PPPs

PPPS for performance

For human settlements to thrive and survive, communal or public water infrastructure is essential. This need often starts with a shared well and extends through water supply and sanitation systems to fully integrated infrastructure to manage the whole water cycle in large and complex cities.

Chile - Wastewater Plant La Farfana

Building, operating, maintaining and renewing and extending such infrastructure has always been, and will always remain, a challenge for public authorities and city managers. Throughout history the rise and fall of towns and cities has been closely related to their ability to provide and maintain water infrastructure. Generally, there has been a gap between the needs for water infrastructure and its provision. In certain cases, this gap has become so big that the settlement or society has collapsed.

 

At the global level today, there is a significant backlog in water infrastructure. There are two main reasons. Either the infrastructure has never been built or it has not been maintained and replaced at the end of its useful life. These shortfalls in investment impact most countries of the world, whether they are in developed or developing economies. Various estimates have been made for the scale of this deficiency and the investment needed to correct it. See for example the analysis in “Water: Fit to Finance “, a joint report made by the OECD and the World Water Council in 2015. 

A recent study by McKinsey   has estimated that globally between teen 2015 and 2030, US$19 trillion needs to be invested in water infrastructure. Of this, US$7 trillion has been earmarked in current projects or plans, leaving a gap of US$ 12 trillion to be filled.

It is often perceived that investment in essential infrastructure must be made from public budgets. There are many exceptions to this throughout history, with water and wastewater infrastructure having been provided in all or part using private funds (England, France, Spain, USA etc.). In today’s economic environment recourse to the private sector, including private water operators, is a real option that public authorities can consider. In very different ways, public private partnerships can be used to attract or inject finance into infrastructure projects.

 

In some projects, private operators invest themselves. More commonly, they make projects possible where private investors, funds or banks are willing to invest. In other cases, they improve the performance of public systems in ways that enable them to attract more direct investment. Additionally, private operators can reduce the need for capital investment by reducing waste, improving efficiency, innovating and optimising the design and operation of infrastructure.

 

AquaFed and its members observe steady growth of water Public Private Partnerships (PPP), a trend that is noted by other observers such as Envisager and Bluefield Research Links This growth is the response to several factors including – tight public budgets, growing demands, need for efficiency, cost control and technological advances. The number of people served by the private sector has passed the 1 Billion mark. More than 1 billion people, 1 in 7 of the world population, now benefit from water/wastewater services delivered by Private Water Operators.

 

This trend is also the result of the positive impact PPPs have all over the world. Indeed, the experience shows that PPPs are efficient in implementing the human rights to safe drinking water and to sanitation – improving wastewater management – improving relationship with water-users – improving efficiency of water utilities – raising and maintaining staff capacity – responding to natural disasters. The samples below highlight those positive achievements. 

1/ Public private partnerships (PPP): SHARING SKILLS AND ASSETS FOR THE BENEFIT OF THE GENERAL PUBLIC

Public private partnerships (PPP): SHARING SKILLS AND ASSETS FOR THE BENEFIT OF THE GENERAL PUBLIC

Definition

A public-private partnership (PPP) is a contractual arrangement between a public agency (federal, state or local) and a private sector entity for the execution of a project or service. This contract should include a detailed description of the responsibilities, risks and benefits of both the public and private partners. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility. (Source: National Council for public private partnerships http://www.ncppp.org/ )

 

Key features

The public authority is the “master” party to the contract and is free to fix objectives, goals and conditions. Private operators are the “servant” party who carry out the operations and are also able to advise public authorities in order to transfer technology and know-how to improve public water and wastewater services. They act as change agents to improve services according to local circumstances and evolving trends in society such as urbanisation or climate change.

Content and Scope of PPP contracts

PPP contracts can be “tailor-made” to suit specific needs of any public authority. It is possible to contract a PPP for the management and operation of a single step of the water services delivery process. For instance, a public authority can sign a PPP only for the delegation of the billing system. At the other end of the scale a single contract can be let to operate and entire integrated water and wastewater service. This would involve all the steps in the process from collecting raw water, treating it and delivering it to customers, collecting the water once used, treating this wastewater, recycling used water, managing rainwater and operating flood protection, as well as incorporating all customer relationship management and billing.

Range of contract types

These tailor-made PPP contracts can be divided into different categories or “families” depending on what the public authority is seeking from the private operator. Factors that determine the length and complexity of the contract include:

  • Overall Scope
  • Level of technical requirements
  • Which party is financing what (capital investment in infrastructure (Capex), operating capital (Opex), maintenance and renewal expenses, etc…)
  • Level and sensitivity of cost recovery requirements
  • Degree of management delegated
  • Who employs the staff
  • Etc…

Contracts can have a duration as short as 3 years for those with the simplest scope, many have a duration of around 10 to 15 years and those that are very complex or require very high levels of investment may last for 30 years or more. There are many thousands of contracts of this kind in force throughout the world today, with new contracts coming in to force all the time while others reach their normal conclusion.

