1.

Nagpur: PPP in city-wide water supply

1.1. Case abstract
This case profiles the initiative of Nagpur Municipal Corporation (NMC) to implement a 25-year Public-
Private Partnership (PPP) project for provision of continuous water supply on a city-wide scale. The
Project, among the first few initiatives in India to attempt continuous water supply on a city-wide scale,
seeks to build on positive experience from a demonstration pilot to provide 24x7 water supply to
15,000 connections in the Dharampeth zone of the city.
The case discusses pre-cursor actions leading up to the Project, reviews the salient features of the
PPP agreement and traces its progress and current status. It summarises positive outcomes
achieved, challenges faced, and distils lessons for other Indian cities that are considering use of
PPPs for provision of reliable and continuous water supply.

1.2. City profile

1.2.1. About Nagpur city
Nagpur, located in the Vidarbha region of Maharashtra is among Indias fast growing cities. It is an
important political/administrative centre and hosts the State Assemblys winter sessions. It is home to
several Government agencies and Research institutions including the National Environmental
Engineering and Research Institute (NEERI) and is a centre for Maintenance Command of Indian Air
Force. Nagpur is also a hub of industrial activity in the Vidarbha region. While Butibori is the largest
industrial estate in its vicinity (located 25-30 km from Nagpur city), other industrial areas around
Nagpur include Kamptee, Hingna, Wadi, Khapri, Butibori and Kalmeshwar. The Government of
Maharashtra (GoM) has also initiated efforts to develop the existing airport at Nagpur as a Multimodal
International Hub Airport at Nagpur (MIHAN) along with creation of a Special Economic Zone (SEZ)
and allied facilities. MIHAN is being developed as a multi-dimensional, multidisciplinary project of
global standards.

1.2.2. About Nagpur Municipal Corporation

Nagpur Municipal Corporation (NMC) is mandated with provision of civic services in Nagpur city. At
the time of Census 2011, NMC had a population of 2.46 million, spread over an area of 218 sq.km,
(average population density of 113 persons per hectare). Of this, about 8.6 lakh people (or 34% of
population) live in slums. A slum-mapping exercise undertaken by NMC in 2010-11 identified 447
slums, 287 of which were notified slums while the rest were non-notified slums.

1.3. Water supply scenario prior to Project

1.3.1. Water supply system in Nagpur
Water supply service delivery in Nagpur city is the responsibility of NMC. Even prior to the Project,
NMC had piped water supply access to over 80% of its citizens. Supply was intermittent with an
average duration of 4 hours (ranging from 2 hours in some areas to 12 hours in others). Thus NMC
was doing relatively better vis--vis several Indian cities on access and duration of supply indicators.
Refer Exhibit 1.1 for a snapshot of Nagpur city water supply system.
 Exhibit 1.1 NMC - Water Value Chain

240.00)

Source: Draft CSP & NMC

NMC gets its water supply from three surface sources namely Pench canal, Kanhan river and
Gorewada Tank, with the treatment capacity of Water Treatment Plants (WTPs) at approximately 500-
530 Million Litres per Day (MLD).
Water from these WTPs flow into two master balancing reservoirs at Seminary Hills and at the
Government House, from where it is supplied through a distribution network of approximately 2,100
km organised across three areas namely, (a) parts of North/East/South supplied from Kanhan Head
Works/WTP, (b) parts of North/West/South/Central areas from Pench and from Gorewada and (c)
parts of North/Central parts from Pench and Kanhan.
The distribution network is also organised along ten zones for efficient Operations and Maintenance
(O&M). The storage capacity in the 43 service reservoirs (spread across 31 locations in the city) is
151 Million Litres (ML) which translated to about 29% of daily supply.

