Globally, experience with water-related PPPs has been mixed, with some being relatively successful and others failing to bring finance to the sector or being terminated prematurely due to lack of improvements in services. New partnership models are emerging, indicating that PPPs can be better structured with a more balanced risk allocation, whilst providing incentives for the private sector to improve performance and deliver efficiency gains. This chapter examines selected water-related PPP models and how they have balanced the risks between public and private actors.
Financing Water Security
Models and Approaches for Investments that Last
Abstract
A key challenge in designing PPP transactions is to balance the risks between private and public actors to ensure they deliver policy outcomes whilst retaining value for money for the public sector.
Recent Build-Operate-Transfer (BOT) and concession contracts in the water sector demonstrate that PPPs can be deployed to achieve policies related to investment mobilisation as well as viable, inclusive and efficient water services. For instance, in the State of Rio (Brazil), PPPs are deployed to achieve universal water and sanitation services coverage. In Jordan and India, governments are calling on the private sector for improving treatment services beyond the construction phase. In France, environmental vulnerabilities are leading some municipalities (Lille municipality, for example) to embed new performance measures in PPP contracts related to water consumption efficiencies.
Such partnerships come with risks, but contracts can be structured to mitigate risks for both parties. All contracts can embed clear and measurable results for which contractors are accountable. BOT-type contracts can incentive performance by embedding a results-based funding element (tying payments from the public sector to the achievement of results, at least partially). In some contexts, concession contracts for large service areas that include different population income levels, can benefit from blended finance to balance financial risks and incentivise private sector investments.
Enabling conditions for successful PPP transactions include: (i) clear government policies backed by legal provisions, particularly on private sector participation conditions, contract structures, tariffs and service level performance; (ii) strong public sector capacity for contract preparation, negotiation and management (iii); stakeholder engagement, including with citizens; (iv) readiness to deploy blended finance; and (v) a robust private sector, ready to take on technical and financial risks.
Public-Private Partnerships (PPPs) continue to attract governments seeking to mobilise investment capital as well as technical expertise for durable water and sanitation services. Recognising the important role of the private sector in addressing water sector challenges, the Global Commission on the Economics of Water (GCEW) highlighted the need for PPPs in which risks and benefits are shared in a balanced way between public and private actors (GCEW, 2024[1]).
Globally, experience with water PPPs has been mixed, as some failed to bring finance to the sector and others were terminated prematurely due to lack of improvements in services (Marin, 2009[2]). However, new partnership models are emerging, indicating that PPPs can be better structured with a more balanced risk allocation, whilst providing incentives for the private sector to improve performance and deliver efficiency gains (Delmon, 2015[3]).
This chapter examines selected water PPP models and how they have balanced the risks between public and private actors. In this chapter, “PPP” refers to a broad range of agreements between public and private actors related to water and sanitation service delivery, falling in the scope of concession contracts and Build Operate Transfer (BOT) modalities (see Box 5.1). The common denominator of these partnerships is the sharing of a range of risks between actors, including financial risks.
There is no clear definition of what constitutes a PPP. The OECD broadly defines PPPs as long-term agreements between the government and a private partner, whereby the private partner delivers and funds public services using a capital asset base, sharing the associated risks. PPPs may deliver public services with regard to both infrastructure assets (such as bridges, roads) and social assets (such as hospitals, utilities, prisons). In this chapter, PPPs include (BOT)-type contracts and concession contracts but excludes full assets’ privatisation (see Figure 5.1). Unlike lease or management models, these forms of private sector participation expect some levels of investment from the contractor.
BOT refers to different forms of contractual arrangements generally introduced for the development and management of new assets. The model can include Build-Own-Operate-Transfer (BOOT) and Build-Transfer-Operate (BTO), in which ownership of the asset is transferred at different stages of the contract. BOTs can also exclude ownership transfer, with assets remaining under public ownership.
Concessions are generally introduced for the management of existing assets together with their rehabilitation and/or the development of new assets. They are medium (10-15 years) or long-term contracts (20-25 years), with the distinguishing feature that remuneration of the private sector is through users’ tariffs and charges.