According to the level of complexity and duration, the “families” of contracts are often given generic names as follows:

  • Technical assistance contracts
  • Management contracts
  • Delegated management, “Affermage” or lease contracts
  • Design build and operate contracts (with a number of different subcategories)
  • Concession contracts

for some of the more complex kinds of contracts it may be necessary to create one or more “special purpose companies” to hold the contract with the public authority. These are usually purely private companies, but on some occasions, they can be joint venture companies between the public authority and private operators.

 

Other approaches

Most of the engagements between public authorities and private operators are PPPs, but there are other forms of collaboration. The three main types are:

  • Partial privatisation: sale of part of the assets to a private operator. In this case, part of the capital (usually restricted to less than 50%) of a municipal or state owned company is sold to private shareholders. This is a way of injecting financial capital and operation and management skills and technology into the company. This approach has often been used when a state-owned company has required significant capital injections to meet medium-term requirements. Examples are the cities of Berlin and Budapest. In both these examples the public’s capital investment objective has been met and the private operators’ shares have been bought out.
  • Full privatisation via sale of all the infrastructure to private shareholders, thus transferring all the assets and the responsibility of maintaining and operating to the private sector on a permanent basis. This model is relatively rare and has only been used in England and Wales and Chile. In both cases it enabled very significant investments to made a very quickly to meet pressing needs to improve services.
  • Investor owned utilities are those systems that have been set up from the beginning as private companies with private investors. This is a model that developed in the USA and today serves 25% of the US population.

2/ Some advantages of PPPs

PPPs can offer many advantages to the public authority and to the water service users they serve. These include:

  • Use an external strength to support a public authority to manage a situation
  • Maintain control by the public authority
  • Clarify responsibilities through the definition and allocation of roles and responsibilities in the change management process
  • Ensure transparency: opting for an external solution implies making issues public in several ways. In particular, PPPs require operators to fulfil certain key performance indicators (KPIs) and to report on these on a regular basis. This discipline is often not required of a public operator.
  • Generate competition via the public bidding process
  • Generate performance via the identification of the best operator to meet the local circumstances
  • Create solutions specifically adapted to local circumstances

3/ Key steps in preparing a PPP

  • When considering a PPP, a public authority assesses its needs and decides what it wants to externalise to a private operator.
  • Once this assessment has been made, and the specifications are fixed, the public authority publicises its intention widely in order to attract a maximum number of potential candidates
    • in assessing potential bidders, it is usual for the public authority to evaluate candidate’s experience in the specific area of the type of partnerships being considered. This is an important factor in identifying the right partner for long-term success. Equally, the financial capacity of the private partner should be considered in the final selection process. 
  • Then the pre-qualification phase starts. The public authority normally chooses no more than 3 to 4 candidates from among all the respondents. 
    • If there are too many candidates, the public authority organises a pre-competition 
  • On the basis of this short-list, the authority launches the formal public tender process. Tenders are first assessed for their technical compliance and competence and only after that assessment is complete is the price and financial offer examined. The “best value” (not always lowest price) in a partnership is critical in maintaining the long-term relationship that is central to a successful outcome.
  • Once the contractor has been selected, the negotiation phase can start. This is necessary to clarify and refine the details of the final contract before it can be signed.
  • It is possible to sign “with reservations” to allow for certain conditions that need to be met before the contract can come into full force.
  • The key success factor for a PPP is that both parties’ have the will to deliver an efficient service at the right cost. Both parties need to be actively and continually engaged, paying attention to preserving the quality of communication with each other. Realizing that all contingencies cannot be foreseen, a good contract will include a clearly defined method of dispute prevention and resolution.

4/ How is the duration of the contracts decided?

The public authority always decides of the duration of the PPP contract. It depends on local circumstances, tasks to be achieved and the technicity and finance needed to answer them. The duration is the result of matching the objectives and the way to achieve them.

 

Each contract has a defined period and an end date. New contracts with new goals can be signed with the same or another operator using a tendering process. Contracts can be renewed or extended if needed and required, but often only for limited periods and under specific conditions.

 

As in any contract, it is necessary to anticipate difficulties occurring and procedures to overcome them. In the worst case, if one party or another does not respect their obligations, there need to be mechanisms for redress and, if necessary, for premature termination of the contract in an orderly way.

5/ Does contracting a PPP have an impact on water pricing?

The public authority has the control on the contract in its full performance and therefore on the pricing policy before, during and after contracting a PPP.

A sustainable water economy requires cost recovery. Most of the fixed costs depend on external factors, not on the private water operator (labour, energy, chemicals, finance required for the construction and maintenance of the systems, etc.…).

