Case Study of The Financial Model For Water Supply Project
According to the RICS recent survey only 4% of the people want to live in Urban Area. This shows the reverse in standard of living requirement which was dream of living in the urban area. What has gone wrong? We know that gypsies used to settle were they could find water. It can be said that water is such an important element for development of any place irrespective of urban or rural area.
In India 30% of the total population live in Urban Area and contribute to 60% of the total GDP (Gross Domestic Product). 31% is the increase in the population in last decade compared to 18% in the rural area. So it is necessary to boost urban infrastructure by public as well as private intervention institution.
Creativity is the service of the age that generate Ideas that become product and service. The downturn of the economies has advantage of new invention which is also true in case of maximization profit. With increase in the demographic of ages, climate, cultures and immigration it is difficult to take the risk of demand of the urban area. The risk of controlling the demand must be taken by government agency to encourage the private parties for excellence service in Infrastructure.
1.2 Research Aim and Objective
To develop financial model for water supply projects using “JNNURM toolkit”. This can be used to analyze the relationship between performance and sustainability in PPP method of procurement.
To study the preparation of Urban Infrastructure and Investment plan for the city.
To evaluate the feasibility of water supply service in particular.
Role of PPP in Urban Infrastructure.
1.2.3 Main Hypothesis
Need for Urban Infrastructure and their implementation under governance of JNNURM scheme. To promote sustainable investment and innovative PPP method of procurement increase in the efficiency at municipality level by vigilance. Freedom should be given to private parties to make them comfortable.
1.3 Outline Methodology of Study
We will first try to figure out what is the need of the curbing population of that particular city. The cities are in a desperate need of finance for carrying out the reviving projects. But the previous schemes and projects by the municipalities and state governments have failed miserably on the grounds of implementation (ie, time management) and utilization of funds. So there is a need to gather finance for the reviving project for the curbing infrastructure .The story does not end here, there is also a need to govern the utilization of fund.
There is a new scheme which is growing popularity by the Government of India along with State government and the municipalities. The buzz word in this scheme is the governance of the project because there is a proper channel how to control the funds issued by the government. Also the government of India will regularly monitor the implementation of the project. Along with this there is a unique proposal of submitting the CDP (City Development Plan) for approval.
So our approach would be to find a method of relating the increase in population and need of the same in coming 20 years as well as to arranging and managing finance considering all the factors like inflation, operation and maintenance cost. For this we would study CDPs of various cities and also study their approach in solving the future infrastructure problems. Also we would compare various CDPs and comment on their efficiency.
Since we are talking of CDPs preparation and involvement of private parties we will try some case study and prepare the financial appraisal of the same. We would critically analyze whether the project is financially feasible under JNNURM (Jawaharlal Nehru National Urban Renewal Mission) scheme
1.3.1 Literature review and the pilot study
This literature review the following subject of India
City Development plan
Finance scheme for city development plan
Pilot Study consists of Theoretical approach. Study of a practical approach to prepare CPD for water supply project under guidelines of JNNURM scheme toolkit.
1.3.2 Main Study
Case study:- Feasibility of water supply project under JNNURM scheme using Financial appraisal calculation and role of PPP in such project. The name of the city under case study has been changed due to sensibility of the case as it is live project. The name of the city will not effect on research subject of development of financial appraisal model because scenario is well detailed.
The approach of this study by Quantitative and Analytical
Comparison of CPD between different states: – selected 4nos of states for comparison.
The approach is Quantitative by reading the CPD’s of different states and comparing them.
1.3.3 Writing Up
Chapter-2:-City Development Plan
Chapter-4:- JNNURM Scheme
Chapter-5:- Case Study
Chapter-6:- Comparison of CPD between different states
2 City Development Plan
2.1 Geographical Information
29 states and 6 union territories*
Andaman and Nicobar Islands*
Dadra and Nagar Haveli*
Daman and Diu*
Jammu and Kashmir
* Union territory
Table 1 India: Development Indicator
“According to a United Nations study (1995), by the year 2015, ten of the world’s fifteen largest cities will be in Asia (excluding Japan); three of these will be in India. In 1950, this same region claimed only three of the world’s fifteen largest cities, whilst India claimed only one.
