Private Sector Participation in Financing and Managing ...publications.iwmi.org/pdf/H038023.pdfent....

i lIeas market as a think tank in India A host of eminent economists on imarkets Bazaar Chintan publishes its working paper series conducts il sectoral studies researches issues of contemporary interest and ~Iitical economy

Dterprises (India) is a not-for-profit organization registered in India Private Sector Participation inf the Companies Act 1956 with a mission to improve equitably the ental conditions offamilies in need with special emphasis on the rural ling and marketing affordable appropriate and environmentally Financing and Managing Surface ilIrket sources

Irrigationking papers is circulatedfor comment among academics media and ~en refereedfor final publication

Chasing A Miragel rs are a series (jpublications on issues relating to the Indian economy I monthly basis and discuss concerns faced by the market in India

amp Grapher New Delhi s J Phal1salka

1 Introduction

on in India through Bollywood Eyes Amir Ullah Khan and Bibek The net sown area in India is estimated at 142 million hectare 02 (mha) Surface water irrigation potential of 43 mha was created Pment An Asian Perspective BibekDebroy September 2002 by the end of 1994 while a potential of 41 mha under ground tries A Survey Zafar H Anjum and Syeda Quratulain October 2002 water irrigation was created (National Commission for Integrated limate Change Richard Trent Robert Balling Jr Zafar H Anjum Water Resources Development (NCIWRD) 1999) of which 31 and

38 mba respectively were actually utilized The ratio of the gross ent Bibek Debroy December 2002 irrigated area (GIA) to the gross sown area (GSA) thus stood at Iforthe Poor Prasanna Srinivasan January 2003 32 per cent by 1994 India had created a storage of 174 billion ~yFood Ashima Srivastava February 2003

cubic metres (BCM) by the end of that year and another 76 was in India Debashish Chakraborty March 2003

under construction at the time The net sown area has nearly1 alulExtension Services GokulPatnaik April 2003

reached its physical limit in the country and as the population Agriculture Amir Ullah Khan May 2003 rises and the demand for food and agricultural commodities dian Agricuiture Bibek Debroy June 2003

~andRural Reduction N C Saxena July 2003 grows there is no option but to increase the irrigated area The vating Small Holders in Markets S 1 Phansalkar August 2003 ratio GIAGSA has to reach the levels of 4045 and 52 per cent uity of Food Market Interventions Bharat Ramaswami September by 2010 2025 and 2050 respectively to meet the food demand

This requirement means a huge net addition to the irrigation nOrder A Study on Technical Standards that Affect Indian Agriculture potential There has been a phenomenal growth in new ground

I Saqib October 2003 water capital (wellstube wells and pumps) in the country Shah Stern India Rajesh Chakrabarti Anupam Gupta November 2003 estimates that nearly a million such tube wells are added to theJnequal Outcomes Robert Jensen December 2003

~ation Systems in South Asia A J Hall R V Sulaiman B Yoganand

ry2004 1 This is a pre-publication draft The author has benefited from and is lie-Headed Households More Vulnerable to Poverty Subhashish grateful for the comments received on the preliminary draft of this paper d Wilima Wadhwa February 2004 and the seminar he gave on this subject at IWMI-Tata Water Policy

Programme on August 3 2005Two Years ofFailure ShabanaZahoor March 2004 2 S J Phansalkar is Senior Regional Researcher and Project Leader at IvVMIshyarkelsfor the Poor Ajay Mahal April 2004

Tata Water Policy Research Programme at Anand Gujarat Feedback and vale Health Care Provider in RuralIndia S 1 Rao May 2004

comments are welcome at sphansalkarcgiaLorgion Projects Technological Prejudice and Politics of Hope V

ajagopaan s Ambirajan June 2004

2 PIUVATE SECTOR P ARTIClPATION

existing 21 million stock each year and the ground water juggernaut shows no sign of slowing down (World Bank 2005) A bulk of the investment in the ground water assets is privately funded (Mukerji and Shah 2003) In any case the investment in ground water irrigation infrastructure occurs in such a completely decentralized and almost uncoordinated manner that it is seldom thrown up as an instance of the crisis of the investment ability In that respect it differs sharply from the investment problem of the surface water infrastructure

An estimate of the necessary infrastructure is an extra storage of 178 BCM with an associated huge addition to the distribution network (NCIWRD 1999) A broad estimltlte of the investment needed for creating such huge storage and distribution infrastructure was given at Rs 560000 crores by the Task Force on National River Linking Project (NRLP) This excludes such investments as are necessary for maintaining the ageing and often poorly maintained existing assets (World Bank 2005) Quite admittedly the river interlinking project is not yet a reality and hence talking of that as a pointer to investment may not make a convincing argument But even in the absence of the interlinking project large sums of monies are required for implementing the irrigation schemes proposed by the various states

For instance Maharashtra would need to invest a whooping Rs 30000 crores for completing the development of the water resources deemed feasible in Maharashtra (Report of the Water and Irrigation Commission Mumbai 1999 Chapter 16) Maharashtras tax revenue was Rs 39737 crores in 2004-05 (Report of the Eleventh Finance Commission Annexure V 23 p 210) Thus the required investment is nearly three-fourths of a full years tax revenue for the state The difficulty in finding government resources for making these investments is obvious

Nor is it quite so easy to borrow for the purpose of making these investments In 2004-05 Maharashtra had an interest burden of Rs 6803 crores (Eleventh Finance Commission op cit) interest liability amounting to a little over 155 per cent of its tax revenue during the five year period 1995-99 Repayment of principal amounts of these debts is yet another burden Adding further to the debt servicing requirements would be quite ruinous to the

PRJV ATE SECTOR PARTICIIATlON

health of the state finances What is of most Indian States Interest payrr revenue is smaller than this level of Indian States (Tamil Nadu Karnat (Eleventh Finance Commission Ann situation of most Indian States woule than that of Maharashtra

Can the states tap the private de investments This was once viewed a financing (Gulati and Raju 199 Maharashtra among the other India from the market for funding irrigatie 1998-2002 Partly to avoid showing h sheet and partly to bring in greater 1 had created special purpose vehicles ir Corporations Maharashtra set up fi corporations raised money from the the prevailing market rates The bon state However the market becam tranches of bonds issued by the vari( Corporations and credit rating agel them (see for instance CRISIL dOl Vidarbha Irrigation Development C Phansalkar and Jagdeo 2003) The dif either swapping the high interest r seeking agreements from bond holder well known With high interest liabili ratings market borrowing is not eas

Thus neither are the states in a invest in irrigation from their own position to raise it from the market Ye must be created External multi-later an option with a willing and eager quadruple its annual lending to the wa are these volumes adequate to cover talking of raising the lending to US crores per year) nor are they free of p costs Hence there is an urgent need broadening the sources of the invest

