one of the indicators of a well-structured and transparent PPP bidding

process. Three key indicators of bidder interest are

1. Number of Expressions of Interest/ Request for Qualification received and shortlisted

2. Number of financial proposals received

3. Diversity of bidder profile consisting of domestic and international bidders

A project that receives adequate number of diverse bids, at the initial stage as well as the

financial proposal stage, indicates that the project profile is attractive, the PPP contract is well

designed and the procurement is on a level playing field.

A bidding process that excludes a certain class of bidders or favours a certain class of bidders

sends a signal of cartelization, especially if the criteria is not consistent with best practices.

Projects that shortlist too few bidders create a perception of lack of transparency and level

playing field. Projects that receive few financial bids send a signal of poor project

preparation.

Repeated instances of such poor bidder participation lead to an impression that Water Sector

PPPs in India are unattractive. This in turn reduces bidder interest to invest in the Indian

market and undertake business development efforts. Civil society opposition also grows as a

perception of cartelization is created.

Therefore, ensuring a wide bidder participation is a key success factor for individual projects

as well as for the Indian water sector as a whole.

Current Situation

The Indian water sector PPPs have shown a mixed record on this indicator. The number of

financial bids has been low in most of the projects (average of 2.58 in 12 projects studied).

Four of these projects adopted a two stage process (an initial Request for Qualification or

shortlisting stage followed by a detailed technical and financial proposal stage). In three of

them, there was adequate interest initially (6 to 9 shortlisted bidders). However, only a few of

the shortlisted bidders eventually submitted a financial proposal. In the fourth project that

adopted a two stage process only a limited number of bidders (3) were shortlisted leading to

limited competition in the financial proposal stage.


2


City Financial Bids Shortlisted Bidders

KUWASIP 2003-04 4 7

Latur 2006-07 3 6

Mysore 2008 3 NA1

Khandwa 2008 3 NA

Shivpuri 2008 1 NA

Nagpur Full City 2009 2 3

Aurangabad 2009-10 2 9

Malviya Nagar 2012-13 2 NA

Vasant Vihar 2012-13 3 NA

Raipur 2012-13 4 NA

Shimla 2012-13 2 NA

Nangloi 2012-13 2 NA

In 2003-04, the perception regarding Indian water PPPs was poor, as a result of a few failed

PPP projects in the late 1990s (Bangalore, Hyderabad, Pune). In spite of this, the KUWASIP

project in 2004 attracted international bidders and shortlisted seven bidders each of which

was led by an international firm. As compared to this, in three of the recently awarded Delhi

Jal Board projects (2012), two projects received only two bids and the third received three

bids. In Aurangabad (2009-10), nine bidders were shortlisted with a mix of domestic and

international firms. Only two bids were finally received.

Analysis

An analysis of bid documents of water PPP projects indicates the following issues.

1. A few water PPP projects were considered unattractive due to their location/ size of

the city. As a result, these projects received limited bidder interest.

2. Some projects received considerable bidder attention. However, due to poor process

(constant changes in bid documents) and poor design (poor contractual terms), these projects

received only a limited number of financial bids; this is inspite of high initial bidder interest

and atleast in one case, shortlisting of several bidders.

3. Some projects had broad qualification criteria which permitted both contractors with

construction experience and operators with O & M experience to bid. In such cases, the

number of interested bidders, especially domestic bidders was high. However, this

discouraged international operators who felt that their operating experience was not valued;

the international operators also felt that they would not be able to compete with domestic

firms which have a higher risk appetite and who are therefore aggressive in pricing their bids.

1 NA – Refers to single stage bid process.


3


4. Where projects required the bidders to have O & M experience, the number of bids

was low. Possible reasons are as follows;

a. Domestic firms do not have water sector operating experience. Therefore, they

had to tie up with international firms. The project documents required that the

partners in a consortium should have a minimum equity stake in the project to be

considered for evaluation. This may have discouraged some international firms

that were keen on the project as an operating partner, but were reluctant to invest

and expose themselves to financial as well as legal risks of the project.

b. The experience criteria were specific to each project. For example one project

required the bidders to have experience in constructing a certain size of river

intake, although the asset was only a small fraction of the overall investment. In

another project, the criteria required bidders to have operated a system with very

low Non Revenue Water levels – below 20% to be eligible to apply and

effectively below 15% in order to be shortlisted. In still another project, the

criteria also had subjective elements and required bidders to demonstrate

experience similar in ―complexity and characteristics‖ to the project being bid.

5. Projects also included criteria that are non standard PPP practices. For example, one

project did not consider project experience if the project had been implemented by an

associate company or a subsidiary. PPP projects are normally implemented through Special

Purpose Vehicles. This criteria did not permit the parent company to claim the project

experience. Some projects specified a threshold eligibility. All bidders crossing the threshold

in all evaluation areas would be shortlisted. Some projects specified a minimum combined

score in order to be shortlisted. One project specified that upto seven bidders would be

shortlisted.

In summary, the reasons for poor bidder interest in submitting financial bids can be attributed

to the following reasons:

1. Restrictive and inconsistent criteria

2. Requirement to invest in SPV that discourages some international bidders

3. Poor project structure or project potential

4. Rushed procurement process

Each of these factors successively reduce bidder interest, leading to limited competition. This

of course affects the project but it has a larger impact on the water PPP potential.

International bidders are unable to develop an India strategy since the pre-qualification

criteria are inconsistent. This also affects domestic bidders who are unable to enter into long

term partnerships with experienced international operators. Depending on the criteria for a

particular project, they pursue partnership dialogues within the limited time provided for

bidding. These factors build up a perception that the selection process is inconsistent and non

-transparent; this reduces bidder interest further in the Indian water PPP market.


4


Observations from Other Infrastructure Sectors

Highway sector

The highway sector in India has seen a large number of projects. The level of participation of

domestic as well as international firms is high. Over the years, the bidding process for

highway projects has been streamlined. A few salient features of national highway bidding

are summarized below:

1. There is a model concession agreement for highway projects. This document was

evolved taking into consideration feedback from bidders and financiers. The revenue model

in the highway sector is also formalized. There is a legally notified toll policy. Projects that

are not viable are provided ―Viability Gap‖ assistance. Together, the toll policy, the viability

gap fund and the model concession agreement reduced commercial risks in a project.

2. The eligibility criteria is standardised across projects. This was initially done through

a standard RFQ document. Since the criteria is uniform across projects, interested domestic

and international bidders were able to develop a business strategy for the Indian highway

sector as a whole. Many bidders also formed medium term partnerships to pursue projects

together.

3. In the recent years, the process has also been more standardised with the introduction

of annual scoring of applicants. Under this process, bidders are evaluated on an annual basis

and are assigned a score. This score is in turn related to the value of the project. A bidder

receiving a particular score is deemed eligible to bid for projects upto a corresponding

threshold size (in terms of Rs crores). When a project is bid out, bidders need to only submit

their score (with other limited documentation). This simplified the qualification process

further.

Electricity distribution

The electricity distribution sector has several parallels with water distribution. In the recent

past, the concept of distribution franchisee2 has gained ground in India. In these projects, the

bidders undertake responsibilities which can be compared to a PPP water distribution project.

The eligibility criteria in the distribution franchisee projects have the following

characteristics:

1. The criteria is broad and is not restrictive. For example, bidders who have experience

in any aspect of the electricity sector value chain (in generation, distribution or transmission)

are eligible.

2 An arrangement under which an electricity distribution company can appoint a franchisee in a specific area, to

carryout electricity distribution on its behalf. While project arrangements vary, generally the franchisee buys

bulk electricity from the distribution company, supplies it to retail customers in the area, bills and collects

revenue. Many contracts include asset rehabilitation also in the responsibility.


