Water and Sanitation Program: GUIDANCE NOTE Delivering Universal and Sustainable Water Services Partnering with the Private Sector Iain Menzies March 2016 The Water and Sanitation Program is a multi-donor partnership, part of the World Bank Group’s Water Global Practice, supporting poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. Author Iain Menzies Contact us For more information, please visit www.wsp.org The Water and Sanitation Program is a multi-donor partnership, part of the World Bank Group’s Water Global Practice, supporting poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. WSP’s donors include Australia, Austria, Denmark, Finland, France, the Bill & Melinda Gates Foundation, Luxembourg, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States, and the World Bank. The findings, interpretations, and conclusions expressed herein are entirely those of the author and should not be attributed to the World Bank or its affiliated organizations, or to members of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to wsp@worldbank.org. WSP encourages the dissemination of its work and will normally grant permission promptly. © 2016 International Bank for Reconstruction and Development / World Bank © 2016 Water and Sanitation Program (WSP) www.wsp.org | www.worldbank.org/water SKU K8693 Delivering Universal and Sustainable Water Services Partnering with the Private Sector Iain Menzies March 2016 Contents Acknowledgments.............................................................................. v Abbreviations..................................................................................... vii Introduction......................................................................................... 1 References................................................................................ 2 I. PPP in the Water Sector............................................................. 3 What Is PPP?............................................................................ 3  Rationale for PPP: Deciding Whether Private Sector Participation in the Water Sector Makes Political and Economic Sense....................................................................... 3 References................................................................................ 6 II. Sector Readiness for PPP............................................................ 7  A National Institutional, Legislative, and Policy Framework for PPP..................................................................................... 7  WSS Sector Policy and Institutional Framework: Support for PPPs.................................................................................... 9 Water Sector Financing Framework......................................... 10  Managing the WSS Political Economy: Stakeholder Mapping and Participation....................................................... 11 A PPP Track Record on which to Build.................................... 11 References.............................................................................. 13 III. Choice of PPP Structure/Model.............................................. 15 Available PPP Options............................................................. 16 References.............................................................................. 20 IV.  Implementing PPP: From Origination to Contract Management – Mind the Gap.................................................. 22 The PPP Process.................................................................... 22 PPP Project Identification, Selection, and Screening................ 23 PPP Project Structuring and Appraisal..................................... 25 Designing the PPP Contract.................................................... 29 Managing the PPP Transaction................................................ 31 References.............................................................................. 37 V. Smaller-Scale PPP Challenges................................................ 39 Aggregation and Clustering..................................................... 39 PPP Capacity Gaps................................................................. 41 Access to Finance................................................................... 41 References.............................................................................. 43 www.wsp.org iii Delivering Universal and Sustainable Water Services Contents VI. Forget Customers, Especially the Poor, At Your Peril............ 44 Customer Orientation in PPP................................................... 44 The Poor and PPP Sustainability............................................. 45 References.............................................................................. 47 Appendix A: Key Reference Sources................................................... 48 Box 2.1: National Policy Statement in Cambodia.............................. 9 Figures 1.1: Four Key Elements of a PPP Framework............................. 4 2.1: Roles of Different Agencies in PPP...................................... 8 2.2: Organization of Institutional Set Up to Enable PPP in Niger.......................................................................... 8 2.3: Institutional Framework in Benin........................................ 10 2.4: Unified Financing Framework............................................ 11 2.5: Stakeholder Relationship Framework................................ 12 2.6: Typical Range of Stakeholder Interest................................ 12 3.1: Typical Range of PPP Options........................................... 17 3.2: Available PPP Model Options............................................ 17 4.1: PPP Process Road Map................................................... 23 4.2: Government Best Practices for PPP Management............ 24 4.3: Two-Stage Evaluation Process.......................................... 24 4.4: Optimal Risk Transfer........................................................ 27 4.5: WSS PPP Key Risk Factors.............................................. 27 4.6: Evolution of Roles under a Phased PPP Contract............. 31 4.7: PPP Procurement Decision Points.................................... 32 4.8: Framework for Developing a Strategic Approach to Communications............................................................... 34 4.9: PPP Regulatory Framework.............................................. 35 5.1: Critical Constraints for Stakeholders in WSS Finance........ 42 Tables 2.1: PPP Contracting (Public) Party in Different Countries......... 10 3.1: Matching PPP Options with WSS Sector Challenges........ 16 iv Water and Sanitation Program Acknowledgments This report was developed by Iain Menzies, Senior Water cited may be informal documents that are not readily and Sanitation Specialist, World Bank. The author wishes available. to thank Jemima Sy, WSP Business Area Lead for Domestic Private Sector Participation, Shin Kue Ryu as lead researcher, The findings, interpretations, and conclusions expressed and the panel of peer reviewers comprising Cledan Mandri- herein are entirely those of the author and should not be Perrott, Victoria Rigby Delmon, and Jane Jamieson of attributed to the World Bank or its affiliated organizations, the World Bank who have all provided valuable input on or to members of the Board of Executive Directors of the the Note. Finally, the author thanks Bill Kingdom, David World Bank or the governments they represent. The World Michaud, and Rajesh Advani who also provided feedback Bank does not guarantee the accuracy of the data included on the draft Note, and WSP and World Bank staff in in this work. The boundaries, colors, denominations, and Washington, DC, and various country offices for their other information shown on any map in this work do not ­ support in its preparation. imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorse- Contact Us ment or acceptance of such boundaries. For more information, please visit www.wsp.org. The material in this publication is copyrighted. Requests for The Water and Sanitation Program (WSP) is a multi- permission to reproduce portions of it should be sent to donor partnership, part of the World Bank Group’s Water worldbankwater@worldbank.org. WSP encourages the dis- Global Practice, supporting poor people in obtaining semination of its work and will normally grant permission affordable, safe, and sustainable access to water and sani- promptly. For more information, please visit www.wsp.org. tation services. WSP’s donors include Australia, Austria, Denmark, Finland, France, the Bill & Melinda Gates © 2016 International Bank for Reconstruction and Foundation, Luxembourg, the Netherlands, Norway, Development / The World Bank Sweden, Switzerland, the United Kingdom, the United States, and the World Bank. 1818 H Street NW Washington DC 20433 WSP reports are published to communicate the results of Telephone: 202-473-1000 WSP’s work to the development community. Some sources Internet: www.worldbank.org www.wsp.org v Abbreviations ADB Asian Development Bank ATSP Accreditation of Technical Service Providers (Philippines) BOO build-own-operate (contract) BOOT build-own-operate-transfer (contract) BOT build-operate-transfer (contract) CAPPP Cellule d’appui aux PPP (Niger) CBO community-based organization CLC community liaison cell CWSA Cambodian Water Supply Association Danida Danish International Development Agency DBL design-build-lease (contract) DBO design-build-operate (contract) DILG Department of Interior and Local Government (Philippines) GL Gorom-Lampsar (Senegal) GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) IBRD International Bank for Reconstruction and Development (of the World Bank Group) IFC International Finance Corporation (of the World Bank Group) IFI international financial institution JICA Japan International Cooperation Agency JV joint venture KUWSMP Karnataka Urban Water Supply Modernization Project (India) KfW Development Bank of the German Federal Government LGU local government unit (Philippines) MPI Ministry of Planning and Investment (Vietnam) NDP Notto-Diosmone-Palmarin (Senegal) NGO nongovernmental organization NRW non-revenue water NWRB National Water Resources Board OBA output-based aid O&M operations and maintenance (contract) PCG partial credit guarantee PDF Project Development Facility/Fund PPBC phased performance-based contract PPIAF Public-Private Infrastructure Advisory Facility PPP public-private partnership RoW rights of way SOE state-owned enterprise SPV special purpose vehicle ULB urban local body (city government, India) www.wsp.org vii Delivering Universal and Sustainable Water Services Abbreviations UNICEF United Nations Children’s Fund USP unsolicited proposal VfM value for money VGF viability gap funding WSP Water and Sanitation Program WSS Water and Sanitation Services All dollar amounts are U.S. dollars unless otherwise indicated. viii Water and Sanitation Program Introduction 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril The World Bank Group is committed to eliminating facing them. Struggling to operate old systems while satisfy- extreme poverty by 2030 and boosting shared prosperity by ing increasing demands for better or expanded service focusing on the bottom 40 percent. Expanding access to requires access to expertise not immediately available. In clean water and basic sanitation services is fundamental to such instances governments are investigating options that these goals. bring in the know-how, and sometimes the financing, of the private sector to improve management of the water util- Worldwide, 663 million people still lack ready access to ity company. improved sources of drinking water; nearly half are in sub- Saharan Africa. Furthermore, some 2.4 billion people do One option, considered in this document, is for public not use an improved sanitation facility, and of these 1 bil- entities to partner with the private sector. lion people still practice open defecation. This causes pre- ventable deaths—mostly of children, contributes to the Public-private partnerships (PPPs) can be an important spread of disease, and suppresses economic growth. At the option for implementing sector reform strategies and can same time, water supplies in many developing countries are address the key challenges to providing universal and sus- under growing pressure from urbanization, desertification, tainable service access. Whether viewed from an operations and climate change. Helping governments identify the best perspective, or an investment perspective, the goal for the solutions to these challenges in a given local context is a public sector is the same in these instances—to leverage the World Bank Group priority. knowledge and skills of the private sector to help them improve the performance and efficiency of service delivery The performance of water and sanitation utility companies to customers. The scope of such arrangements can range varies greatly, but many are underperforming. This is due from a part of the utility’s activities (such as leakage reduc- mainly to systemic issues, which can include weak gover- tion) to delegated management and investment for service nance, lack of accountability, poor management, inade- delivery to a whole city. quate or aging infrastructure, and insufficient funds for operations and maintenance. These all adversely affect ser- As a partner, the private sector can bring technical and man- vice delivery. For many people, having 24×7 access to a safe agement skills and experience, commercial discipline, and water connection at home is still a dream. private finance to help tackle such challenges in a structured and contractually binding manner. Previous experiences There is no one solution to addressing often very complex have shown that while PPP can be a powerful tool for water and sanitation challenges. However, if we are to improving the performance of WSS services, they are also achieve the new United Nations Sustainable Development complex and challenging to implement (Marin 2009; Goal 6 targets of ensuring universal and equitable access to Gassner, Popov, and Pushak 2008). For PPP to be successful safe and affordable drinking water and to adequate sanita- and sustainable, the contractual schemes must be properly tion and hygiene by 2030, much work remains to be done designed, with incentives for performance, realistic targets, in the sector. efficient monitoring, and sufficient access to financing (whether public, private, or both) to carry out the rehabilita- In many cases the public sector water and sanitation tion and expansion of infrastructure. At the same time, gov- ­ service providers seek support to overcome the challenges ernment needs to create a conducive enabling environment www.wsp.org 1 Delivering Universal and Sustainable Water Services Introduction in terms of policies, legislation, and institutions and develop professionals. Many water PPP engagements in developing its capacity to manage the PPP cycle from project concept, countries are more domestically oriented and at a smaller through procurement and negotiation, to implementation scale than international transactions. This Note outlines a and regulation—a long-term process that can be carried out rationale and approach for launching a water sector PPP so in parallel with the PPP. This will be critical to ensuring that government leaders and private sector providers can the private sector partners deliver on their obligations, are have informed discussions about the path forward should accountable to citizens, and deliver value for money to the they choose to explore this approach in their countries. government and customers. References The objective of this Guidance Note is to offer practical, Gassner, Katharina, Alexander Popov, and Nataliya experience-based guidance to those considering or currently Pushak. 2008. Does Private Sector Participation Improve engaging in PPP in the water sector, and to provide a basic Performance in Electricity and Water Distribution? An understanding of water PPPs and the PPP cycle to better Empirical Assessment in Developing and Transition inform dialogue with governments that are considering Countries. PPIAF Trends and Policies Series. PPIAF. PPP arrangements. It builds on the experience of WSP in supporting PPP reforms in developing countries, especially Marin, Philippe. 2009. Public Private Partnership for through the domestic private sector. Key stakeholders Urban Water Services, A Review of Experiences in in this dialogue include government at all levels, service Developing Countries. PPIAF Trends and Policies providers, policy makers, customers, civil society, and Series #8. PPIAF. 