3 PRIVATE SECTOR P ARTIC]P ATION

year and the ground water ving down (World Bank 2005) ground water assets is privately ) In any case the investment in cture occurs in such a completely dinated manner that it is seldom crisis of the investment ability from the investment problem of

infrastructure is an extra storage lUge addition to the distribution road estima le of the investment uge storage and distribution 60000 crores by the Task Force ect (NRLP) This excludes such or maintaining the ageing and assets (World Bank 2005) Quite g project is not yet a reali ty and ~r to investment may not make a n the absence of the interlinking e required for implementing the the various states

vould need to invest a whooping g the development of the water aharashtra (Report of the Water Mumbai 1999 Chapter 16)

IS Rs 39737 crores in 2004-05 Commission Annexure V 23 p mt is nearly three-fourths of a full le difficulty in finding government ~stments is obvious

)rrow for the purpose of making laharashtra had an interest burden ance Commission op cit) interest er 155 per cent of its tax revenue 995-99 Repayment of principal lother burden Adding further to s would be quite ruinous to the

PRIVATE SECTOR PARTICIPATION

health of the state finances What is true of Maharashtra is true of most Indian States Interest payments as a proportion of tax revenue is smaller than this level of 155 per cent only for three Indian States (Tamil -Jadu Karnataka and Madhya Pradesh) (Eleventh Finance Commission Annexure IL5) Thus clearly the situation of most Indian States would be similar if not far ~orse than that of Maharashtra

Can the states tap the private debt market for making these investments This was once viewed as an innovation in irrigation financing (Gulati and Raju 1995) They certainly tried Maharashtra among the other Indian States had raised money from the market for funding irrigation investments in the years 1998-2002 Partly to avoid showing high debt on its own balance sheet and partly to bring in greater business discipline the state had created special purpose vehicles in the Irrigation Development Corporations Maharashtra set up five such corporations These corporations raised money from the market by issuing bonds at the prevailing market rates The bonds were guaranteed by the state However the market became weary when subsequent tranches of bonds issued by the various Irrigation Development Corporations and credit rating agencies started downgrading them (see for instance CRISIL downgraded bonds issues of Vidarbha Irrigation Development Corporation as narrated in Phansalkar and Jagdeo 2003) The difficulties faced by Gujarat in either swapping the high interest rate Narmada bonds or in seeking agreements from bond holders for their early maturity are well known With high interest liabilities and plummeting credit ratings market borrowing is not easy

Thus neither are the states in a position to find money to invest in irrigation from their own revenue nor are they in a position to raise it from the market Yet an irrigation infrastructure must be created External multi-lateral aid can of course remain an option with a willing and eager World Bank that plans to quadruple its annual lending to the water sector However neither are these volumes adequate to cover the full need (the Bank is talking of raising the lending to US $ 800 million or Rs 3300 crores per year) nor are they free of political social and financial costs Hence there is an urgent need for considering options at broadening the sources of the investment funds

4 PRTV ATE SECTOR P ARTICIPA TION

2 Conceptual Issues in Irrigation Financing

The Indian State is in a difficult financial situation and cannot find money to invest in irrigation The whole tone of the discussion on irrigation financing is one of helping the State in a difficult situation But should this be the case We need to understand dearly whether the State ought to be investing in irrigation at all and if so in which components of the irrigation projects and for what reasons Merely because the State had invested in the irrigation infrastructure in the past does not mean that it ought to be doing so forever Similarly merely because the investments in the surface irrigation infrastructure are chunky and beyond the capacity of the private investors that does not imply that the burden rests logically with the State We need to understand the nature of the investment its risk profile and the profile of the stream of benefits it creates in order to come to a focused conclusion and then go on to suggest ways of finding feasible means of generating resources The task is attempted in this section The reasons why surface irrigation infrastructure is deemed fit for public investments are listed below

Reason 1 The OWllership of the Resources Vests zvith the State

The State owns the surface water resources Individuals and groups have an easement right over the flow in the streams to which they are riparian but the ownership rests with the State (Chhatrapati Singh 1991) Similarly the ownership of the forest or the revenue wastelands on which much of the infrastructure is to be located also vests with the State It is not legally easy nor socially or politically simple for the State to assign lease its rights away to private parties on water resources or forest lands as recent events such as the Janmabhoomi case in the case of forest lands in Andhra Pradesh or the Sivanath river case in Chhattisgarh demonstrate Even if eventually the State may be able to create rights in these resources at the hands of the private investors the process is expected to be tedious and legally problematic thus massively increasing the risk perception


Reason 2 Allocation of Resour

Dams and canals create an a of scarce economic resouro regions a task which is only i who else but the State can pl a check dam (that benefits trib in the reservoir of a dam tha This deliberate allocation of n choice of expending tax or no affects the rights that are enj fundamental way

Reason 3 Lumpy Investments Periods

The investments needed for c are truly massive Historicall averaged some Rs 17000 p~ area Even then in more diffi( of paucity of rain or topog Maharashtra and Cujarat the that level More recently the j lakhs per hectare of the desig a design command of 10000 1 130 crores The time that ela] project and its completion tel years and perhaps in a few u dams decades

Reason 4 Generation of a Coml Goods

Surface irrigation assets creat essentially public goods This i is viewed as an economic goO( consumed or benefit derived can accrue from a dam are as of the Commission on Water al Chapter 16 CoM 1999)

5 PRIVATE SECTOR PARTICIPATION

Financing

inancial situation and cannot 1e whole tone of the discussion lelping the State in a difficult ase We need to understand be investing in irrigation at all the irrigation projects and for le State had invested in the t does not mean that it ought lerely because the investments He are chunky and beyond the that does not imply that the

teo We need to understand the profile and the profile of the order to come to a focused ggest ways of finding feasible rhe task is attempted in this e irrigation infrastructure is are listed below

ources Vests with tile State

er resources Individuals and ver the flow in the streams to )wnership rests with the State ly the ownership of the forest lich much of the infrastructure ~ State It is not legally easy nor the State to assignlease its water resources or forest lands mabhoomi case in the case of or the Sivanath river case in if eventually the State may be trces at the hands of the private ed to be tedious and legally easing the risk perception

PRIVATE SECTOR P ARTfUlATIO~

Reason 2 Allocation of RfsOllncs

Dams and canals create an opportunity for deliberate allocation of scarce economic resources between groups of people and regions a task which is only in the ambit of the State For instance who else but the State can prevent the upstream construction of a check dam (that benefits tribals) because it would reduce inflows in the reservoir of a dam that will help the people in the valley This deliberate allocation of natural resources goes far beyond the choice of expending tax or non-tax revenues for development and affects the rights that are enjoyed enjoyable by the people in a fundamental way

