Water Sector in India

Water sector in India
Emerging investment opportunities
September 2011

Foreword

It gives me immense pleasure in observing that Ernst and Young has come out with a special publication on the water sector in India with the active support of the water team of the Royal Danish Embassy. As you are aware, Denmark plays a major role in promoting water on the international agenda. Danish expertise relating to water is well known and highly acknowledged, and Danish companies have established themselves in international markets, supported by Danish environment and development assistance policies. Danish research and development institutions are internationally recognized and Danish expertise is acknowledged worldwide as being synonymous with high standards, credibility and integrity. India’s water and wastewater sector has also witnessed healthy growth in recent years. There is an increased awareness among all stakeholders about the environmental effect of efficient usage of water and better treatment of wastewater. Consequently, calculating the life cycle costs of projects and training manpower are two areas on which Indian municipalities are focusing aggressively. We welcome this initiative taken by Ernst and Young and sincerely hope that Danish solutions can be increasingly utilized in the Indian context.

Best regards,

H E Freddy Svane Ambassador

Contents
Executive summary........................................................................................................2

1 2 3

Overview of the global water industry..............................................................................4
Global water reserves............................................................................................................................4 Current and future global demand-supply scenario (estimates of key international agencies).....................5 What is driving the demand for water in various geographies?.................................................................6

Overview of water industry in India................................................................................10
Demand-supply scenario in India..........................................................................................................10 Key trends and sectoral drivers of water consumption in India – agriculture, industry and domestic usage...................................................................................................................................13 Water scarcity analysis of India (regional heat map of future water scarce regions).................................15 Current policy and regulatory issues, private investment, FDI scenario and key barriers to investment.....16 India’s National Water Mission and its major thrust areas.......................................................................18 Key waste water management technologies and their global status........................................................19 Breakthrough innovation in water and waste water treatment technologies............................................19

Business opportunity analysis of water sector................................................................22
Water value chain...............................................................................................................................22 Critical success factor analysis of the water value chain.........................................................................23 Overview of different emerging business models in the water Industry...................................................27 High-level economics in the value chain segment..................................................................................28 Key aspects of different water management approaches.......................................................................31 Demand-side management of industrial water efficiency.......................................................................32 Competitive landscape of water or waste water value chain (market structure, concentration of players, nature of competition, etc).............................................................................33 Emerging opportunities for PPP in India (case studies)..........................................................................35 Business propositions for potential investors in the water sector............................................................38 Critical requirements for doing business in India’s water sector..............................................................40

Conclusion...................................................................................................................38

Executive summary

The ever-expanding water demand driven by the world’s growing population and economy, combined with the impacts of climate change, are already making water scarcity a stark reality in many parts of the world—and with it we are witnessing severe damage to livelihoods, human health, and eco-systems. Research predicts that in about 20 years, demand for water will become 40 percent higher than it is today, and more than 50 percent higher in the most rapidly developing countries. Expansion of supply and improvement of efficiency at historical rate will merely bridge only a fraction of this growing demandsupply gap. Unless local, national and global communities come together and dramatically improve the way we envision and manage water, the problem will be further aggravated and in turn will affect the global economic development. India’s exploitable renewable fresh water resources are estimated at ~1,100-1,200 bcm. While the total water resource availability remains constant, water demand has grown steeply due to steady growth in population, increasing urbanization, changing lifestyles, and economic growth. Consequently, the per capita availability of water in India has declined to ~1,150 m3 /year, which makes India a severely water stressed country. Evolution of water market resulted in the spread of “organized and integrated utilities” model in many countries of the world. In India the water supply is still largely dominated by the state level bodies, public utilities and municipalities most of which are suffering from financial problems. More pertinently, millions of Indians not only have no access to potable water but also have no water source available within kilometers of their dwellings. India is predominantly an agrarian economy with high dependency on water intensive crops. Moreover, the cheap or free electricity offered to the farmers in some of the sates led to excessive drawl of groundwater which disturbed the underground water table. In future, this situation is likely to intensify further due to increase in the urban and industrial water demand. This study depicts that the water demand

in India, combining all sectors, will grow at a CAGR of 3% till 2030. However, even in rapidly developing, water-scarce countries appropriate level of technological interventions along with sound policies can boost efficiency, augment supply or lessen the water-intensity of the economy to meet human and environmental water needs at affordable cost. The study highlights some of such areas where private sector investors could participate and contribute to the water scarcity solutions through innovative and cost-effective technology use and also secure return on their investment. For many years, the water utilities and municipalities have been facing acute shortage of funds to develop, operate and maintain water supply-distribution infrastructure in an efficient and viable fashion. Moreover, lack of institutional reforms and ineffective implementation significantly affected the performance of the overall sector. As far as supply and distribution of water is concerned, India is dominated by the local municipal bodies. Although there has been very little involvement of the private sector till date, recently several business models and projects have been initiated, driven primarily by the three important policies viz. National Water Policy 2002, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the National Water Mission. Other policy initiatives, such as the Accelerated Irrigation Benefits Programme, the Hydrology Project, setting up of the Water Quality Assessment Authority, the Command Area Development and Water Management Programme, the National Project for Repair, Renovation and Restoration of Water Bodies directly linked to agriculture, flood Management, and River Basin Organizations have also been rolled out at the national and state level. These policies of the Government are aimed at encouraging private investors to invest in India’s water market, which is a necessity; so that new business models evolve to cater to

2

Water sector in India: Emerging investment opportunities

the needs of the society in an economically efficient fashion. Opening up of this sector to the private investment should infuse efficiency through competition and improve operating efficiency levels of the municipalities or the state level water utilities through privatization of these utilities. The Consolidated Foreign Direct Investment (FDI) policy announced by the Government of India where 100% FDI is allowed both in demand as well as supply segment. This opens up investment opportunities for the foreign investors especially in the supply & distribution segment and sewage &sanitation services where there is limited private sector involvement currently. Indian water sector and the consumers can immensely benefit from the advanced water technologies of the West and also from the engineering and project management expertise which foreign investors can bring in. On the other hand given the sheer size of Indian economy and its growing and diverse water needs India will always represent very high market potential for foreign companies. While the water situation in India is not so attractive as of now, reforms on the regulation and policy front have begun to take shape and success of these can create potentially huge investment opportunities in future. Any private investor making entry in this sector at this point of time can surely gain the first mover’s advantage as the sector opens up further and the market matures. The study highlights that the Indian water sector can create investment potential to the tune of USD 130 billion by 2030. Business opportunities revolve around four key themes viz. water demand management, water supply management, water infrastructure upgradation, and water utilities management. Under these four key themes some of the typical opportunities are:
•

business potential of around US$1750 billion
•

setting up of water treatment plants (like desalination) ~ business potential of around US$1303 billion involvement in water EPC business and providing solutions in the form of integrated water resource management for utilities~ business potential of around US$45 billion

•

With the increased involvement of the private sector, there will be a need for efficient water and waste water management to improve operating efficiency levels, which is likely to require an investment in emerging waste water technologies such as the Hybrid Reactor and Solid Aquifier Treatment (SAT) technologies. Urban water demand and water treatment and recycling space is more attractive to the investors compared to irrigation, given the increasing investment in urban renewal and improvement in environment consciousness of corporate India. However, the sheer size of the irrigation sector compared to urban water treatment and recycling is also likely to result in higher growth for companies addressing the irrigation space. Maintaining status-quo in the water sector is no longer an option for most of the developing countries. The beginning of the change is visible and there is good reason to believe that water will be an important investment theme for public, multilateral and private financial institutions in the coming decades. Some of the policy initiatives have actually paved the way for private investors to invest in multiple areas of the water value chain and cost-effectively cater to the growing demand for water in the country. Although affordable solutions are in principle available to close the projected water supplydemand gaps for most regions, institutional barriers, lack of awareness and misaligned incentives may stand in the way of implementation, across both the private and public sectors. Overcoming these barriers will entail persistent action and, in many cases, a transformational approach to be adopted together by the Government, business community and the civil society

Metering, instrumentation, equipment supply in the demand side~ business potential of around US$32 billion involvement in Public Private Partnership (PPP) model with the state utilities for water supply and distribution~

•

Water sector in India: Emerging investment opportunities

3

Overview of the global water industry
Global water reserves
Water is a vital component for the economic prosperity of any country. In coming years, the economic importance of water is expected to grow with the global economic growth, industrial development and urbanization. The global water and wastewater sector being the infrastructure segment that shows the greatest promise — steady long-term cash flows from what many describe as the “last monopoly utility business.” Furthermore, it is the sector that has witnessed the least progress in terms of attracting private investment till date. A snapshot of the global scenario in terms of global water reserves is presented in the exhibit below:

Exhibit 1: Global freshwater reserves
1.20% Fresh water – 2.5% Salt Water - 97.5% 30.10% Others Ground water

68.70%

Glaciers

Category 1
Source: 'Water-A Shared Responsibility', United Nations World Water Development Report 2
4 Water sector in India: Emerging investment opportunities

Key facts1
•

Total global water reserves stand at ~1400 million teraliters (MM TL), of which freshwater comprises only around 35 MM TL. Ground and surface water, which together constitute 30.5% of freshwater reserves (~0.76% of the total water on the planet), are the most easily accessible and used sources of water. Every year, there is 0.11 MM TL of precipitation on land. Around 92% of this is lost due to surface runoff, evaporation, etc..