Some governments make a distinction between PPP in a strict sense, whereby the private sector is only remunerated through payment from the government and concession contracts, in which the private sector is remunerated through users’ tariffs and charges. The Brazilian law, for example, distinguishes between user-pays and government-pays projects. Brazil’s Concessions Law governs PPP projects fully paid for by users; other PPP projects are governed by the PPP Law.
All PPPs come with a certain level of risk, both for the private sector looking for financial returns and the public sector looking to achieve policy outcomes. These outcomes may include improved service coverage, quality, viability and, increasingly, resilience. PPP risks range from those related to operational risks to the wider economic and political risks, which are potentially more difficult to anticipate and mitigate (see Figure 5.2).
The main challenge when structuring a PPP is to adequately balance the risks between public and private actors, such that they deliver policy outcomes, whilst providing some value for money for the public side. At one end, a partnership that shifts too many risks onto the private sector may become too costly for the public sector as higher perceived risks typically result in higher financial return expectations. On the other end, shifting too few risks, such as frontloading payments to the private sector before contract execution, may disincentivise performance and result in poor value for money.
Some recent PPP contracts indicate that a fair balance of risks can be achieved. These PPPs have set clear and measurable performance indicators, integrating operational efficiencies, investment responsibilities, as well as service level objectives into the partnership. Under specific enabling conditions, these contracts can lead to stronger performance and value for money for the public sector.
The present chapter seeks to draw practical lessons from practical experiences with balancing risks in PPP contracts. It is based on case studies, selected because they include contract modalities, terms and conditions that seek to mitigate and balance risks between actors involved, whilst addressing pressing water sector challenges.
Selected cases studies include:
1. Concession contracts between the State Water and Sewerage Company of Rio de Janeiro (CEDAE) and private operators in Brazil: Through these contracts, the State government sought to mobilise a total of USD 3.2 billion to provide 13 million people with access to durable water and sanitation services.
2. A BOT contract in Jordan for wastewater treatment and improving water reuse efficiency, which was partly financed through local commercial debt.
3. A BOT-type Hybrid Annuity Model (HAM), introduced in India to strengthen the operational performance of wastewater treatment services. The model involves an annual payment to the private sector based on wastewater treatment performance.
4. The concession contract between Lille municipality and the private operator Veolia, which was designed to address water shortages risks: the contract provides financial incentives for saving 65 million m3 of water in the form of penalties imposed on the concessionaire for not meeting targets.
5. The State of Paraná-owned company Sanepar’s BOT-type contracts in Brazil, which have been used to achieve water and sanitation for all nearly across the State.
This chapter presents and analyses the rationale for introducing these PPP models, their risk-sharing structure and the enabling conditions of such partnerships. Drawing on the case studies, this chapter first highlights the type of results governments can anticipate from a partnership with the private sector, noting that PPPs have been structured for a range of policy outcomes. The chapter then considers the different types of risks allocated between the public and private parties and highlights the corresponding mitigation measures introduced to make these contracts viable for both parties. The chapter then reflects on the enabling factors for successful PPPs, noting the importance of policies and legal instruments, the use of blended finance instruments as well as public and private capacities for such transactions.
The present chapter is the result of a rapid review of PPP contracts and models, rather than an exhaustive evaluation of their underlying structure and results to date. It is based on a review of existing knowledge and communication products and, in some cases, interviews with key stakeholders.1
This section presents the key features of selected PPP contracts, highlighting how they have been structured to address key policy concerns, from viable and resilient water and sanitation services to increasing coverage in low-income areas.
5.2.1. A focus on efficient and viable services with measurable results
Case studies show that governments have structured PPPs to pursue a range of policy outcomes, with a focus on efficiency and long-term viability, including environmental and social considerations. In addition to results in terms of service delivery (for example, the extension of the water distribution network), governments have introduced performance indicators related to operational efficiencies, such as non-revenue water and wastewater treatment levels. Table 5.1 below presents some key features of the selected PPP contracts, including results’ Key Performance Indicators (KPIs) and project costs. These costs refer to the investment expected over the duration of the contracts and can be a mix of public and private funds, depending on the contract.
Note: Project costs refer to the cost of infrastructure development and upgrade planned under the PPP.
