2.1 Rationale and Institutional Architecture

GBWASP was first discussed in 1998 when the then chief minister directed the BWSSB to prepare proposals for the supply of piped water and sanitation to the eight ULBs surrounding Bangalore. In 1999, BWSSB hired Kirloskar Consultants and Water and Power Consultancy Organisation (WAPCO) to prepare a detailed project report based on population projections for the next 20 years. A year later, the government of Karnataka abandoned the project on account of high costs and lack of resources to finance the project.

In 2003, the project was resurrected when the state government recruited the Indo-USAID’s Financial Institutions Reform and Expansion-Debt (FIRE-D) Component Project to develop a marketbased financing framework for GBWASP. The stated goals of FIRE-D are to develop and manage bankable urban infrastructure, mobilise finance, expand the role of the private sector, and build the capacity of urban sector professionals in India (USAID 2006). FIRE-D develops “pooled financing” models for infrastructure delivery in smaller Indian cities (Section 2.2 discusses this in further detail). The government of Karnataka selected USAID’s financing model despite an offer to provide a loan for both the water supply and sanitation component by the Housing and Urban Development Corporation (HUDCO) in 2004. The latter was rejected on grounds that this financial route required a larger government guarantee. Subsequently, a decision was also made to borrow from the World Bank through its Karnataka Municipal Reforms Project (KMRP) to fund the sanitation component of GBWASP.

By early 2004, a project steering committee was formed consisting of representatives from the department for municipal administration (DMA), the Karnataka Urban Infrastructure Development and Finance Corporation (KUIDFC) (a public sector company created to channel loans), the Urban Development Department (UDD), the BWSSB, and commissioners of the eight ULBs. Later, a decision was taken to form a subcommittee consisting of five senior IAS officers from the five departments listed above (GoK 2004). Thus, several important decisions concerning the project largely involved the input of only a core group of senior bureaucrats (Figure 1).

Two additional players entered the project from 2004 to 2006 on the request of the state government to explore the feasibility of a private sector contract: the water and sanitation programme of the World Bank and the International Finance Corporation (IFC), a branch of the World Bank which funds the private sector. IFC’s proposal for a delegated private management contract,

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Figure 1: Financial and Institutional Arrangements in GBWASP

Government of Karnataka Project steering committee (UDD, KUIDFC, BWSSB) Sits on committee Sits on committee Bond market Sits on committee KUIDFC BWSSB USAID KWSPF trust Borrows Water project account Repayment Urban local body Manages trust Payment Beneficiaries Supplies water Submits expenses Oversees engineering design In-house project management consultant (Meinhardt) Oversees pipe laying by private contractors Provides guarantee

however, faced sharp criticism from the employees union as well as the management of the BWSSB on the grounds that the privatisation proposal was financially unviable (BWSSB 2006). In 2005, NGOs and slum-dweller organisations came together under the Campaign against Water Privatisation-Karnataka (CAWPKA) to protest privatisation.5 The privatisation agenda has currently been stalled although it is not unlikely that it will be pursued in the future.

2.2 The Pooled Financing Model and Beneficiary Capital Contributions

As introduced above, the main mechanism of FIRE-D projects is “pooled finance”. Similar to the United States bond bank, by pooling finance, bonds are repaid by several local borrowers in order to diversify risk and lower interest rates (USAID 2006). Pooled finance has the advantage of being able to ensure that smaller less credit-worthy cities can gain a credit rating in order to borrow from the market. In GBWASP’s case, only by pooling the revenues of all ULBs in a fund known as Karnataka Water and Sanitation Pooled Fund (KWSPF) managed by KUIDFC was it possible to get an investment-grade credit rating in order to borrow from commercial markets. KWSPF acts as a financial intermediary between municipalities and the capital market by borrowing from the market and on lending to the ULBs on its own terms. In June 2005, the KWSPF floated 1,000 tax-free municipal bonds each valued at Rs 10 lakh (a total of Rs 100 crore), an annual interest rate of 5.95%, and a lifetime of 15 years (USAID 2006). This pooled fund is backed by a 50% guarantee on the principal amount from the US government to protect investors from defaults by ULBs and to reduce the cost of borrowing. Based on USAID’s model, the budget for GBWASP was determined as given in Table 2 (p 57).