5


2. Additionally, the projects seek experience in handling a large customer base in retail

supply / service delivery, power, gas, water or telecommunication sector.

3. The projects also seek experience in handling a large employee base commensurate

with the proposed project.

Thus, the criteria in the electricity distribution franchisee projects are broad and encourage

both domestic and international bidders.

International Experience in Water Projects

In the year 2009, a study of the PPP experience in water projects in developing countries3 was

published by the World Bank. Among other factors, the study also reviewed the experience of

domestic operators in PPPs. The findings were

1. Local private operators have developed considerably in recent years, serving more

than 40 percent of the market by 2007, and several have performed well.

2. Many of the PPPs classified as broadly successful were implemented with local

private investors that had little or no previous experience in operating water utilities.

3. In Eastern Manila (the Philippines) and Salta (Argentina), partnerships with

experienced operators to transfer operational know-how allowed local operators to bridge the

initial expertise gap over a few years. In other cases, investors with previous experience

in the water sector through the construction, engineering, or consulting businesses proved able

to operate water utilities satisfactorily (as in Brazil, Colombia, and Malaysia). Usually,

those new operators just hired managers and engineers who previously worked for

public utilities in order to have the necessary technical capability (as international operators do

when they enter a new country).

4. This suggests that the need for investors to have strong previous experience in

operating water utilities has probably been overestimated. The benefits from an improved

commercial orientation can be achieved equally through international and local investors—and

the latter have the advantage of knowing more about local needs and culture.

5. Operational and technical experience is important, but it can be obtained through

many means. What counts is not so much whether the local investors have been involved with

operating water utilities before, but whether they can credibly ensure that they have

experienced people in their team to run the utility.

These findings also have relevance to the Indian water PPPs. There are many experienced

domestic construction contractors in the water industry. Some of them also have PPP

3 Marin, Philippe, Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in

Developing Countries. World Bank, 2009


6


experience in other sectors, such as electricity and highways. Water sector PPPs in India need

to encourage international operator participation (since domestic experience in 24 X 7 is

unavailable at this point in private sector too) and at the same time consider developing the

domestic operator base (which can cater to the diverse size and shape of Indian cities).

Corrective Measures Proposed

Based on the analysis of the current situation, experience from other infrastructure sectors in

India and international water PPP experience, the following corrective measures are

proposed;

1. The criteria for shortlisting bidders may be standardised; critically, it should

emphasise O & M experience in the water sector.

2. Pure operating partnerships between interested bidders and international water

operators, without the necessity of equity investment from water operators, should be

permitted. This will encourage international water operators to participate in Indian water

PPP projects.

3. The bidders should be required to commit staff members with relevant experience (in

continuous water supply operation and in customer management) in water utility operations,

as a part of their proposed project team.

4. Standardised annual scoring of water operators, on the lines of the scoring carried out

for highway PPP projects by the National Highways Authority of India should be explored.

Together, these measures will standardize the criteria and emphasise water utility operating

experience; they will also provide adequate avenues for both domestic bidders and

international operators to participate. Most importantly, standardization of the shortlisting

process will also help interested bidders to gain confidence in the potential of water PPPs in

India and encourage them to develop an India business plan.

These corrective measures are also in line with the principles of the Model RFQ document

proposed by the Government of India.4

1. The model RFQ document specifies standardised criteria applicable across

infrastructure sectors. The Technical Capacity (project experience) and financial capacity

(networth) are examined. Experience in the relevant sector in PPP projects is provided the

maximum weightage. Construction experience in related infrastructure sectors is provided the

least weightage. Construction experience in the relevant sector and PPP experience in related

infrastructure sectors are provided intermediate weightages. The indicative weightages are

provided below.

4 Guidelines of the Ministry of Finance, File No 24(1)/PF-II/2006, Department of Expenditure, dated May 18,

2009


7


Nature of experience Factor

PPP Experience in water sector 1.25

Construction experience in water sector 1.00

PPP experience in other sectors 1.00

Construction experience in other sectors 0.50

2. The model RFQ document also specifies that O & M experience be evaluated. The O

& M experience may be brought in by one of the equity partners or through a specific O &

M arrangement with an experienced entity; and in case of less complex sectors, through

experienced staff. The stress on O & M experience is relevant for the water sector and the

Model RFQ also provides for a non equity arrangement with the O & M partner.

Proposals

1) A model RFQ recommended by the Government of India may be adopted for the

water sector, with the required sector specific modifications in line with suggestions in the

already existing model RFQ document itself. The proposed adaptations are as below:

i) The Technical capacity will be evaluated with reference to the water sector.

Experience in water sector PPP projects will be given the maximum weightage.

Construction experience in other related infrastructure sectors will be given the

least weightage. Construction experience in water sector and PPP experience in

other related infrastructure sectors will receive intermediate weightage. The

Harmonized List of Infrastructure Sectors notified by Government of India5 will

be used to define related infrastructure sectors.

ii) The project team will be required to have experienced staff members to head

Technical (distribution and leak reduction) and Commercial functions (billing &

collection and customer management).

iii) O & M experience in water sector will be emphasized. The O & M experience

will be measured as experience in operating a continuously pressurised water

distribution system catering to a specified number of connections (to be linked to

the size of the specific project).

iv) The O & M experience may be brought in by the lead member of the consortium.

On the lines of the RFQ document, two further options are proposed to encourage

international and domestic bidders respectively;

5 Harmonized Masterlist of Infrastructure Sub-Sectors as published in Government of India Gazette Serial

Number No. 59, dated April 5, 2013


8


(1) The O & M experience may be brought in by an O & M partner, who need not

take an equity stake in the project. In this case, a) the O & M partner will be

required to commit key staff with relevant water utility operating experience

as a part of the project team in the Request for Proposal stage and b) the size

of O & M experience will be made higher by a specific factor.

(2) A provision will also be made for the lead member to meet the O & M

experience by inducting experienced staff in the project team. In such a case,

a) the staff members will have to be committed in the RFQ stage itself and b)

the size of prior O & M experience will be made still higher by an additional

factor.

v) Since water sector PPPs are likely to be pure operating contracts without private

investment, setting up a Special Purpose Vehicle for the project need not be

mandatory, but would be based on bidder preference.

vi) All bidders who meet technical capacity, financial capacity and O & M experience

will be shortlisted and will be issued the Request for Proposal document. There

will be no ranking of bidders.

A proposed RfQ, based on the existing model RfQ document (GoI) is attached (refer

Proposed Water RfQ attached. Changes proposed to adopt this to water sector requirements

are highlighted, for easy reference)

2) MoUD will conduct an annual scoring exercise similar to the exercise conducted by the

National Highways Authority of India. Interested bidders will be evaluated based on the

standardised scoring framework and will be assigned scores in technical capacity,

financial capacity and O & M experience. A project proponent will be able to use these

scores directly, in case the bidder is interested to bid for the project.

a) Bidders who are not part of the annual scoring exercise will also be permitted to bid

for a specific project opportunity in order to encourage open competition. In such a

case the project proponent will use the evaluation framework in the Model RFQ for

water sector to evaluate the bidder.

b) Bidders forming a consortium for a specific project may also apply. In such a case

also, the project proponent will use the evaluation framework in the Model RFQ for

water sector to evaluate the consortium.

3) MoUD will create an electronic PPP market place to promote transparency and

information sharing. The annual standardised scoring process will be conducted through

the electronic market place. In addition, the market place will also share information

related to forthcoming PPP projects. MoUD may also create an e-tendering facility for the

use of interested project proponents. The PPP market place will also contain an update of


9


ongoing PPP projects. It will also provide updates on blacklisted/sanctioned bidders,

similar to that of National Highways Authority of India.