1.3.2. Pench III augmentation project and water audit findings

In March 2003, NMC had completed commissioning of the Pench III project (involving increase in raw
water pumping capacity, construction of Water treatment facilities, water mains, 14 Elevated service
reservoirs and distribution network) which augmented bulk water supply capacity by 120 MLD. Even
though input volume of treated water into NMCs water supply system went up by nearly 32% post
this project (from 370 MLD to 490 MLD), billed output volume remained static at 240 MLD.
Dissatisfaction among stake holders including citizens and elected representatives went up post
commissioning of Pench-III when actual water supply to their door-step did not improve despite the
bulk infrastructure being in place. The output of Pench III was not translating to increase in effective
supply or into revenues for NMC. This dissatisfaction and inability to supply reflected in the financials.
Water billings actually dipped from Rs. 73 crore to Rs. 71 crore between 2002-03 and 2003-04, even
as receipts marginally went up from Rs. 4.5 crore to Rs. 5 crore during this period.
Earlier in 2000, the Government of Maharashtra had appointed the Sukthankar committee to review
efficiency of urban water supply systems, following which the Government of Maharashtra provided
75% funding to cities for undertaking water audits. NMC was among the first cities to undertake a
water audit under this initiative. This brought to light the excessive losses in its water supply and
identified areas for improvement.
NMCs water audit assessed its Non-Revenue Water (NRW) at a high 62%. (Refer Exhibit 1.2) Of the
625 MLD of water raw water available to NMC, only 241 MLD was assessed as billed authorised
consumption. Real losses (on account of technical and network losses) accounted for an estimated
148 MLD (39% of NRW) and apparent losses / unbilled consumption account for 226 MLD or (61% of
NRW).
Exhibit 1.2 Findings of Water Audit (2005)
Authorised Billed consumption Revenue Water
Consumptions 241 MLD 241 MLD
(Billed + Unbilled) Unbilled consumption
System 263 MLD 22 MLD
Input Apparent losses Non-Revenue Water
Volume 214 MLD 384 MLD
625 MLD Water Losses Real Losses
362 MLD 148 MLD
Unidentified Losses
43 MLD
Source: NMC Detailed Project Report for 24x7 supply

Apart from helping in assessing the extent of water losses, the water audit also identified specific
areas for improvement and NRW reduction. It facilitated NMC in taking a structured response in three
steps; firstly, NMC initiated a series of performance improvement measures to tackle real or technical
losses, secondly it initiated a pilot project to demonstrate reduction of NRW and improve supply
standards from intermittent to continuous water supply and finally, it sought to use the experience
from the pilot project to scale-up 24x7 supply on a city-wide scale.

1.3.3. Measures to augment water availability and reduce technical losses

NMC undertook a series of measures to reduce losses in its water intake and sources. The water
audit observed that of the 625 MLD that was made available to NMC, it was losing 120-140 MLD in
the canals from where it was drawing the water owing to seepage, illegal use and evaporation losses.
NMC since then initiated a project with funding under JnNURM to replace canal supply with pipelines.
Further, it has undertaken a project to increase treatment capacity at Kanhan from 120 MLD to 240
MLD. As a result of these initiatives, treatment capacity is expected to increase to 765 MLD sufficient
to meet water demand till 2021, without additional investments in new source development. Further,
these initiatives are expected to bring down effective cost of raw water by 75%.

1.3.4. PPP initiatives in water supply

NMC had experience of using private participation in several areas of its water supply system. Since
1999, all new facilities that were implemented by NMC in water supply including WTPs, pumping
stations, valve operation etc., were being managed through Service Contracts. A couple of facility
projects including the Pench I WTP and Kanhan improvement project are being done on a Built-
Operate-Transfer format with private investment accounting for 30% of Project Cost. While the Pench
I WTP was built with a 5 year O&M period, the Kanhan system involved a 15-year O&M period.
Thus, when NMC initiated a pilot project for continuous water supply in the Dharampeth zone, it had
some experience in structuring and managing PPPs in water supply, although these were in the
nature of service contracts and bulk facility PPPs.
1.3.5. Pilot project for 24x7 supply
While NMC initiated several upstream projects to improve its water supply system, it became clear
from the findings of the water audit that a perceptible improvement in service delivery required
tackling last-mile challenges relating to inequitable and intermittent supply, inconsistent water supply
pressure and high NRW. As a first step to address this challenge, NMC initiated a pilot project in the
Dharampeth zone in 2007. The project covered 15,000 connections (including 10 slum areas) and
covered implementation of continuous water supply, 100% metering, rehabilitation of tertiary network,
hydraulic modelling, installation of new billing and customer management system.
The project was implemented through a 7-year Performance Management Contract and was
sequenced with 9 months preparatory work, 15 months for rehabilitation and 60 months of O&M at a
cost of Rs. 27 crore. The Operator was contracted on a Performance-fee model with bonuses built in
with respect to five Key Performance Indicators (KPIs) namely (i) Reduction in Unaccounted for Water
level to below 30%, (ii) 10% increase in volume billed over 2007-08 baseline, (iii) 24x7 supply with
pressure higher than 2m, (iv) Water quality with residual chlorine greater than 2 ppm and (v) handling
of customer complaints within three days.
At the request of NMC, the Administrative Staff College of India (ASCI) had carried out a post-impact
assessment of the pilot project and reported the following outcomes:

Over 7,500 connections were converted to continuous water supply. The entire zone experienced
improved pressures, eliminating the need for booster pumps deployed by households earlier.
Coverage improved with an incremental 5000 connections being given in slum households in the
zone (although all these connections did not receive continuous supply)
Billed water volume increased from 22 MLD to 33 MLD in the zone (an increase of 50%) although
part of this increase was attributed to leakages at the customer end.
NRW reduced from 50% to 38% and was attributed to reduction in illegal connections and
improved accuracy of meter reading.
Further, it made the following observations on challenges and shortcomings of the pilot project:

Stakeholder communication could have been handled better. Consumers were not adequately
informed of the need to fix internal leakages when they transitioned to metered supply resulting in
higher billed volumes. A tariff hike along with such billed volumes led to spikes in billing (in some
cases, billings went up by two to three times) and caused disquiet among citizens. This triggered
protests from citizens organisations.

Continuous 24x7 supply was achieved only in 7500 connections or 50% of total connections.
While this was partly due to challenges in addressing last-mile connection within consumer
premises and non-replacement of pipelines in 70% of network, this became an additional sore
point that was highlighted by consumer organisations in their protests.
Eventually, NMC was forced to back down from its intended tariff reforms. Yielding to protests, NMC
rolled back tariffs from Rs. 8 per KL (as revised in 2009) to Rs. 5 per KL and capped user charges at
50 units of supply, till such time a detailed assessment of metering was not completed.

1.4. The Project: PPP for City-wide water supply

1.4.1. Project rationale and preparatory activities
Notwithstanding challenges discussed above in the pilot project, the Dharampeth pilot project did
provide evidence for improvement in service delivery with single-point accountability for last-mile
distribution revamp. Interestingly, an independent assessment undertaken among urban poor living in
slum areas in the pilot zone revealed that 80% of those surveyed favoured implementation of the
project city-wide. Even though the corresponding figure for general public (56%) was relatively muted,
a majority were still in favour of expansion of the pilot project. While early PPP efforts of NMC which
involved outsourcing facilities on service contracts to multiple players, the pilot project demonstrated
tangible benefits of a performance-led PPP and helped align political and administrative support in
NMC in favour of a single city-wide PPP contract.
Thus in 2008, encouraged by early results from the pilot project, the General Body of NMC passed a
resolution for implementing 24x7 water supply city-wide. Following this NMC appointed a Project
Management Consultant to take the process forward. A Detailed Project Report for city wide 24x7
supply along on a PPP format was prepared by NMCs consultants and obtained approval for funding
support for the Project under JnNURM in early 2009.
Around this time, the Government of Maharashtra also approved an earlier proposal from NMCs
General Body to ring-fence water supply assets of NMC (managed under its water works department
since 1936) and transfer of water supply functions under a separate company, namely, the Nagpur
Environmental Services Limited (NESL) as a wholly owned subsidiary of NMC. The Board of NESL
comprises select elected representatives and officials of NMC. In April 2009, the municipal byelaws
for water supply were revised to include a provision for annual tariff revision to avoid tariff spikes and
include telescopic metered tariff to promote water conservation.
The bid process for inducting a Private Operator was initiated with a Request for Qualification (RFQ)
in 2008. Three of the ten applicants were shortlisted following an evaluation of responses to the RFQ.
Efforts were made to keep the bidding process transparent. Meetings were held with citizens, local
organisations and elected officials. The draft RFP was made available on NMCs website and
extensive efforts to reach out to stakeholders were undertaken during the Bid process. However, as in
the case of the pilot project, pockets of opposition continued during the course of the bidding process.
Post formation of NESL and securing approvals for Request for Proposal (RFP) from NMCs General
Body, bids were invited in 2010 from the three shortlisted consortiums namely, Veolia-Vishvaraj
consortium, IVRCL-Aqualia, and Cascal-Nagarjuna Construction. The evaluation involved an
assessment of technical proposals followed by a series of meetings with bidders to seek clarifications
or amendments. The bidder with the lowest evaluated bid (which is the Operator Rate in Rs. per cubic
metre of water billed and collected), consistent with technical and financial requirements was awarded
the contract. At the end of the evaluation process, the consortium comprising Veolia India and
Vishvaraj Infrastructure Ltd. was declared the winning bidder. A Special Purpose Vehicle was set up
by Veolia-Vishvaraj consortium called Orange City Water Private Limited (OCWPL). A tri-party
agreement was signed in June 2011, among OCWPL, NMC and NESL for executing the Project.
Bidding effectiveness hinges on achieving the oft-delicate balance between stringent pre-qualification
and competition. Of the three applicants that got shortlisted, only two bids were received and the final
bid price of Rs. 7.90 per KL was only marginally lower than the base price set. On hindsight, it would
not be incorrect to conclude that the project could have done with a keener contest.