Although commonly deployed in the US, municipal bonds are relatively new in India. Ahmedabad was the first city in India to attempt bond financing in 1998 (again, through USAID support), and subsequently, FIRE-D designed a pooled financing mechanism

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delays, it is well known that the process of approval, financial closure and awarding contracts through tenders commonly takes 18-30 months; this fact was not sufficiently communicated to beneficiaries from the start.

The initial specified BCC in 2003 was a one-time flat rate of Rs 8,500 for domestic properties and Rs 17,000 for non-domestic users – amounts higher than are imaginable by the majority of

Table 3: Current Structure for Beneficiary Capital Contributions

Charges Per Property Size (Rs)

< 600 sq ft 600-1,200 sq ft 1,200-2,400 sq ft >2,400 sq ft

Residential 2,500 (now waived) 5,000 10,000 15,000

Commercial 5,000 10,000 20,000 Rs 8/sq ft

Penalty per month starting 1 August 2005 50 (now waived) 100 200 300

Source: (GoK 2005b).

peri-urban residents. This was later revised to a slab system of Rs 10,000 for the lowest slab for plots measuring up to 2,400 sq ft. However, after representations by citizen groups and recommendations from a visiting World Bank team, this slab system was revised again to include smaller property sizes (Table 3). The current scheme charges residents on the basis of plot size even though the diameter of the pipeline connecting each household is the same. In this scheme, the poor are those classified living in dwelling size of 600 sq ft or less, while the wealthy are those living in dwelling sizes of greater than 2,400 sq ft.6 Due to demands by the CAWPKA, the government of Karnataka also conceded a full waiver in the BCC for households living on dimensions of less than 600 sq ft.

Citizens were also required to pay a penalty in the event of delayed payment. A cut-off date of 31 July 2005 was set as per a revised government order, after which a monthly fine was demanded on the basis of property size (see last row of Table 3). This measure was taken in order to pressure beneficiaries to contribute to the project. A local NGO, Janaagraha, was also contracted through funding from WSP-SA to launch its participatory local capital area expenditure (PLACE) programme – an institutional mechanism and citywide information campaign.

Figure 2: Cumulative Beneficiary Capital Contribution in Bommanahalli

(2004-08, in Rs crore)

60

50

40

30

20

10

0

3/04 6/04 9/04 12/04 3/05 6/05 9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08

Source: Bommanahalli Zonal Office.

For several reasons, including Janaagraha’s own stated dissatisfaction with the lack of a pro-poor policy as well as opposition to the organisation’s involvement in the project by local groups, Janaagraha pulled out of GBWASP in early 2006.

Figure 3: Beneficiary Capital Contributions by Plot Area in Ward 27 of Bommanahalli

(April 2005-March 2008, in Rs lakh)

160

140

120

100

80

60

40

20

0 <600 sq ft 601-1,200 sq ft 1,201-2,400 sq ft >2,400 sq ft Apartment complexes

Source: Bommanahalli Zonal Office.

We argue that the GBWASP is a case of “cart before horse” syndrome. The market-based financial framework for the project

– including the structure for BCC payments, credit rating of municipalities, selection of municipal bond issuers, etc – were all designed and executed with meticulous detail well in advance of one crucial missing ingredient: water supply. The delay in water supply has resulted in frustration, confrontation and a loss of credibility in the upfront payment system. We discuss the main arguments of this paper and the implications for lessons learned below.