1


Annexure 5: Proposed Process for Funding of Water PPP Projects

Reason for Addressing the Issue

In most Indian cities, improvement of water supply coverage and service delivery entails

significant investment, since existing assets are badly degraded, and / or inadequate. Cities have

been able to take up such investments only with the help of funding programs such as JNNURM,

or externally aided projects. Under JNNURM / UIDSSMT this funding is only available after

cities prepare a Detailed Project Report (DPR). Cities typically prepare the DPR with the help of

consultants who may not have exposure to designing rehabilitation projects in water distribution

or exposure to operations. Cities also lack reliable baseline data regarding under-ground

distribution assets; and inadequate time and resources are made available consultants, which

preclude undertaking adequate and in-depth surveys to bridge information gaps. As a result,

recommended interventions and derived project costs reflected in the DPR are liable to wide

variations. These, however, form the basis of JnNURM / UIDSSMT approval for project

funding, which cities currently procure in a single stage, prior to selecting an operator.

Given the nature of PPP agreements, once an operator has been selected, it then becomes very

difficult subsequently to alter the approved DPR and the associated project cost. This is despite

the recognition that a competent operator, after running a water supply system, may be better

placed to grasp and recommend interventions necessary to ensure improvements in service

delivery – and the associated capital investment required. The current process for procuring

JnNURM / UIDSSMT grant funding support, which requires up-front statement of project costs

prior to selecting an operator, thereby

limits the ability to leverage the private operator’s expertise;

very often results in projects being stalled, as the funding procured is shown by the

private Operator to be inadequate to achieve stated performance targets.

Suggested Interventions and Proposals

This issue may partly be addressed by designing a process for funding water PPP projects that

(a): enables the ULB to leverage the operator’s design and operation capabilities to arrive at

credible interventions and realistic costs for achieving project objectives1; and also (b):

simultaneously offers a certain extent of flexibility on DPR and project cost.

The broad stages of such a funding process are outlined below.

1 It is simultaneously recognized that checks and balances are required to ensure that the operator’s implementation

plan is in line with the ULB’s objectives. These may be established through specifying non-negotiable system

parameters (regarding pipe material; type of pumps deployed…etc) that may be included in the DPR.


2


S.No. Process Components Comments

1 Selection of Detailed Project Report (DPR) Consultant

Cities may use standard ToR and scope of work as per MoUD guidelines. MoUD will fund DPR preparation as per guidelines.

2. Submission of DPR by Consultant to ULB ULB passes a resolution to implement on a PPP basis and obtains state govt. concurrence for the same, if required.

3. Submission of DPR to CPHEEO and MoUD. DPR includes (a): justification of project need (b): information required as per revised information checklist (c): Design norms for the project that would not be amenable to change (d): cost estimate and assessment of financial sustainability (f): proposed project structuring for implementation through PPP

Submitted through SLNA, as per applicable JNNURM process

4. CPHEEO and MoUD review the DPR and provide a first approval. Subsequently, ULB will:

Adopt the MoUD recommended RfQ for bidding

Adopt and build upon the MoUD recommended contract formats, making project specific changes as required

Provide the selected private Operator the opportunity to review and amend the DPR (subject to design norms) and prepare a Project Implementation Plan (PIP)

Approval

Approval is based on (a) ULB prepared DPR, as per revised information check-list (b): satisfaction on financial sustainability; an initial sum is released on approval.

5. Selection of Operator by ULB, adopting MoUD recommended model RfQ document

Contract based on MoUD recommended model contract formats

6. Operator operates the water supply system, and prepares the PIP (within 9 – 12 months of signing the contract) which includes:

Review of existing water supply system and operations and confirmation of baseline conditions

investment plan – capex, opex phased project implementation plan

MoUD will provide funding for operation preparation activities (PIP preparation) undertaken by the Operator (including undertaking additional surveys), as per guidelines. The ULB may be required to submit periodic operational reports to MoUD.

Cost savings are being encouraged since a) the Operator will undertake construction through third party contractors and b) there is an explicit financial incentive under the contract to reduce costs from approved DPR figure.


3


7. ULB submits the PIP with final investment plan and project construction / rehabilitation plan to MoUD.

Submitted through SLNA

The operator will provide revised phased implementation plan, indicating the performance improvement that will be achieved in each time frame.

8. CPHEEO and MoUD review and approve the final PIP and the associated construction / rehabilitation investment plan and fund disbursement plan

MoUD will bear its proportionate share of project cost subject to an increase of 15% from DPR estimates.

An extended time frame for implementation of the investment plan would be more amenable to deliver cost efficient improvements. Subject to guidelines, MoUD will permit such disbursements.

9. Invitation of bids and award of contract to third party contractors based on documents prepared by Operator, in line with procurement guidelines

10. Operator to supervise the construction work and ensure quality and timely completion of contract. Operator will have responsibility for quality and performance.

MoUD will maintain GoI grant share in Rs cr, even if the Operator is able to reduce implemented costs further. This will further incentivize the ULB and Operator to achieve cost savings.

11. Operator to maintain the water supply system and achieve phased performance targets (SLB Benchmarks). Operator revenue is linked to achievement of performance targets.


1 Draft_For Discussion Only

Annexure 4

Assessing Project Financial Sustainability

Reason for addressing the issue

Financial sustainability of WSS service providers1 specifically refers to the adequacy of revenues

for meeting O&M costs and capital costs.

In conventional operations, the availability of finances is a constraint. To cope with inadequate

finances, cities reduced O & M expenditure to match available finances. Capital investments

were deferred and limited to the extent of grants made available. Service levels and asset quality

deteriorated as a result. Though the system was not financially sustainable, cities maintained a

low level equilibrium in service quality.

Water PPP projects do not have this option. Operators are almost always responsible for a set of

service delivery parameters and to meet the related costs. Operators routinely need to spend on

asset maintenance and operations. Major refurbishment of assets is also required to maintain

service standards. Some PPP contracts require the operator to undertake new capital expenditure

and also to replace assets at the end of their useful life.

Assessing the financial sustainability of water PPP projects is therefore relevant.

Current situation

Out of the five water PPPs studied in detail, atleast three projects have faced financial stress. In

Khandwa and in Mysore, the scope of work for the private operators increased as a result of

detailed surveys undertaken by the operator after the contract was signed. The Khandwa

Municipal Corporation was unable to bear the increase in costs. In Mysore, the increased in

scope of work triggered a dispute regarding whose responsibility it is to undertake the additional

work.

In Latur, the project was based on the premise that the Operator would recover his operating

costs through a newly introduced metering and volumetric tariff. The consumers were unwilling

to pay increased tariff, in the absence of improved services, which the operator found difficult to

provide. The two counterparts to the contract (parastatal and the city) were not financially

capable of absorbing the loss of revenue, if the old tariff were to continue. This and other factors

led to a suspension of the contract.

1 Achieving financial sustainability and recovering costs in bank financed water supply and sanitation projects,

Alexander McPhail, Alian R. Locussol, Chris Perry, 2012, Water Partnerships Programme



In Nagpur and in Aurangabad, the cities have committed to provide an operational subsidy to the

Operator. The cities will also be responsible for future capital investments. Thus, the PPP

projects in the cities focussed only on service delivery improvements; financial sustainability has

not been addressed.

Underlying these issues is the poor financial status of WSS sector. Operating cost recovery is

poor. Tariff is low and is not revised regularly. Most cities rely on grants from State and national

Governments for capital investments. As a result, when they take up a project, even though it is

supported by a grant, they are not financially capable of meeting increased O & M liabilities of

improved and augmented services; or uncertainties. The grants are limited to a share of approved

capital costs and do not meet cost escalations or change in scope. When a PPP project encounters

a situation (loss of revenue, increase in costs or change in scope), an easy resolution is not

possible since the city is not financially strong and is reluctant to revise tariff to meet costs.

