IBLJ March 2016: Small Cities- Picking the right bidder to take on PPP project risks.

 

Avijeet Lala (HSA Advocates)

 

Pollution is nothing but the resources we are not harvesting. We allow them to be dispersed because we’ve been ignorant of their value.” – R Buckminster Fuller Around 60 million tonnes of municipal solid waste (MSW) is generated in urban India annually. But sadly waste disposal and sewage treatment plants are missing in most Indian cities. Most waste that is generated therefore finds its way into land and water bodies causing severe water and air pollution.

 

Worsening problem :With rapid urbanization and changing lifestyle and consumption pat-terns, the per capita waste generation will increase significantly in times to come. Without putting in place a suit-able and sustainable mechanism to meet this ever growing MSW menace no city can hope to bring a qualitative change in the lives of its inhabit-ants, which is one of the principal objectives of the Smart Cities Mission launched by the central government. The idea of a “smart city” will work and a city can be “smarter” only if it finds a long-term solution for the waste it generates.

 

Conundrum : The problem is further aggravated by the fact that municipal local bodies, which are tasked with the responsibility to manage MSW, do not possess adequate capacity and institutional and financial capabilities. On the other hand, the private players who have these capabilities do not find sufficient economic incentive to join the drive.

 

A worthwhile solution to the above conundrum has been offered by the tariff policy issued by the central government on 28 January under the pro-visions of Electricity Act, 2003. The tariff policy advocates that all electricity distribution licensees be required to procure 100% of the power produced from all the waste-to-energy plants in each state at the tariff deter-mined by the respective state electricity regulatory commission. This enabling provision in the tariff policy could give a major inducement to the private sector to lend its expertise and resources in managing MSW so that MSW can contribute to meeting the energy needs of the city.

 

Technology options : The government already recognizes waste to energy as a renewable source of energy and it has also been promoting all the technology options available for setting up projects for recovery of energy from urban waste through various subsidies and incentives. However, since most of the proven and commercial technologies for waste to energy need to be imported and require substantial capital investment, the private power developers have been reluctant to enter this sphere in the absence of a guaranteed long-term revenue roadmap.

 

Project lenders have also been generally wary of financing such projects, which are based on government subsidies and do not have a business case or demonstrable bankability of their own. The tariff policy addresses this concern of the power developers and lenders. A cost-plus tariff backed by long-term power purchase agreement with the distribution companies would secure the investments of a developer, make the project bankable and assure the developer of a guaranteed business return.

 

Significant Benefits : There is no denying that the provisions of tariff policy are advisory in nature and not binding on the state electricity regulatory commissions, which are the sectoral regulators and approve the power procurement plans of a distribution licensee. But at the same time there can also be no dispute that use of MSW for energy generation could be a win-win situation for all stakeholders with significant social and economic benefits. Municipal bodies would be able to get rid of MSW in a scientific and socially benign manner, and at the same time it would add to the energy security of the state in whatever small manner it may.

 

This also fits in very well with the stated objectives and overall scheme of the Smart Cities Mission, which aims to provide assured power sup-ply and sanitation, including solid waste management facilities to every smart city. Hence, to this end and in the current context, the opportunity afforded by the tariff policy is worth exploring and it is incumbent upon the authorities concerned and stake-holders involved to make the most of this provision.

 

Taking a cue from the tariff policy, the Gujarat government has recently announced its Waste to Energy Policy 2016, offering various regulatory and fiscal incentives to power plants which use MSW for generation of electricity. This may serve as useful guide for other states to follow.

 

Avijeet Lala is a partner at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai, Kolkata, and Bengaluru..

 

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