Case Studye-. ~ w23723 December2000 Water and Sanitation Program partnership to help the poor gain sustainedhs access to improved - . - *.- water supply and _ sanitation services South Asia Region SUMMARY In 1998, the Pune Municipal Corporation attempted to implement an urban environ- mental infrastructure project, . , valued at approximaiely --.: '.i _;y . - Rs 7.4 billion (US$185 million), - through construction and man- agement contracts with a pri- _ j- vate sector firm. The project , was an integral part of a ,-"- 25-year strategic plan which _ -\ - Jr. aimed to gradually extend, to - _ the total population, a 24-hour - water supply and sewerage . service. This groundbreaking -__ __ _ _ partnership was also designed to ensure that Pune remained New Delhi an attractive economic destina- -w tion for investors. Had it suc- ceeded, It would have provided a model for other cities in Pune, India's seventh India seeking to improve ser- largest city, is located at vices through private sector - - the confluence of the Mutha portnerships. The project was and Mula rivers in the western canceled for a number of rea- Mumboi state of Maharashtra, 163 kms sons, but the most critical was *Pune (102 miles) from Muumbai. a loss of political support. This case study seeks to ana- lyze the challenges faced in the preparation of the project, many of which are illustrative of the obstacles to water sector reform, including increased private sector participation, in South Asia. (Not to scole) Historical and The projectdesign was based on the the city's finances and investment city's long-term strategic planning to capacity; an assessment of the Political the year 2025; it aimed to remedy impact of different budgeting and existing deficiencies while at the financing scenarios on the project Background same time meet expected future implementation; prepared the demand resulting from growth in and Request for Proposal documents and une, India's seventh largest city, around the city. The objectives were provided overall support during the is located at the confluence of the to provide 100% water coverage and bidding process; Mutha and Mula rivers in the west- an uninterrupted supply, 100% sew- * Kirloskar Consultants - drafted ern state of Maharashtra, 163 kms age collection and treatment and a the technical report and assisted in (102 miles) from Mumbai. It has a program of water recycling for irri- preparation of the Request for Pro- strong industrial base traditionally gation purposes. Management ser- posal documents; rooted in automobile manufacture vices andanewventure in billing and * Nishith Desai and Associates - but more recently attracting major collection were to be included in legal advisors; and buvetmren recently aormaction macor addition to the construction phase + IDFC (Infrastructure Develop- nology sector. River water is readily of the project. The feasibility report ment Finance Company) - finan- avoiloble acnd the Pune Municipal proposed a three-phase implemen- cial advisors. Corporation (PMC) supplies 240 tation, the first phase of which would Had the project reached an liters per capita per day. Though be implemented in partnership with operational stage, it would have shortages are rare, there are prob- the private sector. In March 1997, been implemented through three dif- lemswithahigh levels of unaccounted the High Powered Committee for ferent contracts awarded jointly to for water, intermittent supply, low Privatization of Infrastructure of the one selected contractor. These were: pressure, limited sewage treatment, Government of Maharashtra (GoM) * Construction Contract - a fixed rising river pollution and, most approved proposals to invite com- price, fixed time (36 months) contract urgently, the need to extend the ser- petitive tenders from the private sec- for the design, procurement and con- vice network to include the 800,000 tor. On October 7, 1998, two weeks struction of a water treatment plant, inhabitants of 36 villages added to before tenders were due to be opened improvement of existing sewage the PMC jurisdiction in 1997. and the contract awarded, the Pune treatment plants and the laying of In 1996, against a background of Water Supply and Sewerage Project water and sewerage pipelines to naIon19algec nomic lbeckralztound and was unexpectedly canceled. improve the existing system and national economic liberalization and Wasunexpectedlyconcelextend the network to the newly increasing public/private sector part- added areas of the city. nerships, the PMC initiated a water The M ain * Operations and Management supply and sewerage project valued Contract - to begin on completion at Rs 7.35 billion (US$ 185 million). Features f o of the construction work and cover selected facilities for a five-year the Proposed ~~~~period. The contract included treat- The Pune Water Supply and ment and distribution of specified Sewerage project area Included Contract quantities of