Analysis

Availability of adequate finances is therefore a critical requirement in WSS projects. PPP

projects should have clear solutions for meeting

a) Unforeseen cost escalation or change in scope of work

b) Operational costs

c) Future capital investments

All five cities that were studied, attempted PPP projects in the background of poor operational

cost recovery. The following table summarises how the case study projects fared in improving

the financial situation and how the PPP contracts were designed.

Financial Summary of the Five Case Studies

Khandwa Aurangabad Nagpur Latur Mysore

1. Project is concurrent with

tariff revision to improve cost

recovery

Yes Yes Yes Yes No

2. User charges are an integral

part of the revenue model of

the operator

Yes Part user

charges, part

subsidy

Distinct from

user charges Yes Distinct

from user

charges

3. Project eliminates need for

operating cost subsidy from

the city

Yes No, but

subsidy is

capped

No; will

require

operating

subsidy

Yes No

4. Project (pvt. operator)finances

part of initial capital costs 10% 50% 30% of

distribution

network

No No



change in scope in initial cap-

ex

No No No NA No





future expansions

No No No No No

Khandwa focussed on achieving long term operational sustainability. The operator’s revenue is

linked to user charges. The Operator was selected based on its tariff requirements to recover

operating costs and privately financed capital costs (10% of project costs). There is no additional

subsidy from the city to the Operator. The project was vulnerable to changes in scope since the

city did not have the financial strength to meet these costs. Future expansions are also

unaddressed.

In Aurangabad, the Operator is compensated partly by user charges (while the tariff continues to

be determined by the ULB) and partly by a predetermined yearly operating subsidy. The

operating subsidy is 25% of the revenue income of the city. As a result, the project carries

significant revenue risks. In addition, as per the contract, the liability for all changes in scope or

for future expansions rests with the city (since the Operator’s revenue is capped) and its ability to

finance these is untested.

In Nagpur, the operator receives a fixed rate or fee per unit of water billed and collected. This

rate is delinked from the water tariff. The water tariff does not meet the entire water supply

costs. The water supply function will continue to be dependent on city finances for sustainability.

The initial capital investments are partly grant financed (70%) and partly operator financed

(30%). The operator recovers its capital investments through the fee. The city is responsible for

any change in scope and for future expansions. Thus the project neither addressed operational

sustainability nor future expansions.

In Latur, the Operator is fully responsible for meeting operating costs through user charges, like

in Khandwa. However, unlike Khandwa, capital investments were not considered in project

preparation. Major capital expenditure was the responsibility of one of the contract counterparts,

the parastatal agency; but the parastatal does not have a revenue base. The second counterpart to

the contract, the city Government, was financially weak and could not support operations or

capital investments. Thus, while the PPP project considered operational sustainability, it ignored

capital investments and future expansions.

In Mysore, the operator is compensated by a fee paid by the city which is higher than current

tariff levels. The gap between the water supply revenue and the operator payments is met from

the general budget of the city. Identified capital investments are fully financed by grants and a

small share from the city Government. However, the contract does not clearly assign

responsibility for changes in scope. This has led to disputes when surveys doubled the length of

distribution network that needed replacement. Further, there is no clear framework for financial

sustainability for the future. The PPP arrangement expects to improve commercial practices, but

after the PPP project, the water supply function will continue to rely on city finances for meeting



deficits in recurring costs as well as to finance future expansions. Thus the project neither

addressed operational sustainability nor future expansions.

All five studied have attempted to improve their WSS financial situation in one way or the other.

While Khandwa and Latur targeted operational sustainability through user charges, they ignored

changes in scope and future expansions. Nagpur and Aurangabad sought to access private

finance partly and improve the cost recovery situation partly. Mysore focussed neither on

operational sustainability nor on future expansions. In addition, poor contract clauses triggered

disputes in Mysore and poor financial condition of the cities created a stalemate in Mysore and

Khandwa.

Corrective Measures

Financial sustainability can be improved only through a carefully planned cost recovery plan (or)

through committed long term support from cities to WSS sector. The required measures are well

known and are part of the municipal and WSS reform agenda. However, these are long term

measures and the current situation will continue to be vulnerable. The best possible solution at

present is to

a) assess whether the financial risks are compatible with a PPP approach,

b) integrate to the extent possible, financial sustainability into PPP design and

c) make stakeholders aware of residual risks so that they can manage them better.

A financial sustainability assessment tool is intended to be developed for this purpose. This tool

will be a diagnostic tool which will assess if the PPP project design ensures availability of

finances for sustained service delivery.

Proposals

The financial sustainability assessment tool is intended to be used at different stages of design:

a) At the pre-feasibility level, when broad project costs are available. The diagnostic tool will

help make a summary assessment of the suitability of the PPP approach, given the costs,

existing tariff and city finances.

b) After a Project Feasibility Report (PFR) has been prepared and financial analysis is available,

a more detailed assessment can be made. At this stage, the ability of the city to meet the

capital and operating subsidies can be assessed. The likely variations in project cost can also

be assessed based on the quality of preparation underlying the feasibility report.

c) The third assessment can be after the PPP structure is finalised and a risk sharing framework

is designed. Normally this will occur after the preparation of the Request for Proposal

document for the selection of private operator. This assessment will indicate if the risk

sharing terms are aggravating the financial risks.



d) This assessment can be regularly updated. For example, after the Operator prepares a detailed

investment plan, the assessment can be updated to reflect the data gathered by the Operator

and the final investment plan.

This tool builds on the financial model that will be prepared as a part of the feasibility report. It

is not a substitute for financial modelling. To illustrate, the financial model will focus on

determining the project returns given a certain set of assumptions. The financial assessment tool

will indicate whether the assumptions are realistic and what is the likelihood of the project being

vulnerable. This tool is not intended as to asses if a) the project is delivering value for money or

b) efficiency in investment planning or c) competitiveness in procurement. Each of these factors

may indirectly impact financial sustainability. But the focus of the tool is on availability of

finances.

Design

The tool will assess financial sustainability with the help of three sets of indicators (Each

indicator will be elaborated in 1 – 2 lines, for easy comprehension).

a) The first set of indicators called Key Indicators, which are quantitative, measure the impact

of the project on the stakeholders and their ability to bear the impact. The tool will assess the

impact on a) project company, b) Operator, c) lender, d) consumer and e) city. There are

seventeen key indicators. Six of these indicators can be calculated at pre-feasibility stage

itself or even earlier, with minimal information. This assessment can be used by the project

proponent as well as funding agencies (like JNNURM).

b) The second set of indicators measure quality of Risk Allocation in PPP design to assess if all

known costs and revenue risks have been addressed. It will assess how the risk allocation

affects the availability of finances at different stages of the project (development and

construction; operations – revenue; operating costs changes and expansions). This

assessment can be carried out after the project structuring has been completed and a draft

Request for Proposal document has been prepared. This assessment can be used by the

project proponent as well as the State Government agencies that may be approving the PPP

approach.

c) The third set of indicators measure the quality of Project Preparation to assess the level of

detail underlying cost and revenue estimates and if assumptions are realistic. Eight areas of

project preparation are assessed. This assessment can be carried out on completion of the

feasibility report and after a financial model is available. This assessment can be used by the

project proponent as well as agencies approving the project report (State Government

agencies, JNNURM).

Each indicator is graded in a four-way colour scheme. Red indicates Weak; Yellow indicates

Vulnerable; blue indicates Acceptable and green indicates Sound; A template provides guidance

on how to grade the indicator as sound or acceptable or vulnerable or weak.



Overall, the tool helps assess

a) Which stakeholder is vulnerable to financial impacts?

b) What is the quality of risk allocation and which stages of the project are vulnerable?

c) Which areas of project preparation are weak; and therefore what are the revenue and cost

risks that stakeholders should be conscious of?