Reason 3 Lumpy Investments Long Gestation and Longer Payback Periods

The investments needed for creating surface water infrastructure are truly massive Historically till the Sixth Five Year Plan they averaged some Rs 17000 per hectare of the design command area Even then in more difficult (in the sense of the combination of paucity of rain or topographic conditions) states such as Maharashtra and Gujarat the investments were nearly double of that level More recently the figures have gone up to over Rs ]3 lakhs per hectare of the design command area Thus a dam with a design command of 10000 ha needs a gross investment of Rs 130 crores The time that elapses between the conception of the project and its completion tends to be long running to several years and perhaps in a few unfortunate cases like the Narmada darns decades

Reason 4 Generation of a Combination of Private Goods and Public Goods

Surface irrigation assets create some private goods but mainly ~ss~ntially public goods This is so even when water for irrigation IS VIewed as an economic good to be priced in relation to volume consumed or benefit derived thereof The types of benefits that can accrue from a dam are as follows (adopted from the Report of the Commission on Water and Irrigation (Chitale Commission) Chapter 16 GoM 1999)


Private Goods are

bull Facilitation of cultivation of crops in the second and the third season in the command area

bull Production of electridty where the hydro-electric project facility is a part of the project

bull Production of fish in the reservoir

bull Supply of water for domestic and industrial purposes to nearby townships industrial estates and

bull Creation of recreational possibilities in the reservoirs and in the gardens on the embankment

Public Goods are

bull Avoidance or significant mitigation of floods in the down stream areas and hence avoidance of consequent loss to life and property

bull Avoidance of famine-like conditions and consequent acute distress to a mass of population by creating the potential for providing protective irrigation to staple crops

bull A voidance of acute distress arising out of paucity of water in dry seasons as the stored water can and often is used for the supply for drinking purpose to human settlements

bull Accretion in ground water storages arising out of seepage of surface water and return flows and

bull Generation of employment as a result of direct effect on double cropping as well as indirect secondary and multiplier type effects

It is not possible and certainly not desirable to even remotely privatize at least the famine and flood and drinking water distress avoidance benefits of the surface water infrastructure Technically it is difficult to measure and value the ground water accretion And economically it is difficult to measure and attribute the second order economic effects

The infrastructure also generates bads (negative externalities) again some accrue to individuals and some remain as public bads For instance water logging results indriving a lot

PRIVATIi SECTOR P A

of land out of communities b

livelihoods The Also a point n dams generally floods in downsl possibilities of h either to excessh in Morbi or mOrE and less dramat dam waters are 1

inflow in the re~

Since the in and public bac made by the pul the consensus en in the irrigation projects are asse is discussed bel

3 Assessment (]

The question as infrastructure b4 thinly veiled commercial via of Net Present finance theory su but the logic bel here To whom assumes that it i that it is doing s set of questions I private investor economic return

If the invest investor then he

7 PRIVATE SECTOR PARTlClPATIOK

of crops in the second and the third area

here the hydro-electric project facility

reservoir

lestic and industrial purposes to trial estates and

possibilities in the reservoirs and in Inkment

mitigation of floods in the down avoidance of consequent loss to life

e conditions and consequent acute lulation by creating the potential for gation to staple crops

ess arising out of paucity of water in i water can and often is used for the pose to human settlements

er storages arising out of seepage of n flows and

ot as a result of direct effect on double irect secondary and multiplier type

tainly not desirable to even remotely line and flood and drinking water of the surface water infrastructure neasure and value the ground water it is difficult to measure and attribute effects

Iso generates bads (negative crue to individuals and some remain water logging results indriving a lot

PRIVATE SECTOR PARTICIPATIOTgt

of land out of agriculture There is land submergence forcing communities to abandon their habitation and losing their livelihoods There are negative ecological consequences as well Also a point no engineer would like mentioned is that while dams generally reduce the incidence and frequency of seasonal floods in downstream areas they also create small but ever present possibilities of huge flash floods when their walls give way (due either to excessive inflows or earthquake et cetera) as it happened in Morbi or more recently in Digras in Maharashtra More frequent and less dramatic perhaps are the dislocations caused when the dam waters are released as a preventive measure fearing excessive inflow in the reservoir

Since the investment is bound to create these public goods and public bads it is arguable that the investments must be made by the public agency It may be noted that even if tomorrow the consensus emerges for allowing the private sector to participate in the irrigation projects there is a hitch in terms of the way the projects are assessed and the way the water charges are levied as is discussed below

3 Assessment of Feasibility and Fixation of Water Charges

The question as to when should a dam or some other irrigation infrastructure be deemed techno-economically feasible evokes thinly veiled ideologically rooted answers The purely commercial viability of the project would mean the assessment of Net Present Value or Internal Rate of Return in the way the finance theory suggests The mechanics of the calculation is simple but the logic behind them is not so Who is the project holder here To whom do the benefits accrue To start with if one assumes that it is the State which is investing in the project and that it is doing so on behalf of society then one raises a different set of questions than if one were to assume that the investor is a private investor investing on his own behalf and looking for economic returns

If the investor is seen to be a profit seeking private sector investor then he would wish to price the products of his project

8 PRlVATE SECfOR PARTICIPATION

namely water supplied for electricity production for irrigation and for domestic industrial application with clear intent He would wish to cover all the Operations and Maintenance (OampM) and establishment costs from the sale of water to its users and expect a market rate of return on his investment In fact he would derive the price of water from his assessment of OampM and establishment costs and his expectation of the return Alternately he would consider the project commercially viable if he expects to get the benchmark rate of return when he charges the most practical price for water Basically the purely profit seeking private sector investor is unlikely to be swayed by the public goods of avoidance of famine or avoidance of distress caused by the drinking water crisis

In India the State justifies the irrigation projects chiefly from the public goods they create The First Irrigation Commission explicitly recommended in 1901 that the level of investment in an irrigation project should be assessed to be reasonable by relating it to the famine relief expenditure the State would have to incur if the project were not implemented The view was tenable principally because it was the Commission appointed by a Colonial Government The Second Irrigation Commission appointed by the Government of India after Independence talked of benefit cost ratio as the guiding criterion and pegged the cutshyoff at 15 The benefit is to the farmers and the cost is to the State It also suggested that the water rates should be linked to the benefits received by farmers and not to the cost of implementing the irrigation project4

The Commission took into consideration such factors as the estimated total cost of famine relief works in a tract for the preceding 25 years the population of the tract the per capita area which should be protected by irrigation and the area already protected After weighing these factors it concluded that the Government should be prepared to face an expenditure equal to three times the future annual cost of famine relief and remissions of revenue for the sake of preventing famine altogether According to the Commission protective works could be sanctioned without hesitation when the capital cost was not likely to exceed thirty times the net revenue or whenever a net return of three per cent on the actual outlay could be anticipated

