URBAN INFRASTRUCTURE

FINANCING AND MANAGEMENT

Value added of Infrastructure Service by country group

Low - Low -
Low -
Income Income
Sector Income
countrie countri
countries
s es
Transport storage and
5.34 6.78 9.46
communications
Gas, electricity and
1.29 2.24 1.87
water
Source: World Bank National Accounts Data - 2001

1% increases in per capita GDP

1% increase in infrastructure
0.3% increases in access to safe water
0.8% increases in paved road
1.5% increases in power
1.7% increases in telecommunication
 Category of Public enterprises
 Core sector
 Non-core sector
Public enterprises

Core Sector Non Core Sector

Strategic Non Strategic Profit making Loss making

Organisations at the Interface of State, Markets
and Civil Society

State (hierarchy and control

Employer
organisations,
trade unions, NGOs
professional
cooper
associations
atives

Civil society
Private sector Private (voice and
(profit and Voluntary Collective
competition) organisations action
Three Strategies for Improving Government
Service Delivery
Strengthen voice
Increase exit mechanisms
possibilities

Core public
sector

n ce
Broader public ia
pl y
sector m lt
co ya
ove d lo
Markets and the pr an
I m
private sector
 Infrastructure – Classification
Excludable Non Excludable
Rival Private Good Common
Property

Telecommunication Urban Bus Fossil fuel power Ground water

generation
Rural Sanitation Piped water Supply
(on-site disposal)
Local Power Rail, airport and port service Surface water Irrigation
Distribution
High voltage transmission Sanitary landfill
Rail, port and airport facilities Urban Sewerage
Inter-Urban highways Rural Road
(toll road) Street Sweeping
Traffic signaling
Non Public Good
Rival
Lower Externalities Higher
Riva – consumption by one user reduces the supply to others
Excludable – A user can be prevented from consuming the service
 Urban Infrastructure Characteristics

Sector Degree of Sub Degree of Natural Typical Externalities and

tractability Excludability Monopoly Social Objectives
Water Supply (trunk High High High * Public Health & Safety
and distribution
systems)
Solid Waste Medium Medium Low * Allocation of Water
Management
(Collection)
SWM (Disposal) Low to Medium to High Medium to * Affordable access by all
Medium High population segments
Waste Water Low High Medium High * Pollution and
Management Environmental issues
(Sewerage and
treatment)
Urban Transport Medium High High * Urban land use
(Metro /Rapid
Transit)
 Challenges

 Inefficiency of Operation
- Unaccounted for water two to three times higher in developing
countries than in developed countries.
- Surplus taken force
 Inadequate maintenance
- On an average one-third of roads built in past twenty years has to
be replaced in developing countries.
- Average cost of unaccounted for water, arising from poor
maintenance of the distribution system, is 42 per count of total
operating income
- Poor maintenance accounts for low power generating capacity
- Less than 60 per cent on average
- Procurement problem – delay in purchasing by section entities
and inadequate supervision of contracts increase in cost of
imported material by 30% on the average.
- Lack of standardization of equipment creates delay in repair and
increases the cost of replacement parts.
 Financial Inefficiency
- Poor infrastructural policies absorb scarce fiscal resources railways subsidies
form 1.5% of GDP
- Telecommunication generally good sector but its revenue is often siphoned
off for other uses, leaving the sector under-funded.
- Poor financial performance weakening internal base, more dependency on
external sources
- Public failure raises private costs. Poorer people spend 5% of their income to
supplement inadequate water supply compared to 1% by the wealthier.

 Financial Inefficiency
- The poor use fewer infrastructural services than the non-poor.
- They have very low access
- Subsidies are not focussed – flat rate electricity charges in rural India
benefits the better- off as the poor cannot buy pumps and other appliances.
- Longer wait for transport, infrequent service and more time spent on
crowded vehicles cause more sufficing to the poor.
Objectives for Privatization
 To introduce elements for competition and market

forces in the working of enterprises.

 To give greater autonomy.

 Reduction of burden on government treasury for

loss making enterprises.