(1) Payment Has Not Guaranteed Customer Entitlements: The implications of considering citizens as stakeholders in capital investments are very serious in terms of two issues: equity and entitlements. In the case of sub-Saharan Africa, Jaglin (2003) argues that equating participation with financial contributions raises many questions around equity; indeed, the majority of greenfield investments for water and sanitation are taking place on the fringes of cities, areas that concentrate the urban poor who are now expected to bear the financial burden of these new investments. In Greater Bangalore, several residents interviewed argued that although it is justified to charge consumers depending on the amount of water they consume, from an equity standpoint, it is difficult to justify charging peripheral customers for capital costs when core customers have not thus far been asked to contribute towards capital costs. It would have been more equitable had the costs for GBWASP been borne by all of Bangalore’s residents instead of just peripheral populations. After all, the nature of a networked infrastructure such as water is such that the system is interconnected. New feeder mains, pumps, overhead tanks, and bulk water supply to this network will benefit the core and the periphery alike. From an engineering standpoint, it makes little sense to single out peri-urban customers.

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Still, if peri-urban customers must be singled out, there are serious repercussions to calling payees “stakeholders”, creating the impression that the utility and the citizens have equal “stake” in the infrastructure. One RWA even suggested that the use of the term “stakeholder” has no meaning in this project and is unwarranted, if not illegal. Most residents interviewed reacted to the fact that payment guaranteed neither improved responsiveness from the project implementers nor proactive information dissemination. Some RWAs collected capital contributions from all households and deposited the total amount with BWSSB in the hopes that this would convince authorities to prioritise water supply to their areas. We suggest that in the future, financial contributions by citizens should ensure certain minimal customer entitlements. In other words, if citizens are expected to behave like customers, they should be treated like customers because there is no doubt that they will demand to be treated as such. We also make the point that in this project, and increasingly in Indian cities, economistic calculations of participation have overshadowed the agenda for more meaningful and democratic deliberation and debate by citizens in decision-making.

(2) GBWASP’s Model Is Disconnected from Urbanisation Patterns: As described in Section 2, the periphery is a heterogeneous and haphazardly developed expanse. The majority of development (revenue layouts and slums) is “unauthorised” which presented considerable difficulty to pipeline laying contractors. Field engineers describe that in these areas, local roads and sewers (where they exist) do not follow gridlines and do not link up with main road and sewer lines. There is also little adherence to legal norms regarding public ownership of space, seen, for instance, in private encroachments of public roads and sewers. This has necessitated greater time spent in negotiations and a far greater amount of distribution pipeline than originally envisaged, thus prolonging the schedule for laying pipelines across two phases. It also required a revision of earlier engineering plans designed by WAPCO/Kirloskar during the project’s second incarnation when a new project management consultant, Meinhardt, was brought in.

While delays by the project implementers are one result of the lack of attention to actual patterns of urban settlement, another problem relates to equity. Because some areas of the periphery are technically more difficult to connect and often far poorer (e g, Bandepalya slum in Bommanahalli which is perched on an abandoned quarry), the result is that some areas will get connections and water in advance of others, and some areas may never get piped water supply. Even after the completion of the distribution pipelines, only approximately 1,00,000 connections have been provided as against a total estimated potential of 4,50,000 in the periphery.7 A preference to those areas that can be billed for water consumption is likely to be given as against those areas that are more impenetrable by utility employees who are tasked with raising revenue. Moreover, faced with a huge demand from new apartment buildings, there is doubt whether water will be supplied to all revenue pockets, even though several households living in these areas have paid the BCC.

The sheer population growth and demand in Bangalore have also made the supply projections under GBWASP unrealistic and reveal that they may have been technically unsound to start with. A report of the USAID FIRE-D, 2003 claims that with the completion of Cauvery Stage IV (Phase I), 135 MLD was to be allocated to peripheral areas (USAID 2003). In actual fact, by the end of 2005, this amount was largely absorbed by core city areas where demand continues to outstrip supply. In retrospect, setting aside 135 MLD for future customers in the periphery when water demand in pre-existing service areas is itself escalating daily, and, as described above, the system is interconnected, seems to be an unrealistic assumption. To make up for this “lost” water, the BWSSB is using JNNURM funds to supply an additional 100 MLD of Cauvery Water by installing booster pumps on the transmission mains. Over 70 wards that are aligned with the existing feeder mains were selected for commissioning under this scheme. Other wards (250 in total) will be commissioned as the rest of infrastructure is completed. Water will be shared among the core city and peripheral areas on a staggered basis (resulting in supply that could be as low as once a week), which will greatly lower the per capita “standard” of 125 lpcd originally envisaged in project documentation (USAID 2003). This, again, is a reflection of the project superimposing standards and calculations derived from models that are not appropriate for Bangalore’s urban context.