Current and future global demandsupply scenario (estimates of key international agencies)
An overall snapshot of water consumption (sector-wise) in the world’s major economiesis presented below2: Units in the bar graph are in billion liters per day.

•

•

Exhibit 2: Global sectoral-wise water consumption
8% 10% 11%

Therefore, it is clear that a very small percentage of fresh water reserves are accessible to the human population for usage.

59% 82% 30% Low and medium income countries Agriculture Industrial High income countries Domestic

Source: 'Water-A Shared Responsibility', United Nations World Water Development Report 2

1 2

‘Water-A Shared Responsibility’, United Nations World Water Development Report 2 ‘Water for People Water for Life’, United Nations World Water Development Report, 2003

Water sector in India: Emerging investment opportunities

5

Unlike in developed countries, the current demand for water in developing countries is mainly from agriculture. However, this pattern is expected to change significantly in the future as many of the economies make a transition from agragrian to industrial pattern. The following exhibit highlights demand trends in the USA (an example of a developed country) and India and China (examples of developing countries) and elaborates on current demand trends in growing economies such India rising, as compared to developed economies, in which the demand for water is witnessing a declining trend.

Exhibit 3: Comparison of water demand in developing nations viz-a-viz developed nations
USA 2500 2000 1500 1000 500 0 2005 2050 E Domestic 2500 India China 2500 2000 1500 1000 500 0 2005 Industrial 2050 E Agricultural 2005 2050 E

CAG R -0 .3%

2000 1500 1000 500 0

% .56 R0 G CA

4% 0.9 GR A C

Source: 'Water-A Shared Responsibility', United Nations World Water Development Report 2

Therefore, that the following is clear:
•

An entire range of water services needs to be put in place to meet the rapidly rising demand for water. Moreover, the requisite infrastructure and their effective implementation and operation have to be ensured for these services to be well run and effective. Huge investments are required to upgrade and expand water infrastructure to surmount the current challenges being faced globally.

Overall water usage in low and middle income countries and their per capita domestic consumption is expected to increase over a period of time due to the following factors:
•

Increasing population and urbanization, like in India, where the growth rate of the urban population is expected to be 2.54% Changing consumption patterns with the use of more water-intensive products Rapid industrial growth, with technology moving toward more water-intensive technologies

•

•

•

What is driving the demand for water in various geographies?
The key factor driving the demand for water worldwide is water scarcity, which is dependent on factors such as population growth, urbanization and industrialization.

Developed and high-income countries are expected to reduce their overall water consumption across all sectors by 2050 through the following initiatives:
• •

Better water management measures Reduction in per capita water consumption

6

Water sector in India: Emerging investment opportunities

The probable future scenario in different parts of the world has been depicted in the following exhibit: Exhibit 4: Global water scarcity map Water scarcity will have spread further; India and China will continue to be the largest countries facing water stress 2000 2050

Surplus

Adequate

Stress

Extreme scarcity

Scarcity

No data

Source: ‘Global Water Initiative’ (June 2005), GEF International Waters Conference, The Coca-Cola Company

The projected worldwide demand for water in the three main segments of consumption is presented in the exhibit below Exhibit 5: Water Consumption rates in various sectors
All figures are in billion cubic meters Agriculture 1.5X 2030 E CAGR 1.9% 2010 3100 2010 4500 2030 E CAGR 3.2% 800 2010 Industry 2X 1500 2030 E CAGR 2% 600 Domestic 1.5X 900

Source: 'India’s Water Future to 2025 –2050: Business as Usual Scenario and Deviations'

Water sector in India: Emerging investment opportunities

7

By 2030, water scarcity is expected to have spread further, with India and China continuing to be the largest counties facing water shortage. When compared with global water consumption, the focus of developing countries such as India and China is clearly on agriculture due to the low yield per drop of water in these countries, as well as because of free or (low) fixed cost electricity offered by the governments to farmers, which encourages unrestrained usage and heavy exploitation of ground water. The current urbanization pattern and per capita water consumption rate (shown in the following exhibit) clearly indicates that the growing demand from the energy and industrial sectors will significantly outgrow agricultural and residential demand in the future and will be one of the major factors contributing to the increased demand for water Exhibit 6: Urbanization pattern in different cities of India
India will have 68 cities with population of more than 1 million by 2030.

.54% R–2 CAG
340 93 52 195 2008 Tier 1 – >4 million

590 155 104 331 2030

Tier 2 – 1million – 4 million Tier 3 and 4 – <1 million
Source: India Urbanization Economic Model; Census 2001; Mc Kinsey Global Analysis

8

Water sector in India: Emerging investment opportunities

Water sector in India: Emerging investment opportunities

9

Overview of water industry in India

Demand-supply scenario in India
India, which is home to 16% of the world’s population, has only 2.5% of the worlds land area and 4% of its water resources. Precipitation in the form of rain and snowfall provides over 4,000 TL of fresh water to the country. Most of this freshwater is carroed out to the sea and ocean via the many large rivers flowing across the subcontinent. A portion of this water is absorbed by the soil and is stored in underground aquifers. A much smaller percentage is stored in inland water bodies including natural (lakes and ponds) and man-made (tanks and reservoirs). Out of the 1,869 TL of water reserves in the country, only an estimated 1,122 TL can be utilized due to topographic constraints and distribution issues. Furthermore, the demand for water has been increasing rapidly in the past few decades. India’s current water consumption is approximately 581 TL, with irrigation needs accounting for a staggering 89%, followed by domestic use at 5% and industrial consumption at 6%, as shown in the exhibit below..

Exhibit 7: Break up of water consumption in India

42%

Usable Water 58%

89%

6% 5% Usable water
Source: ‘Global Water Initiative’ (June 2005), GEF International Waters Conference

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Water sector in India: Emerging investment opportunities

The projected demand for water in the three main segments of consumption, along with basic requirements, currently and in the future in India, is depicted in the following exhibits: Exhibit 8: Basic service demand forecast The massive scale of India’s urbanization will create a huge supply demand.
All figures are in billion liters/day Description Water supply Water demand will increase 2.4 times Metric Million liters per day Demand forecast 189 83 2030 2007

Basic service demand
Sewage Sewage Generated will increase 2.3 times Million liters per day 151 66
Source: United Nations ; Handbook of benchmarks;Ministry of Urban Development; W. Smith,national Council for Applied Economics Research

2030 2007

Water sector in India: Emerging investment opportunities

11

Exhibit 9: Gap analysis of basic demand and supply
Water supply (billion liters per day) 189
Gap increases 3.5x to 94 billion liters per day

83 56

95

2007 Supply

2030 Basic Service Demand

Source: United Nations; press search; City Development Plans; The Energy and Resources Institute Planning Commission ; Census 2001;Central Pollution Control Board; Mckinsey global Institute Analysis

Exhibit 10: Gap analysis of basic demand and supply in some of major cities in India
Water Supply ( Million liters per day) 11300 9600

5800 4100 1600 3000 1700 3400 900 1700

2007 Basic Service Demand
Source: United Nations, Handbook of Benchmarks, Ministry of Urban Development

2030 Basic Service Demand

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Water sector in India: Emerging investment opportunities

Key trends and sectoral drivers of water consumption in India — agriculture, industry and domestic usage
In India, agriculture consumes the largest quantity of water. The industrial and residential segments account for the rest of water consumption. This chapter provides details on the break-up of the country’s water consumption pattern as well as an analysis of the key drivers of demand in the future. The key demand drivers contributing to the change in water consumption pattern as well as key concerns are detailed in the table below. Exhibit 11: Sectoral water demand situation and key drivers
All figures are in billion cubic meters 2010 Domestic 2030E
►

Demand drivers Population growth Increased per capita water consumption Expansion of the water intensive industries like power, iron & steel, chemical is leading to increase in water demand Domestic food grain demand increasing with increase in population Demand for Water intensive crops like wheat, rice are increasing substantially Poor water Management
► ►

Key concerns Absence on regulatory binding on usage and wastage of water

34.05

66.44

►

►

Industry

40.86

91.63

Absence of loss monitoring and subsequent reduction scheme

►

►

Over-exploitation of ground water Reduction of ground water levels due to climate change

Agriculture

606

674

►

►

►

Source: 'India’s Water Future to 2025 –2050: Business as Usual Scenario and Deviations', Ernst & Young Analysis

Water sector in India: Emerging investment opportunities

13

The way in which India’s business sector in shaping up (in the light of the drivers mentioned above) as well as several issues and opportunities are summarized in the following exhibit:

Exhibit 12: Business environment drivers
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Population growth Increased water intensive food consumption Urbanization: now half of the world’s population Industrialization increasing water intensity Rate of ground water withdrawal is higher than the rate of discharge Pollution Inefficient use and management Increasingly stringent water quality standards and environmental regulations drive increased spending, technological innovation, and positive pricing

Strong demand growth drivers

► ► ► ►

Declining supply

► ►

Improving regulatory environment

►

Increased capital investment

►

According to the World Bank, more than $900 Billion needs to be invested worldwide to maintain and upgrade aging water infrastructure. In the developed world, water related investment is growing at 1‐2 times GDP. Increased capital spending requirements, combined with growing consumer awareness of increasing water scarcity and concerns about water quality, are driving accelerating pricing trends and industry growth. Consolidation potential in both regulated and non‐regulated companies is driven by increased regulatory requirements and cost efficiencies from scale. These opportunities in the water industry are also attracting the interest of large multinational companies.

