Structuring and Governing the Use of Public Private Partnerships in Water
Water is essential for life. Historically, governments or governing regimes have been responsible for delivering good quality water supply to their residents. However, recently, in many parts of the world there has been shift away from public delivery towards the use of public private partnerships (PPPs) for the delivery of water and sanitation services. Let us examine why this has been the case. Primarily there is often a feeling that public agencies are hampered by an intrinsic x-inefficiency stemming from bureaucratic procedures that they need to follow, and a lack of performance-based incentives for their personnel. This then leads to underperformance of public agencies and can be borne out by fact when public agencies are benchmarked on metrics such as the quality of water supplied, the efficiency of water supply and so on. There is therefore a case to be made for bringing in private sector efficiencies into the provision of water. Although this rationale that the private sector can provide better quality services is not unjustified, it does not automatically follow that PPPs – projects wherein the private sector shoulders greater ownership and risks as compared to traditional construction contracts – will always be successful where there are cases of government failure in service delivery. In particular, projects should be carefully chosen and structured such that they can be governed over their lifecycle.
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Framework for identifying appropriate PPP opportunities
Antonio Vives formerly of the Inter-American Development Bank and his colleagues have developed a framework that can help identify appropriate PPP opportunities in the water and sanitation sector. They list eight criteria – the presence of a legal framework that allows for PPPs, the presence of political or bureaucratic will to implement the project, lack of fiscal space for the state to finance the project on its own, public sector capacity to structure and award PPP contracts, willingness and ability for users to pay for the services, sufficient project size to ensure economies of scale and a stable price and economic environment – as key factors that determine whether or not a project can be pursued via PPPs. The robustness of this framework can be demonstrated by applying it to a recently executed PPP in India – a Sewage Treatment Plant (STP) built in the town of Alandur in Tamil Nadu, India. Alandur has a relatively well educated and reasonably affluent population, and was large enough for a project to make commercial sense. Alandur municipality lacked the financial capability to execute a STP on their own. They therefore intended to enter into a Build-Operate-Transfer arrangement with a private provider who could construct, operate and then handover a STP to the municipality. A recent government order had legitimized PPPs in municipal services, and the chairman of Alandur municipality was a charismatic individual set on ensuring that sanitation services would be provided through partnerships with the private sector. The chairman conducted an active communications campaign on the benefits of the project that helped convince citizens to pay for improved sanitation services. Municipal officials however did not have much knowledge on PPPs and were therefore unable to structure the contracts themselves. Alandur therefore sought the help of a state-level nodal agency with in-house PPP expertise to help them structure the project. This confluence of factors ensured that the right project had been selected for PPPs and that the project award process was smooth and successful. However, as the project progressed, the nodal agency withdrew, and the institutional capability of the public sector to govern the contract diminished. This then led to turbulence on the project marked by litigious proceedings between the private operator and Alandur municipality. It therefore becomes important that these factors that are used to select appropriate PPPs are maintained in a stable fashion over the lifetime of the project in order for it to be sustainable.
Project Governance
This then brings us to our second construct – project governance. While it is important to carefully select projects for delivery through PPPs, awarding a project does not guarantee successful long-term outcomes. Take the case of a water supply project that was undertaken in the town of Tirupur, also in the state of Tamil Nadu in India. Tirupur is home to a thriving textile industry where good quality water is an essential need. The industry greatly needed this project and appeared to be willing to pay a premium for high quality water. A project was structured wherein a private operator would sell treated water to the industry and also provide water at low, cross-subsidized rates to the residents of Tirupur. After operations commenced, Tirupur was fortunate enough to receive abundant rainfall. For several of the smaller textile operators, it therefore seemed more cost-efficient to draw groundwater for industrial purposes as opposed to paying for expensive, treated water. Demand dropped and the project’s finances took a turn for the worse.
How then does one successfully govern PPPs over their operational duration? We posit that there are three strategies that must be employed simultaneously. First, most PPPs are enacted over several decades, and the future is always uncertain. Contracts must therefore be flexible with triggers built in for renegotiation. Second, the incentives of public and private stakeholders must be aligned. In the case of the Tirupur Water Supply project, the state government was a shareholder in the project company and therefore infused capital in order to resuscitate the project. Both parties shared an incentive to keep the project going. Finally, relationships with the broader user community must be carefully nurtured and managed prior to and through the operations of the project. Small textile units in Tirupur did not see the value in paying for good treated water. In contrast, the efforts put in by Alandur’s chairman to educate the populace paid dividends and Alandur’s sewage treatment plant did not face any demand risks.
Minimizing long-term costs
PPPs are extremely complex service delivery arrangements enacted under uncertain environmental conditions, over long periods of time. Although a PPP can help tide over public sector inefficiencies, their inherent complexity implies that they will entail high transactions costs to sustain. Projects should therefore be carefully chosen and structured with long-term governability in mind such that transactions costs are minimized along their lifecycle and the intended benefits of a PPP are realized.
References
“Vives Antonio, Benavides Juan and Paris Angela M. (2006) Financial structuring of infrastructure projects in public-private partnerships, Inter-American Development Bank, Washington.”
Resources
This article was written by Ashwin Mahalingam and Ganesh Devkar:
Ashwin Mahalingam - Assistant Professor, Indian Institute of Technology, Madras, India. Email: mash@iitm.ac.in
Ganesh Devkar - PhD Student, Indian Institute of Technology, Madras, India.
The issues in this article are addressed in the case research, Creating the Alandur Sewerage System: Project Structuring and Risk Management, written by Ashwin Mahalingam, Ganesh Devkar and Satyanarayana Kalindi of II-T Madras, India. The case research was published by the Institute of Water Policy, Lee Kuan Yew School of Public Policy and can be accessed here at: http://www.spp.nus.edu.sg/iwp/CaseResearch_Studies/Case_Research_IWP002_2009.pdf.
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