Next steps

1. A grading template has been developed alongwith the tool. While indicative grading has been

provided, it would be useful to test the tool with a set of projects that are currently being

considered for approval. This would help calibrate the grading template. More importantly it

could also highlight additional indicators that may be relevant for financial sustainability

assessment.

2. The financial sustainability tool also needs to be web enabled for easy access and data

aggregation. This step would be taken up once the tool is tested and calibrated with a set of

projects.

Financial Sustainability Assessment Tool

As discussed earlier, the tool has three areas of assessment, a) Key indicators, b) Risk allocation

and c) Project preparation.

Index TabsProject PreparationRisk AllocationKey IndicatorsSummary

Project Preparation Project SustainabilityInstitutional StrengthInstitutional Strength

Institutional StrengthKey Indicators

Project PreparationProject Preparation

Risk AllocationProject Sustainability

Project SustainabilityProject Preparation

What is the financial impact of the project on key stakeholders?

What is their ability to bear the impact?

How are the key project risks allocated?

How does it impact the availability of finances during various stages of the project?

Covers construction risks, revenue risks, operating costs escalations and expansions

What is the level of detail underlying the cost and revenue estimates?

Are the assumptionsrealistic?

Covers construction, revenue, operating parameters , operating ostsand escalation, expansion and financing



Key Indicators

The Key Indicators are organised into five columns each of which measure the impact on a

specific stakeholder. These are in turn divided into three categories. The six indicators marked

“1” are summary indicators and can be calculated at even with minimum information. The four

indicators marked “2” will require additional information, generally available only after a Project

Feasibility Report (PFR) / study and financial modelling have been undertaken. The seven

indicators marked “3” are supplementary indicators. Some of the seven indicators will require

additional information related to risk sharing. This information is available after a Request for

Proposal document has been prepared.

If, for example, Own Contribution/ Revenue Surplus is graded “Vulnerable”, it indicates that the

project is too large to be financed by the city. Thus, at an early stage itself, the city can focus on

optimising the investments or seeking additional source of finance. Alternatively, it can pursue

private investment, if it is confident of reforming tariff framework to ensure cost recovery.

A grading sheet provides guidance to grade each indicator. For example, if “Total User

Charges” as a proportion of “Total Water Supply Operational Costs” (based on the projected

costs after completion for project) is between 40% to 60%, the project is graded “Vulnerable”

since it would rely on operational subsidies from the City Government. Similarly if the project

viability measures in terms of post tax project IRR is less than 10%, the project is termed very

weak; commercial borrowing would be difficult under these circumstances.

Index Tabs Key Indicators

Project


Water Supply Costs





Operator Revenue

Equity IRR post tax


performance



Debt-----------

Revenue Surplus

Minimum DSCR

Average DSCR

Source to customer

responsibility


Tariff in Rs/KL


charges


Project Cost-------------------------

Total Revenue




1 1

1

1 1

12

2

2

23

3

3

3

3

3

3



Risk allocation

Risk allocation in four stages of the project a) development and construction, c) operations

related to revenue, c) operations related to costs and d) expansions is assessed. Indicators are

provided to assess quality of risk allocation pertaining to each stage.

Sound Acceptable Vulnerable Very Weak

1 Key Indicators

Project

Sustainability through

tariff revenues

User Charge/ Water

Supply Costs > 80% 60% to 80% 40% to 60% < 40%

Project Viability Post tax project IRR >15 % 13% to 15% 10% to 13% <10%

Key for grading


Development and

ConstructionRevenue




















length



The grading is qualitative for most parameters; the grading template provides guidance.

Project Preparation

The key assumptions and level of detail underlying project preparation are assessed. Eight areas

of project preparation are assessed. These are a) development and construction assumptions, b)

demand, c) revenue, d) operating parameters, e) operating costs, f) operating cost escalations, g)

provision for expansion and h)financing. A total of fifty seven key indicators related to project

preparation are assessed. For example, under Construction and Development, the following

indicators are assessed.

1. Bulk and treatment assets

2. Estimates of pipe length

3. Estimate of number of connections

4. Percentage of pipes to be replaced

5. Percentage of house service connections to be replaced

6. Percentage of meters to be replaced

7. Escalations

8. Physical contingencies

9. Basis for unit cost estimates

To illustrate, if estimates of pipe length are based only on available surveys (which may be

dated/inaccurate) of road length, then it is graded as vulnerable. If it is based on a detailed

assessment of road length and also includes ongoing road developments, it is graded as


2 Risk Allocation

Development and

Construction

Change in scope Change in pipe length

ULB to

compensate

additional costs

Project area

reduced to fit

budget

Not operator

liability, but no

clear solution

Operator

responsibility

Change in number of

connections

ULB to

compensate for

connection

subsidy

Operator to

recover costs

from consumers

Not operator

liability, but no

clear solution

Operator

responsibility

Change in % of

assets replaced

ULB to absorb

validated costs

Operator to

mobilise

finance,

compensated by

deferred

payment

Not operator

liability, but no

clear solution

Operator

responsibility

Key for grading



acceptable. If the pipe length estimates are based on covering the entire the service area based on

the master plan road length, it is termed as sound.


3

Project Preparation -

Estimates and

Assumptions

Construction and

Development

Bulk and treatment

assets

Detailed design

available

Feasibility level

estimates

Estimates of pipe

length

Coverage of

entire service

area

Coverage of

entire road

network existing

and ongoing

developments

Based on

available surveys

of road length

Based on

estimated road

length without

physical surveys

Estimate of number

of connections

Based on

physical survey

of households;

allowance for

growth

Based on

physical survey

of households

Based on

current data on

connections; no

physical survey

Key for grading



Sample assessment

This section summarises the financial assessment of one of the case studies. The key indicators

are summarized below.

a) The project is somewhat vulnerable; user charges do not cover operational costs (column 1).

As a result, the city will need to subsidise the operations. However, the municipal subsidy as

a proportion of revenue surplus of the city is at an acceptable level (column 4).

b) The Developer is vulnerable since a very high proportion of the capital expenditure payments

as well as O & M revenue are linked to performance. The Operator does not have source to

customer responsibility; this increases operational risks.

c) There is no interface with lenders since the project is fully grant funded.

d) Consumers are well placed since tariff levels are low and have not been revised.

e) The city too is relatively well placed. Tariff structure is poor and has not been revised.

However, the city is financially in an acceptable position to meet the operating subsidies. Its

share of capital expenditure compared to its revenue surplus is also reasonable.

Going a step further, if we assess the quality of risk allocation, the following conclusions

emerge:

a) The development and construction stage risks are poorly allocated.

b) Due to the short term nature of the contract, risks in other stages are not relevant. Future

expansions are clearly not in the scope of the operator.


Project


Water Supply Costs





Operator Revenue

Equity IRR post tax


performance



Debt-----------

Revenue Surplus

Minimum DSCR

Average DSCR

Source to customer

responsibility


Tariff in Rs/KL


charges


Project Cost-------------------------

Total Revenue






The project is vulnerable due to poor preparation. The assumptions and methodology related to

construction cost estimates, operating cost estimates, operating parameter specifications are poor

and make the project vulnerable. The project is short term in nature and therefore the

assumptions related to demand, revenue, cost escalations and expansion are not critical. Where

applicable, assumptions in these areas are acceptable. The project is fully grant financed.


Development and

ConstructionRevenue




















length


Development and Construction Demand Revenue

Operating Parameters Operating costs Operating cost

escalation

Provision for Expansion Financing



Overall, while the city seems to have adequate financial strength to manage the PPP project, the

project has been made vulnerable due to controllable factors – a) poor project preparation, b)

poor risk allocation in construction stage and c) excessive revenue risk to the operator.