Project authorities have argued that when Cauvery Stage IV (Phase II) is completed, water supply will be more regular and satisfactory. This argument tends to be difficult to digest for residents who have paid their BCC amounts (with penalty) and who continue to pay coping costs on a daily basis. The studies on the willingness to pay did not factor in the time delay between the amount paid today and the delivery of water seven years later. Had the studies done this, it is likely that willingness and ability to pay in the periphery would have been considerably lower than reported. Settlement patterns and varying coping costs should be accounted for in the technical and financial design phase, i e, prior to project execution.

(3) Lack of Political Buy-in and Community Acceptance and Participation: The lack of political buy-in at the local level and poor information dissemination have also hindered the project’s success at collecting BCC. Our interviews revealed that faced with few answers, councillors urged their constituencies not to pay BCC and to wait for water supply first. Although Janaagraha conducted meetings in 2005 in some zones in Greater Bangalore (note that its liasing office was located in the core city and not on the outskirts), once it withdrew from the project, there was no concerted effort to channel information about the project from the top-down. RWAs had to rely on media reports and meetings with BWSSB’s engineers to glean data on the project’s progress. Very few RWAs were satisfied with the amount of information they received. Technical and financial details are being handled by the project management consultant housed in BWSSB and KUIDFC with insufficient communication to citizens themselves, let alone elected representatives and BWSSB field officials. Elected representatives have since been excluded all together from decisionmaking because of suspended elections since the end of 2006. In an era when Indian cities have been attempting decentralisation and the devolution of water supply and sanitation to ULBs – and given the fact that decentralisation is a mandatory reform under JNNURM – it is difficult to see how this project supports this overall agenda. It is important that elected representatives are engaged at every stage, and information to the public about the project’s progress should be proactively provided, especially in the event of delays.

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One additional cause of poor political buy-in and community acceptance is the lack of coordination between BWSSB and KUIDFC on the one hand, and between BWSSB and BBMP on the other. This has resulted in further confusion among residents and has raised larger questions about what the entitlements of BCC are. For instance, in 2007 the BBMP announced the Akrama Sakrama scheme to regularise “illegal” commercial and residential buildings (mainly in the peripheries) that had violated planning norms on payment of a fee. Those who did not pay to be regularised were threatened by BBMP with disconnection of water supply. This caused concern among households that had paid BCC to BWSSB but not the Sakrama fee to BBMP and were consequently unsure whether their water supply could be stopped.

(4) Modifications Have Been Essential to Sustain Credibility:

Very recently, the water board has taken certain key decisions to sustain the legitimacy of the project as well ensure continued revenue generation. Four of these modifications are noteworthy. First, due to several representations being filed by RWAs – not the least of which is the critique that although residents have paid late penalties, the government has not been penalised for late water delivery – the BWSSB has come forth with an important decision to waive penalty payments after 31 December 2007. That is, a maximum of 30 months penalty payment (1 August 2005-31 December 2007) can be paid, and no more. Second, based on political pressure, the water board has decided to connect households regardless of BCC payment hoping that this will serve as a confidence building measure for residents. Third, a decision was taken to allow BCC payments in 20 instalments, thus easing the upfront burden. Fourth, it is no longer required that residents show formal proof of tenure or any other document in order to pay the BCC, unlike originally stipulated in project pamphlets. While the first two measures were taken in order to quell criticism of the project and to win public and political support, it can be argued that the second two measures were taken in order to ensure continued revenue through BCC by reducing barriers to payment. These modifications reveal the importance of strategic manoeuvres and project re-engineering by governing institutions faced with difficult on-the-ground-realities.