These projections suggest that demographic growth in India’s large cities will be high, partly due to national population growth and partly due to immigration. The logistic model used by the United Nations, the World Bank, and other international agencies for the projection of urban population world-wide suggests that India is poised for rapid urbanisation, along with several other countries in south and East Asia. “
SIZE: As per Census 2001, only 28% of the 1.1 billion Indians live in urban areas. Expected to increase to 40% by 2021. About 60% of the country’s GDP originates from urban areas. Allocation of US$12 billion by the Government of India under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) for a period of 7 years for improving urban infrastructure across 63 cities. Key metro cities Mumbai, Kolkata, Delhi, Bengaluru, Chennai, Hyderabad and Ahmedabad allocated 47.5% percent of these funds.
STRUCTURE:JNNURM functions under the overall guidance of a National Steering Group (NSG) which comes under the purview of Ministry of Urban Development
JNNURM is aimed at fast-track planned development of identified cities. Key highlights
Integrated development of urban infrastructure projects
Renewal and redevelopment of inner city areas
Provision of basic services to urban poor
Funds to be channelised through Urban Local Bodies who will be responsible for implementation
Implementing agencies to leverage sanctioned funds to attract private sector investments through PPP contracts
Investments of more than US$50 billion would be required in the next 5 years to improve and build urban infrastructure
JNNURM is the single largest initiative of Government of India for planned development of cities
Opportunity for private players to partner with Urban Local Bodies (ULB) in development of urban infrastructure such as
Water supply and sanitation
Urban transportation including roads, highways, expressways, Mass Rapid Transport Systems (MRTS) and metro projects
Solid waste management
POTENTIAL: A large component of development work will be through public-private partnership. Water supply and sanitation in urban areas to attract investments over US$30 billion.
100% FDI under the automatic route permitted for townships, housing, built-up infrastructure and construction-development based projects subject to minimum scale norms
JNNURM will provide grants/viability gap funding for projects
“Urban Local Bodies (ULBs) of India are the constitutionally provided administrative units that provide basic infrastructure and services in cities and towns. According to Census of India 1991, there are 3255 ULBs in the country classified into four major categories:
Large urban areas are governed by Nagar Nigams, often simply called corporations. The area under a corporation is further divided up into wards. Individual wards or collections of wards within a corporation sometimes have their own administrative body known as ward committees.
Smaller urban areas are governed by Nagar Palika, which are often referred to simply as municipalities. Municipalities are also divided into wards, which may be grouped together into ward councils. One or more representatives are elected to represent each ward.”
“What is worse, many ULBs have accumulated ‘large’ debts and face serious problems in servicing them. Besides the restriction to a small resource base poor planning process, lack of periodical revision of municipal tax rates / user charges, and poor information system and records management are some of the basic weaknesses in the present municipal administration.” The
“Infrastructure Problem : In spite of its prominent role in Indian economy, urban India faces serious problems due to population pressure, deterioration in the physical environment and quality of life. According to estimates nearly one third of the urban India lives below poverty line. About 15 percent of the urbanites do not have access to safe drinking water and about 50 percent are not covered by sanitary facilities. There is a huge and widening gap between demand and supply of essential services and infrastructure. “
2.4 Schemes for development of urban development
The ongoing schemes of Urban Infrastructure Development in the mega cities, and Integrated Development of Small and Medium Towns (IDSMT) do not meet the requirement of infrastructure development of all cities/towns in the country. There is, therefore, need to have a comprehensive scheme for infrastructure development of all cities/towns in the country. Other scheme like Urban Reforms Incentive Fund (URIF) also needs to be subsumed in the said comprehensive scheme. Funding is linked to reforms which are classified into “mandatory” and “optional” as detailed below:
Mandatory Reforms—State level:
Repeal of Urban Land Ceiling and Regulation Act
Reform of Rent Control Laws so as to stimulate private investment in rental housing schemes.
Rationalisation of Stamp Duty to bring it down to no more than 5 per cent within the next five years.
Introduction of independent regulators for urban services.
Mandatory Reforms –Core (at ULBs level):
Double entry system of accounting for Urban Local Bodies
Adoption of public disclosure law – disclosure of medium-term fiscal plan and quarterly performance reports.
Passage of community participation law.
All special agencies currently involved in delivering urban civic services to be brought under the supervision of ULBs, thus creating a uniform accountability platform.
A Bangalore Action Task Force (BATF) kind of citizen’s technical advisory group should be constituted for each city to guide the process of urban reforms.
Urban development authorities discharging city Planning functions and the new city development function should associate the ULBs more closely.
Introduction of e-governance, Global Information System (GIS) and Monitoring Information System ( MIS)
Reform of Property Tax laws.
Levy of reasonable user charges.
Revision of byelaws to streamline the approval process.
Simplification of legal and procedural frameworks for conversion of agricultural land for non-agricultural purposes
Introduction of Property Title Certification System in ULBs.