2 Water and Sanitation Program I. PPP in the Water Sector Chapter Summary This chapter provides an introduction to PPP and explains the following: • PPP frameworks: policies, procedures, institutions and rules • Deciding if a PPP makes sense • The importance of undertaking a WSS diagnostic study • PPP in the context of WSS sector reform 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril What Is PPP? policies, procedures, institutions, and rules that together A public-private partnership (PPP) is a contractual arrange- define how PPPs will be implemented (IBRD, WB, ADB, ment between the public and private sectors where the pri- and IADB 2014). Not only does the establishment of a vate sector is paid to deliver infrastructure and/or related clear PPP framework publicly communicate the govern- services on behalf, or in support, of the government’s ment’s commitment to PPPs, it also defines how projects broader service responsibilities and policy objectives.1 PPPs will be implemented, helping ensure good governance of typically make the private sector parties that build infra- the PPP program (promoting efficiency, accountability, structure and/or deliver services responsible for the infra- transparency, and fairness). This will help generate both structure’s condition and performance over the duration of ­ private sector interest and public acceptance of the PPP the contract term. program. Typical features of a PPP include: Figure 1.1 shows four key elements of an effective PPP • Provision of a service, the contractual scope of framework, the implementation of which will support which can include the creation of an asset involving a process conducive to attracting and sustaining pri- private sector design, construction, financing, main- vate sector participation in the Water and Sanitation tenance, and delivery of ancillary services to an Services (WSS) sector. The concepts underpinning these agreed performance standard for a specific period; key elements will be a recurring theme in this document. • A contribution by government through land, capi- The critical thing to bear in mind is that failure by gov- tal works, risk sharing, revenue diversion, purchase ernments to work through all these elements may ulti- of the agreed services, or other supporting mecha- mately result in underperformance or even failure of the nisms; and planned PPP. • Payments to the private sector from government or users once operation of the infrastructure has Rationale for PPP: Deciding Whether Private commenced—these payments are contingent on the Sector Participation in the Water Sector private sector’s performance in providing for and Makes Political and Economic Sense delivering the services. The quality of water supply and sanitation services in many countries leaves much to be desired. Policies, incentives, or PPP Frameworks institutional arrangements may be inadequate, resulting in Many countries have developed PPP frameworks to sup- services, and a sector, that are unsustainable. Some of the port their PPP programs. The PPP framework refers to the more common challenges include: 1 Examples of PPPs include the National Public Private Partnership Guidelines, government of Australia, and the Scheme for Support to Public Private Partnerships in Infrastructure, government of India. www.wsp.org 3 Delivering Universal and Sustainable Water Services PPP in the Water Sector Miller 2014; Jamieson, Sy, and Warner Figure 1.1: Four Key Elements of a PPP Framework 2014; WSP 2010). Government Commitment Fair Risk Allocation to PPP Agenda • To party best able and willing to Undertake a Diagnostic of Current • To PPP project control and manage the project WSS Operations and Investments • To procurement scheme The first response to concerns over • To providing financial support WSS delivery failure, whether deliv- ery is through government depart- Well-Prepared PPP Model and Regulatory and Legal Framework ments and agencies, utilities, or Clear Tender Process community-based organizations (CBOs), • For risk transfer • PPP model selection should be to help the relevant entity • For private sector security • Private sector consultation or entities undertake a diagnostic study to identify the key issues in WSS delivery, identify performance Source: Adapted from Mandri-Perrott and Menzies 2010. gaps, and gain an understanding of the reasons for the gaps and failures. This diagnostic is likely to uncover • Low access rate to piped water and sewerage information and data ­ deficiencies ­services: with the poor living in marginal urban along the value chain (from source to tap), especially neighborhoods and rural areas being the most affected; with respect to underground assets (location, condition, • Low levels of service for those with access: inter- and performance), connections, production, sales, and mittent piped water supply, low pressure, poor NRW, as well as the financial situation of the service drinking water quality (biological, chemical), fre- provider(s). It may also identify broader institutional and quent overflows and odors of sewage networks, poor policy issues impacting WSS delivery (e.g., unclear or customer services; inconsistent mandates between ministries, between differ- • Inability to recover operating costs: low connectiv- ent levels of government, and between local government ity; tariffs below cost recovery; poor metering, bill- and service providers with respect to WSS provision and ing, and collection; high non-revenue water (NRW); sector regulation; underfunded universal access; or decen- overstaffing; and low energy efficiency; and tralization policies). • Water scarcity and poor water resources management and planning: unreliable raw water ­ This analysis should include assessment of substitutes to availability/quality as a result of aquifer depletion/ piped service delivery that may be playing an important over abstraction, surface water pollution, and com- role in how the public copes with unreliable “official” petition with other users (irrigation, hydro-power, piped water distribution services, and how the unserved navigation, aquaculture). access water services. Providers of substitutes may have a significant market share and be important stakeholders All or any of these sector challenges may become drivers for in any reform and potential private sector participation reform and for partnering to learn from the private sector. initiatives. The Water and Sanitation Program (WSP) has seen a range of drivers for partnering with the private sector in improv- This diagnostic will provide the basis for designing appro- ing WSS, with governments recognizing the skills and priate WSS reforms, as well as for identifying if, and how, experience, technical knowhow, and finance that private ­ the private sector could be engaged to improve WSS deliv- operators can infuse into the sector (Castro, Jagannathan, ery and investment. It will also provide baseline data for and Romero-Navarro 2014; Kacker, Ramanujam, and future reform programs. 4 Water and Sanitation Program Delivering Universal and Sustainable Water Services PPP in the Water Sector PPP Must Be Considered in the Context of WSS Sector Reform and Improving Service Provision Common Pitfall: PPP not connected to The gaps, issues, and failures identified in the diagnostic sectorwide reform will be key drivers for sector reform and potential private sector participation. They may also help determine priori- PPP alone is unlikely to deliver sustained ties for reform and shape the reform process. The main improvements in services without broader and objectives of reforms will be to: supporting sector reform measures. • Improve and expand service access; • Increase efficiency of operations; and PPP is not a band-aid for a dysfunctional WSS • Enhance service reliability, sustainability, and sector—sector reforms may be needed first, before affordability. PPP is feasible. PPP should be seen as part of, and Experience has shown that high-performing utilities/service contributor to, a wider sector reform strategy. providers, those that deliver these reform objectives, share the following common attributes (Baietti, Kingdom, and van Ginneken 2006): • Autonomy – they are sufficiently independent to West African countries, for example, PPP was the heart of manage their operations professionally; sector reform, with over 1,000 PPPs now in place in Benin, • Accountability – they are answerable to others for Burkina Faso, Mauritania, Niger, Rwanda, and Senegal. decisions, resource use, performance; and PPP is a potential vehicle for achieving reform objectives • Consumer orientation – they report to and listen to and reinforcing institutional reform measures, or it may customers and meet their needs. form an integral element of a reform strategy targeting ­ particular issues, objectives, or attributes. However, PPP These attributes apply to the relationship between the alone is unlikely to deliver sustained improvements in ser- utility/service provider and the environment in which it ­ vices without broader and supporting sector reform mea- operates. sures. PPP is not a band-aid for a dysfunctional WSS sector—sector reforms may be needed first before PPP is Institutional reform measures to make public utilities more feasible (e.g., decentralization, corporatization, cost-­recovery effective include: tariffs, regulation). PPP options should be seen as part of, • Corporatization – establishing a separate corporate and contributors to, a wider sector reform strategy (see entity with operational and financial management chapter 2 on sector readiness for PPP). discretion including clear/explicit priority objectives; • Performance agreements – setting out the responsi- In Albania, during the 1980s, the water sector was plagued bilities of parties, performance targets, sanctions, by underperformance. Tariffs were well short of cost recov- and tariff/budget commitments; ery levels, electricity bills and salaries went unpaid, NRW • Consumer accountability – performance report- was 70 percent, collection rates were around 20 percent, ing, complaints, consultations, and customer con- and water was available 3 to 4 hours per day. Between 1997 tracts; and and 2005, a reform strategy was implemented with three • Capacity building – customer services, contract main elements: decentralization, private sector participa- management, asset management, business planning, tion, and increased cost recovery. During implementation, and finance/commercial management. a number of PPP contracts (one concession and two management contracts) were signed with donor or interna- ­ Governments sometimes see PPP as a catalyst to provoke the tional financial institution (IFI) support. Despite all this larger discussion of and commitment to a sector reform good intent, results were patchy at best, in part because agenda, of which PPPs are only one component. In many of inconsistent government policy implementation on www.wsp.org 5 Delivering Universal and Sustainable Water Services PPP in the Water Sector decentralization and in part because private operator auton- Directions in Development Series. Washington, DC: omy was undermined by utilities retaining authority over World Bank. key decisions. Without the prerequisite governance, legal, institutional, economic, administrative, and social (partici- Kacker, Suneetha Dasappa, S. R. Ramanujam, and Tracey patory) reforms in place (World Bank 2011), it could be Miller. 2014. Running Water in India’s Cities: A Review argued that the PPP element of the reform strategy was of Five Recent Public-Private Partnership Initiatives, always unlikely to succeed. Water and Sanitation Program, Flagship Report. Washington, DC: World Bank. Key reference sources on WSS sector reform and PPP are IBRD, WB, ADB, and IADB (International Bank for provided in the final section of this document. These will Reconstruction and Development, World Bank, Asian provide the reader with more detailed and in depth infor- Development Bank, and Inter-American Development mation on the topics covered in this document. Bank). 2014. Public-Private Partnerships Reference Guide Version 2.0. Washington, DC, and Mandalyong References City: World Bank, ADB, and IADB. Baietti, Aldo, William Kingdom, and Meike van Ginneken. 2006. “Characteristics of Well-Performing Mandri-Perrott, Cledan and Iain Menzies. 2010. Private Public Water Utilities.” World Bank Water Supply & Sector Participation in Light Rail/Light Metro Transit Sanitation Working Note No. 9 (May). Initiatives. Washington, DC: World Bank. Castro, Aileen Bolus, Vijay Jagannathan, and Mariles van Ginneken, Meike, and Bill Kingdom. 2008. “Key Romero-Navarro. 2014. “Beyond One-Size-Fits-All: Topics in Public Water Utility Reform.” World Bank Lessons Learned from Eight Utility Public-Private Water Working Note 17, August, World Bank, Partnerships in the Philippines.” Water and Washington, DC. Sanitation Program Learning Note, World Bank, World Bank. 2011. Albania: Decentralization and Service Washington, DC. Delivery in Albania: Governance in the Water Sector. Fall, Matar and Alain Lucussol. 2009. “Guiding Principles A World Bank Issue Brief. Washington, DC: for Successful Reforms of Urban Water Supply and World Bank. Sanitation Sectors.” World Bank Water Working WSP (Water and Sanitation Program). 2010. “Public- Note 19, January. World Bank, Washington, DC. Private Partnerships for Small Piped Water Schemes: Jamieson, Jane, Jemima Sy, and Robert Warner. 2014. A Review of Progress in Seven African Countries.” Tapping the Markets: Opportunities for Domestic Water and Sanitation Program Field Note, Investments in Water and Sanitation for the Poor. World Bank, October 2010. 6 Water and Sanitation Program II. Sector Readiness for PPP Chapter Summary This chapter discusses the institutional, legal, and policy frameworks necessary to support PPPs and includes the following: • PPP support programs and institutions • Project development facilities and funds • Understanding the WSS sector policies that will influence PPP • Selection of contracting authorities • Water sector financing • Managing water sector stakeholders 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril A National Institutional, Legislative, and on highway, rail, airport, or energy PPPs. In this case, con- Policy Framework for PPP sideration needs to be given to ways the government can Many countries have developed policy and legal frameworks assist local governments in their WSS PPP projects. to enable and support PPPs, and have created and promoted PPP opportunities. Laws and regulations can enable the In the Philippines, for example, the national PPP Center government to enter into PPPs and set the rules and bound- is focused on PPPs of national strategic importance. aries for how they are implemented. This can include PPP- Recognizing an opportunity, WSP has started working with specific legislation (e.g., PPP, build-operate-transfer (BOT), the PPP Center to develop a framework to streamline assis- and concessions laws), other public financial management tance provided by the PPP Center, in collaboration with the laws (e.g., public procurement laws) and regulations, and Department of Interior and Local Government (DILG) sector specific laws and regulations. Some of these laws and and the National Water Resources Board (NWRB), to sup- regulations will specify eligible sectors for PPP, so it will be port scaling up PPPs in water supply services nationwide. important to check that PPP is possible in the WSS sector This will institutionalize the process by which WSS PPPs and determine whether there are any restrictions on the type can be identified, negotiated, and concluded within a of PPP that can be undertaken, or if there are laws that spe- framework of clear rules and responsibilities of the opera- cifically apply to certain PPP structures (e.g., the Philippines tors, the local government unit (LGU) administration, BOT law). Where gaps or roadblocks in the framework national government agencies, and water supply users, con- exist, there may be an opportunity to help or support the fining the role of national government agencies to one of government in drafting the missing elements. connecting, facilitating, and light-handed regulation. WSP is working with the PPP Center, the NWRB, and the DILG Some countries have also established PPP support programs/ to facilitate the scaling up of small WSS systems in hun- institutions (e.g., national PPP units/centers and sector PPP dreds of locations with well-defined time lines and stan- units/cells, which may be housed in the line ministry) under dardized unit costs. Figure 2.1 shows a suggested institutional their PPP frameworks. National PPP units can represent an framework for WSS PPP in the Philippines (WSP 2014), excellent opportunity to introduce PPPs into the WSS sec- illustrating the integration of national and local govern- tor or scaling up pilot initiatives to the national level, as long ment agencies, operators, and financial institutions. as they are realistically set up and do not introduce new lay- ers of bureaucracy. Because of the relatively small scale of In Niger, one of the world’s poorest countries, the govern- WSS PPPs, many of these PPP units have not focused on ment has established a PPP Support Unit (Cellule d’appui (or developed capacity in) the WSS sector, instead focusing aux PPP, or CAPPP) in the Office of the Prime Minister. www.wsp.org 7 Delivering Universal and Sustainable Water Services Sector Readiness for PPP This is an appropriately simple insti- Figure 2.1: Roles of Different Agencies in PPP tutional arrangement (see figure 2.2). PPP Center, DILG, LGUGC, LWUA, NWRB • Technical assistance High PPP Transaction Costs: • Performance monitoring & public disclosure Assistance from Project • Regulatory oversight • Guarantee on LGU/WD payments, if any Development Facility/Fund Long-term financing Some countries have recognized that developing a PPP and running a PPP LGU administration: GFI/PFI/Equity Contracting party transaction is typically more expen- sive than the equivalent process for a Loan repayment traditional public investment project Private Subsidy (OBA/VGF) (even though they can bring in con- sector: Water distribution Contracting siderable benefits if they are success- party ful), and this may sometimes deter Users Targeted subsidies agencies from identifying PPPs. In public contribution Subscription tariff Outcome order to overcome this potential bar- payment reporting rier to PPP project identification and Source: WSP 2014 pipeline development, a number of Note: DILG = Department of Interior and Local Government; GFI = Government Financial Institution; PFI = Private Financial Institution; LWUA = Local Water Utilities