4 Conclusions

Market-based models like pooled finance are being widely adopted across the country. The Eleventh Five-Year Plan has articulated a need for PSP in water supply and sanitation in cities, but clearly stated that, “without aiming at full cost recovery, private sector participation cannot be a successful proposition” (MoUD 2006: 2). The government of India in November 2006 launched a Pooled Finance Development Fund (PFDF) with Rs 2,500 crore funding in the Eleventh Plan period that will support ULBs to access capital markets based on their creditworthiness through state-level pooled financing mechanisms (ibid). The Indo-USAID’s FIRE-D project supported the union ministry of urban development in formulating the PFDF guidelines (Vaidya and Vaidya 2008). These guidelines urge states to create their own pooled financing entities so as to benefit from central assistance.

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Pooled financing has also been promoted in the 63 JNNURM cities.

Given the enthusiasm within India for market-based models, it is imperative that we closely examine their workings on the ground. This article takes the case of the GBWASP, a model that for the first time introduces the concept of capital cost recovery from customers. While GBWASP’s financial model also relied on municipal bonds based on credit ratings, government loans and guarantees, a substantial component of capital cost recovery was to come from customers themselves. If successful, this model will in all likelihood be replicated in other Indian cities.

There is no doubt that the GBWASP was greatly complicated by the creation of the BBMP at a late stage of the project. The eight ULBs that were covered under GBWASP are now part of five different zonal offices of BBMP making for considerable administrative confusion arising from unequal BCC payments (and thereby differing entitlements to water supply), maintenance of new and existing water infrastructure and responsibility for debt repayment. There are, however, many things that we can learn from this case.

Our research reveals the serious disconnects between the model and technical, social and economic realities on the ground. The lack of attention paid to the rapidity and heterogeneity with which the peripheries were developing resulted in severe delays in installing pipelines, miscalculations in length of pipeline needed, and a low ability to service technically difficult areas which typically are poorer, unauthorised, and less able to pay for an expensive piped water system. Both technical feasibility and the drive to generate revenue favoured the connection and supply of water to richer areas. The growing gap between demand and supply for water also sets up a dynamic of competition between core areas and peripheral areas with the BWSSB trying to balance these competing needs by staggering provision of water to these areas. This will mean lowering “standards” of per capita water provision in sharp contrast with original project goals.

The time lag between payment of BCC (with penalty) and supply of water has forced customers to pay daily coping costs, while they live with the uncertainty of not knowing when they will receive water. While their contestations have resulted in modifications to the BCC rates and manner of payment as well as removal of the penalty after 31 December 2007, their frustration and apathy toward government has not abated. The project has been marked by an overall lack of information. The non-inclusion of elected representatives in the GBWASP has had particularly serious consequences for the success of the market-based model being pioneered.

The research also highlights the serious implications of considering citizens as stakeholders in capital investments. What are the entitlements that come with BCC payments? Can the project agencies actually fulfil them? Can we justify burdening peripheral customers (who are generally poorer) with these costs, when those living in the core did not bear these costs and are not sharing them now? These are questions that citizens themselves are posing and that the BWSSB, let alone proponents of the market-based financing model, are hard-pressed to answer. GBWASP has revealed that customer responsiveness has not increased and participation has not gone beyond a narrow monetary understanding.

Notes

1 This is approximately $13 billion. Note that 1 crore = 10 million. 1 lakh = 1,00,000. $1 is approximately Rs 40.

2 The 12th Finance Commission recommended that the central government stop providing guarantees to states making them directly borrow from IFIs or the market.

3 ULBs are considered autonomous urban local self-governments. There are 222 ULBs in Karnataka falling under four main classifications: corporations are the largest, followed by CMCs, TMCs, and town panchayats (TPs) or village governments.

4 While anybody can dig a borewell and gain access to groundwater, pumping water needs a power connection which cannot be obtained without proper land documents.

5 Subsequent to the demand, a committee with a representative from the BWSSB, USAID, WSP-SA prepared a pro-poor policy that was not made available in a draft stage to the elected representatives or slum-dwellers or others anywhere.

6 Our interviews found that this rationale is often challenged by poorer families living in the 1,200-2,400 sq ft slab.

7 The laying of distribution pipelines is nearly complete, and approximately, one-third of the construction of feeder mains remains. A few wards aligned with existing feeder mains have been commissioned and are likely to get water before the end of 2008.

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