In the PPPs under review, the private sector has been brought in as a partner for achieving ambitious service coverage targets, including to reach the poorest communities. In the case of the concessions in Brazil, the private sector is accountable not only for operating assets in an efficient manner (with minimal NRW) but also for extending the infrastructure up to the poorest communities in the service area. The three 35-year concession contracts tendered for the four blocks (or service areas) in Rio involve an investment programme heavily front-loaded in the first years, so as to reach near universal targets by 2033. At the time of signature in 2020/21, the rate of access to water services in the area was near universal, but residents in poor areas relied on informal connections due to a lack of infrastructure. Access to sanitation only amounted to 50%, with poorer citizens particularly affected, leading to significant environmental pollution. The concessions were designed to enable investments of up to BRL 1.8 billion (USD 315 million) in interventions benefiting specifically underprivileged communities. Contracts were specifically designed so that high and low-income areas alike benefit from improved service levels via cross-subsidisation between municipalities.
Ambitious environmental and social outcome measures can also be embedded as performance indicators in PPP contracts. The contract between Veolia and the municipality of Lille (Métropole Européenne de Lille, MEL) contains an innovative economic model for water conservation (see Box 5.2). In Jordan, the contractor operating the As-Samra treatment plant is required to meet effluent standards under Jordanian regulation, with payment contingent upon demonstrable compliance. Similarly, the HAM in India is designed so that payments for services over the 15 years of operation are tied to performance in effluent treatment quantity and quality.
Water resources are severely decreasing in Lille’s river basin, due to changing weather patterns and the slowing of groundwater recharge rate. The area of Lille comprises 66 municipalities and 1.2 million people. Water production is the responsibility of the public company Sourcéo, whilst distribution services have been delegated to the private sector since 1996.
For MEL, avoiding a “ground zero” moment required a significant reduction of water consumption. Following two years of consultations with private operators, citizens and public authorities, MEL designed a new type of contract for meeting its ambitious water efficiency (sobriété hydrique) objectives. In 2024, MEL and Veolia signed a contract for water distribution services with innovative economic features to incentivise a reduction of 65 million m3 in water use over 10 years.
In this contractual model, the concessionaire is subject to financial penalties if reduction objectives are not met. The contract signed with Veolia features specific volumes of water to be purchased from Sourcéo, above which the concessionaire is subject to a financial penalty: the price of bulk water would double.
To meet water consumption targets, Veolia committed EUR 60 million in investments targeting water loss reduction and for engaging with water users. For example, Veolia is planning the introduction of “water efficiency contracts” with large consumers, which will commit them to reducing water consumption (with technical assistance from Veolia) and the distribution of water saving devices to its customers.
Source: (Intercommunalités, 2024[7]).
5.2.2. Structuring PPPs to incentivise results’ achievements
Governments have structured PPPs in a way that mitigates risks for both parties and incentivises performance.
In PPP contracts reviewed, governments have mitigated operational risks (leading to poor performance) by tying under one contract construction and operations. This is the case in both BOT and concession contracts included in this chapter. As future operators are also responsible for construction (and in some cases, for design), they can optimise the design features, bringing innovations, which can lead to more efficient operations. All PPPs considered in this chapter expect the operator to also be responsible for infrastructure development.
PPP contracts’ remuneration structure can also introduce operational performance incentives. Remuneration can be exclusively linked to tariffs or be service fees paid by the contracting party (see Table 5.2). Where the remuneration is linked to tariffs (and therefore, to water consumption), the operator is incentivised to increase demand or connection rates (as in Rio de Janeiro). To mitigate the risk that the operator only focuses on affluent areas (with potentially higher consumption rates), governments can specify in the contract the areas that should be served. Concession contracts, in which the operator is also responsible for operational cost recovery, are well-suited to incentivise operational performance.