Administration; LGU = local government governments have established a unit; LGUGC = LGU Guarantee Corporation; NWRB = National Water Resources Board; OBA = output- Project Development Facility or Fund based aid; VGF = viability gap funding. (PDF) under their PPP framework. The purpose of these PDFs is to arrange and provide funding support to public agencies and authorities to cover the costs associated with identifying, structuring, and Figure 2.2: Organization of Institutional Set procuring PPP projects. A PDF typically covers the costs of Up to Enable PPP in Niger PPP feasibility studies, and hiring transaction advisors to, among other things, prepare bidding documents and PPP Prime Minister contracts, and hire transaction advisers. The World Bank and other international financial institutions (IFIs) and donors have helped governments set up and (co) fund PDFs in a number of countries including Vietnam Permanent (PDF), India (Infrastructure Project Development Fund), secretary Pakistan (Infrastructure Project Development Facility), Policy committee Common Pitfall: High Transaction Costs Experts unit A PPP transaction is typically more expensive than CAPPP the equivalent process for a traditional public Source: Presentation made by CAPPP to the Forum on British Investments investment project, which can deter agencies from to the Profit of Niger, London. June 14, 2012. Note: CAPPP = Cellule d’appui aux PPP, the PPP support unit in Niger. identifying PPPs. 8 Water and Sanitation Program Delivering Universal and Sustainable Water Services Sector Readiness for PPP South Africa (PDF), Ghana (PDF), the Philippines (Project the Government of Benin to develop the water supply ser- Development and Monitoring Facility), and Indonesia (PDF). vice in rural areas through PPPs. The institutional set up, in which the water ministry (Ministry of Mines, Energy, and WSS Sector Policy and Institutional Water, or MMEE) is the regulator, the local councils (com- Framework: Support for PPPs munes) act as the contracting authority, and the private Where government is considering introducing a PPP into the sector comprises the water service providers, is well defined. WSS sector, the PPP arrangement must be consistent with The National Water Policy, adopted in 2008, identifies the and supportive of sector policies reforms and the institutional private sector as a key actor in developing water supply framework. Many countries have produced sector policies ­ services for the rural population. and water master plans, and it will be important that policies explicitly allow, and even support PPP (see box 2.1 for an WSS PPP and Government Decentralization Policies example of one country’s policy statement). When national In a number of countries, government decentralization or legislation and policies support PPP in the water sector (e.g., devolution policies have opened up the potential for intro- a PPP law), then the WSS policy should set out how this will ducing PPP. In Madagascar (Annis and Razafinjato 2011), be implemented. This will include identifying the institu- for example, a new Water Code put WSS infrastructure tional arrangements for PPP procurement and contract man- under the ownership and management of the communes, agement. Assistance can be provided to the government to and stated that water supply services may be delegated to a (re)draft the sector policy to encourage and support PPP. third party via management agreements, leasing, or conces- sions. This policy created a significant market opportunity The starting point in assessing sector institutional readiness for rural/small town PPPs but uptake has been slow, in for PPP is to map out the sector’s existing institutions and no small part as a result of the formal private sector in their roles and responsibilities. It will be important to iden- Madagascar being largely underdeveloped, and virtually tify which part of government will be responsible for manag- nonexistent in the water sector. Other PPP challenges in ing each part of the PPP project cycle from project inception Madagascar include: to contract management and regulation (see the section • The Ministry of Water is poorly funded, under- “Managing the WSS Political Economy”). In Benin, for staffed, and has a limited presence in rural areas; example, the implementation and administration of water • There is no accurate database available regarding the policies has been devolved to local authorities (communes). roles of local government structures vis-à-vis man- Figure 2.3 describes Benin’s institutional framework. agement of infrastructure; and • Local leaders and community groups lack the A review of the national documents (World Bank 2012) political will or capacity to respond when water ­ demonstrates that there is strong political will on the part of ­supplies fail. It is possible that the WSS sector Box 2.1: National Policy Statement in Cambodia was not ready for PPP. The section The Cambodian national policy on water supply and sanitation states “A PPP Track Record” suggests some that “the Private Sector shall be encouraged to be involved in all areas approaches for supporting both the of service provision contracts, including service contract, management supply and demand aspects of creat- contract, lease contract, concession contract, BOT contract, and BOO ing a viable PPP market. contract.” The objective is “to widely expand the urban water supply in both quality and service coverage. Promote market competition in The Contracting Authority response to the consumer demand, by ensuring sustainable supply.” With the introduction of PPP into Source: Global Study for the Expansion of Domestic Private Sector Participation in the the sector, a key question for the gov- Water and Sanitation Market – Cambodia Draft Deep Dive Report. WSP and Cambodia Ministry of Industry, Mines and Energy (MIME). 2013 ernment is which public entity will enter into (sign and manage) the PPP www.wsp.org 9 Delivering Universal and Sustainable Water Services Sector Readiness for PPP Figure 2.3: Institutional Framework in Benin MMEE • Policy setting DG Eau PREFECTURES SONEB • Development and • Have the authority of the • Provision of water services monitoring of policy and MMEE to coordinate with in urban areas strategy implementation different state actions • Delegated contracting • M & E and regulation within the department authority status Assistance for coordination of different Accountability state actions COMMUNES S EAU • Contracting authorities • Decentralized DG Eau • Provision of water and services in the Backup support/ sanitation services within departments technical advice the territory Source: Benin - Global Study on the Expansion of Domestic Private Sector Participation in the Water and Sanitation Market. WSP Draft Deep Dive Analysis Report. 2012. Note: M&E = Monitoring and Evaluation; MMEE = Ministry of Mines, Energy, and Water; SONEB = Société Nationale des Eaux du Bénin (national water utility); DG Eau = General Directory of Hydraulic Affairs (DHA); S-Eau = decentralized DHA services in the Departments contract with the private operator: Table 2.1: PPP Contracting (Public) Party in Different Countries who will be the “contracting author- Country Contracting party ity”? Since this may be a new arrange- Benin (operator, monitor) Water User Association ment in the sector, a new authority Benin, Burkina Faso, Madagascar, Niger (+ ministry) Commune may even need to be created. It will Madagascar Ministry of Water be important that the contracting Mali, Peru, Philippines Local authority municipality authority has the legal, technical, Mozambique National Water Directorate financial, and management capacity Uganda Town Water Supply Authority to undertake this responsibility. New Source: Delmon 2014. legislation or regulations may also need to be introduced to ensure that the proposed contracting authority Water Sector Financing Framework has the right or authority to enter into the contract. Another dimension of sector readiness for PPP is the sector’s Table 2.1 shows that in many PPPs the public party to the financing framework and its links with national finance and contract is a local entity: the community or a local author- budgeting arrangements. The government will need to assess ity/municipality. In several countries, water user associa- and plan for any financial commitments to support PPPs, tions were a party to the contract, sometimes as a third and must be aware that investors will seek a high degree of party. In Benin (which uses the affermage model), the water clarity and financial/legal certainty in terms of sources of user association monitors contract performance, while in revenue and financial support (including subsidies and Niger, the association also represents consumers. guarantees). The framework will need to show the sources 10 Water and Sanitation Program Delivering Universal and Sustainable Water Services Sector Readiness for PPP of public funding and financial sup- port institutional responsibilities for Figure 2.4: Unified Financing Framework those sources, and how they will be National Policy Steering Committee coordinated and allocations approved. (Line/coordinating ministries) New government laws, decisions, or regulations may be required to institu- Technical Loans: Partial VGF grants Secretariat/ tionalize the framework and ensure • Commerical banks credit OBA grants Grant disbursement agency • Development banks guarantees government budget allocations over the medium term. Since some PPPs may require grant funding over a Service number of years (e.g., for construc- providers tion), new multiyear government budgeting mechanisms may need to Source: Adapted from Philippines Unified Financing Framework for Water Supply and Sanitation, 2015, World Bank, Washington DC. be introduced to support PPP. Where Note: OBA = output-based aid; VGF = viability gap funding. sector decentralization policies have been implemented, the framework may need to cover sector-specific fiscal See “Communication and Public Outreach” in chapter 4 transfer mechanisms. These transfers could also potentially for more on this topic. be used as some form of security or collateral to enhance the bankability of a possible PPP or PPP program. Engaging stakeholders early in the process can lead to positive results. For example, in the twin cities of Hubli- ­ Figure 2.4 shows an example water sector financing frame- Dharwad (Karnataka State in India), one of the key success work that is being designed to accommodate PPP. It shows factors for the pilot was the strong political support for the how the government plans to manage and coordinate initiative,3 with senior local politicians and administrators public grants (viability gap fund and output based aid), who championed the project and actively engaged with loans from commercial banks and state-owned develop- civil society from the earliest days. ment banks, and partial credit guarantees. The frame- 2 work will also set out eligibility criteria for operators to Figure 2.6 summarizes the typical range of stakeholder access funding, which forms part of a wider sector reform interests in PPPs. program with access to funding acting as an incentive for PPP and improving coverage and service efficiency and In this respect, having a politically designated and trusted standards. champion or driver for the PPP process can be critical, and can act as a focal point for public communication and Managing the WSS Political Economy: information, ensuring that attention is focused on the key Stakeholder Mapping and Participation issues, working to achieve stakeholder consensus, and lead- When dealing with a service like water, which is so essential ing government decision making. to human life and livelihood, it is important in any reform process to engage all stakeholders as early as ­ possible. A PPP Track Record on which to Build Figure 2.5 shows an example framework for analyzing When assessing the potential for WSS PPP in a country it stakeholders; finding win-win opportunities; creating is important to look to precedents in other sectors. In many strategies and plans for engaging with stakeholders; countries, WSS is one of the lagging sectors for PPP, with and finally, evaluating the effectiveness of the process. the telecommunication, energy, and transport sectors often 2 Partial credit guarantees (PCGs) cover private lenders against all risks during a specified period of the financing term of debt for a public investment. These guarantees are designed to extend maturity and improve market terms. The IBRD and the IFC can provide PCGs (as can other IFIs such as regional development banks). 3 The PPP pilot was under the World Bank’s Karnataka Urban Water Supply Improvement Project (KUWASIP). www.wsp.org 11 Delivering Universal and Sustainable Water Services Sector Readiness for PPP Figure 2.5: Stakeholder Relationship Framework Win-win opportunity maximized 8 Adjust 7 Evaluate 1 2 3 Map 4 Design 5 Create 6 Execute Evaluate the Assess the stakeholders engagement engagement engagement current state stakeholders to objectives strategy plan plan Identify win-win Win-win opportunity opportunity communicated Source: WSP Domestic Private Sector Participation Group. action plan with the government to Figure 2.6: Typical Range of Stakeholder Interest create a viable WSS PPP marketplace. ­ Commercial and investment climate fac- Government tors will affect private sector appetite for Employees • Maximize revenue participating in the WSS sector, influ- • Fair treatment of current • Provide universal access encing firms’ actual or perceived costs employees • Ensure affordable service and risks, and impacting their willing- • Career opportunities • Attract investors • Improve productivity, efficiency, • Improve public welfare ness to invest. Key concepts to create and and morale stimulate sustainable WSS PPP markets include (Sy, Warner and Jamieson): Investors Consumers • Stable, transparent regulatory To stimulate the demand side: • Fair pricing process •  Ensure consumer affordability • Improved service quality • Organizational restructuring and and reliability and assess willingness to pay— asset allocations that favour • Increased accountablity with due regard given to ensuring efficient operations and responsiveness that the poor have the capacity to • Provide trained human resources pay (through, for example, lifeline • Generate investment opportunities tariffs and targeted subsidies); •  Increase access to consumer finance for connections— Source: Adapted from ADB 2008. through, for example, micro-­ credits and installment schemes; leading the way. Reviewing the successes, challenges, and •  Actively consult and engage lessons from these other PPPs can facilitate and inform the stakeholders on introducing PPP; dialogue with WSS stakeholders. • Strengthen public sector institutional capacity for PPP; Where PPP is new to a country but there is a conducive enabling • Establish a PDF to incentivize PPP project prepara- environment, then it will be important to assess the demand tion; and and supply sides of the WSS sector/market and develop an • Cluster subscale projects. 12 Water and Sanitation Program Delivering Universal and Sustainable Water Services Sector Readiness for PPP Checklist 2.1:  Sector Readiness for PPP q Laws and regulations are established to enable government to enter into PPPs. q PPP support programs/institutions are in place to help scale pilots to the national level. q Sufficient funding is available for public agencies for identifying, structuring, and procuring PPP projects—for example, creating a Project Development Facility or Fund (PDF). q Stakeholders are engaged in the early stages of the PPP process. q WSS sector policies are consistent with PPP arrangement. q Roles and responsibilities in the sector have been mapped and management responsibilities for each part of the PPP project cycle have been identified/allocated. q Decentralization or devolution policies have been explored (if applicable). q Contracting authority has been established or identified. q Financing framework shows sources of public funding and financial support and institutional responsibilities, and how sources will be coordinated and allocations approved. q A high-level project champion is identified. q Stakeholders are engaged in the early stages of the PPP process. q Win-win opportunities are developed. q PPP actors and stakeholders agree on PPP objectives. q PPP market supply and demand factors are assessed and stimulated as appropriate. q Consultations are carried out with other IFIs, bilateral donors, and NGOs that are relevant to the WSS sector. To stimulate the supply side: private sector. In Vietnam, for example, the government • Provide market intelligence to increase market and donors formed a technical working group to work on awareness; WSS PPP policy. Membership in the working group • Develop consistent and transparent tariff cost recov- included line ministries, the World Bank, the Asian ery and subsidy policy and mechanisms; Development Bank, the Deutsche Gesellschaft für • Increase access to finance to encourage investment Internationale Zusammenarbeit/ Development Bank of (network expansion)—through, for example, con- the German Federal Government (GIZ/KfW), the Japan cessional finance, credit enhancements, and International Cooperation Agency (JICA), Danida, the guarantees; Dutch Water Partnership, UNICEF, and an active interna- • Reduce transaction costs through standardizing/ tional NGO (the East Meets West Foundation). streamlining PPP procedures and documents; and • Improve supply chains and technical support by Key issues to consider in assessing sector readiness for PPP improving professional capacity—for example, by are summarized in checklist 2.1. identifying (potential) private sector operators, cre- ating WSS operator trade associations, and provid- References ing accredited business development services to ADB (Asian Development Bank). 