PRIVATE SECTOR PARTICIPA nON

As expected the criteri fixing water charges hm rather than economic deci dubious economic logic at

on grounds such as extr numerous instances of (Phansalkar 2003) The g~ public services to the pul being able to recover wh the case of water chargE recover OampM and estab projects in most of the Stat schemes during 1995-200 crores while the expend investments) was Rs 594 of Rs 121 crores Most oth from irrigation schemes ( Tenth Finance Commissio III7) The maintenance c Government amounted to projects and Rs 9891 croJ period 2000-2005 for the from water charges were Eleventh Finance Commi

The Commission supports I

in sanctioning projects It return of the projects shou accepting projects only if prudent precaution The G rule should be relaxed in affected areas where a 10 Commission wishes to emf implementation it must be by technical considerations it~n Essentiallv the value of From the irrigators point ( related to the benefit whid an irrigation project The should be reviewed and re every plan (See abstracts 0

website httpwrminnicil

10 PRIVATE SECTOR PARTlCIPATlOr-

V7) This is despite the fact that there have been numerous Committees and Commissions that have recommended that water charges must not only recover OampM and establishment costs but also contribute some return on investments

4 Basic Requirements of the Private Sector Participation in Infrastructural Investments

It is important to understand the basic requirements that need to be fulfilled before the private sector considers investment in infrastructure Only when such requirements are met can one proceed to structure the deal to make the investment opportunity attractive to the private sector There has been significant discussion on when Public-Private Partnerships (PPP) work Some of the conditions deemed necessary for PPP to work are

bull A general move to shift from input based contracting to output based contracting in the sphere of public services and infrastructure

bull Changes in procurement processes procedures and instruments that reflect the above shift

bull Clear legal structure and due diligence to cater to contractual issues define scope and limit of PPP and its implementation and the basic scope for long term financing

bull Creation of a sound and functioning regulatory framework including laVis and institutions for regulations and

bull Macro-economic and macro-political stability

Some of these trends are visible in India in sectors such as telecom and highway construction The extent to which these conditions can be created in the water sector is moot So far we only have the negative history of PPP in the water sector the most celebrated case being the abortive attempt to bring in a PPP in urban water supply in Pune Maharashtra The above paper also

For instance the Vaidyanathan Committee on Water Pricing recommended in 1994 that water charges to be fixed so as to recover OampM costs and give 1 per cent return on the inv(stmenL

See for a detailed discussion Pengabbean (Z005)


mentions the need for crea to become pro-poor but it 1

assets are a fit case of nab is difficult to envisage instance the legal structt clear The greatest diffict would have inter-state im state situation of water d and there appears no enc condemning the arrangerr any way one can state absence of macro-politica sector involvement in the

It is to be noted that regarding the urgency of national importance et CE

the issues listed above is serious private sector actc State Governments willir needs to be seen

We proceed to explt infrastructure can be struc sector investors assuminE above tricky and contenti

5 Areas in Which Privat

The initial section of thi possible private sector in possible role of the priv irrigation management P participation in irrigatiOl

7 See Patkar and Aravinda I 3 2002 among other insta privatize a 23 km stretch government The move ha government

11 PRfVATE SECTOR PARTfClPATfON

t there have been numerous have recommended that water M and establishment costs but restment

ivate Sector Participation in

asic requirements that need to ctor considers investment in ~quirements are met can one ake the investment opportunity There has been significant

Partnerships (PPP) work Some 7 for PPP to work are

put based contracting to output re of public services and

esses procedures and ove shift

liligence to cater to contractual )f PPP and its implementation crm financing

loning regulatory framework 1S for regulations and

olitical stability

Ie in India in sectors sllch as n The extent to which these rater sector is moot So far we Ip in the water sector the most attempt to bring in a PPP in uashtra The above paper also

ttee on Water Pricing recommended d so as to recover OampM costs and 1cnt )bean (2005)

PRIVATE SECTOR PARTfePAno

mentions the need for creating a competitive environment for PPP to become pro-poor but it would appear that the surface irrigation assets are a fit case of natural monopolies and hence competition is difficult to envisage There are other difficulties as well For instance the legal structure surrounding irrigation is far from clear The greatest difficulty arises in the case of projects that would have inter-state implications As is well known the intershystate situation of water dispute resolution in India is unsettled and there appears no end to the fluidity Without justifying or condemning the arrangement with the private party involved in any way one can state that the 5hivnath case points to the absence of macro-political stability causing damage to private sector involvement in the water sector

It is to be noted that the mere repetition of the statements regarding the urgency of creating water sector assets and their national importance et cetera without significantly addressing the issues listed above is quite unlikely to cut the ice with any serious private sector actor To what extent are the Central and State Governments willing to seriously engage in this matter needs to be seen

We proceed to explore how investment in the irrigation infrastructure can be structured to make it attractive to the private sector investors assuming that the Indian polity will sort out the above tricky and contentious issues

5 Areas in Which Private Sector Participation is Feasible

The initial section of this paper has highlighted the need for possible private sector investment in new dams It ignores the possible role of the private sector in other aspects of surface irrigation management Again there is room for private sector participation in irrigation financing that falls short of equity

7 See Patkar and Aravinda Interlinking mirages in Tlit Hmdu December 3 2002 among other instances of public outcry against the move to privatize a 23 km stretch of river Shivnath in Chhattisgarh bv the then government The move has subsequently been cancelled by the next government

12 PRIVATE SECTOR PAR1IClPATION

contribution in specific dams This section discusses possible areas in which the private sector participation is possible without involving such equity contribution

PRIVATE SECTOR PARTIe

for the purpose oj consortium would

I Rs 30000 crores a allocations of a pre to what the state i5

51 Bridge Finance for Irrigation that the state will

It was pointed out that in the case of Maharashtra in 1999 the about funds avail total financial need was estimated at Rs 30000 crores while the transaction betwee annual Own Tax Revenue of the state is just Rs 39737 crores A similar if not worse situation is observed in all states There are many calls on the State revenue Under the circumstances the State Government makes provisions for irrigation construction in its annual budget and its Five-Year Plan outlays at levels that are much smaller than the total projected need This is inevitable However what makes it worse and perhaps not always inevitable is that these smaller allocations are then further spread thin across several projects within the state This becomes necessary on account of political pressures emanating from different geographic parts of the state and the need for the State Government to be and also seem to be fair In consequence the actual allocation to any specific dam project becomes miniscule compared to the projected capital cost Thus the projects take much longer to complete involving as it must sharp cost escalations over time For example the Gosikhurd project on Wainganga was slated to cost Rs 150 crores in the eighties Its cost was revised upwards by the time it was cleared through the environmental technical political and administrative hurdles - the last two being specific to the issue of regional politics in Maharashtra and documented in Phansalkar 2003 During the entire period of the nineties allocations to the project were at ridiculous levels of a few crores each year The project has still not moved much beyond the survey and drawing board stage despite a passage of 20 years since its conception While the extreme pro-Western Maharashtra 1 biased manner of irrigation financing was the principal reason behind this the phenomenon of piecemeal financing of a large number of dams is very common and the consequences of each of them getting delayed and costlier is equally common