A service fee remuneration from the contracting party to the private sector can also be designed to stimulate performance. The India’s HAM case study shows that conventional BOT models can be improved upon, with a conditional remuneration structure that incentivises effectiveness and efficiencies after the construction phase. BOT models can be risky for the public sector, especially as they are usually introduced for large infrastructure such as desalination plants, bulk water production systems and wastewater treatment plants. Failure to adequately structure BOT contracts can lead to widespread environmental and social damage and a financial loss for the public sector. In India, the HAM contracts were introduced by the government on the back of poor experience with more traditional contracts (Engineering, Procurement and Construction - EPC or classic BOT). Prior to the HAM, the government’s effort to clean the Ganges River largely focused on creating sewerage infrastructure assets that local governments operated and maintained. This approach, primarily driven with a focus on constructing assets, failed to adequately invest in their operation and maintenance, and as a result, to improve the quality of the Ganges River (C-WAS, 2018[8]). The government of India sought the support of the International Finance Corporation (IFC) to structure a PPP model that leverages private sector expertise to construct, operate and maintain treatment facilities. As detailed in Box 5.3 below, the remuneration structure was partly conditional on the achievement of operational performance.
The HAM model involves two types of payments from the government to the private sector. A first transfer occurs at the start of the contract and covers 40% of the total contract cost, including operations (but excluding energy costs). The remaining 60% is paid over the construction phase, through annual payments. Over the construction period, these annual payments are conditional on the operator meeting sewage treatment standards, as set in the contract.
Source: (IFC, 2018[9]).
5.2.3. Shifting risks and accepting trade-offs
Whilst all PPPs come with risks, for both the public and private sector, some PPPs are riskier than others for the private sector. For example, the concessions in Rio, are riskier ventures for the private sector due to the following factors, among others:
The remuneration structure, entirely dependent on demand and revenues from tariffs.
Operational constraints since the operator must service all designated areas, regardless of the level of demand.
A 35-year duration, which heightens political, social, economic as well as environmental risks.
The level of investment required, which puts significant financial responsibilities on the private sector.
Table 5.3 below illustrates some of the main risks implied in this concession contract, compared with As-Samra BOT model. A key difference between the two models is the remuneration structure. In the BOT model, remuneration is guaranteed, as long as the operator meets the operational standards (treatment quality and quantity), without bearing the demand risk since the only customer is the Water Authority of Jordan. In this case, it is the Water Authority of Jordan, the public utility in charge of operating the water distribution and sewer system, who bears the bulk of the demand-side risk. In the case of the concession, remuneration is directly linked to the demand for services, which is uncertain to some extent.
Legend: Risk level
Low
Medium
High
Long-term contracts are particularly vulnerable to environmental hazards, given increasing uncertainty in weather patterns and their impacts on water resources, and therefore may incorporate specific mitigation measures. Contracts should account for such risks and factor in some flexibility to enable both partners to address unforeseen events effectively. Risks include flooding, extreme droughts and landslides, which can damage water and sanitation assets and affect operations. Such risks can be addressed through Force majeure provisions that set each party’s responsibility. The specific definition of a Force majeure and the risks these provisions include are set on a case-by-case basis. In countries particularly exposed to environmental hazards, these provisions should be balanced with incentives for developing resilience (World Bank, 2017[5]).
Considering the various risks exposed above, balanced PPP contracts include trade-offs and incentives for the private sector. In the Rio concessions, for example, demand side risks are addressed by ensuring social tariffs are in place, which will allow services to be affordable for the poorest. With the planned expansion of the water system in Rio de Janeiro, the population benefiting from the social tariff is likely to increase tenfold. Whilst the social tariff acts as a mitigation measure for the demand risk, it can create financial uncertainties related to debt servicing – since a larger volume of water is likely to be sold at a lower price. To address the risk, the transaction includes access to concessional finance from the federal development bank, the National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social – BNDES). The role of BNDES in this transaction is further discussed below.
Financial risks falling under the public sector can also be mitigated. In India, under the HAM model, the government remains responsible for covering energy costs of wastewater treatment operations, which are paid based on actuals. These arrangements are designed to shield the private sector from energy prices inflation risks. To mitigate the risk of inefficiencies and excessive energy consumption, the contract introduces a Guaranteed Energy Consumption, which commits the private sector to delivering services within a specified energy consumption limit. If the limit is surpassed, then the contract envisages penalties affecting remuneration.