2008. Public-Private increase technical, financial, and management capac- Partnership Handbook. Manila: ADB. ity of the private sector. Annis, Jonathan and Gerald Razafinjato. 2011. Public- It may be productive to consult and coordinate with other Private Partnerships in Madagascar: A Promising multilateral IFIs, bilateral donors, and nongovernmental Approach to Increase Sustainability of Piped Water organizations (NGOs) active in the sector that may also Supply Systems in Rural Towns. 6th Rural Water be in a dialogue with government on engaging the Supply Network Forum, Uganda. www.wsp.org 13 Delivering Universal and Sustainable Water Services Sector Readiness for PPP Delmon, Victoria. 2014. “Structuring Private-Sector WSP (Water and Sanitation Program). 2012. Benin - Participation Contracts for Small Scale Water Projects.” Global Study on the Expansion of Domestic Private Sector Water and Sanitation Program, Washington, DC: Participation in the Water and Sanitation Market: Draft World Bank. Deep Dive Analysis Report. Water and Sanitation Program, World Bank. Sy, Jemina, Robert Warner, and Jane Jamieson. 2014. Tapping the Markets: Opportunities for Domestic WSP (Water and Sanitation Program). 2014. Expanded Investments in Water and Sanitation for the Poor. Small Water Utilities Improvement and Financing Directions in Development–Private Sector Technical Assistance: Phase 2 Final Report, Water and Development. Washington, DC: World Bank. Sanitation Program, Philippines, World Bank. 14 Water and Sanitation Program III. Choice of PPP Chapter Summary This chapter provides the following support for determining Structure/Model a PPP structure: • An overview of the types of PPP structures/models • A description of where PPP models fall on the spectrum of private sector participation • An in-depth look at models with government and private ownership 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril The steps taken so far in preparing for the introduction of • Maintain: Maintaining the WSS operator’s assets PPP into the sector have created the context or enabling envi- (plant and equipment) to a specified standard over ronment for implementing a PPP-based model. The next the life of the contract. stage in the PPP process is to determine what kind of PPP • Operate: Operating the technical assets (treatment structure would be best suited to address sector reform priori- plants and networks) and providing support services ties and the specific needs of the proposed project or initiative (metering, billing, collection, customer services), that will be politically and socially acceptable. depending on the scope of the contract (e.g., is the scope to be limited to bulk supply of treated water or Many PPPs involve the creation of new assets (“greenfield” broadened to the inclusion of networks and retail projects). An example would be the construction of a new services to customers). water treatment plant. PPPs can also be used to upgrade and manage existing assets (“brownfield” projects). An example The other key element in PPP model selection is deciding how would be the handing over of the responsibility for an existing the PPP operator will be paid. This can be a combination of water supply system (treatment plant and distribution net- user fees (water bills), subsidies (e.g., for household connections work). One of the first steps in deciding on the most appro- or public budget support due to affordability/cost-recovery priate PPP model is the selection of which key functions and constraints), and direct government payments for services (e.g., responsibilities the government is interested in bundling into the purchase of bulk treated water from a PPP treatment plant). the contract(s) for private delivery and management: • Design: Setting output and performance require- PPP model selection will need to be informed by the risk ments as well as design specifications (e.g., raw water appetite of the private sector (e.g., is it prepared to take source works, treatment process and capacity, plant demand and tariff risk through payments limited to cus- layout, network routes/sizing, pumping stations, tomer billings) and the political economy/government pol- connections). icy acceptability of some options (e.g., is it acceptable for the • Build or Rehabilitate: Constructing, installing, and private sector to own WSS assets, or to take responsibility for commissioning new WSS assets and/or rehabilitating/ network management and/or retail operations). This should refurbishing/upgrading existing assets and/or network be tested at the earliest stage of PPP option planning. extensions. • Finance: Determining how investments (construc- In Vietnam, for example, the government undertook a tion, major refurbishments) and operations/mainte- market sounding of both the private sector and public sec- ­ nance will be funded (e.g., through public subsidy tor (provincial and city government, utilities) on six PPP such as viability gap funding (VGF), public loans, options that could be effective at resolving some of the sec- private capital, ODA grants/loans, user fees). tor’s problems. Table 3.1 summarizes the findings. www.wsp.org 15 Delivering Universal and Sustainable Water Services Choice of PPP Structure/Model Table 3.1: Matching PPP Options with WSS Sector Challenges Performance-based Management Lease- Concession BOO/BOT Joint NRW reduction contract affermage contract venture + contract contract PSP contract Low efficiency High NRW ✓ ✓ ✓ ✓ ✗ ✓ Low revenue collection ✓ ✓ ✓ ✓ ✗ ✓ Poor service quality Low access ✗ ✗ ✓ ✓ ✓ ✓ Low continuity ✓ ✓ ✓ ✓ ✓ ✓ Weak incentives ✓ ✗ ✓ ✓ ✓ ✓ Limited funds to invest ✗ ✗ ✓ ✓ ✓ ✓ Political will ✓ ✓ ✗ ✗ ✓ ✓ Experienced in Vietnam ✓ ✗ ✗ ✗ ✓ Recommend ✓ ✗ ✗ ✗ ✓ ✓ Source: Report on Private Sector Participation Options for the Water and Wastewater Sector in Vietnam. Consultant’s Report to the Vietnam Ministry of Planning and Investment. 2014. Note: BOO = build-own-operate; BOT = build-operate-transfer; NRW = non-revenue water. The options requiring the transfer of control over the entire including traditional public service options. A range of operations of the water distribution system did not gain PPP models and contract forms is available. As the Vietnam political support. There was a clear preference for state-owned example shows, selecting the most appropriate model(s) is and controlled utilities to be responsible for operating the a function of sector reform objectives (e.g., increasing effi- distribution network and for dealing with consumers. As a ciency and quality of services, expanding treatment capac- result, three PPP options were recommended for piloting ity), availability of (public) investment finance, political urban WSS in Vietnam: a performance-based non-­ revenue support/PPP policy objectives, legal constraints, and pri- water (NRW) reduction contract, a build-operate-transfer vate sector willingness to absorb project risk. (BOT) contract, and a joint venture plus a PPP contract. It was also noted that there were no legal and regulatory Figure 3.1 shows the typical range of PPP options;5 the restrictions to the implementation of these PPP options. range shown here reflects the degree of private sector involvement (asset ownership, financing, operational con- This Vietnam example introduces the PPP universe of acro- trol, revenue independence). nyms, terminologies, and jargon— much of which is used in confusing, misleading, and frequently inconsistent ways Option selection along this continuum will involve answer- around the world. Much has been written on this topic,4 but ing a number of questions: here the focus will be limited to a number of tried and tested • Will the project involve creating new assets or using WSS PPP models, especially those suited to smaller-scale ini- existing assets, or both? tiatives in rural, periurban, and small to medium-sized towns. • What will the operator be responsible for—­ operations and maintenance, new build, refurbish- Available PPP Options ment, and/or network extensions? Before embarking on a PPP project it is important for • How will the operator be paid—water bills/tariffs, ­government and the relevant contracting authority to exam- government fees, and/or operating budget/capital ine the different options for proceeding with the project, subsidies? 4 A good starting point is found in Delmon 2010. 5 See the PPP in Infrastructure Resource Center at http://ppp.worldbank.org/public-private-partnership/agreements. 16 Water and Sanitation Program Delivering Universal and Sustainable Water Services Choice of PPP Structure/Model Figure 3.1: Typical Range of PPP Options Public owns and operates Public private partnership Private sector owns assets and operates assets Utility Joint venture/ • Civil works Management • Concessions restructring Leases/ partial • Service and operating • BOT projects Full divestiture corporatization Affermage divestiture of contracts contracts • DBOs decentralization public assets Low High Extent of private sector participation Source: PPP in Infrastructure Resource Center. • Does the law or government prescribe or recommend cer- Figure 3.2: Available PPP Model Options tain forms of contract? • Are there legal constraints on Existing asset New build (+Existing) asset Management/O&M contract/ risk or responsibility transfer? Lease/Affermage DBO/DBL/Concession In Benin, for example, legislation TARIFF FEE TARIFF FEE requires the communes (districts) to construct the water infrastructure and Lease/ Management/ to provide the service. It also requires Concession/DBL DBO/BOT Affermage O&M Contract them to delegate its service provision functions to private or community operators. The General Directorate of Source: Adapted from presentation: Structuring Private-Sector Participation (PSP) Contracts for Small Scale Water Projects. Iain Menzies. 27 August 2014. Manila, Philippines. Water in Benin has developed a guide for the communes to develop water services in rural areas based on these requirements, including a set of short model agreements to be used for this PPP Models with Government Asset Ownership purpose. Performance Based Management/Operations and Maintenance Contract Figure 3.2 shows the PPP model options available when the Under a management contract, the government appoints a questions on assets (existing and/or new build) and opera- private contractor to manage the operations and the system tor payment (user tariff or government service fee) have (assets and staff) in return for a fee (paid by government), been answered. which is performance based (with incentives and penalties for performance). Responsibility for all investment remains The next section provides a quick overview of these PPP with government. Contract term is typically 3–5 years, models and a few other commonly used ones.6 but may be longer if the operator has repair or renewal 6 A good starting point for much more detailed descriptions and examples of WSS PPP models is the World Bank’s PPPIRC website: http://ppp.worldbank.org/public-private​ -partnership/sector/water-sanitation. www.wsp.org 17 Delivering Universal and Sustainable Water Services Choice of PPP Structure/Model obligations (up to 10 years). Management contracts are a Faso, and Senegal) and is similar to a lease. Under an affer- potentially beneficial form of PPP when there is strong mage, the operator “fermier” has delegated to it the obliga- political or public reluctance to water tariff increases or tion to supply customers with potable water in the delegated concern about relinquishing ownership/control to the pri- area as well as operation and maintenance obligations, and vate sector. Management contracts may also be the pre- a limited obligation to repair and replace (typically this ferred approach if potential private sector investors consider obligation applies only to minor parts). Revenue comes that the risks associated with a higher level of private from tariffs and the operator’s fee is paid out of revenues. involvement are currently too high. Such contracts have Any revenues collected above the operator’s fee are paid to even proven successful in reestablishing services in post the authority for investment in the scheme. The authority is conflict situations. In post-war Kosovo, a three-year the owner of the scheme and is responsible for major repairs, performance-based management contract was designed to ­ renewal, and expansion. Affermage contracts tend to be for (1) improve services and (2) establish a viable public utility a medium period of time (from 3 to 10 years), but can be capable of operating on its own at the end of the contract. longer. Payments were based on a fixed fee plus performance bonus. Between 2001 and 2004, the operator turned around the Lease Contract utility from loss to profit, reduced NRW, and improved ser- Under a lease contract, a local government or its water util- vices (Marin, Mugabi, and Manino 2010). ity leases the full operation and maintenance of its facilities within an agreed geographic area to a private operator for a Performance Based Non-Revenue Water (NRW) fixed period (typically 5 to 10 years). The operator bears Reduction Contract extensive revenue risks since it pays a fixed lease fee to the These are a specialized type of management contract focused government out of revenues collected from customers. The on reducing physical leakages and water losses. With lease payment is intended to cover the government’s capital increasing water scarcity and the drive for improving water costs in extending or upgrading the facilities (for which it operator efficiency, interest is growing in this type of PPP retains ownership). Under some lease contracts, the opera- contract. NRW contracts have been used around the world tor may have obligations for asset repair and renewals. (e.g., Bangkok, Dublin, Ho Chi Minh City, Manila, São Paulo, some cities in Jamaica, and the State of Selangor Design-Build-Operate (DBO) Contract in Malaysia), and many other countries are now actively The operator is required to design and build the project, exploring this option (e.g., India, Indonesia, Kenya, and deliver the service (“operate”). The operator is not Pakistan). Under a performance-based NRW contract, required to finance the project capital costs. It will typically a private operator is contracted by the government or its be paid a lump sum by the government for the installation water utility to carry out a NRW reduction program on commissioning of the scheme and, thereafter, a periodic (Kingdom, Liemberger, and Marin 2006). The private fee for operations. DBO contracts typically have longer operator is usually paid a fixed and a performance-based terms than the affermage and management contracts (con- fee—the performance fee is tied to achieving NRW reduc- struction period plus operating period of 5 to 10 years). The tion targets (e.g., the volume of water saved per day or the government bears the revenue risk. The DBO has the number of district metering areas completed). In most advantage that the same party that is designing and build- ­ performance-based NRW reduction contracts, the capital ing the scheme will be operating it, thereby reducing the investments are funded by the government or a public government’s risk of under- or over-design and poor con- utility. struction quality. Affermage Contract Design-Build-Lease (DBL) Contract The affermage contract is used in civil law jurisdictions The operator designs and builds a scheme, sells it to the (e.g., francophone African countries such as Benin, Burkina contacting authority, and simultaneously leases it back for a 18 Water and Sanitation Program Delivering Universal and Sustainable Water Services Choice of PPP Structure/Model fee (usually for 10 to 30 years) to operate it. On the expiry government in return. The operator typically uses existing of the lease the scheme is then transferred back to the assets and is responsible for developing new assets and for authority. It has advantages similar to the DBO mechanism financing the associated investments. These new assets may because it removes the procurement and risk interfaces of be owned by the concessionaire until fully depreciated or traditional procurement. until contract expiry. The operator is remunerated from tar- iffs, taking customer demand and payment risk. One exam- DBO and DBL contracts have been used in the Philippines, ple of a concession in the rural WSS sector is in Madagascar, Cambodia, and Vietnam. One of the key risks with these where it was called a “delegation contract.” arrangements is that the operator abandons the contract soon after construction is completed. This often occurs BOT and concession contracts have the advantage of bun- where the operator is essentially a construction company dling all commercial, technical, performance, and financing and is focused on getting its returns out of the construction risks into one accountability structure, but the operators’ contract, after which the penalties for termination (during financing costs are likely to be higher than those of the gov- the operating period) are often limited. ernment—private capital is typically more expensive than public—and it is often difficult for small-scale operators to PPP Models with Private Asset Ownership raise private/commercial finance. Designers of concession These PPP models have been used extensively for WSS contracts will also often face significant challenges when the projects but are much