Earmarking at least 20-25 per cent of developed land in all housing projects for the poor.
Introduction of computerized process of registration of land and property
Revision of bye-laws to make rain water harvesting mandatory
Bye-laws for reuse of reclaimed water
Administrative reforms, i.e. right sizing of the ULBs.
It is important to note that the contribution of urban sector to GDP is currently expected to be in the range of 60 percent. In this context, enhancing the productivity of urban areas is now central to the policy pronouncements of the Ministry of Urban Development. Cities hold tremendous potential as engines of economic and social development, creating jobs and generating wealth through economies of scale. They need to be sustained and augmented through the high urban productivity for country’s economic growth. National economic growth and poverty reduction efforts will be increasingly determined by the productivity of these cities and towns. For Indian cities to become growth oriented and productive, it is essential to achieve a world class urban system. This in turn depends on attaining efficiency and equity in the delivery and financing of urban infrastructure.
The India Infrastructure, Report, 1996, assessed the total annual investment needs of water supply, sanitation and roads sectors at Rs. 28,036 crores per year on an average during 1996-2006. Where as funds to that extent are not available. To overcome these constraints and challenges, the Ministry of Urban Development has initiated institutional, fiscal and financial reforms. First generation urban sector reform – known as the 74th Constitutional Amendment Act of 1992, recognizes the principles of local self governments and empowers urban local bodies with financial resources through Central Finance Commission and State Finance Commissions. Subsequently, in order to strengthen these local bodies, second generation reform have also been started. In the last decade, enormous progress has been made in removing impediments to efficient investment.
Resource Mobilization Effort:
In August, 1996, the Central Government guidelines entitled ‘Urban Development Plans Formulation and Implementation’ were circulated to all State Governments for adoption. These guidelines, apart from other issues, suggest innovative approaches for fiscal resource mobilization. In the backdrop of the New Economic Policy, it was suggested that the traditional system of funding based on Plan and budgetary allocations be reduced and ultimately withdrawn due to fiscal deficit.
Subsidies need to be rationalized and urban development plans and projects need to be placed on a commercial format by designing commercially viable urban infrastructure services and area development projects. This can be achieved by restoring a proper match between functions and source of revenue by giving additional tax measures. Other innovative resource mobilization measures include using land as resource, increase in the non-property taxes and using public private partnership in service delivery.
2.4.1 Second Generation Reforms
The participation of the private sector in financing and the delivery of infrastructure at the municipal level, especially in the water and sanitation sector, require a regulatory framework to protect consumers, apply environmental standards and support the delivery to the poor. As there are a variety of models of regulation from centralized to decentralized systems, guidelines will be developed at the National level to ensure consistency across the country. Appropriate training programme and capacity support to regulators will also be developed in partnership with the private sector and urban research institutions.
The Central Government is in the process of preparing model legislation for facilitating private sector participation in urban infrastructure. This is necessary as the present legislative scenario does not encourage private sector participation in this field. A model Municipal Act which will be recommended to the State Governments would include modification and simplification of Municipal bylaws, provision for enhanced borrowing, allowing the entry of private sector and authorizing concessionaires to penalize users for non payment of tariffs.
Municipal Accounting System:
The Task Force constituted by the O/o C&AG of India had recommended for introduction of accrual basis of accounting system for the urban local bodies (ULBs) and suggested model budgeting and accounting formats for that purpose. The Task Force Report was circulated to all States/UTs for adoption of accrual basis of accounting system as well as the budget and accounting formats. Further to provide a simplified tool kit to the ULBs for recording the accounting entries, Ministry of Urban Development in cooperation with the Office of C&AG of India has prepared a National Municipal Accounting Manual (NMAM) and circulated to all States/UTs in January, 2005.
The Manual comprehensively details the accounting policies, procedures, guidelines designed to ensure correct, complete and timely recording of municipal transactions and produce accurate and relevant financial reports. The NMAM would help the States prepare their state-level accounting manuals in accordance with their own requirements for use by the ULBs. This initiative is expected not only to enhance the capacities of ULBs in municipal accounting leading to increased transparency and accountability of utilization of public funds for the development of urban sector but also will help in creating an environment in which urban local bodies can play their role more effectively and ensure better service – delivery.
Public private partnership guidelines:
Central Government will develop guidelines for involvement of the private sector in infrastructure, which will ensure competitive biding process in a transparent manner. These guidelines will not only protect the consumers but also ensure integrity of the process. This would support municipalities in designing the PPP process on the lines of the BOT Centre in Philippines or the PPP in the Ministry of Finance in South Africa. Chapter4 included the issues related to PPP.
2.4.2 Fiscal incentives
Foreign direct investment (FDI):
Hitherto Foreign Investment Promotion Board (FIPB) allowed direct investment in providing urban services on a case to case basis. This scenario has changed with the decision of the Central Government removing restrictions on FDI in urban infrastructure facilities which are now open both under FIPB and the automatic route as per sector specific guidelines. Guidelines have since even issued for FDI in development of integrating township including housing and building material.
Since independence, externally assisted urban sector projects have accounted for US$ 2300 million. A review of these projects indicated a need to adopt a programme approach rather than a project approach for availing external assistance. It also indicated the need to encourage a multiple donor scenario and tapping low cost funds for urban infrastructure.
Tax free municipal bond:
Municipal bonds were successfully issued by several Municipal Corporations like, Bangalore, Ahmadabad, Ludhiana, Nagpur, Nasik, and Madurai for raising resources for urban infrastructure. The Central Government had announced tax exemption in case of bonds issued by Municipal / Local Governments. Guidelines were issued by this Ministry on 8.2.2001 for regulating issue of tax free municipal bonds. Under the guidelines, such bonds will be issued for raising resources for capital investment in creation of new infrastructure as well as augmentation of existing systems. Tax free bonds worth Rs. 100 crore by Ahmadabad Municipal Corporation have been permitted for improving infrastructure. Hyderabad Municipal Corporation has also been permitted to issue tax free municipal bonds for Rs. 82.5 crore.
Pooled financing for municipal infrastructure:
Traditionally, municipal corporations and urban local bodies have relied on subsidized funds for providing urban services which constraints the constraints the introduction of user charges and efficient project operation and maintenance. In view of the huge resource gap, direct access to capital market would now be an accepted viable option. However, access to capital market requires financial discipline and enhanced credit rating. It has been the experience that only bigger municipal corporations are in a position to take the advantage of the resources available in capital market.
Medium and smaller municipalities are unable to do so due to weak financial position and lack of capacity to prepare viable project proposals. A State level pooled financing mechanism is being proposed for smaller and medium municipalities. The objective of a State level pooled finance mechanism is to provide a cost effective and efficient approach for smaller and medium sized ULBs to access the domestic capital markets for urban infrastructure and to introduce new institutional arrangements for mobilising Urban Infrastructure Finance.
Government of India is also encouraging citywide reforms and restructuring so as to ensure that cities are managed efficiently and become creditworthy (to attract private finance ) which will enable them to prepare long term plans for infrastructure investments and implement poverty alleviation programmes.
Citywide reforms and restructuring will, however, result in significant transaction costs during the period of transition. Leaving cities to finance these costs by themselves will delay and make it difficult to implement these reforms. It is to partly offset this disadvantage that the Ministry of Urban Development is proposing to set up a performance based City Challenge Fund for catalyzing city level economic reform programmes. The resources from the Fund would be given as grants but should ideally be matched by equal allocations either from the cities themselves or from the respective State governments. Access to the fund would be on a competitive basis.
Establishment of an urban academy:
The proposed Urban Academy is visualized as a centre of excellence in Urban Matters such as urban water supply, sanitation, urban transport, urban governance, municipal finance, etc. It will be a n ideal town-planning habitat, wherein experts from India and abroad can experiment with new layouts, building materials, landscaping, heritage preservation etc., and it will have Synergic links with all other institutions specializing in urban matters. This will coordinate all Training and Capacity Building Initiatives and effort of change management forums.
In conclusion, it is evident that the New Economic Policy launched in India in 1991-92, did see several important initiatives in the urban sector designed to encourage private sector participation in urban infrastructure projects. These initiatives would need to be taken to their logical conclusion. A series of new Reform Measures are being put together for implementation during 10th Plan Period. Through these, we hope to reverse the declining standards of urban infrastructure in the country.
Public Private Partnership
Procurement addresses how the industry organizes itself to deliver construction projects. Contracts define the rules governing the relationships between the many organizations involved in each project.
Construction industry clients are faced with a perplexing array of skills and resources which must be combined effectively to develop a building (or other constructed facility) that will fulfill their needs. All but the simplest of buildings involve the management, design, assembly and commissioning of large amounts of raw materials using appropriately-skilled labor provided by multiple organizations over a long period of time. The flow of money between Organizations must be formally organized, as must the distribution of responsibility and risk among them.