It is possible to explore the possibility of a consortium of private sector investment bankers offering a form of bridge finance

State Governmen discussion on desil which the states we that the State Gove amount to the irri would be used for and credit worth guarantees and ht parties

52 Possible Role ( Management Fillin

The subject to be existing canal syst well below their I reasons As is corr perform to their po scenario described

PRIVATE SECTOR P ARTlClPAnON

ams This section discusses possible lector participation is possible without ribution

PRIVATE SECTOR PARTICIPATION 13

for the purpose of avoiding these delays For instance such a consortium would offer to say Maharahstra a bridge finance of Rs 30000 crores against state guarantee of a stream of annual allocations of a pre-determined magnitude which is comparable

igation

the case of Maharashtra in 1999 the timated at Rs 30000 crores while the of the state is just Rs 39737 crores A on is observed in all states There are venue Under the circumstances the rovisions for irrigation construction in ve-Year Plan outlays at levels that are al projected need This is inevitable )rse and perhaps not always inevitable ations are then further spread thin lin the state This becomes necessary tressures emanating from different and the need for the State Government I In consequence the actual allocation t becomes miniscule compared to the IS the projects take much longer to lUSt sharp cost escalations over time d project on Wainganga was slated to ighties Its cost was revised upwards through the environmental technical e hurdles the last two being specific Hics in Maharashtra and documented 19 the entire period of the nineties ere at ridiculous levels of a few crares B still not moved much beyond the stage despite a of 20 years

the extreme pro-Western Maharashtra n financing was the principal reason ton of piecemeal financing of a large mmon and the consequences of each ld costlier is equa lly common

re the possibility of a consortium of mkers offering a form of bridge finance

I to what the state is currently making any way The advantage is that the state will be able to execute projects without worrying about funds availability This is a straight forward financial

I transaction between a consortium of investors and the concerned State Government This arrangement does 110t involve any discussion on designs of the specific irri~ctivn projects or returns which the states would get there-from but just a credible guarantee that the State Government would in fact allocate a pre-determined amount to the irrigation sector each year and that this amount would be used for servicing the debt This involves the credibility and credit worthiness of the state and also the acceptable guarantees and hence it is a matter of negotiation between the parties

52 Possible Role of Private Economic Actors in Canal Systems Management Filling an Emerging Institutional Void

The subject to be discussed now is much more specific to the existing canal systems that have been created but are operating well below their potential essentially because of management reasons As is commonly experienced the canal systems fail to perform to their potential for reasons described in the most typical scenario described in Box 1

14 PRIVATE SECTUR PARTICIPATIUN

Box 1

Correcting the Woes of Stagnation in Canals

Water is released from dams into main dnd branch 111als for conveyance and eventual release in distributarips which take thpm to farmers fields Ideally farmers ought to get water just in time to irrigate their crops This happens more by chance thcm by design for a large number of farmers in most of the in India In fact what tends to happtll is that farmers in reaches routinelv suffer from flooding 111d water logging mising out of excess flows and the farmers in t]il reaches wait for the water and often cope with its absence by resorting to ground water irrigation Water does not reach the tail end due to plugs and obstructions in the channels in its length These are not cleaned due to a paucity of budgets and a bureaucratic system of administration In effect only a small proportion of the potential users get water when they want and in quantities they rpquire and these arc the only groups of farmers who have a concrete positive stake in system performance Other farmers get a raw deal dnd are hence not at all willing to pay for vater As a result the recoveries of water charges plummet and the system is progressively starved of tunds for maintaining itself

This downward spiral is a result of the management system characterized bv agencies which are not accountable to lIsers and personnel who have no incentive to perform their tasks As states experiencE increasing financial strain they cut back on staff and their facilities The canal management wings have been the most frequent victims of state Thus both due to poor management system and due to stdle neglect an institutional void is emerging management systems

States have been tinkering with partial privatization such as contracting out canal system cleaning to private operators and have also been stressing on the complete transfer of irrigation management to the Water Users Association The latter has not come of age and has to travel a long distance to meet the expectancy of the promise its propagandists make on its behalf

While the involvement of private corporate sector entities is not meant to be there is abundant room for thinking about the possible role of the private economic actors who will undertake tasks of canal system cleaning proper operations of regulators and gates and thus contributing to better water delivery to farmers It is necessary to think hard on how to structure their roles as well as incentives in such a manner that they stand to gain only

PRIVATE SECTOR PARTICIPA

from an overall impro forthcoming paper (I Privatization Issues C further

6 Is There a BOOT t

Now we return to thl sector participation in

Diverse mechanisl sector in the creation Competitive tenderin defined circles for a s chosen option in the te well in the telecom Sl

years highlights a hUl in the consumer pric possible and hence thE power sector is a mixi Cogentrix walked out and contracting Poor and a suggestion of frc made Dabhol Power a participation in the inj road sector is quite p( (BOOT) or Build Opel that have been experil tried out in ports as v irrigation infrastructUl out Some of the key

bull Risk and Returns management of a in three phases wit 2002) The feasibi in which investmE of field survey et ( design and the fea to arriving at an

15 PRlVATE SECTOR PARTICIPATION

non in Canals

1to main and branch (ana Is for 1 distributaries which take them to ught to get water just in time to nore by chance than by design for 5t of the systems in India In fact mers in head reaches routinely 199ing arising out of excess flows wait for the water and often cope oound water irrigation Water does 5 and obstructions in the channels 1 due to a paucity of budgets and istration In effect onlv a small get water when they w~nt ilnd in re the only groups of farmers who 3ystem performance Other farmers at all willing to pay for water As 1arges plummet and the system is ~ maintaining itself

result of the management system are not accountable to Llsers and to perform their tasks As states

in they cut back on staff and their vings have been the most frequent 1 due to poor management system tional void is emerging in the

Nith partial privatization such leaning to private operators and ~ complete transfer of irrigation s Association The latter has not ~l a long distance to meet the ropagandists make on its behalf

rivate corporate sector entities is ant room for thinking about the lomic actors who will undertake proper operations of regulators o better water delivery to farmers I how to structure their roles as mer that they stand to gain only

PRIVATE SECTOR P ARTICIPATIOgt

from an overall improvement in the canal system performance A forthcoming paper (Improving Canal performance and Partial Privatization Issues Options and Experience) elaborates this point further

6 Is There a BOOT that will fit the Sore Irrigation Foot

Now we return to the central theme of discussing how private sector participation in irrigation financing can become possible