less common in smaller-scale PPPs. quality of data (e.g., asset condition/performance), current Under these models, the private operator is typically respon- levels of service, and the costs of improving service cannot sible for funding and building the assets, which is more be easily evaluated during the design phase (see “How to challenging for small-scale projects where access to finance Deal with Imperfect Data” in chapter 4). and the ability of local communities to pay is often more limited. Joint Venture Under this model, the government forms a joint venture Build-Operate-Transfer (BOT) Type Contracts (JV) with a private operator. The private operator typically The operator designs, builds, finances, and operates a sys- buys equity in the JV. In Latin America, this model is tem for the duration of the contract. BOTs (also known as known as empresa mixta (mixed company). Typically, the build-own-operate-transfer, or BOOT, contracts) are often private equity is only a few million U.S. dollars, which used in the WSS sector for greenfield-bulk water supply or means that the empresa mixta is best suited for systems with wastewater treatment plants, although the scope of these low performance but also low investment needs. Experience contracts can be extended to complementary network has shown (Brazil, Colombia, Cuba, Mexico and Spain) ­ construction. The operator owns the asset until contract that the empresa mixta model can be a publicly more termination/expiry when the new asset transfers to the gov- acceptable form of PPP since it allows the public sector to ernment. The operator is typically remunerated through a retain a certain level of control and, importantly, be a party volume (produced/treated) based fee paid by the govern- to decisions made by the operator (Castro and Janssens ment. A variation of the BOT model is the build-own-­ 2011). A unique feature of the empresa mixta model is that operate (BOO) model, under which the assets remain the main private partner also enters into a management permanently in the ownership of the operator (there is no contract with the public partner for full control of day-to- transfer). day operations. This means that the private partner can be simultaneously operator and part-owner. Concession Contract Under a concession contract, the operator is granted the This JV model was one of those proposed for Vietnam, and right to develop and utilize assets for the duration of the JV model is also under consideration in India (Ehrhardt the contract, and sometimes pays a concession fee to the et al. 2015) through the creation of a new water company www.wsp.org 19 Delivering Universal and Sustainable Water Services Choice of PPP Structure/Model special purpose vehicle (SPV)—a JV between the city gov- but results have been patchy at best in terms of improved ernment and a private partner, with the private partner in efficiency or service delivery (WSP 2014)—mainly because this case owning a majority of shares in the company. Two the equitization process is focused on administrative process variations of the JV model were proposed: the SPV can be rather than utility service reform. Private operators have not either an investor-owned utility that owns the infrastruc- been sought as investment partners, but rather as cash equity ture assets or a concessionaire (in which case the urban investors. Other challenges include: local body, or ULB, will own the assets but the SPV will use • Determining how to value the utilities—using “book them, and invest in their upkeep and expansion). In either value” (the balance sheet value of the asset) has case, this new SPV will be responsible for all aspects of tended to overvalue the business, and regulatory water service. In Bucharest, Romania, a hybrid JV-concession uncertainty makes cash flow–based valuation diffi- model was adopted, with the international operator taking cult/unreliable; and 80 percent of the shares in the concession company, while • Local governments’ desire to retain public control the municipality retained 20 percent (IFC 2013). over the utilities’ assets and management. In Vietnam, another variation on the JV model forms part of These challenges make private investment unattractive the government’s state-owned enterprise (SOE) reform pro- and highlight the challenges of undertaking PPP initiatives gram, whereby provincial water utility SOEs are “equitized” without supporting sector policy and complementary and private investors encouraged to purchase minority reform measures. The same model is also being used in rural equity stakes in the corporatized utility. To date, 23 out of Vietnam, where provinces are establishing capitalized utili- the 79 urban water utilities in Vietnam have been equitized, ties and seeking private investors. This PPP model is some- times called a (partial) divestiture. Common pitfall: Government interference Key issues to consider in selecting and designing an appro- ­ discourages private investments priate PPP model are summarized in checklist 3.1. Local governments’ desire to retain public control References over the utilities’ assets and management make Castro, Vivian and Jan G. Janssens. 2011. “Mixed Private- private investment unattractive. Public Ownership Companies “Empresa Mixta.” Written for PPPIRC, World Bank, 2011. Checklist 3.1:  Choice of PPP Structure/Model q Government has decided the key functions and responsibilities that will be bundled into contracts (design, build, finance, maintain, operate, etc.). q Government has decided how PPP operator will be paid (user fees, subsidies, direct government payments). q PPP models are evaluated in context of private sector risk appetite and government policy acceptability of various options. q PPP models are evaluated in context of the WSS sector and potential reforms, availability of public investment finance, political support, legal constraints, and private sector willingness to absorb project risk. q PPP actors have decided if new or existing assets, or both, will be used. q The operator’s responsibilities have been established (operations, maintenance, new build, etc.). q The contracting vehicle is determined. q Legal constraints around risk or responsibility transfer are identified. q Asset ownership preference is established (model with public or private asset ownership). 20 Water and Sanitation Program Delivering Universal and Sustainable Water Services Choice of PPP Structure/Model Delmon, Jeffery. 2010. “Understanding Options for Water (NRW) in Developing Countries – How the Public-Private Partnerships in Infrastructure – Sorting Private Sector Can Help: A Look at Performance-Based out the forest from the trees: BOT, DBFO, DCMF, Service Contracting.” Water Supply and Sanitation Concessions, Lease…” Policy Research Working Paper Sector Board Discussion Paper 8, World Bank, 5173, World Bank, Washington, DC. Washington, DC. Ehrhardt, David, Riddhima Gandhi, Josses Mugabi, and Marin, Philippe, Josses Mugabi, and Manuel Manino, William Kingdom. 2015. “Evaluation of Water Services 2010. “Improving Water Services in a Post-Conflict Public Private Partnership Options for Mid-Sized Situation: The Case of the Management Contract in Cities in India,” Washington, DC: World Bank. Kosovo.” PPIAF Gridlines Note 52, World Bank, IFC (International Finance Corporation). 2013. “Romania: Washington, DC. Bucharest Water and Sanitation.” Public-Private WSP (Water and Sanitation Program). 2014. Final Partnership Impact Stories, IFC, Washington, DC. Technical Assistance Report: Review of Urban Water & Kingdom, Bill, Roland Liemberger, and Philippe Marin. Wastewater Utility Reform and Regulation in Vietnam. 2006. “The Challenge of Reducing Non-Revenue Washington, DC: World Bank. www.wsp.org 21 IV. Implementing PPP: Chapter Summary This chapter walks the reader through the process of From Origination implementing a PPP, including: • The roles of stakeholders, especially those of the to Contract government and the public Management – Mind • How to identify, select, and screen projects • How to structure and appraise projects the Gap • How to design a PPP contract • Communications and outreach • Contract management and regulation 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril The PPP Process A country’s PPP policy or PPP framework will often detail Figure 4.1 sets out a PPP process road map, highlighting the stages, tasks and subtasks, responsibilities, and approving the key stages in developing and implementing a PPP authorities. The Nigerian PPP Policy,7 for example, describes project. A number of steps and decisions need to be the PPP process and contains supplementary notes with taken before a tender for a project is launched, and it is details of how the government will implement the process. important to budget and allow for the cost and time for these steps, preparation activities, and associated studies. The Critical Role of Government in Managing Developing a PPP project can be costly, and so early the PPP Process checks that the project is promising can help ensure that The government (public sector) will be responsible for PPP project development budgets are well spent. At each managing the PPP process and it is critical that it have the key stage, approval is required to proceed. As a result, the dedicated resources and capacity needed to manage the PPP is iteratively developed and appraised. There are two projects over their life cycle. Figure 4.2 illustrates best prac- important advantages of this iterative approach to devel- tice requirements from the government. The WSP report oping a viable PPP project: on strengthening public institutions (WSP 2015) provides • It enables timely involvement of oversight agencies more comprehensive guidance on the public sector’s roles in approving projects. and responsibilities, but it is essential that any dialogue • It minimizes the risk of wasting resources on devel- with a government considering embarking on a WSS PPP oping weak projects. is made aware of the scope of its role and the need to plan, develop, and allocate sufficient resources to manage these It is very important to take all these steps because skipping activities and create the required PPP enabling environ- steps can lead to poorly designed and structured projects, ment to minimize the risks of PPP failure. projects that are not attractive to private operators, or ­ projects that are difficult to implement successfully. It may Depending on the complexity and size of the PPP, the gov- be possible to streamline this process for smaller PPPs or ernment will need to consider hiring a transaction adviser programmatic PPPs, but leaving gaps in the process can to provide legal, technical, and financial assistance through- be a recipe for disaster. Success also requires a sound PPP out the PPP process. Where the government has a PDF in enabling environment (PPP policy and framework, legisla- place, this would be the first port of call for hiring. If the tion and regulation, sector policy, political support, etc.). PPP has donor support, then donors will often fund the 7 See the National Policy on Public Private Partnership and its Supplementary Notes, Federal Government of Nigeria. http://icrc.gov.ng/resources/publications. 22 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP Figure 4.1: PPP Process Road Map Progress toward Stage Progress toward investment decision PPP contract • Originate project ideas • Screen candidate projects for Develop PPP Strategy/Outline 1 Identify PPP project Approval PPP potential concept business case • Prioritize potential PPPs for development To proceed with business case • Perform technical, financial, and Conduct pre- legal due diligence Revise PPP 2 feasibility • Identify potential procurement concept strategies and contract types • Structure PPP: Identify and allocate risks and responsibilities 3 Structure and Define key • Appraise PPP: Project feasibility, Business case Approval appraise PPP commercial terms commercial viability, fiscal responsibility To proceed with transaction • Design performance requirements Design PPP • Design payment mechanisms Draft PPP 4 • Create adjustment mechanisms contract contract • Establish dispute resolution mechanisms • Decide on procurement strategy Manage PPP • Market PPP Finalize PPP 5 Finalize decision Approval transaction • Qualify bidders contract • Manage bid process • Reach financial close To sign contract • Establish project management mechanism Deliver PPP • Public agency monitors PPP Project management 6 project delivery • Private party implements PPP contract • Deal with change of circumstances or scope Source: Delmon, Victoria. Structuring Private-Sector Participation (PSP) Contracts for Small Scale Water Projects, Water and Sanitation Program, 2014. advisors/experts. The International Finance Corporation screen projects for their PPP potential. Potential PPP (IFC) can also provide advisory services directly. For projects may emerge from sector master plans (national, example, IFC played a major role in the structuring and ­ regional, etc.) or from a bottom-up solicitation process. successful procurement of the recent WSS PPPs in Benin. Where PPP is new in the sector or is still in the pilot The commercial close of four PPP transactions covering stage, the government may choose to seek PPP proposals 10 piped water supply systems in three communes in from reform-minded local governments (and possibly Benin was reported in October 2014. ­ private sector proponents) and then submit them to a transparent screening process. Incentives may be offered PPP Project Identification, Selection, by the government to attract viable PPP proposals (e.g., and Screening project preparation/procurement support, concessional Where a government is embarking on a WSS PPP initia- financing, guarantees, subsidies/capital grants, land, and tive, the first stage of the PPP process is to identify and tax incentives) so as to reduce risks and encourage better www.wsp.org 23 Delivering Universal and Sustainable Water Services Implementing PPP Figure 4.2: Government Best PRACTICES for PPP Management To manage projects over their life cycles Create a Develop a Identify the Design a sound comprehensive solid business Select the right Track the projects that regulatory and prioritized plan and private-sector performance are well suited schedule and infrastructure- technical partner of all projects for a PPP PPP contract investment plan specifications To create an enabling environment Establish rigorous program management Communicate with the public early and often Ensure the necessary public- and private-sector skills Source: Adapted from Airoldi et al 2013. overall financial proposals from the private sector. Figure 4.3: Two-Stage Evaluation Process Proposed projects In Vietnam, for example, the govern- ment’s Ministry of Planning and Investment is keen to identify WSS Is the project effective at solving sector No potential pilot PPP transactions as part of a problems, and replicable? No broader sector reform and PPP initia- Yes tive to attract private sector finance and Potential projects technical/management expertise. The government sought PPP proposals from provincial governments and their Screen projects against criteria WSS utilities as well as from private 1 – Meets criteria No potential 0 – Does not meet criteria sector proponents. Part of the incen- 0.5 – Possibly meets criteria No tive for proposal submission was sup- port for PPP project preparation and Yes procurement. A two-stage evaluation Priority projects process was developed (see figure 4.3). Source: Adapted from consultant’s report for Vietnam Ministry of Planning and Investment: Report on Pilot Transaction Selection. 2014. Stage 1: A precondition is that the private sector’s participation will be effective at solving the sector’s most significant problems. • The project conforms to the sector’s master plan or The selected pilot transaction should be one from which socioeconomic development plan of the province. government authorities can learn lessons and replicate in • The project is in the list of prioritized projects issued other provinces to address similar problems. by the provincial government. • The project has been proposed by the local govern- Stage 2: The project should satisfy three conditions: ment to the Ministry of Planning and Investment to ÿ The project conforms to policy in at least one of the request for inclusion of the project in the official list following ways: of PPP projects. 