1.4.2. Features of the PPP agreement

Refer Exhibit 1.3 for an overview of the PPP structure of Nagpur city wide 24x7 water supply project.
The scope of project and salient features of the agreement are discussed below.
 Exhibit 1.3 Nagpur city wide water supply: PPP structure

GoI and GoM

Construction
Capital Grants Contract
70% of Approved
NMC Project Cost Shareholders

Debt + Equity
Top-up by Contract 30% of Approved
NMC in
Escrow
NESL OCWL Project Cost +
Capital Grants Cost Escalation
NESL
expenses
Revenue to
Lenders
Escrow Operator
Consumer
Account
Collections from
NMC Water & Consumers
Sewerage account

Source: NMC PPP contract and IMaCS analysis

Term, Transition Period and Project Scope: The Project is being implemented through a 25-
year Performance Management Contract (extendable by mutual agreement for another 25 years)
between NESL, NMC and OCWPL. The Term included first 5-years as Transition Period during
which OCWPL is responsible for operating and maintaining the existing network and have to
undertake rehabilitation of the network (including replacement of consumer connections and
metering). Post the Transition Period, the operator will carry out O&M of the water supply system
for next 20 years during which the revenue and collection risk is also loaded on to the Operator.
During this period, operators performance will be monitored against a set of performance
parameters and the remuneration is based on metered volume that is billed and collected.

Financing of Initial Performance Improvement project: The Initial Performance Improvement

program is envisaged to be completed with funding under JnNURM within the 5-year transition
period. The approved project cost of the DPR for this program was Rs. 387.86 crore and 70% of
this will be brought in by NMC through grants from Government of India and Government of
Maharashtra. The remaining funds (30% of the approved project along with escalation over the
initial estimate) are to be brought in by OCWPL. The rehabilitation program is to be implemented
through a Bill-of-Quantities item rate contract. The Contract allowed for revisions to the approved
project cost to address any additional elements to meet performance standards subject to NESLs
approval and cost escalations on the basis of a Bill-of-quantities contract. The incremental capital
cost (over and above the 30% of approved Project Cost) incurred by OCWPL was to be
compensated through an increase in his base Operator Rate to ensure a fixed Project IRR of
14.5% for OCWPL.