 Advantages of Privatisation

 Private firms have stronger incentives to build and run infrastructure projects and
to choose good projects and bad projects.

 Privatisation encourages and facilitates charging of cost-covering tariffs –takes

on the problems of under pricing.

 Greater efficiency and cost-covering prices help to reduce budgetary subsidy

and improve government fiscal position.
Privatization—two extremes
 Involvement of greater market forces to ensure higher competition and reducing
role of the government
 Divestiture…transfer of ownership from state to private hand.

Options in between
 Transfer of share of public enterprises

 Private placement of share

 Sale of public assets

 Reorganisation of public enterprises into holding and subsidiary companies.

 Privatisation of management either by lease or management contracts.

 Deregulation…transferring road construction or electricity generation to private

sector
Privatization—two extremes
 Involvement of greater market forces to ensure higher competition and
reducing role of the government.
 Divestiture—transfer of ownership from state to private hand.

Options in between
 Transfer of share of public enterprises

 Private placement of share

 Sale of public assets

 Reorganisation of public enterprises into holding and subsidiary companies.

 Privatization of management either by lease or management contracts.

 Deregulation—transferring road construction or electricity generation to

private sector.
Mode of Privatization

 Unbundling
 Vertical----delinking those who provide intermediate inputs from those who serve the
customer—generation transmission and distribution of electricity under different
ownership and management.
 Horizontal – broken up to compete among themselves; lines of business are separated
by the customer served i.e. passenger and freight.
 After unbundling, competition may bring efficiency and cost reduction as multiple
providers may compete with each other.
 Competition may be created through lease or concessions – firms compete for the right
to supply the entire market.

 Bundling
 Bundling sector provides more economy and easily coordinates between input supplier
and final service providers.
 Gains from economies of scale need to be measured against cost reduction from
competition.
 Bundled system provides subsidy to the poor or those in remote areas.
From Commercialisation to Privatisation- Benefits of
Private Sector Participation

 Private Sector participation brings in:

 Extended Resources
 State of the Art Technologies
 Efficient Project Management
From Commercialisation to privatisation Packaging of
Services for Viability

 For self-sustainability, unbundling and packaging of services

into commercially viable projects should be done to recover
direct service charges.

 Appropriate unbundling of large and complex infrastructure

services into smaller packages help to create independent cost
centres to be developed as financially viable units.
From Commercialisation privatisation Packaging of Services
for Viability

 Illustrative List of Potential Packages-

URBAN TRANSPORT
 Development of urban mass transport systems

 Operation and maintenance of urban mass transport systems.

 Development and maintenance of terminals

 Operation of bus and intermediate public transport (IPT)

systems
 Construction and maintenance of toll bridges

 Construction and maintenance of parking facilities.

 From Commercialisation to privatisation Packaging of Services
for Viability

 WATER SUPPLY
- Water resource management and development of source
- Treatment of water and bulk supply – Water Purchase Agreement
- Distribution/O&M
- Billing/Collection
 SANITATION
- Sewerage network (collection system)
- Pumping Stations (Installation and )&M)
- Disposal system – Through taxes (on the basis of water consumed)
 SOLID WASTE MANAGEMENT
- Collection
- Separation and treatment
- Distribution of by products (scarp material, manure, fuel pellets and bio-gas)
Route to Private Sector Participation

 The concept of Public-Private – Partnership is generally seen as one of

these models:
- Build-Operate-Transfer (BOT)
- Build-Operate-Own-Transfer (BOOT)
- Build –Operate Lease-Transfer (BOLT)
- Rehabilitation Operate Transfer (ROT)
 However there are various other models of Private Sector Participation

being practiced depending upon the local conditions and requirements.