24 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP ÿ The project is PPP viable: it is important for the project development team to under- • Legal viability: The project meets legal requirements take technical, financial, commercial, and legal due dili- on investment and the private investor is allowed to gence to assess the feasibility of the project’s long-term implement the project. success and sustainability. This section will highlight the • Commercial viability: The project can generate suf- key aspects of WSS PPP project structuring and appraisal, ficient revenue to cover the costs and provide a rate recognizing that other sources will cover these topics in of return sufficient for the private sector to consider more detail.9 it to be commercially viable. • Economic viability: The expected economic benefits PPP Project Appraisal (including social benefits) exceed the expected eco- The core building blocks of any systematic PPP project nomic costs. appraisal are: • Fiscal viability: The government has sufficient ÿ Market analysis and project scope: These assess the resources to provide any required capital or operat- need for and appropriate scope of the project, building ing subsidies. on the work already done at the identification, selection, • Market has sufficient capacity and appetite: There is and screening stage. This would include: sufficient market interest to attract and select a pri- • Perform a needs analysis: Does the project meet vate party that has the capacity and resources to basic consumer needs? Does it contribute to meeting deliver the project. the objectives of the sponsoring government author- • The present value of the project’s costs is at least ity (investment, service coverage, service quality)? $10 million. The government cannot achieve value for Who will the consumers be (domestic, commercial, money if the project scale is less than $10 million.8 institutional, industrial)? • The provincial government shows political commit- • Perform an options analysis: What is the best option ment. The local government is willing to implement for meeting the service need: an asset-light solution the project as a PPP and commits to take risks and (network optimization/leakage reduction), existing responsibilities under the PPP contract. assets (operations and maintenance), or new assets ÿ The project is well prepared to move to the transac- (new production capacity, network extension)? tion preparation phase: • Define the output(s): What services will the project • Projects that are still at a pre-concept stage were provide (bulk treated water, new connections, pota- deemed to be not ready for assessment and ble water, 24/7 supply)? implementation. • Estimate and forecast demand: What level of demand is there for the outputs/services from the PPP Project Structuring and Appraisal project, and how much are users willing to pay (what Once a priority PPP project has received initial approval it is the value of the demand)? Some countries have is then developed and appraised. Appraisal and structuring used national (cost) norms for demand calculations should be an integrated and iterative process, with projects which led to over-sized projects (e.g., Vietnam). It is cycling between structuring and appraisal until a fully much better to estimate local demand in the project appraised and structured project is produced. The end result area based on actual consumption patterns and local is often called a business case or a PPP feasibility study, and cultural/social norms. is typically the basis for approval to proceed with the PPP ÿ Social and environmental feasibility, including the transaction. The cost of these structuring and appraisal requirements for impact assessments and for the associ- activities can be significant, but even for smaller-scale PPPs ated mitigations. This appraisal will be based on national 8 Many countries set thresholds for minimum project size for inclusion in national PPP programs. Many WSS projects are relatively small and potentially less attractive for PPP, but this has not prevented significant numbers of rural/small town WSS PPPs being developed to meet public demand for improved services. 9 A good starting point is module 3 of the IBRD, WB, ADB, and IADB 2014 Public-Private Partnerships Reference Guide 2.0. www.wsp.org 25 Delivering Universal and Sustainable Water Services Implementing PPP laws and regulations, but will also be informed by appli- • Capital investments (treatment, networks, pumps, cable safeguards policy compliance requirements where connections, IT/computer hardware); donors’ funds will be used.10 • Financing (equity, loans (tenor, interest rate, grace ÿ Technical feasibility and technical parameters based on period), capital/revenue subsidies); the market analysis, including specification of required • Profitability (returns on equity or investment, oper- facilities and scenarios of project size, for use in prelimi- ating and net margins); nary project design. In the WSS sector, the technical • Cash flow, profit and loss account, and balance sheet appraisal will include: (as outputs); and • Raw water source quality, quantity, and reliability • Sensitivity analysis on key inputs (volumes sold, tar- (sustainable yield and flow availability); iffs, energy costs, construction cost overruns, interest • Drinking water quality standards (output and per- rates). formance specifications); ÿ Economic feasibility: Assessment of overall net eco- • Network performance standards (pressure, continu- nomic benefit of the project, incorporating estimated ity) and maintenance requirements; project benefits and costs including nonmarket fac- • Treatment plant technology options and costs (life- tors such as those from the social and environmental cycle basis, both capital and operating) and optimi- assessment. zation (especially for wastewater, where energy costs ÿ Other PPP due diligence activities, including value- can be significant); for-money (VfM) analysis if sufficient reliable data are • Network routing, topography, and pumping available.11 stations; ÿ Project implementation schedule, including an out- • Connections: direct household, kiosks, and yard line of the proposed PPP procurement and award pro- taps; and cess through to technical and financial close, an outline • Outline and preliminary engineering design for the of the construction schedule and target operation date, project. and any phasing that is planned for project extensions or ÿ Preliminary cost assessment based on the technical ongoing development. specification and assessed project risks. ÿ Financial analysis and due diligence, incorporating a PPP Project Structuring: Understanding Risk projected revenue structure (e.g., proposed tariff, required The core activity in structuring a WSS PPP is identifying subsidies) and assessing any need for financial support and allocating risks and responsibilities. This allocation will from the public sector (to ensure that the improved ser- ultimately be reflected in the terms of the PPP contract. vices will remain affordable for the poor). Explicit refer- Risk studies will also help refine the PPP model selection ence should be made to the extent of commitment of process. Figure 4.4 illustrates the challenge in structuring a public funding and budget support. A (cash flow) finan- PPP project, which is to find the optimum level of risk cial model for the project will need to incorporate: transfer to the private operator: where public value for • Revenues (volumes sold/treated, tariffs, customer money is maximized. classification, connection numbers, bill collection rate, connection fees); In reality, this optimum point—where public value for • Operating costs (chemicals, energy—such as elec- money is maximized—is conceptual, since risk allocation is tricity or diesel—staff, offices, and other overheads); inevitably a pragmatic compromise over which party (the 10 In the case of the World Bank Group: OP 4.03—Performance Standards for Private Sector Activities: The eight IFC Performance Standards have been adopted by the Bank as the World Bank Performance Standards for Projects Supported by the Private Sector (“WB Performance Standards”) for application to Bank support for projects (or components thereof ) that are designed, owned, constructed and/or operated by a Private Entity. 11 The use of VfM analysis to inform PPP decision making is difficult and can be controversial. Practitioners face some significant methodological challenges and, given the poor quality of data typically available for (smaller-scale) WSS PPPs, careful consideration should be given to the benefits of undertaking rigorous VfM analysis. See World Bank and PPIAF 2013. Recognizing the capacity and data constraints in low income countries, attempts are being made to develop simplified, practical, and effective VfM approaches. See Pérez et al. 2015. 26 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP Much has been written about risks in Figure 4.4: Optimal Risk Transfer the PPP literature, which has typically Optimal risk transfer Value for money taken a standardized approach more Significant benefit of suitable for large-scale infrastructure risk transfer as Value declines as private sector costs of risk projects (power and transport sectors) discipline ensures transfer outweigh effective performance benefits involving international commercial finance and international operators and investors. For such projects, key issues include foreign exchange risks Cumulative risk transfer to private sector (local currency revenues versus for- eign currency–denominated pur- Source: Delmon, Victoria. 2014. “Structuring Private-Sector Participation (PSP) Contracts for Small Scale Water Projects.” Water and Sanitation Program, Washington, DC: World Bank. chases [plant and equipment] and loan repayments, currency convert- ibility), dispute resolution (interna- tional arbitration), applicability of inter­national law, and so on, which Figure 4.5: WSS PPP Key Risk Factors do not typically feature in smaller- scale domestic WSS PPP projects. Operations This section will focus on the key risks • Asset condition/performance in WSS PPPs,12 and key risks that Construction • Demand need to be evaluated and allocated in • Raw water quality/quantity smaller-scale WSS PPPs. • Technology and design • Wastewater quality/quantity • Time delays • Labour relations • Budget over-runs Figure 4.5 highlights the key risk fac- • Service standards • Land acquisition/rights of way tors that need to be considered in the • Billing and collection • Permits and consents design and implementation of a water PPP. The relative importance of these risks will vary from project to project Finance/economics Political according to local and national cir- • Inflation • Tariff mechanism cumstances, and the PPP model being • Currency/foreign exchange • Payment risk/guarantees adopted: • Tenor/refinancing • Regulation and penalties • In a management contract, the • Interest rate • Political economy • Tax (local/international) • Change in law/regulations focus is more likely to be on the oper- ations risks; • In a DBO/DBL type contract, Source: The author. the focus will be on both construction and operations risks; • In a BOT/concession type arrange- government or the private operator) is willing and able to ment, the focus will extend to con- bear (or share) a particular risk. None the less, this is a fun- struction, operations, and financial risks; and damental concept that lies at the heart of structuring (and • Political risks will apply to all PPPs, but typically negotiating) a PPP project structure. increase with project size and increasing depth of 12 For more detailed discussion on WSS PPP risks see chapter 6 of Public Private Partnerships in the Water Sector, Mandri-Perrot and Stiggers 2013, and Approaches to Private Participation in Water Services: A Toolkit, chapter 6 (World Bank 2007). www.wsp.org 27 Delivering Universal and Sustainable Water Services Implementing PPP private operator risk taking (demand risk and financ- development policy, tariffs, and willingness to pay/ ing risk). affordability, connection fees, network extensions, raw water availability, treatment capacity, and so on. Good practice is to draw up a risk register/matrix itemiz- This risk is significant where the operator relies on ing all the key risks, identifying potential mitigation mea- tariff income (concession, JV, lease, affermage) and sures, and allocating the risk to the government or private the risk is often shared in some way. In the La Paz-El operator.13 Alto concession (Bolivia), initially projected demand growth failed to materialize, resulting in revenue Design and Construction Risks shortfalls for the concessionaire (Aguas del Illimani). • Where the private operator is responsible for tech- The regulator did not permit an associated tariff nology and design, and for construction budgets review, resulting in significant financial stress for the and timetables (DBO/DBL and BOT PPPs), these operator. For bulk supply and treatment BOT PPPs, risks are usually allocated to the private operator it is common for there to be a “take-or-pay” provi- who can mitigate them through professional con- sion in the contract, whereby the government guar- struction management, using turnkey or EPC-type antees it will purchase the plant’s capacity volume contracts and/or taking out construction insurance irrespective of actual demanded output. (e.g., delay in start-up insurance).14 • Access to a sustainable raw water source is critical. • Risks associated with land or site acquisition, The technical feasibility appraisal should have evalu- (RoW) rights of way or access, and construction ated this risk, but there may be additional risks: the permits and consents are typically under the con- issuing of abstraction permits/licenses; the impact of trol of government agencies and so these risks are droughts or pollution; potential competition with usually allocated to the government. Many govern- other users, which can evolve over time (irrigation, ment agencies are slow and inefficient in processing aquaculture, hydropower); and political boundaries approvals for these activities, but delays in approvals (where the source is located in a different jurisdic- can lead to increased costs and lost revenues to the tion from the PPP project—this was identified as a private operator, and so this may be a significant risk key issue in the World Bank’s Bandar Lampung for the government if financial penalties are attached water supply PPP in Indonesia, which is still under to their delays under the PPP contract. preparation). This risk is typically allocated to the government, which is responsible for water resources/ Operations Risks environmental management and regulation. • Where existing assets are to be managed by the • Where there is a brownfield PPP, the private opera- private operator (for example, in affermage, lease, ­ tor may assume responsibility for managing the concession, JV/divestiture PPPs), the location, con- incumbent workforce. The government will need to dition, and performance of underground assets is consider whether staff retain public sector employ- often unknown or uncertain. This uncertainty has ment contracts, how to manage potential redundan- implications for the private operator’s ability to meet cies and pension liabilities, and so on. The private service standards and its financial liabilities (O&M, operator will need to be sensitive to public sector rehabilitation costs). Mitigation and risk allocation customary work practices and plan for staff training can therefore be complicated. and capacity building; it may wish to choose which • Demand risk is a bundle of risk factors: popula- staff it takes on from the public service provider and tion growth and consumption habits, housing bring in its own management team or experts. 13 Annex 2 of Mandri-Perrott and Stiggers 2013 provides a comprehensive risk matrix for WSS PPPs. 14 An engineering, procurement, and construction (EPC) contract is one under which the contractor designs the installation, procures the necessary materials, and builds the project. Typically the contractor carries the project risk for schedule as well as budget in return for a fixed price. 28 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP Industrial relations can be a major risk during the Political Risks transition from public to private service provision. • Most political risks result from the government failing • Service standard targets will be specified in PPP to honor its PPP contractual obligations: not imple- contracts. The risks of operational performance menting tariff increases, not paying fees, regulatory (water quality, service continuity, service coverage, failures (e.g., pollution), public investment failures billing, and collection) is usually allocated to the pri- (e.g., raw water source not developed or protected), vate operator; this is its core business. political interference, or not issuing permits and con- sents. Mitigation measures include government guar- Finance/Economic Risks antees. For larger or programmatic PPPs it may be • In domestic PPP projects, where private finance is possible for the operator to access political risk insur- required (BOT, concession, and JV), the financing is ance/guarantees from IFIs such as the World Bank typically arranged through local financial institu- Group’s Multilateral Investment Guarantee Agency. tions in local currency. Where loans are arranged on • Changes in laws and regulations (e.g., new water qual- a floating rate basis (that is, where the interest rate ity standards or tariff-setting regulations) can impact the will vary with movements in government set base/ operator’s costs and ability to meet contractual obliga- prime rates), the operator’s financing costs will be tions. Many PPP contracts provide for financial com- uncertain and a risk to the operators profitability. In pensation for the impacts of such changes. some cases, the risk can be mitigated by taking out fixed rate loans or through interest rate hedging Force Majeure (swaps), but this is not always possible in emerging This term relates to uninsurable risks associated with exter- markets. In some projects (e.g., Jakarta and Manila nal events beyond the control of the parties to the contract, concessions and Bangkok BOTs), this risk is shared such as natural disasters, war, or civil disturbance. PPP con- using “pass-through” provisions in the PPP contract tracts should have a specific clause to provide for such risks. (tariffs/fees adjusted up or down in line with actual Where a force majeure event lasts for an extended period, interest costs). contract termination is the common end point. • All PPPs will have to manage the impact of infla- tionary pressure on operating costs (cost of chemi- cals, power, staff, pipes, consumables, and rentals), Common Pitfall: Poor Risk and which are outside the