It is very common for local authorities to make important choices about the economics of their water and sanitation services at the time they engage a private operator. One of these is to move from cost recovery using taxes, that are not “visible” in relation to water, to tariffs or direct charges that are “very visible” to service users. The other is that the authority has engaged the private operator to make or facilitate extensive investment programmes that are needed to restore, extend or upgrade the infrastructure and operations. Using a private operator may even have been chosen to help them implement these decisions. The result can be that private operation “appears” to be more expensive, but in truth it is only the reflection of changes decided by the public authority and that would have occurred anyway.

6/ What is a PPP’s impact on performance?

The essence of private operators’ participation in a PPP is to improve the public water services performance. This is why public authorities contract them. Private operators bring their knowledge and expertise to contribute to optimise:

  • technical system performance,
  • staff productivity,
  • energy and chemical consumption
  • identify and repair leaks,
  • rationalise operational processes,
  • construct and repair infrastructure, financing

 

7/ Why do cities consider PPPs for water and/or wastewater management?

There is a wide range of reasons why a municipality would consider using a PPP. These include:

  • To upgrade a water or wastewater system that has fallen into disrepair or is failing to meet performance standards
  • To help meet new technical or legal requirements
  • To inject new management methods or new technologies
  • To conduct a particular service improvement such as better customer management, leakage reduction, SMART installations, etc.…
  • To construct new facilities or extend the network
  • To spread the costs of investment or upgrades in order to limit sudden price rises
  • To clarify and simplify water governance issues
  • To transfer technical or financial risk away from the municipality
  • To consolidate with neighbouring municipalities to gain economies of scale
  • Etc.

 

Public private partnerships have enabled the construction or introduction of appropriate technologies while using efficient operations to hold down the costs that would have traditionally been passed through to customers or taxpayers. Contracting, professional water operators is a way for public authorities to share the risk of projects and realise savings thanks to effective cost controls, dedicated management, technology applications, operational innovations.

 

In many cases, private contractors generate economies of scale leveraged by larger companies with expert staff across multiple operations.

 

8/ How does a PPP operator finance its operation?

In all forms of PPP contracts, in order to be sustainable and viable, the operator has to have covered all its costs by the end of the contract from the cost recovery mechanism set up by the public authority. This can either be done by a direct fee payment from the public authority, or by retaining an agreed portion of the charges collected on behalf of the authority from the service users.

In the early stages of a medium to long term contract, it may be necessary for the operator to invest significant sums to cover the needs for capital investment (Capex) operating costs (Opex). These loans can come from several sources:

  • borrowing from a bank or financial institution in the form of a loan
  • Investment of funds (capital) from a financial investor or the operator itself
  • A repayable subsidy from the state or public authority
  • A repayable subsidy or loan from a revolving mutual fund
  • A non-repayable grant from a donor or the state.

There are many variations on these mechanisms, which can also be used in combination as “blended finance”. All of them except the last one are likely to incur financial charges and all except the last need to be repaid by the end of the contract.

9/ How are customer rates established under public-private partnerships?

When a private water company is working within a partnership with the public decision makers, the setting of the community’s water rates remains the responsibility of the public authority. The city government normally sets the charging structure for a PPP contract. Guidelines may be set down by national law or by a water sector regulator. This charging structure includes the proportion of costs to be covered directly in the water tariff and how much can be covered by local taxes or subsidies. The costs to be covered include the long-term capital investment in infrastructure, the operating and maintenance costs, financial charges and debt service. Depending on the contract more or less of these may be costs incurred by the private operator. The charging system should cover the revenue needs to provide every aspect of the service in a sustainable and predictable way over the long-term. This charging system must include the revenue needs of both the public authority and the operator, whether public or private.

 

10/ What are the benefits of PPPs for local communities?

By engaging private water and wastewater operators, local communities can benefit in many ways:

  • Ensure a focus on high-quality public services that protect public health, thus reducing the cost of sickness to individuals and the burdens on the community of curative health care.
  • Contribute to a community’s economy by providing quality water and dependable service that supports existing and generates new businesses in the area.
  • Support the local economy by paying income, property and other business taxes
  • Transfer technology and know-how to local staff and to local subcontractors and suppliers
  • Advise the municipalities on economic and environmental conditions for the development of new industrial areas.
  • Provide municipalities, suburban areas and other entities with, know-how and expertise, involve existing staff in capacity building programmes, and advanced technology required to operate water systems in the respect of today’s water quality standards.
  • Contribute to individual well-being
  • Protect the environment and enhance environmental benefits
  • Improve water security and protect the environment against the impacts of floods and droughts

March 14th 2015

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    Attached Ressources

    Corporate documents
    • 01/01/16 | Follete de presentacion de AquaFed (en español)
    • 01/01/16 | AquaFed Brochure (ES)
    • 01/01/16 | AquaFed Brochure (in English)
    • 01/01/16 | AquaFed Brochure (EN)
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    • Album | 20/05/16 | Case studies
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    • Press release | 30/09/15 | 10 years AquaFed - Sustainable Development Goals 2015-2030: potential for AquaFed and its members