Staffing: Employees of NMCs water works department were deputed to OCWPL at the start of
the contract for three phases covering (i) Mobilisation period of 120 days, (ii) Personnel
Integration Period of 90 days and (iii) Change Consolidation phase of 180 days and (iv)
Revocation period of 60 days. The costs of NMC employees thus deputed would be borne by
OCWPL. At the end of the Change consolidation period, NMCs employees may choose to join
OCWPL and Operator can make offers to NMC employees who wish to join. At the end of the
Revocation period, NMC employees not joining OCWPL would revert back to NMC and will be
redeployed in other departments of NMC. OCWPL will need to mobilise staff replacements during
this period.
 Revenue model: During the Transition period, the Operator is compensated on the basis of
Operator Rate (in Rs. Per KL) for a fixed volume of 250 MLD or actual metered volume billed and
collected by Operator on behalf of NMC whichever is higher. Thus there is a minimum guaranteed
offtake and hence assured revenue during this period. After the Transition Period, the revenue
payable to the Operator will be compensated on the basis of the escalated Bid Tariff on the basis
of actual metered volumes that are billed and collected.

Performance standards, linkages with Operator payments and maximum liability: The
Operator is expected to complete the Initial Performance Improvement Program and achieve
continuous water supply during the Transition period. During this period, Contract does not
specify intermediate performance standards. From the fifth year of contract, there are specific
deductions from Operators remuneration for excess raw water consumption and excess
electricity charges vis--vis norms specified. From the sixth year, revenue and collection risk is
also loaded on to the Operator as his remuneration is based on metered volume that is billed and
collected. Refer Exhibit 1.4 for a list of other performance targets specified in the contract. While
there are no specific penalties or incentives against performance indicators other than for
collection efficiency, raw water and electricity charges, the contract allows levy of liquidated
damages for performance non-compliance, which is capped at 5% of annual Operator revenue.
Exhibit 1.4 Performance targets specified in the Contract
Performance Indicator Target as per Contract
Technical Aspects
Treatment Efficiency (%) 97.5%
(Volume delivered/Volume produced)
Water Quality
Bacteriological conformity (%) 96%
Conformity to physical / chemical parameters 95%
(%)
Quality of service
Incidental interruption for repairs > 12 h (%) 100
Operational Efficiency 60% progressively by 60th month
(Volume billed/Volume supplied) Achieve 75% by 120th month, maintain
Bills based on metered consumption 100%
Financial
On-time payment of NMC dues 100%
Collection Rate 75% progressively by 60th month
(Effective collection /billings) 98% by 120th month and maintain
Source: PPP contract agreement between NESL and OCWPL

Operators Rate adjustments: The Contract provides for two kinds of rate adjustments; (i)
Standard Rate adjustment, which is done annually to provide for changes in price inflation, and (ii)
Extraordinary Rate adjustment once every five years or whenever an event deemed to be a
Ground for such extraordinary rate adjustment occurs. Even though the operating risks are borne
by the Operator, the Extraordinary Rate Adjustment clause allows for rate adjustments against
amendments to Operator obligations, Change in Law, availability of grant financing for NESL,
changes in Business plan, increase in Operators cost due to delay / overruns, failure of NESL to
supply water, non-insurable Force Majeure events and additional capital expenditure by Operator.

Escrow mechanisms and Payment Security: The collections from end-consumers by OCWPL
will be routed through NMCs water and sewerage account into an Escrow account maintained by
NESL. This escrow account would be used to make Operator payments. Under the contract,
NESL is required to maintain a minimum amount equivalent to three months of expenses at all
points in time. In case collections fall short of outflows from the account, NMC is required to make
 good the shortfall from its general budget. NMC is also responsible for provision of raw water
(from irrigation department) and electricity (from MSEDCL) as both the service providers are
committed to subsidise the services to public utility.
The PPP Agreement addresses bankability concerns effectively through several features: a realistic
5-year transition period, minimum off-take, annual indexation of Operator rate, Re-basing for
extraordinary events, capital grant support and escrow mechanism for payment security. However,
with a relatively high capital grant support, minimum off-take and guaranteed revenues during the
Transition Period, incentives for capital investment efficiency appear somewhat limited.
There has also been some criticism in several quarters, that the performance requirements could
have been more stringent. The relatively long transition period of 5 years, trajectory of NRW reduction
targets, non-inclusion of penalties for 24x7 supply, non-inclusion of intermediate milestones and
performance targets during Transition period, have been questioned in several forums. Yet, given the
information baseline limitations, legacy challenges in rehabilitation and replacement of internal
plumbing in existing water connections, low baseline tariffs and challenges of cost recovery etc., it
seems that NMC took a considered view in favour of conservative yet impactful targets to avoid the
set-up to fail syndrome that has plagued water supply PPPs with unrealistic targets in the past.
Notwithstanding this limitation, Operators revenues after the Transition Period are indeed contingent
on actual water delivery at doorstep, collection efficiency and norms on raw water use and energy
consumption, which if achieved will be path-breaking outcomes on their own.

1.5. Project progress and current status

The Project commenced in November 2011 and is in the middle of the Transition period of the
Contract. OCWPL has taken over the water supply system and is currently in the process of
implementing the Initial Rehabilitation and Improvement Program. The rehabilitation is being
sequenced along command areas of Elevated Service Reservoirs and capital works for the same
have been contracted out. NMC also has a Project Management Consultant to monitor and report on
the implementation progress.
Interactions with NMC reveal that the improvement program is progressing as per the timeline. As of
August 2014, physical progress of nearly 75% has been achieved with over 400 km out of 539 km of
pipeline replacement having been completed. Following the positive experience from its pilot project,
NMC is using HDPE pipes in the network in view of favourable costs and hydraulic properties.
However, there have been delays in provision of house service connections. As against a target of
321,000 connections, only about 61,000 connections have been completed. The delay was due to
protests against imposition of connection charges and low pressure in some existing connections.
NMC has attempted to overcome some of these issues. In July 2014, as a means to enlist public
support to get the rehabilitation program moving, NMC passed a resolution waiving connection
charges for all connections. This is also expected to help bring erstwhile unauthorised connections
(close to 100,000 unauthorised connections have been identified during the rehabilitation phase till
July 2014) into the consumer database and this will help in reduce commercial losses and improve
NMCs revenues. The service delivery related issues are also being tacked through infrastructure
augmentation and increase in capacity of Elevated Service Reservoirs.
OCWPL has also set up a round-the-clock call centre with a toll-free number to address consumer
grievances. Bill payments are currently managed through zone-level kiosks set up by OCWPL and
through Bank of Maharashtra. OCWPL plans to launch a web portal for information dissemination and
billings in the next few months. Discussions with OCWPL reveal that it has also initiated efforts to
update and clean up the consumer connections database. Till July 2014, it has identified and
submitted for NMCs approval and regularisation, close to 100,000 incremental unauthorised
connections which when regularised and added could potentially add to NMCs revenues.
NMC has faced severe resistance on tariff increases and the tariffs have been retained at the level
they were reduced in 2009. Even though NMC had revised their bye-laws to revise water tariffs
annually, NMC has made little headway on this front. On staffing, it is understood that most of the
NMC staff deployed to OCWPL have been transferred back and are getting re-deployed in other
departments within NMC. As of July 2014, of the 495 employees that were in NMCs water works
department and deputed to OCWPL, OCWPL has 66 employees and NESL has 70 employees. Rest
of the employees have been transferred back to NMC.

1.6. Challenges ahead

Notwithstanding the progress made, the Project continues to face a number of challenges:

The foremost challenge relates to continued stakeholder engagement and communication to build
trust and credibility. Pockets of opposition to the project have continued from time of the
demonstration pilot. A project of this nature calls for pro-active stakeholder engagement,
awareness creation and building bridges with all concerned. While NMC and OCWPL will need to
continue to address this aspect, building positive behavioural disposition will require delivering on
service improvements expeditiously.

NMC will need to find ways to deal with sequencing and moving forward on tariff reforms. Though
NMC took a positive step towards revising its Byelaws in 2009, it has not been able to carry
forward with its tariff increases. In addition to the Operators payment, NMC bears the electricity
and raw water costs and therefore user charges at the present levels are unlikely to recover O&M
costs in full. With an annual revision built into Operators Rate, this will imply that additional
resources from NMCs general budget will be needed to bridge the gap between revenue
collection and operator payments, even though NMC has sufficient resources at this stage. NMC
could have greater flexibility when rehabilitation is completed and when service levels improve.