Sanepar’s2 BOT PPP model also embeds strong risk mitigation measures for the public sector, providing incentives for the private sector to perform and achieve the expected outcomes. Under this arrangement, the private operator, typically a Special Purpose Entity (SPE), is contracted to develop and operate the services. User payments are collected by the SPE and transferred to Sanepar, which subsequently disburses funds back to the SPE (Sanepar, 2023[10]). The SPE’s performance is subject to stringent oversight: an independent verifier appointed by Sanepar conducts all required performance assessments. In parallel, the state regulator, AGEPAR,3 closely supervises Sanepar’s compliance with performance standards and may impose penalties on the state utility in cases of non-compliance. This framework provides strong incentives for the PPP to deliver on the expected outcomes, i.e. increased water and sanitation coverage, reduction of NRW, improved billing and collection rates.
Source: (Sanepar, 2023[10]).
Another important risk to mitigate on the public sector side is the total PPP project cost. Many PPPs help governments to bring in additional capital or to defer and pace capital investments, depending on the contract. The trade-off, however, is that calling on private capital, which is generally accessed on commercial terms, increases the project capital cost. This applies to the two BOT contracts considered in this chapter, which require private investments, whilst embedding regular government transfers to cover the total project costs over time.
Mitigation measures of projects’ capital costs can be introduced to minimise the capital costs through careful project preparation and competitive bidding. In India’s HAM, bidders were required to submit their price based the total lifecycle of the project, including operations charges (and the Guaranteed Energy Consumption cost mentioned above), over the year of operations. A well-prepared public sector, equipped with a full view of potential project cost, is in a good position to evaluate the bids, without the risk of under-bidding.
At least five enabling conditions contribute to the design and implementation of balanced PPPs: (i) enabling policies and regulations, both economic and environmental, (ii) a robust and well-equipped public sector, (iii) stakeholder engagement, (iv) ability to mobilise blended finance where required and (v) the capacity of the private sector.
5.3.1. Enabling policies and regulations
Balanced PPPs require clear government policies backed by robust legal provisions. The cases above illustrate that structuring and implementing such complex arrangements demand substantial resources, time and strong commitment from both the public and private parties. Their effectiveness is driven primarily by coherent government policy, the legal instruments that operationalise these policies and regulatory authorities that enforce compliance. Clear PPP requirements embedded in legislation, promoting transparency, competition and political-risk mitigation, help attract experienced and well-capitalised investors and operators to the water sector.
In Brazil, the Rio concessions and other PPP contracts implemented in recent years are the result of legal reforms that opened water and sanitation services to competitive tenders (see Box 5.4).
Brazil’s New sanitation Legal Framework remarkedly changed water and sanitation markets in the country. Approved in 2020, the law was introduced to stimulate investments in the water sector. It introduced competition in the tendering of water and sanitation systems’ management, opening opportunities of private investments. The law set the specific goal of providing access to drinking water to 99% of the population and access to sewage collection and treatment services to 90% of the population by 2033.
Until 2020, the concession for the supply of services was carried out through so-called program agreements (contratos de programa), which are contracts entered into between cities and states and public or semi-public companies, without a competition and bidding process. The New Sanitation Legal framework prohibits the provision of water and sanitation services through such program agreements and establishes that the concession of the services must be carried out through public bidding, in which both public and private companies can participate. The expectation is that the regulation will open opportunities for private sector participation and pave the way for increased private investments in the sector. Specific changes introduced with the new law are presented in Table 5.4 below.
Well-defined and adequate regulatory frameworks across the PPP project cycle, from contract design to monitoring contribute to making PPPs more effective. Such regulations may concern:
The different contract types, to enable public sector actors to select the optimum partnership model from a range of PPP models (concessions, BOT, HAM, etc.).
Model contract terms that allow performance-based contracting and flexible risk allocation between parties.
Mechanisms for tariff adjustments and cost recovery, that balance financial viability with affordability.
Frameworks for monitoring and enforcing performance standards with clear and measurable KPIs.
Rules governing contract modifications / renegotiations to address long-term uncertainties such as extreme weather and environmental risks.
Rules for contract renegotiation are key to enable innovative and large-scale contracts with stringent performance indicators. Large, complex and innovative PPPs face uncertainties and unforeseen events, whether technical issues, changing weather patterns or financial constraints. The capacity to adjust strategies and measures over the course of contract implementation is critical to achieve the overall goal of the partnership. To ensure that a contract is manageable throughout its life and will subsequently deliver value for money, some flexibility should be introduced (EPEC, 2014[13]). For example, contract terms can introduce periodic reviews of the contract to ensure that pre-agreed results and targets are fit to evolving realities (for example, those related to energy and other material costs, changing water customers’ behaviour, etc.)
