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.
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
2/ Some advantages of PPPs
PPPs can offer many advantages to the public authority and to the water service users they serve. These include:
3/ Key steps in preparing a PPP
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:
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:
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:
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: