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Unit 13: Regulatory Framework of Projects

13.6 Uncertainty Leads to High Project Risk Notes

Whether or not private sector financing and management of infrastructure is desired, holistic
project development has become very important. This is underscored by the fact that new
projects are slow to take off, have spotty implementation rates, and have difficulty achieving the
desired performance. These common problems are traditionally handled in a very reactionary
crisis mode, rather than anticipated from the onset. The Sangli case discussed earlier is just one
of many challenging examples across the country. Pune’s US$185 million water supply and
sewerage project that the FIRE (D) Program helped structure is another example. The project was
cancelled after the commissioner, who was the local champion, got transferred. The local
government council reviewed the project costs and expressed concern that they were too high.
The council thought consumers would have to pay too much to ensure that a private operator
received a sufficiently high rate of return. Furthermore, there was apprehension that an
international firm would potentially win the contract. Ultimately, neither the political
establishment nor the public understood the project structure, even though it was viewed as a
model for the country technical Diagnostic on Project Development know the local market
Conditions One of the main reasons that project risks threaten the development process is the
lack of attention to local market conditions at the onset. By not incorporating market demand
into project development, infrastructure becomes reduced to an engineering exercise that
overlooks how the community will utilize the services, how good O&M will be ensured, and
how the system will be financially sustainable. If local risks are identified early, they can be
addressed more substantially. Since 1994, the FIRE (D) Program has focused heavily on these
aspects and promoted key reforms. Over time, the project expanded its focus on commercially
viable demonstration projects to encompass policy and governance issues, such as enhancing
municipal financial and managerial capacity. The Jawaharlal Nehru National Urban Renewal
Mission (JNNURM) has expanded much of the FIRE (D) Program’s agenda into more than 60
cities. With time, a working definition (see the following section on “Defining Commercial
Viability”) of commercial viability for municipal infrastructure projects emerged based on
practical experience and a growing understanding of municipal governance, infrastructure, and
financing. The FIRE (D) Program advocates for projects to be framed within the context of a city’s
overall investment decisions for service improvements. For example, in the water sector, it is
likely that immediate benefits would result from reducing the non-revenue water. Initiatives to
improve system efficiencies must complement efforts to augment capacity. Considering both
types of investments together will influence the sequencing of projects, the levels of investment
required, and the need to revise user charges. The success of these decisions, however, requires
clear linkages to improved efficiency in operations and institutional management. Project
development with a commercial format require Pilot Projects: Design, Implementation, and
Policy reform Although India had some experience in developing commercially viable projects
in the power, transport, and telecommunication sectors by the middle 1990s, environmental
urban infrastructure still utilized traditional public sector approaches. Now there are good
demonstration cases in water, sanitation, and solid waste management, but substantial private
sector participation and commercial investment is still not the norm. The FIRE (D) Program has
tested several institutional arrangements and risk mitigation strategies to structure commercially
viable projects over the last 17 years. Based on these lessons, the FIRE (D) Program established
some useful tools for practitioners and policy makers.
13.6.1 Demonstration Projects Utilizing Commercially Viable Structures

1. Local government implementation through an engineering, procurement, and construction
contract and commercial finance in Pune, Maharashtra’s water and sewer project.

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