Financial institutions involved in urban infrastructure financing have tightened project financing norms and have conveyed to the state governments that they will have to carry out water tariff increases every two years.
Sources said such increases would be made mandatory for extending debt funds for water supply projects in the urban areas. These FIs include Housing and Urban Development Corporation Ltd (Hudco), Life Insurance Corporation (LIC) and General Insurance Corporation (GIC).
So far, only two states have complied with the FI condition, Karnataka and Rajasthan. Hudco has extended loans of Rs 100 crore each to these two states.
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Karnataka has carried out a water tariff increase of 20 per cent on a weighted basis, implying that the bulk of the increase was borne by bulk consumers including industries and commercial users like hotels. Rajasthan has also carried out similar increases using identical methods.
The water tariffs levied by the states are sufficient to recover either the fixed costs or variable costs, which include operation, maintenance and interest costs. Since the existing tariffs are insufficient to meet even the debt service costs, FIs are making these tariff increases a precondition for extending future loans to water supply projects. In order of priority, operational costs assume precedence over meeting interest costs.
Where water connections are metered, tariff increases are linked to recovery of operation and maintenance costs. In the case of the Madhya Pradesh, Hudco has recommended a 15 per cent tariff increase every two years for meeting the operation and maintenance costs. For other projects, like the Pune Water Supply Project where the funding is being done on a limited recourse basis, the annual escalation is linked to Maharashtra State Electricity Board's tariffs.
In the case of unmetered connections where the main form of recovery is in the form water taxes, the FIs have insisted that water taxes be increased periodically to cover the increases in the operation and maintenance costs.
The FIs have begun insisting on such tariff increases to ensure that tariffs result in sufficient revenue for debt service payments. So far, debt service payments have been covered by state government guarantees. But FIs are no longer reassured by such state government guarantees in view of the large increases in contingent liabilities of the states. FIs have already faced a situation where the guarantees were invoked and payments were still not realised.
As an alternative or in addition to state guarantees, some of the FIs have begun using routes like creating escrow pools out of municipal receivables, which include octroi receipts by the local bodies. In the case of the Pune Municipal Corporation, where ICICLE and Hudco are expected to be providing funds to the extent of Rs 100 crore each, the escrow pool has been created out of the octroi receipts.
In the case of the water projects in Tamil Nadu, the escrow pool have been created out of property tax collections by local bodies and state government transfers to the local bodies.