​​What is a PPP?

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The phrase public private partnership is used to describe a wide range of arrangements between public authorities and private  sector organizations. 

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However, for a private water operator, a public-private partnership (PPP) defines a contractual arrangement between a public agency (federal, state or local) and a private sector entity for a water or wastewater related project or service. This contract should include a detailed description of the responsibilities, risks and benefits of both the public and private partners.

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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. Each party shares in the risks and rewards potential in the delivery of the service and/or facility.

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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 which carry out the operations and advise public authorities to transfer technology and know-how to improve public water and wastewater services.

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​Content and Scope of PPP contracts

 

​Contracts can have a duration as short as 3 years, 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.

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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.

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

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• Technical assistance contracts

• Management contracts

• Delegated management, “Affermage” or lease contracts

• Design build and operate contracts (with a number of different subcategories)

• Concession contracts

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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.

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Other approaches

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

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Partial privatization:

• Sale of part of the assets to a private operator.

• Part of the capital (usually restricted to less than 50%) of a municipal or state-owned company is sold to private shareholders.

• Injecting financial capital and operation and management skills and technology into the company.

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Full privatization:

• Via sale of all the infrastructure to private shareholders, transferring all the assets and the responsibility of maintaining and operating to the private sector.

• 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.

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Investor-owned utilities:

• Set up from the beginning as private companies with private investors. This is a model that developed in the USA.

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​​Impacts of PPPs on pricing

 

​​The public authority has the control on the contract and therefore the pricing policy.

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

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It is very common for local authorities to make important choices about the economics of their water and sanitation services when 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.

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The other is that the authority has engaged the private operator to make or facilitate extensive investment programs 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.

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​​Financing PPPs

 

​​For PPP contracts to be sustainable and viable, the operator has to cover 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.

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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:

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• 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.

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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.

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​​Private operators and sustainable development

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Private water operators through AquaFed had advocated for several years on the need to set a goal dedicated to water – Sustainable Development Goal 6.

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Sustainable development is an essential part of the job of private water operators. The services they deliver have a direct impact on economic, environmental and societal progress all over the world.

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Water operators provide a link between the natural and the human water cycles. They take water from nature to provide it safely to users – and they collect used water, treat it to remove pollution and return it to nature. This sustains the natural water cycle and ensures service continuity day and night all year long, even as conditions are changing constantly.

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Private operators strive to support the sustainability of the communities they serve. The public authorities who employ them look to them to fulfil service delivery that is in itself sustainable. They also seek advice and actions that enhance the security and sustainability of the towns, cities and villages that they are responsible for.