Increased capital investment

►

Increased capital investment

► ►

Source: Ernst & Young Analysis

Projection of future demand-supply scenario The demand for water is projected to overtake its availability in India. In some regions of the country, this has already happened. The following exhibit shows the likely trend of the growth in demand. India’s rapidly increasing population, urbanization and industrialization has led to a significant increase in the need for water. In the next decade, this demand is expected to grow by 20%, primarily fueled by industrial requirements that are expected to double from 23.2 trillion liters at present to 47 trillion liters. Domestic demand is expected to grow by 40% from 41 to 55 trillion liters, while irrigation is likely to require only 14% more after 10 years — 592 trillion liters up from 517 trillion liters at present.

Exhibit 13: Projection of demand-supply scenario
1400 1200 1000 800 600 400 200 0 1998 2010 Demand 2025 E Supply 2050 E 1400 1200 1000 800 600 400 200 0

Source: Source: Standing Sub-committee of Ministry of Water Resources, Development

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Water sector in India: Emerging investment opportunities

Water scarcity analysis of India (regional heat map of future water scarce regions)
Water shortage could worsen in the future in the country, mainly due to the exponential growth of its agricultural and industrial sectors, which are expected to be the major water consumers. A detailed analysis of the major growth drivers, along with the key issues, is presented in the following exhibit. Exhibit 14: Key issues across major consumption areas
Key issues Agriculture
►

Industry
►

Domestic
►

Rise in water consumption: Rice, wheat and sugarcane together constitute ~90% of India’s crop production and are the highest water-consuming crops India has a reasonable water footprints among the top rice and wheat producing countries (China, US, Indonesia, etc.) Over-exploitation of groundwater: States with a reasonable production of rice/wheat are expected to face groundwater depletion of up to 75%, by 2050 Increase in wastewater discharge: Agri-based industries such as textiles, sugar and fertilizer are among the top producers of wastewater

►

Industrial water consumption is expected to quadruple between 2000 and 2050. By 2050 industrial water consumption will reach 18% of total annual water consumption, up from just 6% in 2000 Industrial wastewater discharge causes pollution and reduces available freshwater reserves There is no regulatory binding on water usage and wastage Around 6.2 billion liters of untreated industrial wastewater is generated every day Thermal power and steel plants are the major contributors to annual industrial wastewater discharge

The population density supported by India’s river basins is higher than most other developing countries The five states mentioned below are the highest producers of rice, wheat and sugarcane (water-intensive crops) and together produce ~70% of the total food crops in India Subsidies on electricity in these states has led to excessive pumping of groundwater for agriculture

►

►

►

►

►

►

►

►

Source: Ernst & Young Analysis

Exhibit 15: Demand from irrigation in the major river basins
Major river basins Ganges Krishna Kaveri Godavari Major agricultural states in river basins Uttar Pradesh Maharashtra, Karnataka Tamil Nadu, Karnataka Andhra Pradesh, karnataka Population density of people per square kilometer 449 253 389 189 Water used for irrigation as a percentage of total consumption 91% 90% 95% 89%

Source: Ministry Of Water Resources

Groundwater depletion affecting most river basins that support agriculture in these states Scenario by 2050:
•

•

The groundwater level in the Ganges basin (which provides water to Uttar Pradesh) is projected to be depleted by 50%–75%.

Groundwater levels in the Krishna, Kaveri and Godavari basins (which provide water to Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh) are projected to be depleted by ~50%.

Water sector in India: Emerging investment opportunities

15

Current policy and regulatory issues, private investment, FDI scenario and key barriers to investment
According to the Indian Constitution, water is the subject of legislation at three levels — the Centre, the states and local bodies, with the primary responsibility resting with the states, while the Centre only looks at inter-state water disputes. A brief outlook of the provisions of the Constitution, which provide legislative legitimacy to the three centers of power, is depicted in the exhibit below. Exhibit 16: Analysis of Water Institutions in India
Union Ministry of Water Resources Centre National Water Development Agency Central Water Commission Central Groundwater Board
► ►

Centre looks at inter-State water disputes only
►

Regulation and development of inter-State rivers and river valleys to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest

State

Irrigation department

State PHE Department

Water Supply and Sanitation Board
►

The State government has the power to make laws on “water, that is to say, water supplies, irrigation and canals, drainage and embankments, water storage Under the seventy-fourth amendment to the Constitution, the States have been given the authority to devolve to the Municipalities, which has the powers the implementation of schemes of, among other things, “water supply for domestic, industrial and commercial purposes

Local bodies

Municipality 2

Municipality 1

Municipality 3

Source: Planning Commission, Government of India, Ernst & Young Analysis

Since water bodies do not confine themselves to the political boundaries drawn up between states in India (some countries follow such a demarcation system), given their over-lapping jurisdiction, co-ordination and co-operation is required between states on exploration and development of national level policies. Furthermore, local water bodies can serve more than one local body. Therefore, rule-making in these areas requires the significant involvement of all the concerned stakeholders.

Unlike in the case of the power sector, in which the cost of production is high and that of transportation low, which makes it a national business, water, with its low cost of production and high cost of transportation, is by its nature localized. However, although water is a local business, rules and policies governing its upstream use impact the downstream sector as well. Therefore, coordinated rule-making is imperative. The following exhibit depicts the evolution of major water policies in India.

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Water sector in India: Emerging investment opportunities

Exhibit 17: Evolution of water policy in India
National Water Perspective Plan : INR0.26 billion spent in years 1999 & 2000 Swajaldhara programme: INR10.69 billion Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT):\ INR6.82 billion Bharat Nirman Programme Phase I : INR210 billion

1972

1980

1994

2003

2005

2010

Accelerated Rural Water Supply Program (ARRWSP) : INR0.25 billion

Accelerated Urban Water Supply Programme : INR18.23 billion

Jawaharlal Nehru National Urban Renewal Mission (JNNURM) : INR331.6 billion

National project for Repair, Renovation and Restoration of Water Bodies : INR100 billion

National Water Mission(NWM): INR287 billion

Source: Government of India Ministry of water resources

The National Water Policy 2002 had been responsible for driving water privatization initiatives in India. The policy encourages strong private sector participation in water resource projects for diverse uses, from planning and development to actual management. Role of Foreign Direct Investment Private investment in water is allowed – both Indian and foreign. There is no specific restriction on the entry of private players in the water sector. However, given that a user cost-recovery mechanism is not operational across the country, the private sector has been hesitant in investing in the sector. For example, Latur in Maharashtra, which privatized its water supply, had to backtrack from its commitment to a private player on metering after facing public resistance — this, was despite it achieving a significant improvement in leakage reduction. According to the Consolidated FDI policy announced by the Government of India, which has been effective from April 2010, 100% FDI is allowed in the water sector, as detailed as below.

Clause 5.22.1 states “100% FDI is allowed under the automatic route in the construction and maintenance of roads, rail-beds, bridges, tunnels, pipelines, ropeways, runways, waterways & water reservoirs, hydroelectric projects, power plants and industrial plants.” Clause 5.22.3 states “100% FDI is allowed under the automatic route in construction and maintenance of rural drinking water supply projects, packaged water treatment plants, rain and rain water harvesting structures, waste water recycling and re-use techniques and facilities, rain-water re-charging and re-use techniques of ground water.”

Ability of regulator to make certain equity of access Currently, there is no national regulator in the water sector. The legislative authority for water related-issues rests primarily with the states, and hence, regulators, as and when they emerge, are likely to operate state-wise. Maharashtra has taken the lead by passing the Maharashtra Water Resources Regulatory Authority Act 2005 and setting up a regulator, whose job description primarily relates to planning and allocation of water supplies to consumers.