Replacement of consumer connections and addressing last-mile and internal plumbing issues will
need to be tackled head-on as these aspects are critical to consistently deliver 24x7 supply.
Inadequate customer awareness and spike in billings following implementation of 24x7 supply
during the pilot project did contribute to negative vibes for the project. Therefore, it is critical that
lessons learnt in this process are adequately factored during the rehabilitation program. NMCs
recent decision to waive connection charges could potentially help with this and in monetising
erstwhile unauthorised connections.

Given that the initial Improvement program started in 2011, two years after the DPR was
approved under JnNURM, it is likely that there could an escalation in costs of the Initial
Improvement Program. While NESL is vested with the responsibility of contract supervision and
management, it may be important for NESL to ensure that formal mechanisms and build in
capabilities for contract monitoring and information dissemination not just during the Transition
Period but also throughout the duration of the Contract.
1.7. Lessons learnt and insights for replication
Most urban water supply systems in India continue to be stuck in a vicious circle of poor service
quality-low tariffs-weak investment capacity. While conceptually, PPPs could help ULBs break this
vicious circle by separating monitoring and regulation from service provision and bringing in technical
and managerial know-how, structuring and implementation challenges have often led to sub-optimal
outcomes. While a few pilot scale projects notably in Karnataka and in Nagpur have managed to
make an impact, Nagpur is probably among the first few city-scale PPP taking shape. Therefore, even
in its early days of implementation, this Project offers vital lessons and insights for other cities seeking
ways to transform their water supply service delivery including the following:

Implementation of city-scale PPPs will need holistic planning and integrated set of actions.
The genesis of this Project can get traced back to NMCs water audit which highlighted the need
for focus on customer-end distribution infrastructure. Even as NMC continued to invest in bulk
supply augmentation, the results of the water audit triggered NMC taking concrete actions for
reducing NRW and for delivering water to the consumers doorstep in a consistent reliable
manner. As is documented earlier, the PPP project was not a one-off effort. On hindsight, it does
seem that the city wide PPP was only a logical step in the series of actions that NMC had set
sights on, and articulated post its water audit. Cities would be well-advised to not see PPPs as a
panacea to their ills, but as a strategic lever to leapfrog on performance even as they fix other
elements of the water value chain.

Institutional clarity on the public side helps; needs to be backed with building adequate
contract monitoring and administration capacity: Anchoring the PPP contract in an SPV of
NMC provided a good institutional basis for contract management. NMC went an extra step and
ring-fenced its water assets under NESL prior to executing the PPP structure. At the same time,
PPPs are complex agreements with changes that could happen during the course of the contract.
NMCs PPP agreement builds in some flexibility by providing for tariff re-basing and for partly
expanding scope using the Bidders IRR as a benchmark. However, administering complex
contracts requires a very high level of maturity and capability on the ULB side and it is critical that
these capabilities are build as cities move towards implementing PPPs.

Political and administrative commitment is critical; so is wider stakeholder engagement

and achieving consumer support. Notwithstanding several challenges and protests from
various quarters at various stages, there to be reasonable policy continuity and commitment for
the Project within NMC right from the stages of the pilot, during the preparatory phases and in the
implementation phase currently. Notwithstanding efforts take by NMC, protests and opposition to
the project in some form has persisted. A coherent and strategic approach to communication, to
inform and engage stakeholders, is critical for sustained broad-based positive support for
successful implementation.

Sequencing tariff reform: Average water tariffs in urban India continue to be low relative to
costs, even as affordability concerns often constrain meaningful progress on user charge led cost
recovery. Even though, NMCs early efforts to raise tariffs have been thwarted by protests, it has
had the cushion of other revenue streams and resources to support the project in early stages to
achieve improvements in service delivery, which can hopefully provide it the flexibility with tariff
revision in future. The case suggests that it would be difficult to sequence tariff rationalisation
upfront and cities attempting to structure PPPs will therefore need to find alternative resources at
least in the early stages.