While the technical complexities of the design solution itself are addressed by the specialized skills of construction industry members, the interaction of these organizations must be structured by the selection of an appropriate procurement route and the effective administration (i.e. day to day running) of the associated form of construction contract. At the project outset, clients will usually seek advice on the selection of a procurement route to bring the required organizations together.
Figure 1 Example of a cost and Time Overruns in Public Sector Projects.
In response to these problems, two key joint industry and government reports were published to stimulate innovation in construction industry practice: the Latham Report in 1994 and the Egan Report in 1998.
In the first report – “Constructing the Team” – Sir Michael Latham commented:
“Implementation begins with clients. Clients are at the core of the Process and their needs must be met by industry”
“Rethinking Construction” proposed five drivers for change in the construction industry:
1. Committed leadership
2. A focus on the customer
3. Integrated processes and teams
4. A quality driven agenda
5. Commitment to people
In the public sector, HM Treasury launched the “Achieving Excellence in Construction” initiative in 1999 to improve the performance of Government in its client role by publishing “Achieving Excellence in Construction Procurement Guides”  which addresses the following issues:
1. Initiating action
2. Project organization
3. Project procurement lifecycle
4. Risk and value management
5. The integrated project team
6. Procurement and contract strategies
7. Whole-life costing
8. Improving performance
9. Design quality
10. Health and safety
Public sector clients are generally concerned with certainty of budget and quality and, above all else, ensuring public accountability as they are spending public money.
Clients who build regularly – perhaps continuously –can be considered experienced
Construction projects can be structured in a variety of ways as “No single procurement route” is suited to all situations and so is required to link the Client’s business requirements before an appropriate project structure can be recommended.
The Office of Government Commerce defines these terms as follows :
“Procurement strategy: The procurement strategy identifies the best way of achieving the objectives of the project and value for money, taking account of the risks and constraints, leading to decision about the funding mechanism and asset ownership for the project. The aim of a procurement strategy is to achieve the optimum balance of risk, control and funding for a particular project.”
“Procurement route: The procurement route delivers the procurement strategy. It included the contract strategy that will best meet the Client’s needs. An integrated procurement route ensures that design, construction, operations and maintenance are considered as a whole; it also ensures that the delivery team work together as an integrated project team.”
Figure 2 The relationship of procurement strategy to procurement route
“A Public Private Partnership (PPP) is an umbrella term for arrangements agreed – often with legal force – between public and private sector organisations to their mutual benefit.
The Private Finance Initiative (PFI) is one form of PPP developed by the Government in which the public and private sectors join to design, build or refurbish, finance and operate new or improved facilities and services to the general public. PFI schemes generally involve a consortium of private sector companies, who collaborate to form a Special Purpose Vehicle (SPV) which then contracts with the public sector to provide services such as hospitals, schools and roads to specifications provided by public sector bodies.”
3.1 Procurement method issues
Construction industry has complex analysis mere by dual component of land and building. It has fuzz boundaries. The fragmentation of the industry between contractor, consultant, project management etc creates the industry highly volatile. It can also be argued the reduction of professionalism if it is at only contractor. So it is expected to carry multitude of negative aspects of Investment which is derived from present consumption. In Economics term Investment is the process of trading present consumption for new capital. Present trading can be alternative to investment in other than the construction industry.
Individual participant have significant approach to price and quantity.
“This definition illustrates several key characteristics of PFI schemes:
A service, rather than capital assets, is purchased.
PFI schemes run for a long time. The public sector typically requires procures the provision of a service over a 25 to 35 year period.
Buildings or other infrastructure is usually constructed by the private sector as a consequence of the need to provide the agreed service. The PFI agreement will define the level of service required (such as providing a maintained, lit, warm, clean and catered hospital, for example) and the private sector will finance the design and construction of new or adapted facilitates as necessary to accommodate that service.
Because the public sector is purchasing a service, rather than assets, it will not own those assets unless the transfer of their ownership is agreed when setting up the scheme (see Section 6.6.5).
Subject to any specification imposed by the public sector client, the private sector is free to use whatever means it considers appropriate when constructing the assets. This can lead to design quality and performance shortcomings (see Section 6.6.4).
The private sector puts itself at risk when securing the finance required to construct any capital assets required by the scheme. In return, it will expect to be paid for managing this risk. This raises the overall cost of PFI schemes above that of non-PFI procurement where financing risks are minimal as they are borne by the public sector with funding traditionally provided and underwritten by the Treasury.”
3.2 Role of PPP in Infrastructures
“In the projects from the Public Private Partnership (PPP) and Private Finance Initative (PFI) programmes, the public sector contracts to purchase services – rather than any particular building – from the private sector in the long term. The delivery