drinking water; treat- Puns Municipal Corporation ment of specified quantities of waste- (PCB), Khadki Cantonment Board *ro ect preparation began in water; and the establishment of a (KCB), 36 villages merged in 1997 LApril 1996 and by March 1997 water quality-monitoring program. (which represent 63% of the total both the Standing Committee of the The contract contained performance- project area) PMC and the High Powered Commit- based penalties and incentives. Estimated population of the tee for Privatization of Infrastructure * Billing and Collection Manage- project area 1 of the GoM had approved proposals ment Contract - a five-year contract in 2001; 6.6 million by 2025 to invite tenders from the private sec- designed to develop and manage Largest population growth tor. Throughout the project develop- billing and collection of water predided in the 36 villages ment process technical assistance charges in selected zones, covering 0.3 million in 1991; 0.8 million was provided to the PMC by: roughly one-third of the total net- in 2001; 2.9 million by 2025 * Indo-US Financial Institutions work; to develop a database for all 444 slum settlements Reform and Expansion Project - connected properties; and to estab- within the project area with an estimated population of 0.7 Debt MarketComponent(FIRE-D)- lish a consumer rights office. The million in 1996 overall project development man- contract contained performance- ager; conducted a detailed review of based penalties and incentives in Water and Sanitation Program - South Asia 'w P.- j '55 Lodi Estate t__ ~~~~~~~~~~~~~~~~~Nedw Delhi 11 0 003 India Lo --Phone: (91 -11) 4690488, 4690489 s Fax: (91-11) 4628250 E-mail: wspsa@worldbank.org < Web site: http://www.wsp.org z _.......... ... .. _ Low income settlements along the Mula Mutha river near Karve Road in Pune. of return to the private operator at people to reduce costs; this project the expense of the consumer. This would have been a good opportu- attitude again underlines the need nity to strengthen and build the for sector-wide debate, at national capacity of local industry. as well as local levels, on what is regarded as an acceptable rate of r return and what is the best way to .:irban development continues in measure it and regulate it. __a haphazard manner without the The fact that there was at least one benefit of planned infrastructure and international company in each of the water problems for the 36 villages bidding consortia reflects the ability are growing. The economic costs and of reform-minded municipalities to the impact of poor and deteriorat- Prepared by Marie-Hasene Z trah, attract international operators. How- ing living conditions resulting from Lyonnaise des Eaux, seconded to ever, this same interest also raised these delays and inaction remain to Wath aSsitan from Kath fears among local contractors, who be quantified. Asia, with assistance from Kathleen have little expertise in operating and The ability of the private sector to Graham-Harrison, Editorial Consult- managing water systems, and con- reduce costs through efficiency savings ant, Water and Sanitation Program- sequently felt threatened by the has notyet been demonstrated in any Student, University of Paris X Centre arrival of more experienced opera- major project in India; Pune could have de Sciences Humaines, New Delhi. tors. The hostility of local contractors provided such a cost comparison had ignored the fact that international the private operator succeeded in December 2000 firms will rely heavily on local keeping costs down. The Water and Sanitation Program is References an international partnership to help the poor gain sustained access to improved Dandedkar H.C. and Sawant S.B. Constraints to developing commercially water supply and sanitation services. 1 n998. .Housing needs in new suburbs viable urban environental infrastructure The Program's funding partners are the of Indian metropolii - Case study of projects. Project Note. Governments of Australia, Belgium, Kothrud, Pune." In Economic and Politi- MASHAL. 1997. Pune Municipal Cor- Canada, Denmark, Germany, ItNly, cal Weekly, Nov. 1998. New Delhi. poration - Environment Status Report, Norway, Sweden, Switzerland, and the Cuttings from Indian Express (Pune 7996-97. Pune. United Kingdom, the United Nations Edition). September-October 1998. PMC. 1997. A Bird's Eye-view. Book- Development Programme, and FIRE (D) Project. June 1998. The let. PuneMunicipal Corporation. The World Bank. Pune WaterSupplyandSewerage Project: PMC. April 1998. Project Report, First Focus on Private Sector Participation. Phase of Water Supply and Sewerage Project Note. Project. Pune Municipal Corporation. Vol- FIRE (D) Project. November 1999. ume 11, Requestfor Proposal Documents. Created by Write Media E-mail: wriiemedia@vsni.rom Printed at PS Press Services Pvt Ltd April 1996 Intemal PMC feasibility report prepared. The Standing Committee gives the go-ahead for private sector bids, to solicit domestic and international financing and to go to the High Powered Commit- tee on Privatization of Infrastructure (Govemment of Maharashtra). April 1996-March 1997 Plans presented to 3 or 4 informal meetings of the elected councilors of Pune. July 1996-Jan 1997 FIRE collaborates with PMC in preliminary project preparation. Jan-Feb 1997 Kirloskar appointed to prepare a detailed feasibility report. March 1997 The High Powered Committee on Privatization of Infrastructure of the Government of Maharashtra approves the project and authorizes competitive proposals from the private sector. PMC invites expression of interest from private sector. 