control of the operator. This risk is usually mitigated by passing these cost Feasibility Assessment increases to the customers through tariff increases— The cost of structuring and project appraisal can be through tariff or fee inflation indexation based on significant but it is important to accurately assess the government published inflation indexes: using the consumer price index or the retail price index is the long-term sustainability of the project. Two of the simplest and most common, some PPPs use a com- most common and disruptive pitfalls of this phase are bination of specific indexes (such as chemicals or related to the difficulty to forecast demand behavior labor indexes) and actual electricity tariff increases. A and to obtain government guarantees to implement common cause of PPP failure is government refusal to implement an agreed tariff, or failure to provide agreed tariff increases. for this risk at all in the PPP contract. Best practice is to have automatic, frequent, and relatively small tariff adjustments (e.g., annually) rather than large periodic adjustments (every 3 to 5 years), which tend Designing the PPP Contract to be universally unpopular—with politicians and The design of the PPP contract(s) will reflect all the deci- customers alike. sions made to date on the PPP model as well as the approval www.wsp.org 29 Delivering Universal and Sustainable Water Services Implementing PPP of the recommendations and outputs of the structuring and many years (Babtie 2004), but has recently resurfaced for appraisal process. governments and practitioners looking for more innovative, more flexible PPP contract structures16 to deal with the Recognizing the need to manage transaction costs for smaller- common situation where PPP-minded governments have scale PPPs and the common lack of technical expertise in no accurate data on underground asset location, condition, government on PPP contracts, WSP has developed a Toolkit or performance. on Structuring Private-Sector Participation Contracts for Small Scale Water Projects. The purpose of this toolkit is to Flexible, multiphased PPP contracts are emerging as a provide guidance to governments and utilities that intend to potential option, with performance-based obligations contract private operators and sector professionals assisting increasing as better data become available. Targets and stan- such authorities on how to structure a contract and bidding dards can be revised during the early years during which documents for private sector participation (“PSP contract”) baseline data are revised, agreed investments are made, in small-scale water projects.15 The toolkit focuses on small- monitoring systems are established, and a light performance scale water schemes typically serving a settlement with a or penalty regime applied related investment and operating population from 1,000 to 10,000—with sufficient density to efficiencies. After an initial transition phase (five years), the warrant a network solution but that does not generate parties can use the operator’s new and more accurate data as enough scale for integration into a centrally managed net- the basis to negotiate a new set of performance targets and work. The toolkit was based, to a large extent, on a review of associated investment plans. There should also be a break over 20 PPP contracts from Latin America, Asia, and Africa. clause in the contract allowing termination for mutual con- venience (no fault) at the end of the first phase. This toolkit includes a sample BOT/concession contract and sample term sheets for DBO and O&M type contracts Imperfect data has been recognized as a major PPP chal- that offer detailed guidance on drafting PPP contracts. Key lenge in India (Kacker, Ramanujam, and Miller 2014), provisions that must appear in a contract include: where initial assessments for rehabilitation were underesti- • Term—how many years will contract last; mated and committed public funds proved inadequate. • Inventory of assets; Two cities, Khandwa and Mysore, were not prepared to • Obligations for capital investment, rehabilitation mobilize additional funding, putting the PPPs at risk. Two and renewal, and maintenance and repair; PPP models for India have been proposed recently17 to • Service standards, performance targets, penalties/ address this challenge. One has a JV structure, and the other incentives, and tariff mechanisms; is an innovative performance-based management contract. • New connections obligations and the right to disconnect; Phased Performance-Based Contract (PPBC): This is a • Contract monitoring and regulation, and accounts two-phase, 10-year full service management contract. The and reporting; operator will be paid a fixed management fee and a perfor- • Asset ownership; and mance fee based on the efficiency with which it uses a capi- • Dispute resolution and termination. tal fund designed to bring customers up to a 24/7 service level. The performance fee could be a share of any cost How to Deal with Imperfect Data reduction in achieving the target service levels. Alternatively, A major challenge in designing brownfield PPPs is how to the contractor could be paid a set amount for each ­additional deal with imperfect data. This issue has been recognized for household (above a specified target number of connections) 15 See also chapter 10 of Mandri-Perrott and Stiggers 2013 on Improving Key Contract Provisions, which covers additional provisions more applicable to larger-scale WSS PPPs with international operators, investors, and financiers. 16 See chapter 13 of Mandri-Perrott and Stiggers 2013 on Dealing with Imperfect Data. 17 Ehrhardt, David, Riddhima Gandhi, Josses Mugabi, and William Kingdom. 2015. Evaluation of Water Services Public Private Partnership Options for Mid-sized Cities in India. Internal World Bank Report, Washington DC 30 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP Figure 4.6: Evolution of Roles under a Phased PPP Contract 0 1 2 3 4 5 6 7 8 9 10 Phase 1 Phase 2 Institutional Create utility Embed good practice Improve management processes, such as information Management Train and certify staff management, human resources, financial, billing • Bring remaining households on 24/7 Service levelsa Close to 100% of • Maintain 100% of households on 24/7 households on 24/7 Capital expenditure • Install bulk meters • Replace mains • Continue replacement program plan and Plan • DMA • Replace service implementation • Pressurization connections • Bulk supply augmentation • Set tariffs Government role • Approve plans • Monitor contract Source: Ehrhardt, David, Riddhima Gandhi, Josses Mugabi 2015. a. Service levels are suggested and may be modified depending on the situation. provided with 24/7 service by a set date. During Phase 1, improve the institutional arrangements, improve manage- the operator will help create a new utility through a corpo- ment processes, improve services, and optimize investment ratization process and will develop and implement a NRW planning and implementation. management program as it gains knowledge on the condi- tion of the distribution system. Managing the PPP Transaction The aim of the transaction or procurement stage of the PPP Proceeding to Phase II—which would start in Year 6—will process is to (1) select a competent operator (with requisite be contingent on satisfactory performance in Phase I. More technical and operational experience and the requisite specifically, the operator will have to meet the minimum financial and management capacity), and (2) find the most standards determined at the start. If they fail to do so, the effective and efficient solution to deliver the project (techni- city government can decide to terminate the contract. cal and value for money). It is recommended that PPPs be Figure 4.6 outlines how roles would evolve over time. procured on a transparent, competitive basis. The key quan- titative bidding variable is typically the average tariff cus- The PPBC model is still at the concept stage, but it offers a tomers will pay, or the amount the government will pay potential contractual approach to dealing with data imper- (fee, subsidy, and so on), for the specified assets and services fection through contracting with the private sector to provided. www.wsp.org 31 Delivering Universal and Sustainable Water Services Implementing PPP Much has been written about PPP procurement, often focused on larger Figure 4.7: PPP Procurement Decision Points and more complex transactions.18 For Is there clear market interest? smaller-scale PPPs, especially if mini- mal operator financing is required, this process should be kept as simple Yes Unsure as possible to minimize transaction costs and encourage bidder participa- Optional: tion. Figure 4.7 illustrates the typical prequalification Expression of decision points and steps in deciding interest (EOI) stage (RFQ) on the most appropriate procurement strategy for a PPP. Is the technical This process will need to be informed solution clear? by any applicable national procure- ment or PPP laws. If IFI or donor funding is involved, then the policies Yes No and guidance of these institutions should also be considered.19 One-stage Two-stage Section 1.5 of the WSP Toolkit: bidding bidding Structuring PSP Contracts for Small Scale Water Projects provides a use- ful overview of the PPP procurement process, particularly for smaller-scale Is more information transactions. Depending on project needed from the size, the government should develop bidders before a plan to market the upcoming trans- deciding on a final technical action (locally, nationally, or interna- solution? tionally) to stimulate bidder (and lender) interest and gauge bidder appetite and concerns. The govern- ment is likely to be interacting with Yes No bidders as they prepare proposals, so it will need to allocate appropri- ate resources to manage these inter- Two-stage Two-stage bidding option 1 bidding option 2 actions (e.g., among specialist and support staff, budget, accommoda- ­ tion, IT systems, transaction advi- Decision point Activity sors) as well as the bidding process: Source: Delmon 2014. Structuring PSP Contracts for Small Scale Water Projects, WSP Toolkit. preparing bidding documents and 18 See module 3 of the Public-Private Partnerships Reference Guide 2.0 (IBRD, WB, ADB, and IADB 2014) and chapter 8 of Public Private Partnerships in the Water Sector (Mandri-Perrott and Stiggers 2013). 19 The World Bank is currently preparing a new procurement framework for PPPs that is more closely aligned with the steps of a typical PPP structuring and implementation process. 32 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP data room,20 bidder conferences, bid evaluation, negotia- Communication and Public Outreach tion, and contract award. Independently of whether services are provided by public or private entities, it is important for the government to Managing Unsolicited Proposals engage all stakeholders and communicate both the risks In the smaller-scale end of the PPP market, typically domi- and rewards of reform options.21 In cases where engaging nated by domestic operators and contractors, unsolicited the private sector is under consideration, the government proposals (USPs) and direct negotiations are relatively should first gauge, such as through opinion research, the common. In urban, small town, and periurban environ- ­ level of consumer/public support for private sector inter- ments, public service providers often cannot meet demand ventions or investments to provide water services. Each and private operators may move in opportunistically to stakeholder engagement program will need to be tailored to meet this latent demand. the local context. A recent study by PPIAF (PPIAF 2014) found an increas- Figure 4.8 shows a framework for developing a strategic ing trend in the use of USPs, but cautioned that some approach to communications. government officials wrongly believed that USPs can deliver ­ public infrastructure without any cost to government or the Engagement should begin early in the process and continue public at large, seeing USPs as a short cut to creating much- through to closure and even during implementation. It needed infrastructure. The study found that USP-initiated should also work on several levels: at the policy or key PPPs faced many challenges, including, among others, poor decision makers’ level, the level of the enterprise, among ­ quality of resulting infrastructure assets/services and lack of the stakeholders specifically affected, and among the pub- competition for and within markets. lic at large. The project structure should incorporate mecha- nisms that ensure ongoing engagement with the public and While these USP PPPs may sometimes be stop gap mea- customers. sures to meet initial demand, they also raise issues regard- ing transparency and governance. Furthermore, they fail Contract Management and Regulation to offer viable business models for scaling and attracting Designing robust and transparent institutional and process private finance. As a result, WSP is working with LGUs arrangements for managing and regulating the PPP will and the national PPP Center in the Philippines to build be critical if governments are to ensure PPPs deliver public institutional capacity for developing PPPs that can be value. Figure 4.9 illustrates how the regulation of PPPs competitively procured. This includes access to business needs to be embedded in the PPP framework, taking a development services to develop viable and bankable PPP holistic perspective of all stakeholders (citizens, govern- projects. This approach is helping create competitive mar- ment, and private operators/investors) and their interests to kets for smaller-scale PPPs through working on the supply ensure long-term sustainability. side (PPP pipeline development and improving access to finance). Figure 4.9 also highlights that economic regulation lies at the core of WSS PPP regulatory frameworks, regulating Many countries are developing USP policy frameworks and prices and service quality. At its simplest, economic regula- setting out procedures for managing USPs, including pro- tion provides a partially independent but informed view of cedures for introducing competition and reward systems what might be acceptable costs and appropriate prices for (such as Swiss challenge, bonus system, direct compensa- water services relative to desired standards. This regulatory tion, automatic short-listing). approach has developed particularly in the context of the 20 Data rooms (physical or online) are used where the government wishes to disclose a large amount of confidential data to proposed bidders. Bidders and their advisers will visit it in order to inspect and report on the various documents and other data made available. 21 Chapman, Karla, Tracey Miller and Paul Mitchell. Communication for Water Sector Reform: Obstacles and Opportunities, Operational Communications Learning Note No. 1, External Affairs, World Bank, 2012. www.wsp.org 33 Delivering Universal and Sustainable Water Services Implementing PPP Figure 4.8: Framework for Developing a Strategic Approach to Communications Key factors for good governance Transparency, Accountability, Customer focus, Results orientation, Risk management, Poverty responsiveness, Sound financing mechanisms, Power balance, Water resource protection, Shared incentives Strategic communication 1. Get to know existing and potential customers Key principles 2. Build awareness around the need for reform 3. Build in support and systems for change Main process Monitoring and Preparation Design Implementation Operation evaluation Regulation process Function of and cooperation with regulation authority Communication Application of Stakeholder objectives, different Monitoring and Communication assessment audiences, communication evaluation process messages approaches Source: Chapman, Karla, Tracey Miller and Paul Mitchell. 