If such an assessment were available at the stage of project approval, the approving entities could

have been in a position to request a rework of risk allocation and a more elaborate project

preparation.

Using the tool

As explained earlier, the assessment can be done at various stages of the project. The tool can

provide inputs to improve project preparation and PPP design. It can also be used as an appraisal

tool by State and national Government agencies.

In the project preparation stage, the tool can be used to standardize key assumptions. The

approach for estimating costs and technical preparation can be validated. If the project is termed

weak or vulnerable, the project size can be optimized to reduce the risk.

In the review, appraisal and approval stage, the tool can be used to develop alterative scenarios to

improve project quality. For example various options related to financing mix and tariff

assumption can be undertaken. If required, technical preparation can also be revised to improve

project quality. Approving agencies can also set covenants for grant disbursal, based on

commitments from the city to improve project sustainability.

At the PPP design stage, the tool can help choose the appropriate PPP model so that the risk on

stakeholders is optimized. It can help set appropriate risk sharing. Depending on the strength of

the project, it can help target the right profile of developers. For example, if a project is deemed

vulnerable on operations cost control, developers with strong operations experience may be

preferred. If a project is termed weak on its impact on consumers, developers with a proven track

record of managing civil society (or) with experience in low income countries could be targeted.



Even if the assessment is done after award of the PPP contract, the tool can help identify

vulnerable areas. This can help in strengthening the monitoring and risk mitigation mechanisms.

Review, Appraisal and approval stage

PPP design stage

Post Facto

Project Preparation Stage

• Standardising assumptions

• Validating approach for estimates, technical preparation

• Optimising investments to improve sustainability

• Iterations with various financing mix, tariff assumptions

• Overall assessment of sustainability

• Revising technical preparation

• Setting covenants for disbursal

• Choosing appropriate PPP models and targettingdevelopers matching quality of preparation and financial impact

• Balancing risk allocation and financial impact on stakeholders

• Recognise vulnerabilities

• Design monitoring and risk mitigation mechanisms

Source of data

Remarks/ Suggested calculation

methodology Sound Acceptable Vulnerable Very Weak Sample M Sample K1 Key Indicators

Project

Due to lack of

project viability

assessment

Sustainability through

tariff revenues

User Charge/ Water

Supply Costs Financial model

Average of atleast five years after

completion of rehabilitation.

Water supply costs will include

the total cost of service delivery

including costs borne by the ULB

directly. > 80% 60% to 80% 40% to 60% < 40% 50% 100%

Project Viability Post tax project IRR Financial model

To include, at the least the entire

debt service period >15 % 13% to 15% 10% to 13% <10% NA Not assessed

Developer

Weakness partly

mitigated by low

financial exposure

Due to lack of

project viability

assessment

Dependability of revenue

model

User Charge/

Revenue to Operator Financial model

Average of atleast five years after

completion of rehabilitation. In

case operator revenue is entirely

through user charges, this ratio

will be 1. > 80% 60% to 80% 40% to 60% < 40% >80% 100%

Project Viability Post tax equity IRR Financial model

To match with the period over

which post tax project IRR is

calculated >20% 15% to 20% 12% to 15% <12% NA Not assessed

Revenue risk due to non

performance

% of operator

revenue linked to O

& M performance

PPP contract or Risk

sharing principles

Percentage of revenue operator

would lose if performance

standards are not met <5% or incentive 5% to 15% 15% to 25% >25%

About 60% of the

fee is performance

linked and

therefore revenue

risk is very high

Operator only loses

concession period;

Small penalties for

non performance

Capex risk due to non

performance

% of capex

reimbursement to

operator linked to

performance

PPP contract or Risk

sharing principles

Percentage of capital cost

expenditure that operator would

not be able to recover if

performance standards are not

met (relevant where ULB finances

capital expenditure partly or fully) <5% or incentive 5% to 10% 10% to 15% >15%

Several guarantees,

securities and

liability, combining

to exceed 15% <5%

Unity of command

Source to consumer

responsibility Project concept

Does the operator have

responsibility over the entire

value chain of water supply? Is

the operator responsible for the

entire city?

Source to consumer

responsibility

Treatment to

consumer

responsibility

Responsibility starts

ex treatment

Multiple

operators;

Limited

responsibility

Responsibility is ex

treatment;

Fragmented

institutional

structure at city

River intake to

customer service

Lenders Not applicable Not assessed

Size of borrowing

Debt/ ULB Revenue

Surplus

ULB's financial

statements

Relevant when ULB is financing

capital expenditure through

borrowings. To consider

outstanding debt as well as

incremental borrowing for

project. < 2.5 times 2.5 to 7 times 7 to 10 times > 10 times

Key for grading

Source of data


methodology Sound Acceptable Vulnerable Very Weak Sample M Sample K

Key for grading

Ability to service debt Min DSCR

Financial model or

projections of ULB

finances

Calculated from ULB's projected

finances if ULB is the borrower.

Calculated from project's

projected finances if the

borrowing is through the project

company > 1.25 1.1 to 1.25 1 to 1.1 <1

Ability to service debt Average DSCR

Financial model or

projections of ULB

finances

Calculated from ULB's projected

finances if ULB is the borrower.

Calculated from project's

projected finances if the

borrowing is through the project

company >1.5 1.25 to 1.5 1.1 to 1.25 < 1.1

UsersOn the borderline of

vulnerability

Affordability

Average monthly bill

for households

Tariff schedule,

Consumption

assumptions

To consider bill for domestic

customers <150 per month

150 to 250 per

month

250 to 350 per

month > 350 per monthRoughly 150 per

month

Entry costs Connection Charges Tariff structure

To consider recovery mechanism

for providing connections to

domestic customers

Recovered in

installments

Capitalised or

subsidised

Recovered upfront,

with subsidies for

poor

Full cost

recovered

upfront

To recheck. There

was no special

connection cost

design

Affordability Tariff/ KL Tariff structure To consider domestic customers <7.5 7.5 to 12.5 12.5 to 17.5 >17.5 6.81

ULB/ Government

Agency

Tariff structure

introduces a degree

of vulnerability

Project is large, but

mitigated by ring

fenced model

Size of project - Capex

Own Contribution/

Revenue surplus ULB finances

Ratio of ULB contribution to

capital expenditure (if any) to

current revenue surplus of the

ULB < 1.5 1.5 to 2.5 2.5 to 4 >4 0.69 Estimate

Size of project

Project Cost/ Total

Revenue ULB finances < 1.5 1.5 to 2.5 2.5 to 4 >4 1.82 Estimate

Sustainability of O & M

Municipal Subsidy/

Revenue Surplus

ULB finances, Financial

model

Annual operating subsidies if any,

by the ULB to the project. The

subsidy would also include costs

that are being borne directly by

the ULB. To be calculated as an

average of first five years of

operations after rehabilitation. < 0.25 0.25 to 0.5 0.5 to 0.75 > 0.75

Pre Project status;

would improve

with private sector

billing

Municipality only

pays for bad debt

remaining

uncollected

Sustainability of O & M Tariff model Tariff structure

Increasing block

volumetric tariff,

automatically adjusted

for power, salary cost

and WPI changes; Reset

periodically to reflect

allowed costs

Increasing block

volumetric tariff

automatically

adjusted for power

and WPI

Volumetric tariff,

with predetermined

escalation rates

Non volumetric

tariff or tariff

structure

without any

specified

adjustments

Tariff revisions are

not periodic,

though later on the

State Government

introduced such a

framework

Periodic WPI linked

revision + power

cost adjustment

Source of data



Key for grading

2 Risk Allocation

Development and

Construction

Risks in implementation

% Conversion of

connections to 24 X 7

each year

Detailed Project

Report, Contract <25% 25% to 33% 33% to 40% >40%

Preparatory period

Detailed Project

Report, Contract

Consider the time the Operator

has after signing of the contract

till start of rehabilitation activities >1 year 9 months to 1 year 6 to 9 months < 6 months