30 companies respond; 14 are short-listed. April 1997 Issue of project documents to short-listed companies. Meetings and site visits arranged. May 1997 Submission of pre-qualification documents. June 1997 6 consortia pre-qualify. October 1997 Local elections in Pune change the composition of the General Body of Elected Councils. July 1997-Feb 1998 Preparation of technical reports, discussions with all interested parties and definition of project structure. Note on financial implications of project submitted as part of budget for 1998-1999; meetings held at state level. Feb 1998 High Powered Committee requests approval of the state cabinet. March 9, 1998 Cabinet approval; grant aid from Govemment of Maharashtra; tax exemptions result in savings of Rs 70 crore; approval of the issue of the Request for Proposal (RFP). March 31, 1998 Issue of RFP on April 28, 1998. Rs 70 crores set aside to meet contract payments approved by the Standing Committee. March-April 1998 National elections result in change of political alliance at the local and state level. April 1998 Pune Municipal Commissioner transferred on April 24; issue of RFP on April 28. 6 companies submit applications. May 30, 1998 Pre-bid conference. June 1998 Deadline for technical and financial submissions extended to October 22. 3 to 4 bids expected. October 7, 1998 Project canceled. addition to specifying the fixed man- initial notice of interest issued in thirds from private investments. The agement fee payable for minimum March 1997. Eleven firms were responsibility for the latter lay with collection targets. The experiences short-listed and eventually six con- the contractor whose bid proposals generated by this contract would sortia, each including at least one would have contained a Plan of have formed the basis for long-term international partner, passed the Finance designed to capture the best policies on tariff structures, metering technical pre-qualification stage. financing optionsforthe projectfrom and incentives for prompt payment. Invitations to bid were issued on April national and international sources. All three contractswould have been 28, 1998. The tender submission The bidders were able to include any managed on a day-to-day basis by a date, originally fixed for July 30, of the several sources of finance for Project Management Unit (PMU) 1998, was later postponed to Octo- which the PMC had already received chaired by the Additional City Engi- ber 22, 1 998. However, despite the a commitment, namely: neer with cross-departmental repre- strong private sector interest and * An AA credit rating for a Rs 2 sentation; but to oversee implemen- the fact that the process was far billion (US$ 50 million) municipal tation of the construction contract it advanced, the project was canceled. bond issue. was envisaged that an independent * Housing Guaranty Funds from engineer would be appointed who USAID through the FIRE(D) project. would report directly to the head of Proposed + In-principle commitments for the PMU. A Project Steering Commit- loans from the Industrial Credit tee (PSC) consisting of the Municipal Prolect Investment Corporation of India Commissioner, the head of the PMU, Financing (ICICI) for Rs 3 billion (US$ 75 mil- nominees of the GoM, and other lion) - (the first instance of such a independent members would have commitment for an urban project provided general management and Mmix of internal and external from ICICI) - and from HUDCO for administrative guidance and been JLfunding was planned for the Rs 2.25 billion (US$ 56 million). responsible for establishing penalties project with the PMC guaranteeing The PMC had proposed the estab- and incentives and negotiating varia- one-third of the cost from public lishment of a Water and Sewerage tions in the contract. funds (23.3% grant assistance from Project Fund (WSPF) underwritten by There was a good response to the GoM and 10% from PMC) and two- Octroi (duty on goods and vehicles (US $185 million), were adjusted to Municipal commissioner today ensurethatfundswould be available Suhas Kulkarni, BJP leader in formally canceled the tenders . the PMC, submitted a letter to of the controversial Rs 735 crore to absorb likely inflationary rises, the Chief Secretary demanding water supply and sewerage price escalation and time and cost a judicial inquiry to probe project ...His decision comes in overruns. The contract was to have whether the tenders issued by the wake of the unanimous been awarded on the basis of the the PMC were as per the govern- rejection of the project by the lowest bids for the total cost of the ment resolution dated May 27, general body of the corporation . 