Water sector in India: Emerging investment opportunities

17

State water resources and setting up of water tariff system Once the regulator model is accepted across the states, regulators can work toward ensuring equity of access, adherence to benchmarks relating to the services of public or private operators and protection of consumer rights, while creating viable tariff structures for recovery of capital, operational and maintenance costs, aimed at yielding a profit, especially if the private sector is to be invited. State regulators can play the role of master coordinators in their states, facilitating coordination between states and advice on inter-state projects (e.g., river-linking ones) as well as help to resolve inter-state disputes.

takes into account the provisions of the National Water Policy and has developed a framework for reducing water usage by increasing water-use effi¬ciency by 20% through regulatory mechanisms with differential entitlements and pricing. It seeks to make sure that a large share of the water needs of urban areas is met through recycling of waste water and the water requirements of coastal cities with inadequate alternative sources of water by the adoption of new technologies such as low temperature desali¬nation technologies that enable the use of ocean water. The mission seeks to develop new regulatory structures, combined with appropriate entitlements and pricing. It also aims to improve the efficiency of existing irrigation systems, including rehabilitation of those that are run down, and also expand irrigation, where feasible, by making a special effort to increase storage capacity. In addition, incentive structures will be designed to promote water-neutral or water-positive technologies, recharging of underground water sources and adoption of large-scale irrigation programs that rely on sprinklers, drip irrigation, and ridge and furrow irrigation. The key thrust areas and opportunities arising from these have been highlighted in the exhibit below:

India’s National Water Mission and its major thrust areas
A National Water Mission has been initiated to monitor integrated water resource management, help to conserve water, reduce wastage and enable more equitable distribution of water resources across and within states. The mission

Exhibit 18: National water mission and its business implications Drivers- Increasing Government Impetus
National water mission
► ► ►

Implication for business Urban water and wastewater market will grow SEZ –Green development mandatory Residential buildings to have sewage treatment and recycling 20 % water reduction mandatory for all industries Water labeling concept introduced Fiscal incentives provided for promoting water efficient technology. Working closely with the government through PPP model for installation of:
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National Water Mission
►

► ► ► ►

Increasing water use efficiency at least by 20%

►

Ground Water recharge Dams Watershed development

►

Focused attention to over-exploited areas
►

► ►

Water tariffs to be revised. Water Foot printing : Promoting mandatory water audit including those for drinking water purposes. Incentivize recycling of water including wastewater

►

Promotion of integrated water resources management

► ►

Source: Government of India Ministry of water resources, Ernst & Young Analysis

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Water sector in India: Emerging investment opportunities

Key waste water management technologies and their global status
There is a need for a sustainable wastewater treatment system, which offers several options from which a choice can be made to find the most appropriate technology. Lagoons or wetlands and anaerobic digestion are the most commonly used technologies used in India. A brief overview of these different technologies is provided below: Lagoons and wetlands
• • •

Anaerobic digestion Anaerobic bacteria degrade organic materials in the absence of oxygen and produce methane and carbon dioxide. The methane can be reused as an alternative energy source (biogas). The advantages of this system are as follows:
• •

Low energy demand Low investment costs and space requirement, and scalability High treatment efficiencies

•

USAB (anaerobic digesters) Hybrid reactors Soil Aquifer Treatment (SAT) technologies.

Lagoons and wetlands In treatment relating to wetlands, natural forces (chemical, physical, and solar) act together to purify the wastewater. A series of shallow ponds act as stabilization lagoons, while water hyacinth or duckweed trap heavy metals; multiple forms of bacteria, plankton and algae further purify the water. Wetland treatment technology in developing countries offers a comparative advantage over conventional, mechanized treatment systems because the level of self-sufficiency, ecological balance, and economic viability offered is greater. The system enables total resource recovery. However, any decision to use wetlands must consider the climate. The system has several disadvantages, as listed below:
• •

So far, anaerobic treatment has been utilized in India, replacing more costly activated sludge processes or diminishing the required pond areas. Various cities in India show an interest in utilizing anaerobic treatment as a decentralized treatment system for “sub-urban” and poor, districts. The uniqueness of this technology is that it can be utilized on a small or big scale. This makes it a sustainable option for a growing community.

Breakthrough innovation in water and waste water treatment technologies
There are some upcoming technologies, the implementation of which would be a key factor for the successful utilization of waste water. A brief overview of the different technologies is provided below: Hybrid reactor An hybrid reactor is an improved version of the UASB system and combines the merits of an upflow sludge blanket and fixed film reactors. Its advantages include simplicity of design and operation, and it is also is more economical than a fixed bed system.

High demand for large area of arable and flat land Often characterized by significant odor problems in anaerobic and facultative ponds Loss of valuable greenhouse gas (methane) to the atmosphere System non-flexible toward increase in population

•

•

Water sector in India: Emerging investment opportunities

19

Soil Aquifer Treatment technologies Soil Aquifer Treatment (SAT) is a geopurification system, using which partially treated sewage effluent artificially recharges the aquifers and then is withdrawn for future use. By being recharged through unsaturated soil layers, the effluent additionally purified before it mixes with natural groundwater. In water-scarce areas, treated effluent becomes a considerable resource for improved groundwater sources. The Gaza Coastal Aquifer Management Program enables treatment of effluents to strengthen the groundwater in terms of quantity and quality. With nitrogen reduction in wastewater treatment plants, the recharged effluent has the potential to reduce the concentration of nitrates in an aquifer. In waterscarce areas such as the Middle East and parts of Southern Africa, wastewater has become a valuable resource, which, after appropriate treatment, becomes a commercially realistic alternative to groundwater recharge, agricultural and urban applications.

Key ideas for implementing new treatment technology A wastewater treatment developer must perform an appropriate risk assessment before initiating reuse of wastewater. Proper consideration of health risks and quality restrictions must be a part of the assessment. Source-point measures, rather than end of pipe approaches, are essential. Source-point measures require extensive industrial pretreatment interventions, monitoring and control programs, as well as incentives given to a community for not disposing of any harmful matter in sewers. Local and municipal participation is essential for selection and promotion of new technology. Although the importance of local participation is a positive growing trend in government projects, it must meet specific local needs. In addition, local communities can contribute indigenous and valid ideas to achieve cost savings in the implementation of projects. Furthermore, design engineers and local residents need to agree on key factors right from the planning stage of the project. If local participation is extensive, capital costs can be substantially reduced. However, as far as new technological interventions are concerned, the involvement of foreign companies that have the requisite technical skills in water treatment plants (WTPs) and waste water treatment plants (WWTPs) is helpful.

20

Water sector in India: Emerging investment opportunities

Water sector in India: Emerging investment opportunities

21

Business opportunity analysis of water sector
Water value chain
India’s water segment can be classified in four major verticals:
• • • •

Water collection, harvesting, desalination and treatment Water supply and distribution Sewage and sanitation services Other services

The water value chain has been represented in the following exhibit and comprise the verticals mentioned above: Exhibit 19: Water value chain
Water collection & treatment Collection of freshwater/ groundwater Supply to domestic consumer Freshwater/groundwater/ treatment plant Supply to industrial consumer Desalination plant Waste water collection, treatment, reuse & disposal Distribution and supply Sewage & sanitation services Other services Irrigation Water purification Bottled water Borewells

Source: Government of India Ministry of water resources, Ernst & Young Analysis

22

Water sector in India: Emerging investment opportunities

Critical success factor for water business
Understanding the Indian situation Globally, agriculture consumes the largest quantity of water (69%). The industrial and residential segments split the rest of water consumption at 18% and 13%, respectively. Industrial consumption of water is expected to grow disproportionately (3.2% per annum) to an overall demand growth of 2.2% per annum. India’s skew toward agriculture is more pronounced on account of the low yield per drop of water and also the low fixed cost of electricity offered to farmers, which encourages unchecked usage. However, with urbanization, the demand from energy and industry is expected to significantly outgrow agricultural and residential demand. Water collection is carried out by pumping from water bodies, including lakes and rivers, for major domestic requirements. In India, water collection and treatment is mainly looked after by

the municipal bodies, sometimes in collaboration with the state government. To meet their domestic requirement of water, families depend on privately shared wells and tube wells. In locations near the sea or ocean, their water demand is catered to by desalination of the water collected. Since India has a tropical climate, rain water harvesting is also a growing option for fresh water collection. Although the private sector has not been involved in water collection, purification and supply-distribution so far due to the inadequacy of the existing infrastructure, private models such as JUSCO and public-private partnership in certain parts of India have been very successful due to enhanced the efficiency and effectiveness of the service provided. It has been observed that people prefer to pay higher amounts for better availability of water and consistency of the service. The Government has now begun to outsource certain work to the private sector, including water collection, piping, construction of reservoirs, water channelizing, etc. In addition, water treatment agents, including chemicals and gases, are now being procured from the private market.