Operator

implemented capex/

Total capex

Detailed Project

Report, Contract

Consider all parallel investments

in the water supply system for the

entire city > 90% 75% to 90% 50% to 75% < 50%

% capex

reimbursement

linked to

performance

Detailed Project

Report, Contract

Percentage of capital cost

expenditure that operator would

not be able to recover if

performance standards are not

met (relevant where ULB finances

capital expenditure partly or fully) <5% 5% to 10% 10% to 15% >15%

Change in scope

Change in pipe

length Contract

Assess the methodology in the

contract for accommodating

changes in distribution network

length

ULB to compensate

additional costs

Project area

reduced to fit

budget

Not operator

liability, but no clear

solution

Operator

responsibility

Change in number of

connections Contract

Assess the methodology in the

contract for accommodating cost

increase due to increase in

number of connections

ULB to compensate for

connection subsidy

Operator to recover

costs from

consumers

Not operator


solution

Operator

responsibility

Change in % of

assets replaced Contract

If there is an increase in the

percentage of assets that require

replacement, how does the

contract allocate responsibility?

ULB to absorb validated

costs

Operator to

mobilise finance,

compensated by

deferred payment

Not operator


solution

Operator

responsibility

Design changes Contract

ULB responsibility if due

to external factors

Operator

responsibility

Price Changes Price escalation Contract

Componentwise

adjustment of capital

cost items

Adjustment linked

to a few large

components of

capital costs

General WPI linked

adjustment

Operator

responsibility

Revenue Not applicable

Number of


Is the operator compensation

adjusted to reflect change in the

number of connections?

Operator compensation

is adjusted Operator bears risk Not applicable

Consumption per

month per

connection Contract

Impact of variation in

consumption assumptions

Two part revenue

model for operator that

protects fixed costs Operator bears risk Not applicable

Source of data



Key for grading

Population growth Contract

Impact of variation in population

growth as compared to

assumptions

Two part revenue

model for operator that

protects fixed costs Operator bears risk Not applicable

Revenue collection/

disconnection

procedures Contract

Do the disconnection procedures

protect operator revenue?

Operator bears risk of

collection; ULB agrees

to disconnect defaulting

customers or

compensate Operator

Operator bears risk;

authorised to

disconnect

defaulting

customers

Operator bears the

risk, disconnection

procedures are not

enforceable or are

prolonged

Operator bears

the risk; no clear

disconnection

procedure

There is a marginal

risk. Operator

revenue is not

directly affected by

poor collections. A

part of the fee is

linked to improved

revenue

Operating Cost changes Not applicable

Staff cost escalation Contract

How is the operator revenue

adjusted to reflect change in staff

costs during the contract

duration?

Costs are adjusted

to reflect consumer

price index

Part of overall cost

adjustment

formulae

No mechanism

for adjusting

costs related to

staffNot applicable;

Short term contract

Power costs Contract


adjsuted to reflect changes in

power tariff?

Costs are adjusted

to reflect actual

power tariff

Costs are adjusted

based on overall

formulae

Operator bears

the riskNot applicable;

Costs borne by ULB

Chemical Costs Contract


adjsuted to reflect changes in

chemical costs?

Costs are linked to

specific indices

Costs are adjusted

based on overall

formulae

Operator bears

the riskNot applicable;

Costs borne by ULB

Other repairs and

maintenance Contract


adjsuted to reflect other price

changes?

Costs are linked to

wholesale price

index or other

appropriate indices

Costs are adjusted

based on overall

formulae

Operator bears

the risk

Short term

contract; Low level

of risk

Raw water costs Contract


adjsuted to reflect chages in cost

of raw water?

Costs are linked to

actual raw water

tariff

No specific

adjustments

Operator bears

the risk Not applicable

ExpansionsNot applicable;

short term contract

Residual capacity for

bulk supply and bulk

supply assets

Detailed Project

Report

Do the existing and planned bulk

water production assets (offtake,

transmission lines, treatment

plants etc) have sufficient

capacity to outlast the contract

duration?

> 1.25 times contract

duration

Matches contract

duration

Less than contract

duration

Less than debt

tenure

Short term

contract; Bulk

supply addition is

parallelly in

progress

Design period for

distribution network

Detailed Project

Report, Contract

Is the distribution network being

planned to cover existing and

future requirements?

Coverage of entire

service area

Coverage of entire

existing road

network and

ongoing land

developments

Based on available

surveys of road

length

Based on

estimated road

length without

physical surveysNot applicable;

short term contract

Source of data



Key for grading

Demand increase Contract

If the consumption levels increase

beyond assumptions, does the

contract enable additional

investments in bulk water supply?

ULB responsible for

incremental

investments

Financing in line

with initial

formulae for capex

financing

Operator's

responsibility

exceeds initial

capex financing

formulae

No clear

mechanism for

financingNot applicable;

short term contract

Increase in


How does the contract deal with

change an increase in the number

of connections?

ULB responsible for

incremental

investments

Financing in line

with initial

formulae for capex

financing

Operator's

responsibility

exceeds initial

capex financing

formulae

No clear

mechanism for


short term contract

Increase in service

area Contract

How does the contract deal with

expansion in service area during

the term of the contract?

ULB responsible for

incremental

investments

Financing in line

with initial

formulae for capex

financing

Operator's

responsibility

exceeds initial

capex financing

formulae

No clear

mechanism for


short term contract

Increase in network

length Contract

How does the contract provide

for expanding network within the

initial service area?

ULB responsible for

incremental

investments

Financing in line

with initial

formulae for capex

financing

Operator's

responsibility

exceeds initial

capex financing

formulae

No clear

mechanism for


short term contract

3

Estimates and

Assumptions

Construction and

Development

Bulk and treatment

assets

Detailed Project

Report

Basis for calculation of capital

costs for bulk water assets

Detailed design

available

Feasibility level

estimates Not applicable

Estimates of pipe

length

Detailed Project

Report

Basis for estimating the length of

distribution network

Coverage of entire

service area

Coverage of entire

road network

existing and

ongoing

developments

Based on available

surveys of road

length

Based on

estimated road

length without

physical surveys

Estimate of number

of connections

Detailed Project

Report

Basis for estimating the number

of household connections

Based on physical

survey of households;

allowance for growth

Based on physical

survey of

households

Based on current

data on

connections; no

physical survey

% of pipes to be

replaced

Detailed Project

Report

Basis for identifying the

percentage of pipes that are

proposed to be replaced

Conservative estimate

based on sample

physical assessment of

condition

Estimate based on

sample physical

assessment; no

allowance for

contingencies

Assessment based

on age and material

No basis for

estimates

% of household

service connections

to be replaced

Detailed Project

Report

Basis for estimating the

percentage of connections that

need replacement


based on physical

assessment of condition

Estimate based on

physical

assessment; no

allowance for

contingencies

No basis for

estimates

Source of data



Key for grading

% new meters

Detailed Project

Report Proposal for replacing meters


based on physical

assessment of condition

and age

Estimate based on

physical condition

and age; no

allowance for

contingencies

Estimate based on

meter reading

records; no

allowance for

contingencies

No basis for

estimates

Price escalations

Detailed Project

Report/ Financial

model

Estimated based on

historical trends

No strong basis

for estimatesNo data available

to assess

Physical

contingencies

Detailed Project

Report

Specific assumption

relecting each asset

category and the

methodology of

detailed project report

Past experience in

contracts

General assumption

cutting across asset

categoriesNo data available

to assess

Basis for unit cost

estimates

Detailed Project

Report

Do the unit cost estimates reflect

market situation?

