How would you compare HUDCO with financial institutions like Infrastructure Development and Finance Corporation, IDBI and ICICI?

HUDCO is a late entrant in financing infrastructure issues. About 10 years ago, 95 per cent of its lending was for housing while urban development was only 5 per cent. Last year, this ratio was 60 per cent in favour of housing. In the next couple of years, the lending in both the sectors would be equal.

While other FIs are going in for financing of large projects in sectors such as roads, power and telecom, HUDCO is focussed onlyon city infrastructure. The cities are growing, but there is very little investment going in to upgrade municipal services. As the Government does not have enough resources, cities across the country are going in for private sector investment. This is where we come in. We are helping private companies as well as municipal corporations to invest in local projects like water supply. Our total exposure in these areas has crossed Rs 6,000 crore already.

What areas in urban infrastructure are you focussing at?

Our main work is water supply and sewerage with 48 per cent of the loan money going into this sector. WE are encouraging privatisation of supply as well as other contract arrangements which will improve efficiency. Over Rs 2400 crore worth of loan has been extended to about 330 projects across the country.

Other sectors include local area development, transport terminals, roads, bridges, airports, ports, commercial and social infrastructure. About Rs 750 crore has been given to road projectswhile Rs 193 crore has been put in Cochin Airport, Calicut Airport and the new oil jetty at the Mangalore Port.

Can water supply be a profit making venture for a private company, given the low tariffs being charged?

There is a tendency of consumers to take water for granted. Nobody wants to pay for it. The biggest challenge is to make people pay for water. What they get in return is better service. Commercialisation of utilities is essential if investment is to increase.

We are becoming assertive in emphasising the need for realistic tariffs for cost recovery before giving institutional credit. In an Orissa project, we asked for a hike in domestic, commercial and industrial rates followed by an annual automatic increase of 10 per cent. In addition, a one time connection charge of Rs 4,000 per connection was also insisted. Similarly, in Kolhapur in Maharashtra tariff hikes, ranging from 75 to 100 per cent, were accompanied by registration charges. We are also insisting on 100 per cent metering ofall consumer connections financed by us.

What are the risk cover arrangements in case of such projects?

We have to go in for non-recourse financing. This means that the revenue streams have to be improved because the state governments do not offer any guarantees against risk. Security comes from assignment of financial flow from tariffs. The key issue is to ensure that the users pay for what they consume. Most of risks are then taken care of.

Are you saying that there are no other risks?

Well, there are other risks which are not commercial. The biggest one out of these are political risks. Private investment is most scared of this type of risks. Sudden changes in policy can kill the viability of projects. Often objections are raised to projects which do not have any credible foundation.

There should be a regulatory body to insulate investments from political risks. Like the Central Electricity Regulatory Commission and the Telecom Regulatory Authority of India, there should be aUtilities Commission in India. The central Government can frame the broad guidelines for this while the state governments can create the actual bodies. The real push will have to come from the states as most of the utilities are under the state sector.

What are the models being adopted for privatising utilities?

There are several options. Service contract, management contract, lease, concession, BOT (build operate transfer), BOO (build own operate) and divestment. The choice depends on the situation of the utility. For instance, one of the main concern is efficiency, then management contract or a lease can be considered. If fresh investment is needed then BOT/BOO, concessions, and divestitures are the logical choice.

The Madras Metro Water, for instance, has contracted services ranging from provision of staff cars to maintenance of sewage pumps. While in Pune, private participation through investment and technology is being put in a water supply project.

We also need to create a projectinitialisation fund. In any project between 1 per cent to 3 per cent of the total cost is spent in pre-project surveys. Only after these surveys are complete can the viability be assessed.