Steps for Structuring Private Sector Participation

 Process Structuring and Stages

 Expression of intend by Public Agencies
 Firming up the Project Contours (Consultants
 Short-listing of Private Parties
 Project Description Report
 Pre-qualification of existing bidders
 Issue of Request for Proposal (RFP)
 Evaluation of Bids
 Negotiations
 Award of the Contract (Financial Closure)
 Commencement of Work
Selection of Private Sector Partner
Role of Experts

 Engineers – To assess the state of existing system

 Financial Analysts – To estimate the cost of achieving the
objectives, implication of costs for tariffs etc.
 Economists – Performance incentives and regulatory provisions
 Lawyers – Analyse existing legal framework, identify required
changes and draft contract documents.
 HRD experts – To work with employees and other stakeholders
 PR experts – To assist in educating public about the process
 HUDCO’s Initiatives in Urban Infrastructure Support

 HUDCO opened its window for urban infrastructure financing in the year
1989-90
 HUDCO offers finance as well as technical guidance
 HUDCO offers consultancy services for formulation of infrastructure
projects
 Urban Infrastructure Schemes
- Integrated Land Acquisition & Development
- City Level Utility Infrastructure Schemes
for Water Supply, Sanitation, Sewerage, Drainage, Solid Waste
Management, Transportation etc.
- Social Infrastructure Schemes
Schools, Health Centres, Community Centres/Barat Ghars, Parks and
Playgrounds/Stadia
- Commercial/ Economic Infrastructure Schemes
Shopping Centres, Market Complexes and Office Building
Role of Financing Agencies as Institutions of Change

For improving the sustainability for water supply and sanitation

schemes HUDCO emphasizes on
- Principle of full cost recovery
- Transparent, targeted and measurable subsidy, if needed

- Cost savings through energy efficiency, reduction of leakages,

manpower rationalisation etc.

- Full autonomy to local bodies to determine tariffs

- Tariff fixation taking care of

- Compulsory 100% metering

- Operation of escrow account

Some Innovative ‘User pay’ Instruments promoted
by HUDCO
Infrastructure Type Innovative user pay Instruments
* Water Supply - Advance registration charges, Connection charges,
Enhancement of water tariff, Water benefit tax/water tax,
Betterment charges, Development charges, Utilisation
from other sources such as octroi, property tax, sale of
plots etc, and Charges from water Kiosks
* Sewerage - Connection Charges, Sewerage Cess Tax, Conservancy
Tax, Sale of Renewable waste, Sale of Sludge and Sale
of Nutrient rich wastewater
* Solid waste - Collection Charges, Cess Sale of Renewable, waste,
and Fines for dumping waste.
* Roads/Fly-over/Bridges - Toll Tax, Land as a Resource and Advertising

* Airports/Railway. - Surcharge on tickets, using land as a resource, Toll tax,

Stations/Bus Terminals User charges for transportation terminals and advertising
rights
 URBAN INFRASTRUCTRE SCHEMES
Financing Pattern

1. UTILITY INFRASTRUCTURE Extent of Rate of Repayment

Finance(%) Interest (%) (Year)
Water Supply, Sewerage, Drainage, Solid Waste Management/Waste 70 15/15.5 10/15
recycling
2. SOCIAL INFRASTRUCTURE

Health, Education, Cultural/Recreational Infrastructure

Public Sector Agencies 70 16/16.5 10/15

Private Sector Agencies 70 16.5/17.5 10/15

3. ECONOMIC AND COMMERCIAL

Office/Shopping Complex, tourism Infra., Technology Parks

Public Sector Agencies 80 16.5 10

Corporate Offices/Enterprise 75 17 10

4. PRIVATE – COMMERCIALS SCHEMES

Commercial Complex 50 19/19.5 5/7

 Cost savings from contracting
Rajkot MC Experience
Service Extent of Original Costs Cost Savings Estimated
Privatisation (Rs. In Lakh) (Rs. In Lakh) Cost Saving A
(%) % of original
Cost
Street lighting 33 14.86 2.97 20.00
Primary solid waste Removal 5 16.97 2.61 15.4
Secondary solid Waste 70 187.2 43.20 23.21
removal
Cleaning of Public Latrines 58 11.16 7.17 67.7
Local Solid Waste Removal 1 2.38 0.54 23.1
Gardens 17.5 8.64 6.30 72.9
Source: Rajkot Municipal Corporation Budget, 2000-01