Schedule of Rates

adjusted for market

situation

Schedule of rates

with key items

adjusted for market

situation

Schedule of Rates

with general

inflation applied

Outdated

Schedule of

RatesNo data available

to assess

Demand

Population estimates

Detailed Project

Report

Are the Estimates of population

realistic?

Based on census data;

adjusted with a recent

physical consumer

survey

Based on census

data; adjusted with

annual growth

rates

Outdated census

data

Estimated

connections

Detailed Project

Report

Are the estimates of number of

connections based on verified

data?

Based on physical

survey of households;

allowance for growth

Based on physical

survey of

households

Based on current

data on

connections; no

physical survey

People per

connection

Detailed Project

Report

Based on consumer

survey.

Based on census

data, verified with

sample consumer

survey.

Assumptions - 4 to 6

per connection

Assumption - <

4 per

connection

Consumption per

person

Detailed Project

Report

< 100 lpcd for revenue

purposes or based on

reliable metering data

100 to 120 lpcd for

revenue purposes

or based on sample

household survey

120 to 150 lpcd for

revenue purposes

> 150 lpcd for

revenue

purposes

Consumption per

month per

connection

Detailed Project

Report

< 15 m3 or based on

reliable metering data

15-20 m3 or based

on sample

household survey 20-25 m3 >25 m3

Population growth

Detailed Project

Report

What is the basis for assumptions

underlying population

projections?

Conservative as

compared to past

trends for revenue

purposes

In line with past

trends

Not in line with past

trends

Revenue

Source of data



Key for grading

Tariff Structure Tariff Structure

Does the existing tariff structure

progressive and protect the

revenue concern of the project.

Increasing block

volumetric tariff

Simple volumetirc

tariff

Non volumetric

tariff or tariff

structure

without any

specified

adjustments

Average tariff/ KL

Is the tariff structure likely to

generate citizen opposition? <7.5 7.5 to 12.5 12.5 to 17.5 >17.5

Average monthly

bill/house Tariff Structure

Is the average monthly bill likely

to generate citizen opposition? <150 per month

150 to 250 per

month

250 to 350 per

month > 350 per month

Connection Charge/

Connection Tariff Structure

Are there adequate mechanisms

to ensure that connection costs

don’t discourage citizens from

taking formal connections?

Recovered in

installments

Capitalised or

subsidised

Recovered upfront,

with subsidies for

poor

Full cost

recovered

upfront

Tariff holiday on

conversion Contract

Does the existing tariff structure

progressive and protect the

revenue concern of the project. > 6 Months 3 to 6 months 1 to 3 months None

Collection efficiency Contract

Are the collection efficiency

assumptions realistic? <90% 90% to 95% 95% to 98% >98%

Tariff escalation

method Tariff Structure

Does the tariff revision

mechanism provide adequate

protection against cost increases?

Automatically adjusted

for power, salary cost

and WPI changes; Reset

periodically to reflect

allowed costs

Automatically

adjusted for power

and WPI

Predetermined

escalation rates

No specified

adjustments

% Revenue from bulk

users Financial model

Is the project too dependent on

revenues from bulk users?

% below poverty line

connections

Detailed Project

Report

Does the service area have a

disproportionate number of

households below poverty line,

requiring special tariff and supply

arrangements?

Operating Parameters

Pumping efficiency

Detailed Project

Report, Financial

model

Are the pumping efficiencies

assumed pratically achievable?

As per manufacturer

specs; allowance for

non optimal utilisation

As per

manufacturer

specs; no allowance

for non optimal

utilisation

Unrealistic

efficiency

assumptions

Change in pumping

efficiency Contract

Do the operating cost projections

provide for normal decrease in

pumping efficiency over the life of

the contract?

Decreasing in line with

age as per manufacture

specs

Decreasing, but

better than

manufacturer specs

Contant

efficiency

assumption

Real Losses

Detailed Project

Report, Financial

model, Contract

Does the contractual target for

real losses increase financial risk

on the project? >25% 20% to 25% 15% to 20% <15%

To be determined after sample assessments

To be determined after sample assessments

Source of data



Key for grading

Apparent Losses

Detailed Project

Report, Financial

model, Contract

Does the contractual target for

apparent losses increase financial

risk on the project? >10% 5% to 10% 3% to 5% <3%

Staff/ Connection Financial model

Does the contract make realistic

projections of the number of staff

required for operations >6 / connection

4 to 6 per

connection

3 to 4 per

connection

< 3 per

connection

% of municipal staff

moved to the project Contract

Does the contract expect that PPP

operations will be carried out by

existing ULB staff? <10 % 10% to 30% 30% to 70% > 70%

Operating Costs

Specific power

consumption

Specific chemical

consumption

Detailed Project

Report

Calculated based

on raw water

characteristics No clear calculation

Total staff

Detailed Project

Report

Does the Detailed Project Report

have an accetable manning

shcedule?

Calculated based

on asset profile,

service

requirements and a

detailed manning

shcedule

Based on staff/

connection

thumb rules

Average staff salary

Detailed Project

Report

Are the salary projections

realistic?

Based on market

conditions

Based on thumb

rules

Repairs and

maintenance costs

Detailed Project

Report

Do the operating cost projections

provide for adequate repairs and

maintenance?

Based on asset

profile and asset

specific

requirements

Based on generally

accepted

percentages

Periodic replacement Contract

Does the contract envisage

investmets to replace assets at

the end of their useful life?

Based on

manufacturer

recommendations No clear proposals

Raw water costs

Detailed Project

Report

Have raw water costs been

correctly estimated?

Based on unit rates

and estimated

requirements

Based on existing

payment records

Cost of international

staff in the

rehabilitation period Financial model

Does the financial model provide

for costs of intenational water

utility staff who may be required

to be deployed during the

rehabilitation period?

Calculated based

on a clear manning

estimate for expat

staff No clear provisions

Cost of third party

auditors Financial model

Does the financial model provide

for costs of independent third

party monitoring agencies/

auditors? Provided Not provided

Covered in pumping efficiency as above

Source of data



Key for grading

Office space and

administration Financial model

Does the financial model reflect

the costs of setting up new office

space? Provided Not provided

Software and

licenses Financial model

Does the financial model include

the costs of procuring utility

systems, software and licenses? Provided Not provided

Operating cost

escalation

Staff cost escalation >10% 8% to 10% 6% to 8% <6%

Power costs >4% 4% to 6% 2% to 4% <2%

Chemical Costs

Other repairs and

maintenance

Raw water costs Higher than trends

Based on historical

trends

General inflation >7% 5% to 7% 3% to 5% <3%

Provision for expansion

Demand increase

Detailed Project

Report

Assumes a

normative increase

in consumption per

capita over time

No clear

assumptions

Increase in

connections

Detailed Project

Report

In line with

population growth

No clear

assumptions

Increase in serviced

area

Detailed Project

Report

In line with land

use density

No clear

assumptions

Increase in network

length

Detailed Project

Report

In line with service

area

No clear

assumptions

Financing

Debt:Equity Ratio Financial model < 1:1 Debt 40% to 60% Debt 60% to 70% Debt > 70%

Interest Rate Financial model

Higher than 3% of base

rate

Within 2% to 3% of

base rate

Within 2% of base

rate

At or below

base rate

Term of the loan Financial model < 9 years 9 to 12 years 12 to 15 years > 15 years

Tax assumptions Financial model

MAT and IT at

existing rates

MAT not

considered

Depreciation

assumptions Financial model

Asset specific

allowance as per IT

and Companies Act

General

depreciation

rate

Working capital

allowance Financial model Considered Not considered

Financial model

Are the cost escalation

assumptions made in the financial

model realistic?

Are the financing assumptions

realistic?

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