1998 or not. It may be recalled last month...All members of the three contracts; it was confidently that members of the corpora- corporation, cutting across assumed that the competitive bidding tion had alleged that when the party lines, had vehemently process, access to internctional state government had sanctioned opposed the project ...arguing that credit, and the proven ability of the the project on May 28, how is the cost of the project was prvi etrt euecsstruh it that the PMC has issued ten- exorbitant and the project had privatesectortoreducecoststhrough der notices and forms on April not taken into account the efficiency measures would produce 27, 1998 without taking the existing machinery and infra- significant savings on the project cost general body's approval. structure on which the estimates; this assumption was corporation had spent crores strengthened by recession in the con- Indian Express of rupees. struction industry. In any event this Sept. 21, 1998 Indian Express assumption could not be tested as Oct. 8, 1998 the project was canceled. an influential local politician, who had initially supported the project, changed his stance. Critics began to entering the city), which accounted Reasons for the question the viability of the scheme, for 45% of the municipal revenues. * * . f the overall cost and the process used Substantial toriff increases had CanCellation of to award tenders to the private sector. been proposed by the PMC including: The transfer of the Municipal Commis- * 25% increase in water charges for the P rojec sioner in April 1998, which left the domestic users (from Rs 2 per cu m project without a local champion, was to Rs 2.5 per cu m). combination of reasons under- considered by many to be a response *43% increase in the annual fee ^'iethelastminutefailuretoreach to this growing vocal criticism. levied on standpipes in slums (from the operational stage, but essentially However, political support from Rs 1 75 to Rs 250). the project lost political support and the state had also begun to waver 4 The Standing Committee rejected the cancellation was effected through with some ministers taking a nega- a proposal to index water charges to political processes. This was despite tive stand against the project. Against electricity prices and to increase tar- the project being consistent with the this background of rising political iff levels by 50% to capture normal state government's policy on public/ opposition, the new Municipal Com- inflationary rises since 1994, the date private partnerships for improvement missioner decided to cancel the of the last tariff increase. of urban infrastructure, despite close project. The estimated costs were Project costs were estimated at consultation at state and local level also cited as a reason for canceling Rs 4.27 billion (US $106 million), a and despite attracting broad cross- the project. figure known as the base cost. But in party support through the prepara- The implication that high project order to address all likely risks, and tory stages from April 1996 until May costs were designed to ensure a high in keeping with internationally 1998. Opposition began to mount rate of return to the private operator accepted good practice, the actual when national and local elections at the expense of the consumer cost estimates used, Rs 7.35 billion altered the political landscape and reflects the concern and suspicion _k _ii The project did not directly address the issue of Pune's 700,000 slum dwellers who would have received only a marginal share of the total project investments. However, the network was designed to reach the entrance of every slum to ensure speedy access for the inhabitants when funds become available. It was envisaged that responsibility for individual connec- tions would then rest with the municipality, not the private operator. But the project was an integral part of the long-term urbain-infrastructure plan, designed to enhance the image of Pune as a forward-looking city, able to attroct national and international investment with the certainty of a reliable, good quality, uninterrupted water supply. Such investments would have had a positive impact on the economic fortunes of the area with knock-on effects for increased employment opportu- nities and access to better standards of living for those in the poorer peri-urban villages. There was considerable opposition through the design of the bidding The Water Supply Minister Anna. .. Dange today instructed the to the high debt burden which the process and the obligations put