Water sector in India: Emerging investment opportunities

23

Exhibit 20: Key players in the segments of water value chain
Collection of freshwater/ groundwater Supply to domestic consumer Freshwater/groundwater/ treatment plant Supply to industrial consumer Desalination plant Waste water collection, treatment, reuse & disposal

Irrigation

Water purification

Bottled water

Borewells

Water collection & treatment
► ►

Distribution and supply
► ► ►

Sewage & sanitation services
► ► ► ► ► ►

Other services
► ► ► ►

Hindustan Dorr Oliver Waste Water Engg Ltd. Subhash Projects Degremont Limited Ramky Infrastructure JUSCO Hindustan Dorr Oliver Waste Water Engg Ltd. Thermax Limited Degremont Limited Ramky Infrastructure Ion Exchange

Subhash Projects JUSCO WIPRO

Hindustan Dorr Oliver Waste Water Engg Ltd. Subhash Projects Degremont Limited Ramky Infrastructure JUSCO Hindustan Dorr Oliver Waste Water Engg Ltd. Thermax Limited Degremont Limited Ramky Infrastructure

Subhash Projects Shlumberger Veolia GE Water

Service: Operation and Maintenance

► ► ► ► ► ►

► ► ► ► ► ►

GAMMON Aquatech SIEMENS VA Tech WABAG GmbH Morf Driplex

► ► ► ► ►

► ► ► ► ►

Hindustan Unilever Phillips Aquaguard Tata Chemicals Grundfos

Products: Design and manufacturing

► ► ► ►

Source: Industry Research, Ernst & Young Analysis

Critical Issues and opportunities in water collection and treatment There are two segments that are engaged in water collection and treatment. An overview of the methods used by them is presented in the following exhibits:

Exhibit 21: Municipality water collection and treatment
Sustainability of water resources Supply and distribution Waste water collection Waste water treatment

Water body

Water treatment

Water pumping

Water harvesting

Source: Government of India Ministry of water resources, Ernst & Young Analysis

24

Water sector in India: Emerging investment opportunities

Exhibit 22: Industrial water collection and treatment
Sustainability of water resources Water pumping Supply and distribution Captive waste water treatment Rain water harvesting

Source: Government of India Ministry of water resources, Ernst & Young Analysis

The key issues associated with most municipalities and industrial water collection systems include overexploitation of groundwater and pollution problems caused by the following:
• • •

and increasing resource use inefficiency, which indicates the need for services in the form of the following:
•

Declining water tables Sea water intrusion in coastal areas Deterioration of groundwater quality (arsenic and iron concentration) Power subsidy triggering extraction of resources and related equity issues Public monopoly in provision of formal irrigation and water supply services Lack of competition in service provision Increasing droughts and floods
•

Inefficient water storage infrastructure is a major concern, which prevents transfer of water from regions witnessing seasonal or regional abundance of rainfall to areas experiencing scarcity. Lack of demand-side management is preventing the implementation of supply-side options. The technology for allocation and monitoring of ground water resources is backdated. Bundled distribution functions are a feature of large irrigation systems. There is lack of awareness among common people about the scarcity of water in the country, which is hampering conservation and waste management.

•

•

•

•

• •

•

Critical issues and opportunities in distribution, supply, other sewage and sanitation services The key issues related to distribution, supply, sewage and sanitation services pertain to ineffective demand management

The kind of opportunities that currently exist for the private sector in India, as well as the critical success factors for such initiatives and the scale of the market, can be summarized in the following exhibit, a detailed analysis of which has been carried out later in the report.

Water sector in India: Emerging investment opportunities

25

Summary of opportunities and market size across the value chain for private players
Water collection and treatment Key activities
►

Distribution and supply
►

Sewage and sanitation services
►

Other services Water resource management

Collection of freshwater/ groundwater Freshwater/groundwater/ treatment plant Desalination plant Cost competitiveness of different equipment for water collection, viz-a-viz locally fabricated equipment, since the latter is much cheaper than imported equivalents, which can pose a challenge for foreign investors in this segment Reliability of equipment Efficient rural marketing network

Supply to domestic consumers Supply to industrial consumers

►

►

Waste water collection, treatment, reuse and disposal

►

► ►

►

Deep understanding of urban and rural underground topography Working closely with township development authority/municipality in the PPP model Strong engineering and project management skills

►

Access to modern waste water treatment technologies Assessing cost competitiveness through an analysis of currently available technologies in India and the capabilities of Indian players in designing technologies on a large scale Efficient reach and spread to key industry clusters Scaling up technology application at cluster level

►

►

►

Critical success factors

Efficient uutilization of water through periodic evaluation and monitoring of losses — currently not the practice in most sectors in India Analysis of loss and development of techniques to minimize loss

►

►

► ►

►

►

Market size in

► ►

2010-0.8 billion US$ 2030-32 billion US$

► ►

2010- 29.5 billion US$ 2030- 1750 billion US$

► ►

2010- 12.16 billion US$ 2030- 1303.5 billion US$

► ►

2010-3.56billion US$ 2030- 45.6 billion US

The key tactical perspectives or opportunities in light of the issues mentioned above for utilities in the water value chain:
•

•

Planning, development and management of water resources project for diverse uses may help to generate financial resources, introduce corporate management and improve service efficiency and accountability of users. There is increased realization of a paradigm shift from water resource development to water resource management by restructuring and strengthening existing institutions for enhanced service delivery and resource sustainability. This is expected to provide the private sector an opportunity relating to integrated water resource management.

Effective regulation of groundwater extraction, along with power subsidies and improved technological interventions, would help in to improve groundwater resource management in the country. Promoting vibrant river basin organizations that focus more on integrated water resource management would go a long way in addressing conservation of resources, efficient utilization and related management including cross subsidization, pricing, collection and investments. This needs to be supported by multi-level stakeholder platforms that play a proactive role at all the stages of the process.

•

•

26

Water sector in India: Emerging investment opportunities

•

Establishing water regulation authorities at the state level would elevate the state’s role to that of a facilitator and regulator from its present one of operator and crisis manager.

• • • •

Financial institutions Large industrial users of water Technology providers The construction sector

Overview of emerging business models in the water Industry
Business models for effective water management3 Governments are not the only stakeholders that matter in this segment, nor do they constitute the only authority that needs to help in taking decisions pertaining to water management. The path forward for five private sector players that can contribute to water security services is outlined below. These players include:
•

Since the agriculture sector accounts for the major share of the country’s demand for water, there is a substantial business opportunity for the five players (mentioned above) through different business models that are discussed subsequently. Within the context of this study, “business model” is defined as the ownership and organizational structure responsible for (1) operation and management and/or (2) capital maintenance and improvement. An efficient business model ensures proper maintenance and effective water usage. Currently, the level of private sector participation in the water sector, especially in agricultural usage, is very low. We have analyzed the different business models, based on different levels of private sector participation, in the following exhibit.

Agricultural producers and other agricultural value chain players

Exhibit 23: Business models in India’s water sector
Investment model Only public Type of business model Municipal and public Operation and Maintenance (O&M) contracts Build-Operate-Transfer (BOT) approach Brief description In this model, the municipality (or occasionally, a region of collective municipalities) owns and operates the utility. In this model, the municipality owns the utility and retains the responsibility for capital improvement, but delegates that for day-to-day operations and maintenance to an outside contractor. The contractor is paid by the municipality, which controls the revenues received from end users. In this model, the municipality presents the opportunity to build and operate a new facility to the private sector, along with the responsibility for all required capital improvements, during the contract period. On the completion of the contract, ownership of the facility is transferred back to the municipality, based on the terms agreed on. In this model, the municipality continues to be the owner of the utility and bears the responsibility for capital expenditure. However, it “leases” the utility to the private sector for day-to-day operations and maintenance. In return, the private sector makes “lease payments” to the municipality to compensate it for its capital investment. Under this model, the private sector retains the user fees received from end customers and uses these to pay its costs. In this model, the municipality continues to be the owner of the utility, but responsibility for capital expenditure as well as day-to-day operations and maintenance rests with the private sector. As in the “affermage” model, the private sector retains user fees received from end customers. At the end of the concession period, the responsibility of the private sector may revert to the municipality or the concession arrangement may be renewed. Investor-Owned Utility (IOU) In this model, the municipality no longer owns the utility, and hence, all its responsibilities (including fee collection) related to utilities reside with the private sector. In some jurisdictions, this model has been adopted to allow the public sector to act as the sole or part shareholder or owner of a “commercialized” utility (utility with a commercial mandate and structure).