Diverse mechanisms have been tried out in involving private sector in the creation and maintenance of infrastructure in India Competitive tendering and award of licenses to operate in wellshydefined circles for a specified fee and other obligations was the chosen option in the telecom sector This method has worked very well in the telecom sector as the experience of the last several years highlights a huge expansion in reach and a sharp decline in the consumer prices Perhaps the sector made competition possible and hence the result was desirable The experience in the power sector is a mixed one Several potential investors such as Cogentrix walked out mid-way through the process of negotiation and contracting Poor negotiation on the part of the government and a suggestion of fraud on the part of the private contractor has made Dabhol Power a Jete (wire for all opponents of private sector participation in the infrastructure in India The experience in the road sector is quite positive Build Own Operate and Transfer (BOOT) or Build Operate and Transfer (BOT) are the mechanisms that have been experimented within the road sector and may be tried out in ports as well What arrangement would be best for irrigation infrastructure assuming all the above issues are sorted out Some of the key issues are listed below

bull Risk and Returns The entire process of construction and management of a surface water system can be broken down in three phases with differing risk and return profiles (Gamble 2002) The feasibility and resource consent phase is the one in which investments have to be made for carrying out tasks of field survey et cetera with a view to arrive at a preliminary design and the feasibility of the project The phase extends up to arriving at an agreement between all relevant parties for

i


appropriating and allocating the land and water resources for the project This is considered the most risky phase with no return to the investor whatsoever The second phase is the construction phase which has modest risks of cost and time over runs and small return possibilities The third phase of operations and management has low risk and a possibility of a fairly stable profile of returns from water charges and so on The relative attractiveness for the private investor will thus be the highest for the third phase and the lowest for the first phase

bull How much investment can be expected from a private investor This question becomes important as major positive externalities from surface infrastructure it the status of a public good To expect purely economic goods (water for irrigation water for power production fish) to pay for huge investments in creating assets may be putting too onerous a load on the economic goods Just as an illustration if the whole investment of Rs 13 lakhs per ha of the design command area is to corne from private investment the water charges would have to be extraordinarily high

bull Who will guarantee recoveries Water charges have to be recovered from thousands of farmers in the command The task of recovery from the farmers in a polity where they form a sizeable vote bank is not to be considered simple Private sector investors are bound to baulk at the prospect of having to face farm lobbies ever willing to agitate and

Illustratively a target rate of return of 10 per cent is fixed and this means that Rs 13000 must come from each hectare of the design command net of 0amp1 costs This figure could shrink somewhat when adjusted for returns from fish and from power if any but the order of magnitude will remain the same Considering that OampM costs are about Rs 700 per ha of the design command and the incremental crop output even from a three crops a year system will be about Rs 75-80000 one may be asking for 15-20 per cent of the maximum incremental crop income from farmers who grow three crops a year with water from the surface water system A lot of farmers will water for just two crops and some will be able to grow just one crop the water charges are very high and indeed as high as cost of running pumps for 200-250 hours

PRIVATE SECTOR PARTICIPATH

block traffic Willi does agree to do process other thar should obtaining considered as the

Specific arrangemel from mere service con differing implications I managing working capi responsibility for colle Resource Society 2004

7 Investment in Surf~

Based on the discuss structuring investmen suggested below Thii discussion

a It is proposed tha process in additioI Each entity is mea facilities namely structures and distributaries The resolution and r distributaries are a their apexes as th (PIM) Bills I Acts i

b The darn construct will invest in the that is determinec private goods that the darn (for instar be an important pt past many conceni darn site it will b urban centres do n responsible for 1

F I

PRIVATE SECTOR P ARTICIP A TION PRIVATE SECTOR PARTICIPATION 17

ing the land and water resources lsidered the most risky phase with rhatsoever The second phase is the l has modest risks of cost and time n possibilities The third phase of nt has low risk and a possibility of urns from water charges and so on for the private investor will thus be )hase and the lowest for the first

block traffic Will the state guarantee recoveries And if it does agree to do 50 what gain does the state see in the process other than obtaining an up-front investment Or should obtaining resources for up-front investment be considered as the chief objective

Specific arrangements for the private sector participation vary from mere service contracts to complete divestiture and have differing implications for financing of initial fixed investments managing working capital management of OampM fixation of tariff

can be expected from n becomes important

a private as major

responsibility for collection et cetera (Chairman Indian Water Resource Society 2004)

1 surface infrastructure give it the [0 expect purely economic goods 7 Investment in Surface Water

er for power production fish) to in creating assets may be putting

the economic goods Just as an nvestment of Rs 13 Iakhs per ha I area is to come from private

Based on the discussion above a specific arrangement for structuring investment in the surface water infrastructure is suggested below This is meant to serve only as a basis of discussion

charges would have to be a It is proposed that three entities will be involved in the

veries Water charges have to be s of farmers in the command The e farmers in a polity where they k is not to be considered simple

process in addition to the water user associations (WUAs) Each entity is meant to invest and construct surface water facilities namely a dam the hydro-power generation structures and equipment and main canals and distributaries The task of OampM water distribution conflict

re bound to baulk at the prospect Ibbies ever willing to agitate and

resolution and recovery of water charges below the distributaries are assumed to be delegated to the WUA and their apexes as the Participatory Irrigation Management (PIM) Bills Acts in many states now propose

rn of 10 per cent is fixed and this means b The dam construction entity and the concerned government each hectare of the design command net ld shrink somewhat when adjusted for r if any but the order of magnitude will at OampM costs are about Rs 700 per ha

will invest in the capital cost of the dam in a proportion that is determined by the relative size of the public and private goods that are being created in the specific case of

~ incremental crop output even from a the dam (for instance the control of recurring floods would about Rs 75-80000 one may be asking (imum incremental crop income from year with water from the surface water

water for just two crops and some will

be an important public good for dams on streams that flow past many concentrations of urban population close to the dam site it will be of much less significance where such

~arly the water charges are very high and urban centres do not exist) The government will be solely Ing diesel pumps for 200-250 hours responsible for resource consent that is arriving at

