Photo Credit: eopath via Flickr Creative Commons
No one in the municipal authority of Bhubaneswar, the capital of the Indian state of Odisha, was in the dark about its street lighting problem – though as years went by and the issue worsened, more and more people were literally in the dark. In this busy city, the main roads were well lit, but smaller streets and residential areas were lit with only dim patchy light or had no lights at all, which threatened residents’ safety, curtailed evening transportation and activities, and led to constant complaints from the public. Moreover, energy consumption for street lighting was extremely high, straining the city’s finances.
The cause of these problems was no secret – poor quality street lighting infrastructure, insufficient maintenance, and lack of a monitoring system. The entire system was operated manually, and many street lamps, mounted on multi-purpose poles, were not even formally connected to the utility’s system. Over 75% of street lights lacked meters, and no inventory records existed. Just six people were responsible for service delivery and addressing customer complaints.
Officials of Bhubaneswar Municipal Corporation (BMC) considered entering into performance-based contracts with the private sector, whereby an energy service company (ESCO) would invest in the street lighting infrastructure and improve management through metering, remote monitoring, compliance with national lighting standards, and use of inventory records. The ESCO would recover its investment by claiming a share of energy savings and any other payments, if required, depending upon the feasibility analysis of the project. But the track record of ESCO contracts in other Indian cities was mixed: many failed because of poor preparation and risk allocation.
To avoid these pitfalls, the BMC, along with the Housing & Urban Development Department (H&UDD), requested the assistance of the International Finance Corporation (IFC) to design, structure, and manage the bid process for an ESCO-based street lighting project in Bhubaneswar.
Quality of existing infrastructure – Energy savings projects can be implemented in municipalities with good street lighting infrastructure, including metering of the street lights, so that municipalities are billed based on the energy consumption. Such a mechanism incentivizes the municipalities to implement energy efficiency projects as it reduces the electricity bill payments to the electricity companies.
Detailed due diligence – In a competitive bid process, providing sufficient technical information and data to all bidders is very important. Technical advisors assisted us in conducting a survey of the street lighting system, assess the number of street lights, and identify rehabilitation requirements. This enabled us to optimally structure the project and present substantial information to the interested firms at the bidding stage.
Tariff structure – For ESCO projects to be sustainable on the basis of energy savings (by way of recovery of both capital cost and operational expenses), the energy tariff needs to be sufficiently high. In case of lower tariffs, there would be a need for the municipality to make additional payment to enable the ESCO to recover its investments and operational expenses. This concept was first introduced in the Bhubaneswar project.
Payment security – In a performance contract, an ESCO recovers its investment through payments from the municipality, making payment security critical for making projects bankable and enabling robust structuring. Several projects in India have run into issues because the municipality did not create any payment security mechanisms as promised and payment delays led to nonperformance of services by the ESCOs. Such payment security mechanisms could be in the form of an escrow account, revolving fund, letter of credit, or bank guarantee.
While such energy-efficiency projects are useful to minimize cost for the municipality and enhance service provision, another feature that enhances their appeal is the increased level of customer satisfaction. The ESCO contracts have operations-linked performance indicators, which an ESCO needs to adhere to during the term of the contract.
Division of responsibility and risk – Clear and defined division of responsibilities between the municipalities and the private operator is the key to a sustainable public-private partnership (PPP) arrangement. In energy efficiency projects, multiple stakeholders have a bearing on the project (municipalities, electricity utilities, state government departments), so this point is especially important. An important aspect of energy-efficiency projects is enhancing service provision for which performance indicators are detailed in the contracts that an ESCO needs to adhere to during the term.
Regulatory/legal analysis and managing a transparent bid process – Understanding and mitigating legal and regulatory risks associated with PPPs and conducting a transparent competitive bid process are key to successful transaction. Along with a fair and transparent bid process, detailing the terms of the transaction and drafting thorough concession agreements considerably reduces the chances of post-bid negotiations or legal challenges.
Investor marketing – In light of the recent global economic scenario, the project will also depend upon the ability of the private partner to attract finance as needed for the project. In turn, investors’ ability to secure additional financing will depend on financial strength of the private partner, market risk, structuring risk, performance and execution risk (the private partner’s ability to successfully execute its strategy).
Careful attention to each of these issues ultimately resulted in a project that has already improved illumination levels in the city. Citizen complaints have decreased, and electricity consumption is down by 75% on average. Moreover, the street light poles can also be linked to other information-technology enabled services such as closed-circuit television (CCTV) surveillance cameras and providing WIFI access to improve citizens’ safety and quality of the life.