Affermage Public-Private Partnership (PPP) Concession

3

Study 7 of the Consulting Series for the Development of a Long-Term Water and Sewer Investment and Financing Strategy by KPMG Water sector in India: Emerging investment opportunities 27

In view of the current context and risk levels, the following exhibit represents all the business models along with their risk potential. The BOT approach seems to be the way forward for the future of municipalities for the implementation of effective water management. Exhibit 24: Risk analysis of various business models
IOU Increasing level of delegation, risk, irreversibility

Concessions Considering the current situation O&M business model seems to be most effective for the eastern region utilities Built operate own approach Leases or Affermage BOT Approach

O&M Contracts

Service Contracts

Source: “Study 7 of the Consulting Series for the Development of a Long-Term Water and Sewer Investment and Financing Strategy”

High-level economics of the value chain segment
As far as the Indian scenario is concerned, an estimate has been provided by Kotak Institutional Equities, forecasting a total estimated annual business potential of US$30 till 2015 as far as water components and equipment are concerned A break-up of this analysis is provided in the following exhibit: Exhibit 25: Business potential in water and waste water sector
Consumption area Agriculture Water consumption (%) 89% Water components/equipment
• • •

Market size (million US$) 18617

Irrigation equipment Irrigation water supply Pumps Water supply and sanitation Distribution equipment Waste water and disposal Purifier Bottled water Desalination

Industry

6%

• • •

9976

Domestic

5%

• • •

1663

Source: missing

28

Water sector in India: Emerging investment opportunities

Analysis of investment trend and potential A detailed analysis of the micro segment on the demand side, i.e., water sanitation, has been conducted, which estimates a market size of US$72 million for the private sector in 2030. The analysis is provided in the exhibit below. Exhibit 26: Business potential in water supply and sanitation Analyze investment trend and potential
Projected investment in water supply during XI plan, 2010-2030E Projected investment in water sanitation during XI plan, 2008-2012E

Private States Centre

112 2054 784

-26% CAGR -18% CAGR -24% CAGR

286 4100 1898 2012E

-26% CAGR -18% CAGR -24% CAGR

18300 58720 97973 2030E Private States Centre

28 880 308

% 72 R-26 CAG % 1757 R-19 CAG % 813 R-27 CAG

% 5173 R-26 CAG % R-19 25247 CAG % R-27 99932 CAG

2008 Investments in US $ Million

2008 Investments in US $ Million

2015E

2030E

Source: Planning Commission, Ernst & Young Analysis

Exhibit 27: Current tariff scenario for supply and distribution in India Supply and distribution India Kolkata Mumbai Chennai Bengaluru Indore Jamshedpur Bhopal Tariff Rs/cubic M 4.9 1.1 4.6 10.9 20.6 2.8 4.5 0.6 Accounted Percentage 68.2 65 87 83 55 NA 87 NA Revenue INR million 19823 260 8789 3127 4255 165 532 100 O&M INR million 14629 1228 4284 1388 3414 881 328 282 O/R Index 0.73 4.7 0.5 0.4 0.8 5.3 0.6 2.8

Source: 2007 Benchmarking and Databook of Water Utilities in India, A Joint Study by Asian Development Bank and Ministry of Urban Development, Government of India

The current scenario is such that private sector investment would lead to a high operating ratio. With a reduced operating ratio, water tariffs are bound to increase in the future. With an assumption of the current value of the operating index, i.e., considering a profit-making approach, demand is expected to equal supply. A scale of the market size has been outlined in the following exhibit.

Water sector in India: Emerging investment opportunities

29

Exhibit 28 - Revenue potential in the supply segment of water value chain
27 billion US$ in 20 years 2010 - 27 billion US$ 2030 - 54 billion US$

2020 - 38 billion US$

Operating Ratio 0.73 2030 - Total domestic and Industrial water demand in India: 500 billion M3/YEAR 2020 - Total domestic and industrial water demand in India: 350 billion M3/YEAR 2010 - Total domestic and industrial water demand in India: 250 billion M3/YEAR

Source: 2007 Benchmarking and Databook of Water Utilities in India, A Joint Study by Asian Development Bank and Ministry of Urban Development, Government of India, Ernst & Young Analysis

It is evident that a major opportunity exists in the supply side, the bulk of which is currently dominated by state utilities.

Exhibit 29 – Annual investment potential in water infrastructure
Annual investment potential in water infrastructure In India (US $Bn) 45.6

Investment trend in infrastructure, sewage and sanitation services The exhibit below shows the annual investment potential of water infrastructure in India: With a market size of over US$4 billion, the Indian water and wastewater market is growing at the rate of 10%–12% every year. Government-related projects contribute over 50% of the revenues generated by this market, while the private sector contributes the rest. The water and wastewater treatment market segment is highly fragmented and unorganized.

4% =1 R G CA

3.56 2010

6.73 2015E 2030E

Source: Planning Commission and Tata Strategic Analysis Infrastructure Today Issue Feb 2009.

30

Water sector in India: Emerging investment opportunities

Imports constitute around US$110 million of the US$690 million market for municipal and industrial water treatment equipment. Exhibit 30 - Indian market for waste water treatment
Indian market for waste water treatment ($m) 3250.91

Exhibit 31 - EBITA margin in water sector
14000
Revenue in Euro Million

25 20 15 10 5 0
Percentage
31

12000 10000 8000 6000 4000 2000 0 Suez Water EBITA Margin in Water Veolia Waste water EBITA Margin in Waste

7% R= G CA
1194.17 800

Source: Different Company reports, Ernst & Young Analysis

2009
Source: www.export.gov

2015

2030

Foreign companies will find opportunities in sanitation, urban water supply improvement and municipal wastewater treatment in India. Additional opportunities exist in providing advisory and design services to the the country’s water industry. In the area of water treatment, foreign investors can enter joint ventures (JVs) with Indian companies to provide the latter integrated approaches in water treatment. These services could include the performance of feasibility studies, designing, technical advisory and provision of operational and on-line maintenance services.

Key aspects of different water management approaches
The key to effective water management is shifting the focus from water resource development to water resource management through the development of different water management options such as the following:
•

Integrated water resource management — coordinated and conjunctive use of water, by location or use, which involves large-scale planning and implementation Ensuring that there is sufficient water in the entire system to support various uses of water and also that it is distributed equitably across locations and users Restructuring and strengthening existing institutions for better service delivery and resource sustainability Making the planning process of big water resources projects interdisciplinary with all environmental, ecological and human concerns internalized The Government developing set of laws, policies, capacities and organizations for water management

Expected returns for private sector utilities Since private sector participation in supply and distribution is still very limited in India, we have made an analysis of private utilities in Europe in terms of the level of returns. If the water rates charged by municipalities are compared with the extent of privatization, it should be noted that many of the agencies that charge high rates are private. Known as water utilities, these agencies have annual maintenance contracts with municipalities and take on the responsibility of carrying out such work. The utilities earn reasonable EBITDA margins.

•

•

•

•

Water sector in India: Emerging investment opportunities

•

Involving service providers as overall water resource management authority to strengthen sustainability of local governance

Demand-side management of industrial water efficiency
The functions of several facets of water utility operations can be improved through the incorporation of demand-side information. In order to achieve an efficient level of water use (with adequate investment), it is necessary to balance the marginal costs and benefits of consumption, whereby the benefits can only be estimated by determining the water use of households (and other consumer groups). The following exhibit details the key aspects of demand-side water management.

Exhibit 32: Approach to demand-side water management
Approach to demand-side water management Use of efficient pricing
►

Management of demand
►

Investment decisions and forecasting
►

Evaluation of performance
►

Pricing goals revenues should cover costs and assign common capital costs across user groups in an equitable fashion Demand of water should be properly calculated through analysis of all customer groups An important feature of pricing should ensure that they are designed to reflect the marginal cost of water supply and also to ensure that demand equals supply Moving to efficient water pricing will provide a number of benefits to water utilities and often will raise social welfare

Proper application of demand side information regarding management of household and other users’ water demands Effective methods of proper demand side management are:
► Pricing instruments

►

►

An alternative approach to infrastructure planning balances households’ valuation of infrastructure with the costs of that infrastructure Additions to a water utility’s infrastructure should be scheduled so as to maximize the present value of the stream of discounted future net benefits deriving from those investments. Net benefits in this context are measured as the difference between benefits (measured by consumers’ willingness to pay for increments to capacity, reliability or water quality) and costs

The most important component to evaluate the performance in case of a private sector utility would be evaluation of consumer satisfaction There should be balancing of costs and benefits through proper assessment of opportunity costs The two major component of water management in the evaluation of customer satisfaction are: ► Degree of reliability of water supply
►

►

►

►

such as increasing block-rate structures, seasonal pricing, charges for excess use and zonal pricing
►

►

► Demand modeling and

►

estimation

► Training on recycling

and reuse of waters incentives, such as rebates, subsidized retrofits and water audits

► Other financial

Rational usage of water by the consumers

32

Water sector in India: Emerging investment opportunities

Competitive landscape of water or waste water value chain (market structure, concentration of players, nature of competition, etc)
The following is an analysis of the entry opportunities in various segments of the water value chain... Cities and municipal bodies
Sustainability of water sources Water treatment Water pumping Water transmission & distribution Domestic treatment Waste water collection & transmission

Water bodies

Industrial water chain
Sustainability of water sources Water treatment Water pumping Water transmission & distribution Water transmission & distribution Waste water collection & transmission

Exhibit 33 – Demand overview of water in India India faces a huge demand supply mismatch in terms of available water supply and water supply infrastructure
1800 1600 1400 1200
Demand in BCM

Drinking water supply coverage 80 70 60 Coverage (%) 50 40 30 20 10

1000 800 600 400 200

0 0 2010 Irrigation Energy 2025 Drinking water Others 2050 Industry Safe drinking water in rural areas Safe drinking water in class I cities2 Safe drinking water in class II cities3 Safe drinking water in class III cities4

Source: ‘India’s water future to 2025 –2050: Business as Usual Scenario and Deviations’, International Water Management Institute; ‘India’s Economic Survey 2007-08

Water sector in India: Emerging investment opportunities

33

Exhibit 34: Investments planned in different segments of the value chain
Investment required in urban areas in water sector (Million US$) Water supply Sewerage and sewage treatment Drainage Proposed sources of funds FDI & private sector Central sector outlay State sector outlay Institutional financing Assistance from external support agencies
► ► ►

120 118 45 Encouragement to private players exist
►

Intent to involve exists
► ►

Evident from National Water Policy JNNURM guidelines stipulate that private sector projects be given priority

Private sector association is actively sought
►

EoI, RFP, NITs etc recently released actively seek association from private players Emergence of specific Acts and Water Regulators (as in Maharashtra)

Safeguarding mechanisms emerging
►

Stimulus packages in water infrastructure (Million US$) JNNURM UIDSSMT ARWSP 82 13 29

Issues with water infrastructure and management, availability of funding and an encouraging landscape may lay a clear emphasis on private participation

Source: Government of India Ministry of water resources, Planning Commission, Ernst & Young Analysis

Exhibit 35: Private sector participation model in India In the past private sector participation has come under different models each having unique contractual characteristics
Public sector ownership Low risk Risk transfer to private sector Without investment Management & maintenance contracts Karnataka pilot areas Bhiwandi Bhopal Operation & maintenance concessions Madurai Build Operate Transfer concessions Visakhapatnam Tirupur Chennai Salt lake Bhiwandi Dewas Haldia Latur
34 Water sector in India: Emerging investment opportunities

Private sector ownership With investment High risk

Works & services contracts

Full privatization

Navi Mumbai Bangalore

Jamshedpur (JUSCO)

BOT concessions to private sector is increasing
Capital investment Risk Asset ownership O&M Typical duration Public Public Public Public & private 1-2 years Public Public Public Private 3-7 years Public (limited private) Shared Public Private 8-15 years Private Private Public & private Private 20-30 years Private Private Private/ Private & public Private Indefinite

Source: Ernst & Young Analysis

Exhibit 36: Challenges for private players in water sector in India Need for private participation in the sector to address key
►

High level of unaccounted for water (UFW)
► ►

High level of losses due to old water systems Poor maintenance of systems

Estimating baseline data is critical

►

Low level of metered connections
► ►

Resistance to metering Poor management of metering

Addressing measurement issues should be high on agenda

►

Poor operating ratio
►

Inefficient management structure and old systems which leads to higher level of operating and maintenance costs

Focus on costs and estimating improvement options required

►

Low tariffs
► ►

Resistance to increase tariffs Consumers not satisfied with current services and are not willing to pay higher tariffs

Increasingly role of regulator may become critical

►

High level of staff/1000 connections
►

Indian water utilities have 7 staff/1000 connections compared with best international practice of 2-4 staff/ 1000 connections

Managing the expectations of existing manpower is important

Source: Ernst & Young Analysis

Emerging opportunities for PPP in India (case studies)
Opportunities in water and wastewater sector under Urban infrastructure Development Scheme for Small & Medium Town (UIDSSMT) projects The Urban Infrastructure Development Scheme for Small & Medium Towns is aimed at improving urban infrastructure in

towns and cities in a planned manner. It intends to subsume the existing schemes of the Integrated Development of Small and Medium Towns (IDSMT) and Accelerated Urban Water Supply Programme (AUWSP) and cover towns left out by JNNURM. Sharing of funds will be in the ratio of 80:10 between the Central and state governments and the balance 10% may be raised by nodal/development agencies from financial institutions.
35

Water sector in India: Emerging investment opportunities

Certain key recommendations on the main components of urban infrastructure financing for growth in business opportunities in the water sector have been outlined below:
•

responsibilities of recommending a service, depending on each party’s knowledge level. 3. Finance: In a PPP project, access to private capital frees government capital, which can be used in projects with higher public policy objectives. For the private sector 1. Business opportunities: The private sector can gain access to business opportunities, which were traditionally only accessible to the public sector, through PPP. 2. Designing and recommending new options: PPP also allows the private sector to move from only constructing assets according to clearly specified designs to designing and recommending new options. It provides more opportunities to the sector to offer efficient options for public services. For the general public 1. Combining the knowledge levels of public and private entities: When structured appropriately, PPPs can recommend public services that can better meet the requirements of the general public without compromising public policy goals and needs. 2. Protection of public interest: The Government will also ensure that public interest is protected in all PPP projects and that service recommendations address public needs at an appropriate monetary value when the private sector is brought in to provide government services. While service delivery through a PPP alters the means of service delivery, it does not change the Government’s accountability to confirming that services are delivered — the department’s focus shifts from providing services to managing service providers.

It is essential to increase the quantum of investments by mobilizing long-term debt financing from financial markets. State governments need to develop sound and transparent financial management practices and demonstrate the creditworthiness of their proposed investment schemes. Urban infrastructure should be financed on longer terms (than is typically the practice) through bank loans. A mixed finance approach is required to increase the overall funding available for infrastructure and match the timing of funds with when they are needed. (A mixed approach utilizes own source revenue, grants, borrowing [loans and bonds] and equity.) Careful project development and financial structuring is required to attract long-term debt financing. The urban poor can afford house connections to infrastructure if they can pay for these over time.

•

•

•

•

•

Importance of PPP in water sector In India, water as a utility is still mainly under the purview of the respective state governments. However, increasing PPPs in the sector is expected to soon gain ground in the water sector. Private sector participation (PSP) is mainly driven by the current water stress scenario in the country, as analyzed in the previous chapters, and offers a win-win option to stakeholders, as explained in the following section. For the public sector PSPs allow the public sector to derive benefits from the efficient and effective infrastructure and services offered by the private sector. This is feasible due to the following: 1. PSP allows the Government to tap the private sector’s capacity to implement reforms in the sector. The Government needs to indicate the services, as well as the desired outcomes/output, it requires. The private sector can then propose and execute new options to meet the Government’s objectives. 2. Sharing of responsibilities: In a PPP project, the Government and the private sector share the
36

PPP in water supply and distribution sector PPP is still a concept model in India’s water supply and distribution sector. Although JUSCO, a private entity, has been immensely successful in providing water supply and distribution services in Jamshedpur, this model has not yet been replicated in other Indian cities. It has been observed that consumers opt for JUSCO’s services over that provided by the state-owned water supply and distribution system due to the following reasons.
•

Consistency in supply

Water sector in India: Emerging investment opportunities

• • •

Efficient service and distribution network Alacrity in addressing customer demand Assured quality of water

Salient features of the project
•

Construction of new 113.5 MLD water treatment plant in two equal modules, based on Dissolved Air Floatation Technology (DAF) Operation and maintenance of existing (113.5 MLD) and new 113.5 MLD water treatment plant for 25 years Provision of billing and collection services to consumers. Management of customer complaints for existing and new customers Network management of existing and new pipelines Rehabilitation of old plants and equipment Management of water quality

Despite the higher cost of the product and service provided, consumers have accepted the model without reservations. This indicates that consumers in India are willing to pay higher prices for efficient services. JUSCO has also widened its portfolio to seek out more opportunities for enhanced PPP opportuniies in different municipal areas. Its services include:
•

•

• •

Operating and maintaining water treatment and sewage treatment plants, and distribution networks Building new water treatment and sewage treatment plants on EPC or BOOT basis Providing technical and management support to improve the performance of water treatment and sewage treatment plants, and distribution systems Controlling Unaccounted for Water (UFW) or Non Revenue Water (NRW) Creating 24 x 7 municipal water supply systems Implementing GIS for asset management, including updating of existing drawings Providing customer support services, including call center facilities for prompt handling of complaints

• • •

•

•

Mysore project Preparatory phase: Preparing existing water infrastructure, service study and documentation Preparing and submitting O&M) plans
•

•

• •

•

Assuming management responsibility of existing water supply for day-to-day management with existing service conditions Undertaking regular O&M activities such as repair and maintenance of distribution network, customer complaint management, billing, collection, etc. Conducting topographical and door-to-door customer surveys to map network and water infrastructure details, and compiling customer database Developing and putting in place plan for implementation of Integrated Management Information System (IMIS) Conducting hydraulic network modeling and design as part of preparation for Draft Investment Plan (DIP) to transform intermittent to continuous water supply Operating, maintaining and improving facilities and provision of water services in distribution operating zone Implementing final investment plan relating to procurement, construction (new network, valves, meters, customer connections, creation of DMA, etc,.) and

•

Apart from Jamshedpur, JUSCO has also entered partnerships in two major projects at Haldia and Mysore.
•

Haldia project Haldia Development Authority (HDA) has entered a concession agreement with Haldia Water Management Limited (HWML). This is a JV between JUSCO and Ranhill utilities for the development, and operation and maintenance (O&M) of the Haldia Water Supply Scheme for 25 years. Under the concession agreement, HWML will construct a 113.5 MLD new water treatment plant and operate and maintain existing plants as well as the new one — total plant capacity after the construction of the new plant will be 227 MLD. The O&M includes operation and maintenance of water treatment plants, intermediate pumping stations, series tube wells, existing as well as new pipe networks, customer management, billing and collection, and renovation of existing plants and equipment.
•

•

Rehabilitation phase:
•

•

Water sector in India: Emerging investment opportunities

37

commissioning
•

Management phase:
•

Implementing Integrated Management Information System (IMIS) customer complaint management, billing and collection procedure and network management modules Monitoring and reporting progress and costs on a regular basis to employer

Operation, maintenance and improvement of services to achieve performance targets

•

The scope of PPP has widened with the initiation of the JNNURM model in India. Although the model is at its nascent stage, it is evident from JUSCO’s experience that it can be successful in the country.

Exhibit 37: JNNURM model
Financial Institute Private Entity Public Entity JNNURM FUND

Project SPV

Water collection & harvesting

Water treatment

Water connections

Supply & distribution

Metering & billing

Maintenance

Information Billing and collection Private Entity Revenue
Source: Ernst & Young Analysis

Service Public Entity

Business propositions for potential investors in the water sector
Investment opportunities are likely to open up as the private sector becomes more involved in what has been till now a public service. Water supply to and disposal from residential and commercial buildings is expected to grow significantly,

even with the Government continuing to spend substantial amounts on the agriculture sector. It has been elaborated on clearly in previous chapters that the Government has recognized the role of private investment, particularly in provision of water and sanitation services to the people.

38

Water sector in India: Emerging investment opportunities

Exhibit 38: Seven key avenues for investment in the water sector for private investors
Sl. No 1 2 3 4 5 6 7 Different avenues for PPPs River-interlinking schemes that will divert water from water excess areas to water scarce ones Water table and rainwater conservation projects at the district level Desalination projects Water supply and treatment projects at urban and rural levels Solar pump-based water supply and treatment schemes addressing power shortage faced by water projects Sewage and industrial waste water-recycling projects PPP projects through BOOT/BOT route

Source: not available

Different investment opportunity models, especially in the supply segment, some of which have already been discussed in previous chapters, are summarized below:
•

Sub-contracting of discrete services, e.g., metering, repairs and revenue collection Contracts for operation and management of systems (flat or performance-related fee) Leasing systems from public owner in return for rental fee, with revenues retained by lessee Takeover and operation of a system for several years, making required investments, generating increased revenue and eventually returning assets to the public owner JVs with municipal or public partner for operation or ownership (or both) of a system or water facility Full divestiture of a publicly owned asset to a private company

A critical factor for private sector investment is the timing and segment of the value chain in which the investment is needed. The following exhibit clearly shows the probable timing of investment in the different segments of the value chain and the revenue associated over time. Exhibit 39 – Emerging water market in India
/ ds ol s h e e us tri ho dus y n t Ci all i

•

•

Long term

•

Water resources

Medium term

•

g in r ist ecto x r/e l s he ria Ot ust d in

•

Immediate

g l in ria om ust c d Up /in ters Zs lus E c S
Time in years

Source: 'Water-A Shared Responsibility', United Nations World Water Development Report 2

Water sector in India: Emerging investment opportunities

39

Critical requirements for doing business in India’s water sector
Options for investments in the water sector It is of utmost importance that investors should be aware of the critical issues involved, so that the key requirements for handling these are analyzed well before they invest in the sector. The exhibit below identifies these key requirements and their associated features. Exhibit 40: Key issues related to investment in India’s water sector
Key requirements Tackling institutional challenges Salient features of the issues
• • •

► Current status of water infrastructure and its (usually poor) maintenance Imbalance of management power between a state and users (farmers, citizens and industries) Water reforms focusing mainly on organizational issues rather than on the instruments that govern the relationship between the regulator and users Increasing PPP requirements ► Deteriorating water quality and pollution issues Seasonal water shortage Increasing drought and floods Wasteful water use in agriculture and urban areas W ► aived or reduced water charges enlarging the gulf between price and cost Liability due to deferred maintenance of infrastructure Users’ resistance to increased charges for poor quality service provision “Sunk costs” incurred by households to compensate for poor public services I ► nter-state disputes on sharing of river water Conflicts between different users (domestic, agriculture and industrial) Conflicts between different areas (rural, urban and peri-urban) I ► nadequate public accessibility to relevant information on water management Lack of accountability, participation and transparency in rules Inadequate involvement of beneficiaries in water resource management

•

Addressing water stress and pollution problems (environmental concerns)

• • • •

Addressing growing financial crunch

• • • •

Addressing growing water conflicts

• • •

Tackling lack of openness in water management and beneficiary participation
Source: Not available

• • •

40

Water sector in India: Emerging investment opportunities

Water sector in India: Emerging investment opportunities

41

Conclusion

In light of the study carried out, it can be clearly concluded that a large number of business opportunities in each segment of the value chain have opened out for the private sector in India. This is likely to help in the realization of a paradigm shift from the concept of water resource development to water resource management by restructuring and strengthening existing institutions to achieve enhanced service delivery and resource sustainability. In the current scenario in the water industry, certain future interventions (mentioned below) could be favorable to the industry as a whole as well as for current and future players in the value chain.
•

Enactment of a water act by the Government to provide (a) greater clarity on water rights, (b) encourage water efficiency, (c) regulate and conserve water resources — both ground and surface water, and (d) enable better participation of users and effective dispute resolution Implementation of the recommendations of the National Water Policy (2002) and roadmap developed by the National Water Mission: Defining accountability for action points outlined in the National Water Policy 2002 and the roadmap outlined by the National Water Mission

•

42

Water sector in India: Emerging investment opportunities

•

Translating policy vision at the state level by creating guidelines and toolkits for them to develop specific water policies and set targets for equitable access to and for water conservation; need for the Government to support the intent outlined in the National Water Policy 2002 with tangible support provided to states in preparation for implementation of state-level policies due different states having varying degrees of institutional capacity to implement the different policies, and left to them, the generally unequal and inadequate progress made in different states Formulating and implementing relevant benchmark norms and disclosure standards pertaining to water consumption and discharge, covering all consumer segments including agriculture, industry and domestic; evolving and disseminating reporting standards at the national level to aid cross state/city comparison Setting up of state-level benchmarks for (a) access to pressurized piped water supply (for instance, in all Class I cities, to provide 90% pressurized piped water supply in these cities by 2020), and (b) treatment and recycling

•

Incentivizing water conservation including the (a) creation of a bureau of water efficiency to review interventions for reducing water usage in the agriculture, industry and domestic segments; (b) setting up of time-bound targets for wastewater treatment and re-use; (c) implementation of a national program to create/restore water bodies in urban areas; (d) making rainwater harvesting mandatory and a part of the building code and town planning legislation countrywide and (e) putting in place a system of water credits Encouraging PPPs in urban water supply systems; helping water utilities to significantly enhance their service delivery by leveraging private sector capacity, with a greater focus on efficiency gains initially, where possible, rather than on bringing in private investment

•

•

•

Water sector in India: Emerging investment opportunities

43

Bibliography

•

‘ ► Water-A Shared Responsibility’, United Nations World Water Development Report 2 ‘ ► Water for People Water for Life’, United Nations World Water Development Report, 2003 ‘ ► Global Water Initiative’ (June 2005), GEF International Waters Conference I ► ndia Urbanization Economic Model U ► nited Nations, Handbook of Benchmarks, Ministry of Urban Development W ► . Smith,national Council for Applied Economics Research C ► ensus 2001 M ► c Kinsey Global Analysis ‘ ► India’s Water Future to 2025 –2050: Business as Usual Scenario and Deviations’

•

•

• •

• • • •

44

Water sector in India: Emerging investment opportunities

•

S ► tanding Sub-committee of Ministry of Water Resources, Development P ► lanning Commission, Government of India “ ► Study 7 of the Consulting Series for the Development of a Long-Term Water and Sewer Investment and Financing Strategy” 2 ► 007 Benchmarking and Databook of Water Utilities in India, A Joint Study by Asian Development Bank and Ministry of Urban Development, Government of India P ► lanning Commission and Tata Strategic Analysis Infrastructure Today Issue Feb 2009. w ► ww.export.gov ‘ ► India’s Economic Survey 2007-08 G ► overnment of India, Ministry of Water Resources

• •

List of contributors 1. Mr. Lars Christensen, Trade Counsellor and Head, Royal Danish Embassy in India 2. Mr. Anshul Jain, Sector Expert and Head, Infrastructure and Water, Royal Danish Embassy in India

•

•

• • •

Water sector in India: Emerging investment opportunities

45

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