on Pune Municipal Corporation to large loans for the project would the operator through the contract. stop the tender procedure and have entailed and some critics Experience in other countries shows to take prior approval of the argued that such an expensive severalways inwhich this is possible general body before initiat- undertaking would siphon off funds (see the WSP-SA series on 'The Pri- ing the project again. earmarked for other, equally impor- vate Sector Serving the Poor'). In the Indian Express tant, social programs. case of Pune, addressing the needs Sept. 22, 1998 of the poor was not a high priority for the project, and it does not Lessons for appear to have been a factor in with which some politicians view pri- South Asia either the project's initial support nor vate sector involvement in the pub- its subsequent cancellation. Other lic sector in India. cities planning similar private sector Opponents also argued that the were are several important les- arrangements should ensure that the failure to consider alternative cost E ons that can be drawn from the poor receive more attention in the saving options, such as improving the Pune experience: planning stages, and that the advan- existing network and streamlining * Credible and consistent politi- tages for the poor are seen as management procedures, called into cal commitment at a high level is important reasons for providing question the competency of the tech- essential if the window of opportu- political and popular support. nical consultants appointed to assist nity is to be opened to private sector * It is debatable whether there the PMC in project preparation. partnerships. Innovative develop- are enough Indian consultants Local contractors were hostile to ments in the water sector, especially experienced enough to meet the the idea of international firms being in relation to improving services for high international standards awarded the contract and they used the poor, involve high political risks. expected in this sort of project, their political influence to protect This requires capacity building given the political sensitivities sur- what they saw as their own interests. among elected representatives, and rounding privatization processes, the As part of the project preparation most crucially, civil society, in order need for openness and transparency, phase, the PMC had already to constructively debate the issues. the development challenges and the increased water charges. This mea- Having a strong local champion, in range of financial needs. This con- sure attracted criticism, despite the this case the Municipal Commis- straint may well prove problematic approval of tariff adjustments by the sioner, is not enough. in other South Asian countries that, Standing Committee. Tariff issues * The kind of scrutiny to which the so far, have little experience of large- may in fact have been a smoke PMC has been subjected indicates scale privatization ventures. screen used to impede the project, the need for municipalities to be 4 The establishment of an indepen- nevertheless tariffs remain a funda- really well prepared when embark- dent regulatory authority or at least mental issue in India where cost ing on a public/private sector part- clear guiding principles could have recovery in the water sector is weak. nership. The failure of the project resolved some of the problems faced reflects the need to have a struc- in Pune. Debate at the national, Describing the total project tured, continuous and focused state and municipal level on sec- cost as "highly exorbitant", Kulkarni said the cost should consultation process that keeps all tor priorities and objectives is a be Re 540.08 crore (US$ 135 mil- stakeholders abreast of develop- crucial first step in the development lion), going by rates standard- ments. The debate in newspapers of guidelines that can be followed by ized by the Maharashtra Jeevan during June to October was one- urban local bodies seeking to utilize Pradhikaran (MJP - the official sided and politically driven, with little the expertise of the private sector; agency of the state goavernment to check and scrutinize water input from officials closely involved such debate will start the process of supply and sanitation projects). with the project. The absence of a building up a clear legal and regu- 'Who is responsible for rte well-managed public relations office latory framework. additional financial burden of resulted in poor media management * Private sector involvement Rs 200 crore (US$ 50 million" and a lack of accurate well-informed depends n the operator being he asked. naakfcuaeelifre deedonteoearbig debate in the public arena. able to make some profits in Indian Express * The project planners did not addition to recovering costs. Crit- Sept. 21, 1998 make the most of the opportunity to ics argued that the high project costs address the needs of the poor were designed to ensure a high rate