Effective regulation of the private sector’s performance contributes to successful PPPs. Regulation is effective when clear performance indicators for the PPP are established. Across the PPPs selected, these performance standards relate particularly to:
Coverage rates (especially where significant pockets of the population are deprived from basic services, as in Brazil)
KPIs on water and sanitation services’ operational efficiencies
Environmental regulations, defining effluent standards
Environmental regulations that incentivise resource efficiency and durability
5.3.2. Strong public sector: from project preparation skills to contract monitoring and regulation
Balanced PPP contracts that provide value for money to the public sector require competent and adequately resourced public authorities (OECD, 2025[14]). Strong public sector capacity is required for the following functions:
Assess and allocate risks appropriately between public and private parties.
Structure contracts that incentivise performance while ensuring value for money.
Evaluate lifecycle costs including operations, not just construction.
Design and conduct competitive bidding processes that consider both price and quality.
Monitor contract compliance and enforce performance standards.
Such capacity can stem from long-standing public sector experience with water management and PPPs. In Lille, for example, MEL remains primarily responsible for water supply in its territory, a responsibility that it carries out through awarding concession contracts to private operators since 1996. MEL also has direct responsibility for water resources management and for sanitation (both sewered and non-sewered) services. This experience and technical capacity have enabled the municipality to design, negotiate and monitor innovative contracts, such as the PPP with Veolia.
Where capacity is lacking at municipal level, central government agencies and development partners support the project preparation process. The national public development bank BNDES in Brazil has played a critical role in the design and tendering of the concession contracts in the country. Public development banks can bring this experience from PPPs in other sectors, such as energy. In India and Jordan, IFC has provided technical assistance to structure contracts in a way that meets government’s, investors’ and operators’ interests. Given the complexity of PPP transactions, critical skills should be concentrated in a “PPP unit” (whether municipal or central level, or both), which can provide support to authorities seeking to enter into PPPs (OECD, 2025[14]).
Public sector capacity for contract monitoring is also a contributing factor to successful PPPs. In Brazil, following the adoption of the New Sanitation Law, monitoring of contract performance and regulation have been strengthened, providing incentives for the partnerships to deliver policy outcomes and greater confidence to both the public sector and the private sector on the process for performance verification.
5.3.3. Stakeholder engagement
Citizen engagement is a critical enabling condition that can mitigate political and social risks embedded in PPP structures. Early engagement with citizens, especially in areas transitioning from public to private services, is essential to make PPPs work. By consulting citizens during the project-preparation phase, governments promote a participatory approach and enhance communication regarding perceived risks (e.g. rising tariffs, inadequate service delivery and grievance-redress mechanisms) and the measures incorporated in the PPP to mitigate them. Such consultations are also essential to identify potential inclusion-related risks for specific groups, which can be mitigated by social tariffs or even direct subsidies where necessary. Both concession contracts in Lille and Rio include special tariffs measures to protect vulnerable groups.
Recent experiences show that citizen engagement should not be a one-off endeavour but should be factored in throughout contract implementation. Both government and the private partner should continue to assess and monitor social perceptions of the partnership and customer satisfaction of the services delivered. In Lille, MEL and Veolia carry out regular outreach and communication campaigns to guarantee citizens’ engagement in the ambitious water efficiency programme (Giscard d’Estaing, 2024[15]).
5.3.4. Readiness to deploy blended finance
Most PPPs reviewed in this chapter have benefited from blended finance, in one way or another. Blended finance has been deployed to make the transaction financially viable and attractive for the operator/investor, particularly where government ambitions of service coverage and efficiency were high, thus requiring significant investments.
Mobilising public funds for blended finance and mitigating public sector risks require careful transaction skills and capacity. Such skills are required to combine different financing instruments to optimise risk allocation and structure payments mechanisms that incentivise performance, such as the hybrid annuity model. Government and financing partners’ capacity to deploy guarantees and other credit enhancement measures greatly facilitate access to commercial finance and blended finance models.