18 PRIVATE SECTOR PARTICIPATION PRIVATE SECTOR PAJ

agreements on water sharing submergence and Rand R of e The govern the PAP Generally the share of private investment can be govern the quite high where private goods such as hydel power and and the ent irrigation benefits dominate and negative externalities of of water fn submergence or ecological costs are deemed to be low The the charges public share of investment will have to be much higher body Simil where public goods dominate the benefit streams The dam of irrigatioJ entity will be fully responsible for the construction of the will be reg dam once the dam design is finalized and approved by all the concerned parties (River Basin Authority State Government Tribunals under the Inter-State Water Disputes (ISWD) Act National Development Council (NDC) Courts et cetera as the case may be)

f The canal i

released fo entity and I

distributar The task (

c The flow of water for irrigation shy domestic and industrial conveyano purposes and electricity generation will be regarded as the are operatE sole income source of the dam entity The government will the basis c pay the entity at pre-determined rate per unit of volume for such volumes of water as are released by the entity in

verified by responsibl i

accordance with the schedule supplied to it The conditions of 75 per cent reliability will apply that is the obligation to supply water for irrigation electricity is contingent upon the adequacy of rainfall in the catchment area The division of the charges to be paid by the government and the electricity entity will be a matter to be negotiated between them

g The water of collectio a matter to associatior the level ( governmel the releast

d Linking payment to BOOT 1 company to volume of water the canal creates an incentive for aiming as high an ability to supply distributal water as is possible given the dam design This could distort the governance away from prudent management of the dam The monsoon falls are erratic and often have short spells of very heavy precipitation Prudent dam management requires watchful monitoring of inflows and controlled release of water to obviate any danger of excess inflow leading to disastrous consequences such as bursting of the dam Yet the desire to maximize revenue could tempt the BOOT 1 company to aim for as high pondage as is possible Given these conflicting factors the agreement will have to contain foolproof systems of monitoring inflows in monsoon so that a moral hazard of this kind is obviated

h

i

The electr produce e will arise governed 1 grid auth(

The dam E

activities facilities ( seasonal 1 levels sub deems fit

I


aring submergence and Rand R of share of private investment can be ~e goods such as hydel power and mate and negative externalities of al costs are deemed to be low The l~nt will have to be much higher lmate the benefit streams The dam onsible for the construction of the ~n is finalized and approved by allmiddot (RIver BasIn AuthOrity State IS under the Inter-State Water National Development Council

I as the case may be)

rigation domestic and industrial generation will be regarded as the ~ dam entity The government will rmined rate per unit of volume for as are released by the entity in

dule supplied to it The conditions 1~ will apply that is the obligation honelectricity is contingent upon n the catchment area The division 3id by the government and the i matter to be negotiated between

)T 1 company to volume of water iming as high an ability to supply ren the dam design This could vay from prudent management of falls are erratic and often have ilVy precipitation Prudent dam ltchful monitoring of inflows and er to obviate any danger of excess us consequences such as bursting to maximize revenue could tempt aim for as high pondage as is

licting factors the agreement will systems of monitoring inflows in hazard of this kind is obviated

PRIV ATE SECTOR P ARTICIPA TION

e The government will create a regulatory body that will govern the inter-relationship between these three entities and the entities and the government The rate of discharge of water from the dam to the hydel electricity utility and the charges to be levied will be governed by the regulatory body Similarly the verification and monitoring of release of irrigation water into the main canals to the canal entity will be regulated by this agency

pound The canal entity will be responsible for taking the water released for irrigation as per scheaule agreed to by the entity and delivering it at the pre-determined points in the distributary network to the apex Federations of the WUA The task of the entity is basically to ensure that the conveyance is unencumbered canals are clean and gates are operated as per the agreed schedule It will be paid on the basis of water delivered at the distributary points as verified by the WUA federations The government will be responsible for making these payments

g The water charges to be levied on farmers and their mode of collection and payments into the government treasury is a matter to be sorted out by the government with the farmer associations WUA and their Federations Irrespective of the level of water charges fixed for the farmers by the government the government will pay the dam entity for the release of water as per schedule and volumes and to the canal entity as per the distribution of water at the distributary points

h The electricity entity will receive and pay for the water produce electricity and supply it to the grid Its income will arise from the sale of electricity to the grid and is governed by an entirely different set of agreements with the grid authority

L The dam entity will regulate subsidiary income generating activities such as leasing of reservoir fishing recreational facilities on the embankment and the reservoir et cetera seasonal lease of reservoir beds for farming after water levels subside et cetera and will make such charges as it deems fit


8 Conclusion Chasing a Mirage

Clearly at this stage the above kinds of arrangements are thinkable only on paper Much work needs to be done to prepare the ground for such arrangements to become feasible socially and politically The following can be taken as elements of the groundwork

a It may possibly be simple and would attract least resistance if some ways are devised to improve the existing canal system management by partial privatization ie by involving the private sector economic actors by structuring their engagement in a manner that their incentives are linked to an overall system performance and they are also made accountable to the users

b There is a need to generate discussions and a consensus on the desirability of a role for the private sector in the irrigation infrastructure Right now the air is full of the battle cries of the spirited and noisy opponents of privatization The case of dams is particularly complex in this regard as it touches the emotional issues of ecology tribal rights and rights of the IIsmall folk for water for subsistence Unless the idea of private sector engagement in surface irrigation becomes socially legitimate it has no hope of taking off in the Indian polity

e There is a major issue involved in persuading the private sector investor that the slate and the farmer lobbies will actually deliver on their promises just as there is a major issue involved in ensuring that the risk of moral hazard from the private sector entity does not become a reality Considering that the investments are so large and have no possibility of earning returns except through the supply of water there is perhaps a greater need to offer credible arrangements for the payments to private sector before the latter consider the investments worthwhile

d The suggested arrangements implicitly assume that it is very important to have upfront investments coming from the private sector and that the State will manage to make recurring annual charges for the volumes of water

PRIVATE SECTOR PAR1

delivered Tl amounts col subsidy on transparent subsidy itsel reducing the is necessary water reSOUI private sectc water chargE

Given the flu political stakehol one of the three That is why seek be tantamount to

q If the State doe investor then the significantly hight is in the nature would compensatE the subsidy thl part of the subsic State in return for needed bv the B pointing this out on August 3 20

21 PRIVATE SECTOR PARTICIPATIOl

firage

above kinds of arrangements are h work needs to be done to prepare lents to become feasible socially and can be taken as elements of the

e and would attract least resistance ed to improve the existing canal r partial privatization ie by tor economic actors by structuring manner that their incentives are em performance and they are also ~ users

rate discussions and a consensus role for the private sector in the Right now the air is full of the irited and noisy opponents of f dams is particularly complex in the emotional issues of ecology

of the small folk for water for dea of private sector engagement )mes socially legitimate it has no ~ Indian polity

volved in persuading the private state and the farmer lobbies will promises just as there is a major ng that the risk of moral hazard mtity does not become a reality stments are so large and have no lTns except through the supply of a greater need to offer credible ments to private sector before the ments worthwhile

ents implicitly assume that it is pfront investments coming from It the State will manage to make es for the volumes of water


delivered The difference between these charges and the amounts collected from farmers will represent the net subsidy on water9 The presence of such explicit and transparent mechanism for determining the extent of subsidy itself may prove a beneficial tool for the State in reducing the level of subsidy Yet careful financial analysis is necessary to persuade the State that it is better to have water resources created by upfront investment from the private sector with recurring subsidy from the State on water charges rather than having no infrastructure at all

Given the fluid state of the polity and the stance of the major political stakeholders there is little room for optimism about any one of the three steps of the ground work actually happening That is why seeking private sector investment in irrigation may be tantamount to chaSing a mirage

4 If the State does not share investments in the dam with the private investor then the rate at which the actor will have to be paid will be significantly higher This is because while a chunk of the dam output is in the nature of public goods mere marginal costing water rate would compensate only for the private goods component Thus in effect the subsidy thus calculated would be artificially high a substantial part of the subsidy would in fact be the recurring charges born by the State in return for the public goods being created and kept available when needed by the BOOT 1 company I am grateful to Shilp Verma for pointing this out to me in a seminar r gave at lWMI-Tata programme on August 3 2005

r I

22 PRIVATE SECTOR P ARnCIPAnON

References

L Chairman Indian Water Resource Society (2004) Public-Private Partnership in Water Sector Hegulatory and Financial Mechanisms paper presented at FlCCI Water Summit New Delhi November 2004

2 Gamble Brent (2002) Equity Investment Options for Community Irrigation Projects MAF Technical Paper 200210 Gov of -Jew Zealand Christchurch

3 Gulati Ashok Meinzen-Dick Ruth and Raju K V 1995 (edited) Institutional Reforms in Indian Irrigation Sage Publications New Delhi 1995

4 Jagdeo M and Phansalkar Sanjiv (2003) Running an Innovation Aground in Issues in Water Use in Agriculture in Vidarbha (mimeo) Amol Management Consultants -Jagpur

5 Mukherji Aditi and Shah Tushaar (2003) Ground water governance in South Asia Governing a colossal anarchy IWMI-Tata Water Policy Programme Highlight no 13 Anand

6 National Commission for Integrated Water Resources Development (NCIWRD) (1999) Integrated Water Resources Development A Plan for Action -JCIWRD GoL -Jew Delhi

7 Pangabbean A (2005) Using Market Mechanisms to Expand Access to Basic Services in Asia Pacific Public Private Partnership for Poverty Reduction paper presented in the ADB-DFID Workshop on Making Markets Work Better for the Poor Manila

S Phansalkar Sanjiv (2003) Political Economy of Irrigation Development in Vidarbha in Issues in Water Use in Agriculture in Vidarbha Amol Management Consultants Nagpur

9 Phansalkar Sanjiv and Jagdeo Mashesh (2003) Running an innovation aground AMOL 2003

10 Singh Chhatrapati (1991) Waler Rights and Principles of Water Rcsources Mallagement N M Tripathi (P) Ltd Mumbai

11 World Bank (2005) Indias Water Economv Bracing For a Turbulent Future New DeihL

Reports

Report of the Eleventh Finance Commission New Delhi 2004 Report of the Tenth Finance Commission New Delhi 1999 Report of the Commission on Water and Irrigation (Chitale Commission) Government of Maharashtra Ylumbai 1999

2 PIUVATE SECTOR P ARTIClPATION

existing 21 million stock each year and the ground water juggernaut shows no sign of slowing down (World Bank 2005) A bulk of the investment in the ground water assets is privately funded (Mukerji and Shah 2003) In any case the investment in ground water irrigation infrastructure occurs in such a completely decentralized and almost uncoordinated manner that it is seldom thrown up as an instance of the crisis of the investment ability In that respect it differs sharply from the investment problem of the surface water infrastructure

An estimate of the necessary infrastructure is an extra storage of 178 BCM with an associated huge addition to the distribution network (NCIWRD 1999) A broad estimltlte of the investment needed for creating such huge storage and distribution infrastructure was given at Rs 560000 crores by the Task Force on National River Linking Project (NRLP) This excludes such investments as are necessary for maintaining the ageing and often poorly maintained existing assets (World Bank 2005) Quite admittedly the river interlinking project is not yet a reality and hence talking of that as a pointer to investment may not make a convincing argument But even in the absence of the interlinking project large sums of monies are required for implementing the irrigation schemes proposed by the various states

For instance Maharashtra would need to invest a whooping Rs 30000 crores for completing the development of the water resources deemed feasible in Maharashtra (Report of the Water and Irrigation Commission Mumbai 1999 Chapter 16) Maharashtras tax revenue was Rs 39737 crores in 2004-05 (Report of the Eleventh Finance Commission Annexure V 23 p 210) Thus the required investment is nearly three-fourths of a full years tax revenue for the state The difficulty in finding government resources for making these investments is obvious

Nor is it quite so easy to borrow for the purpose of making these investments In 2004-05 Maharashtra had an interest burden of Rs 6803 crores (Eleventh Finance Commission op cit) interest liability amounting to a little over 155 per cent of its tax revenue during the five year period 1995-99 Repayment of principal amounts of these debts is yet another burden Adding further to the debt servicing requirements would be quite ruinous to the

PRJV ATE SECTOR PARTICIIATlON

health of the state finances What is of most Indian States Interest payrr revenue is smaller than this level of Indian States (Tamil Nadu Karnat (Eleventh Finance Commission Ann situation of most Indian States woule than that of Maharashtra

Can the states tap the private de investments This was once viewed a financing (Gulati and Raju 199 Maharashtra among the other India from the market for funding irrigatie 1998-2002 Partly to avoid showing h sheet and partly to bring in greater 1 had created special purpose vehicles ir Corporations Maharashtra set up fi corporations raised money from the the prevailing market rates The bon state However the market becam tranches of bonds issued by the vari( Corporations and credit rating agel them (see for instance CRISIL dOl Vidarbha Irrigation Development C Phansalkar and Jagdeo 2003) The dif either swapping the high interest r seeking agreements from bond holder well known With high interest liabili ratings market borrowing is not eas

Thus neither are the states in a invest in irrigation from their own position to raise it from the market Ye must be created External multi-later an option with a willing and eager quadruple its annual lending to the wa are these volumes adequate to cover talking of raising the lending to US crores per year) nor are they free of p costs Hence there is an urgent need broadening the sources of the invest
























Financing













Private Goods are






Public Goods are








PRIVATIi SECTOR P A



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Private Goods are






Public Goods are








PRIVATIi SECTOR P A



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Box 1








6 Is There a BOOT t






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PRIVATIi SECTOR P A



inflow in the re~


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olitical stability

























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Box 1








6 Is There a BOOT t






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PRIVATE SECTOR PAR1





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PRIVATIi SECTOR P A



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3 Assessment (]






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olitical stability

























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Box 1








6 Is There a BOOT t






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i













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PRIVATIi SECTOR P A



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Box 1








6 Is There a BOOT t






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Box 1








6 Is There a BOOT t






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Box 1








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Box 1








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Box 1








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