The financing arrangement for As-Samra treatment plant in Jordan is a typical blended finance structure (see Figure 5.6). It combines public grants, private equity and debt financing to ensure financial viability, whilst balancing risk-sharing. The Millennium Challenge Corporation (MCC) and the Jordanian government provided grants to bridge the financing gap. Private sponsors contributed equity and a syndicate led by Arab Bank extended limited recourse loans, enabling commercial funding and mitigating the government’s risk exposure.
Source: (World Bank, 2016[16]).
5.3.5. Robust private sector
Innovative and long-term PPP contracts require risk takers backed by strong technical and financial capacities. When looking for such risk takers, governments need to pay specific attention to the following capacities:
demonstrated ability to meet operational efficiency targets
capacity to optimise both construction and operations when combined
experience implementing innovative technical solutions
strong asset management capabilities for long-term viability
ability to take on appropriate levels of demand and revenue risk
access to both commercial and concessional financing
financial strength to engage on long-term contracts (25-35 years)
capacity to pre-finance investments where required by contract structure
experience managing projects with complex payment mechanisms
In some contexts, and depending on the contracts, consortiums of private organisations in joint venture (or special purpose vehicles) can meet such requirements. This is the case in Jordan, for example, where Morganti-Infilco-Degrémont-Suez have formed a consortium. In other cases, well-established single entities can lead the contract with the private sector, as Veolia with Lille and Aegea Saneamento with the state of Rio or Parana.
Entering into PPP arrangements to improve water and sanitation services entails a series of trade-offs between public and private stakeholders. These trade-offs help redistribute and mitigate risks while establishing incentives for enhanced performance. From the government’s perspective, a key trade-off is the potentially higher overall project cost associated with mobilising private capital. Additional trade-offs include: (i) improved financing mobilisation, which enhances project readiness and supports the achievement of policy objectives; (ii) the assumption of deferred financial liabilities in cases where future government payments are required, such as under BOT-type contracts; and (iii) potential efficiency gains resulting from private-sector expertise, innovation and operational discipline. For the private sector, trade-offs may involve accepting greater financial and performance risks in exchange for longer-term, higher-value contracts and opportunities to deploy innovative solutions that meet efficiency and service requirements. Collectively, these trade-offs facilitate a more balanced allocation of risks and strengthen the prospects for effective public–private collaboration. In an environment characterised by rising economic, political and environment-related uncertainties, such trade-offs have become increasingly significant and central to the viability and resilience of PPPs.
Comprehensive project-preparation processes, supported by structured engagement with private-sector stakeholders and civil society, enable the identification and assessment of acceptable trade-offs. Tariff increases, for example, are often associated with private sector participation and can be a reason why many citizens (or their representatives) reject or are fearful of it. Yet, two of the large concession contracts reviewed in this chapter did not lead to significant tariff increases. MEL (Lille) has one of the lowest tariffs in France and has stepped up social measures to ensure all citizens have access to water at an affordable price. These measures have been introduced when the operators are expected to make reductions in the volume of water sales. In Rio, the total number of people that will benefit from social tariffs is likely to increase tenfold over the course of the PPP contract.
Governments can draw on such experiences to design well-balanced PPP contracts that maximise value for money on the public sector side, whilst enabling financial gains for the private sector. Experience shows that large concession models are well-suited for water and sanitation, provided that private sector investments are secured through long-term contracts and enabled through blended finance where necessary. Other types of partnerships, such as BOT may be riskier for the public sector (due to many unknowns at contract start) but can enable the achievement of policy objectives. Public sector risks can be minimised through detailed project preparation and contract design, particularly by linking payments to measurable and binding performance indicators.
Going forward, emphasis should be given to building public sector capacity for preparing, tendering and monitoring PPP contracts, in addition to addressing regulatory barriers. Public sector capacity is amongst the several enablers of balanced PPPs, but it is also critically lacking in many countries where public institutions are starved of capable human resources or do not have access to technical expertise. Building this capacity is critical for the public sector to act as a partner throughout the partnership with the private sector, allowing flexibility where required whilst remaining firm on the contract’s objectives.
Where public sector institutions are well-equipped with access to technical expertise, greater emphasis should be placed on the balance of risks to ensure PPPs deliver environmentally responsible and efficient services. This may require clearer policies on environmental priorities and strategic measures for water and sanitation.
References
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