2012. need to ensure that new private operators do not abuse a new emerging regulatory framework. About one half of their monopoly position in the drive for additional profits water operators do not have formal licenses, and 60 percent (Franceys and Gerlach 2008). of water operators are not formally registered as businesses. The process for obtaining licenses is often unclear. However, It should be recognized that the regulatory framework experience has shown the benefits of the licensing and needs take into account the context of the country’s WSS regulatory process since licensed operators in Cambodia ­ sector (e.g., quality/reliability of financial management and tend to: reporting, information available on asset location and con- • Be larger and deliver more water; dition). As such, the framework is likely to evolve with • Have more access to experts; time. In Colombia, for example, the framework evolved as • Invest three times as much; information and capacity developed, with the regulatory • Have a treatment plant; and focus graduating from financial strengthening to gover- • Charge lower tariffs (but higher connection fees). nance and operational efficiency to asset management plan- ning and service quality (Andres and Marin 2010). As a result, the regulatory framework is evolving to encour- age the issuance of longer-term licenses and clarify proce- In Cambodia, WSP is working with the government to dures for issuance, renewal, suspension, and revocation, as introduce a licensing and registration process to bring the well as encouraging informal operators to obtain licenses. hundreds of existing small-scale private operators under Cambodia has a market with dynamic entrepreneurs who 34 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP Figure 4.9: PPP Regulatory Framework Objectives • Operator attractiveness: profit • State and customer safeguarding: affordability, capacity, and quality Design principles Regulatory Private-participation framework Service regulation model Regulatory • Safeguarding process • Degree of private targets participation • Information • Monitoring and • Risk allocation gathering enforcement and Price regulation monitoring • Usage versus • Stakeholder availability consultation • Rate Capex Regulation reviews Market design • Requirements • Unbounded to separate • Appeals, and regulation competitive from arbitration, monopolistic and dispute businesses Alignment levers resolution • Concession duration, ownership, and governance • Legislation Regulatory governance and • Design of politically independent institutions enabling environment • Public-sector capacity Source: Adapted from Chua, Khanna, and Loh 2012. see the poor as key customers and want to partner with regulator is to mediate between the high expectations of government on solutions. society, as filtered through the politicians and policy makers, with the equally high reluctance to allow a reasonable price To achieve its goals, an economic regulator needs to perform increase. If the PPP contract is not balanced and well struc- a subtle and complex balancing act between achieving the tured, with good political and public support, then this task outputs desired by customers and society (low-cost, high- can become almost impossible and the risks of failure rise quality piped water services for all) and the inputs that dramatically. customers and governments are willing to contribute (con- ­ nection fees, water tariffs, taxes, loans, subsidies, and grants). Planning for PPP management and regulation should not All too often the overwhelming task of a WSS economic be left as an after-thought post-procurement. Bidders will www.wsp.org 35 Delivering Universal and Sustainable Water Services Implementing PPP want to understand how the PPP will be managed—who creating a tariff setting methodology and monitoring its will be responsible for day-to-day contract management, application; and stakeholder consultation (with customers who will approve tariff increases, who will manage disputes, and civil society). In a PPP context, the regulator will moni- and who will report contract performance to the public. tor and enforce the provisions of the contract. This can Responsible bidders will also want to see that they have a include monitoring or auditing and reporting levels of ser- competent and professional government counterparty that vice ­ provided (e.g., water quality, quantity supplied, new they can work with during the life of the PPP. If the govern- ­ connections, network expansion, continuity, pressure, leak- ment fails to give bidders such certainty they are likely to ages, repair times, and customer complaints); disconnec- start pricing regulatory risk into their bids, increasing costs tion policy; price and tariff setting and reviews (annual and eroding value for money. indexation, periodic reviews, and subsidy policy); dispute resolution; sanctions (remedies and penalties for nonperfor- Where a government is initiating or piloting PPP in the WSS mance); customer and public consultations over services/ sector, it may be sufficient to regulate the PPP at the local performance/standards, complaints, and asset management government level. But as the number of PPPs increase, the plans (investment and expansion plans), tariffs, equity and government will need to think about institutionalizing sector pro-poor policies, and so on. PPP regulation and standardizing arrangements to capture regulation economies (e.g., streamlining monitoring and Regulatory models typically fall under four categories reporting requirements and benchmarking performance). (Ehrhardt et al. 2007; World Bank 2013): • Separate regulatory agency with a licensing regime, Typical functions of a WSS economic regulator include or regulation by organization (Castalia Strategic monitoring and reporting technical and financial perfor- Advisors 2006) (e.g., Australia, England, and Wales, mance; performance benchmarking; tariff setting, or the United States of America). Checklist 4.1:  Implementing the PPP q Government has dedicated resources and capacity to manage PPP projects over their life cycle. q Projects are identified and screened for PPP potential. q Stakeholder opinion research is conducted to gather data on stakeholder perceptions of the PPP and shape communications. q Stakeholders are consulted and expectations managed from the earliest stages in the PPP cycle. q Risks and rewards of the PPP are communicated to all stakeholders through the media, educating the public, and/or presenting case studies. q The appropriateness of the private sector’s participation in the project is confirmed. q The selected pilot transaction is one that can be replicated in other locations to solve similar problems. q The project conforms to policy. q The project is PPP viable. q The project is well prepared to move to the transaction preparation phase. q The PPP project is appraised through market analysis, assessment of project scope, social and environmental feasibility, technical feasibility, preliminary cost, financial analysis, economic feasibility, and value-for-money. q The PPP project is structured and negotiated, taking into consideration the risks and how they are allocated between parties. q The PPP appraisal and structuring process produces a robust business case or PPP feasibility study. q The PPP contract is designed based on decisions made on the most appropriate PPP model. q A competent operator is selected through the transaction or procurement stage. q Robust and transparent institutional processes for managing and regulating the PPP are established. 36 Water and Sanitation Program Delivering Universal and Sustainable Water Services Implementing PPP • Regulation by contract (e.g., France, Germany, Colombia’s Water Supply and Sanitation Sector. Uganda). Washington, DC: World Bank. • Hybrid regulation – regulation by contract at the Babtie, Jacobs. 2004. “Operator Round Table: Study on local level with a separate central regulatory agency Impact of Imperfect Data.” World Bank, Washington, DC. (e.g., Colombia, Kenya, Senegal). • Self-regulation (e.g., Cambodia, many LGUs in the Castalia Strategic Advisors. 2006. Case Studies on Water Philippines). and Sanitation Sector Economic Regulation: Themes from Four Case Studies: Final Report to World Bank. Each model has its advantages and disadvantages, but a Washington, DC: Castalia. growing number of hybrid regulatory models with a regula- tory body are operating alongside asset holders, or comple- Chapman, Karla, Tracey Miller, and Paul Mitchell. 2012. menting regulation by contract. Designing an appropriate “Communication for Water Sector Reform: Obstacles regulatory model will need to take into account existing and Opportunities.” Operational Communications sector performance and institutional arrangements for pol- Learning Note 1, External Affairs, World Bank, icy, coordination, monitoring, and oversight. Many coun- Washington, DC. tries have separate agencies responsible for urban and rural Chua, Jeffrey, Dinesh Khanna, and Hean Ho Loh. 2012. water and sanitation services, water resources, pollution “A Win-Win Approach to Regulating Public-Private control, drinking water quality, and so on. Thus, new regu- Partnerships. September 7, bcg.perspectives, Boston latory arrangements for PPP management will need to be Consulting Group. https://www.bcgperspectives.com​ coordinated with these agencies. /­content/articles/public_sector_transportation_travel​ _­tourism_built_to_last/. It is important for governments to recognize that whatever model is selected, significant staffing and resources will be Delmon, Victoria. 2014. “Structuring Private-Sector needed at both the local level and the central level if regulation Participation (PSP) Contracts for Small Scale Water is to be effective. Regional- (or state-level) regulatory offices Projects.” Water and Sanitation Program, Washington, may also be required where there is a large number of smaller- DC: World Bank. scale PPPs. New legislation may be needed in some countries Ehrhardt, David, Eric Groom, Jonathan Halpern, and to formalize the mandate and authority of the regulator. Seini O’Connor. 2007. “Economic Regulation of Urban Water and Sanitation Services: Some Practical Taking a PPP project successfully through the PPP cycle Lessons,” Water Sector Board Discussion Paper 9. from origination to operation is challenging. Checklist 4.1 World Bank, Washington, DC. summarizes some of the key considerations. Franceys, Richard and Esther Gerlach, editors. 2008. Regulating Water and Sanitation for the Poor: Economic References Regulation for Public and Private Partnerships. London: Airoldi, Marco, Jeffrey Chua, Philipp Gerbert, Jan Justus, Earthscan. and Rafael Rilo. 2013. “How the Public Sector Can Drive Successful Public-Private Partnerships.” IBRD, WB, ADB, and IADB (International Bank for February 26, bcg.perspectives, , Boston Consulting Reconstruction and Development, World Bank, Asian Group. https://www.bcgperspectives.com/content​ Development Bank, and Inter-American Development /­articles/public_sector_transportation_travel_tourism​ Bank). 2014. Public-Private Partnerships Reference _how_the_public_sector_can_drive_successful_public​ Guide Version 2.0. Washington, DC, and Mandalyong _private_partnerships/ City: World Bank, ADB, and IADB. Andres, Luis, David Sislen, and Philippe Marin. 2010. Kacker, Suneetha Dasappa, S. R. Ramanujam, and Tracey Charting a New Course: Structural Reforms in Miller. 2014. Running Water in India’s Cities: A Review www.wsp.org 37 Delivering Universal and Sustainable Water Services Implementing PPP of Five Recent Public-Private Partnership Initiatives, ———. 2013. “Options Paper for Water Sector Water and Sanitation Program, Flagship Report. Regulation in the Philippines.” Draft. World Bank. Washington, DC: World Bank. World Bank and PPIAF (Public-Private Infrastructure Mandri-Perrott, Cledan and David Stiggers. 2013. Public Advisory Facility). 2013. Value-for-Money Analysis— Private Partnerships in the Water Sector: Innovation and Practices and Challenges: How Governments Choose Financial Sustainability. London: IWA Publishing. When to Use PPP to Deliver Public Infrastructure and Pérez, Marcelo, Bernardo Weaver, Irene Portabales, and Services. Washington, DC: World Bank. Lincoln Flor. 2015. Exploring “Value for Money” Analysis in WSP (Water and Sanitation Program). 2014. Final Low-Income Countries: Lessons Learned from a PPP Project Technical Assistance Report: Review of Urban Water & in Tanzania. Washington, DC: World Bank/PPIAF. Wastewater Utility Reform and Regulation in Vietnam. PPIAF (Public-Private Infrastructure Advisory Facility). Washington, DC: World Bank. 2014. Unsolicited Proposals – An Exception to Public ———. 2015. “Strengthening Public Institutions Initiation of Infrastructure PPPs: An Analysis of Global in Engaging and Regulating Domestic Private Trends and Lessons Learned. Washington, DC: PPIAF. Sector for the Provision of Water and Sanitation World Bank. 2007. Approaches to Private Participation in Services in Rural Growth Areas and Small Towns. Water Services: A Toolkit. Washington, DC: World Bank. Report.” WSP. 38 Water and Sanitation Program V. Smaller-Scale PPP Chapter Summary This chapter explores the challenges of small-scale PPPs Challenges including the following: • Benefits of clustering low- and high-performing areas • Benefits of clustering to attract capable operators and access commercial finance • Need for capacity building support to key stakeholders (lenders, operators, the government) 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril One of the major challenges in designing and developing demand base (of customers and revenues) and investment smaller or subscale PPPs is how to achieve sufficient econo- opportunities. Commercial lenders are also likely to find mies of scale (to improve sustainability and affordability) such larger entities more attractive, since their larger balance and attract experienced water operators and investors. sheets and investment programs can often justify longer- tenor loans and reduced transaction costs. Aggregation and Clustering A number of countries (e.g., Argentina, Brazil, Bulgaria, Central governments may also choose aggregation PPP Hungary, India, Mozambique, the Philippines, and Senegal) models to improve social equity. Aggregating less successful have looked at aggregation models to improve access to service providers with well-performing ones can help pre- finance and attract private sector participation. Aggregation vent private operators from “cherry picking” and focusing can be defined as the grouping of several municipalities into exclusively on the most attractive and profitable service a single administrative structure for the provision of a par- areas, and can thus increase investment in less attractive ticular service (ERM et al. 2005). poor communities. Aggregation should ideally be part of a broader sector Attention should be paid, however, to avoiding too narrow reform strategy and should make technical, economic, and a focus on maximizing the attractiveness of a proposed political sense with or without PPP. As such it can bring a PPP transaction and ignoring other important factors range of benefits, including: influencing service sustainability. In the Philippines, for • Increased operational, procurement, and investment example, although PPP has acted as an important driver in efficiency through economies of scale; the creation of water districts, unequal access to water • Enhanced professional capacity—larger scale opera- resources has been a factor in limiting the success of such tors can afford to pay for specialist skills needed to processes. Political economy factors can also influence the sustain services (e.g., pump repair technicians and structuring and success of aggregation initiatives. Vested qualified finance, management, and customer ser- interests such as mayors and operator management may vices staff); resist aggregation if they have not been actively engaged in • Access to more sustainable water resources; and the process and their power and influence would be • Cost sharing between higher- and lower-cost service diminished. areas to improve affordability. Clustering can also be based around the PPP procurement Aggregating a number of smaller, less attractive service pro- process, bidding out a number of separate schemes under a viders into a single large entity can attract higher capacity single procurement (using the same bidding documents private operators and investors—attracted by the larger and bidding procedure) or through clustering a number of www.wsp.org 39 Delivering Universal and Sustainable Water Services Smaller-Scale PPP Challenges schemes under a single contract. Key considerations on supplying 23,000 cubic meters a day to a population of aggregation options and their feasibility include: 350,000 people under a single affermage contract. Two of the • Who will be the legally authorized contracting key lessons from WSP’s support in Senegal (WSP, 2015) are: authority? • The use of the affermage/lease contracts helps address • Will the clustering be based on one contract (for many concerns over tariff increases. schemes) or on a batch of independent schemes? Can • Clustering small rural water supply schemes helps to bidders bid for more than one contract or more than decrease transaction costs and increases financial one individual scheme? viability for the private sector. • Will assets remain with the original municipalities or be transferred to a new institution? Can they be Similarly, WSP and IFC’s experience in Benin in pooled? Can one community supply another within supporting private sector participation in small-scale the aggregated service area? piped water schemes highlighted the need to form com- • Can the operator pool all the revenues from mercially viable clusters to increase private sector interest customers or do they need to be kept separate for (Sylla et al, 2014). each sub-scheme? • How will tariffs be set? Can there be a single unified In Benin, it was recognized that not every rural water system tariff for the new aggregated service area or will each is commercially viable. Profitability will vary from one loca- community still set tariffs? tion to another depending on: (1) site topography and • How will operating budgets and investments be location (e.g., the availability of groundwater and the pres- prioritized between aggregated sub-schemes? ence of alternative sources of water supply), (2) the level of income and geographical dispersion of the population, (3) In Niger, clustering has been in the procurement process, the condition of the infrastructure, and (4) operation and with numerous separate small water supply schemes bid out maintenance costs. In addition, in a context where retail at the same time to minimize public transaction costs. tariffs are higher in rural than in urban areas, it would not Geographical clustering came about in Niger only at the oper- have been acceptable to increase user charges to cover the ator level, where an operator won several successive tenders in low profitability and lack of scale found in some areas. the same area. One operator in Niger operates 24 schemes (WSP 2010). In Burkina Faso, Mauritania and Rwanda, During the structuring phase of the transaction, it was however, several schemes were aggregated into a single con- found that some sites would not be attractive on a stand- tract for tendering. In Rwanda, where each scheme is rela- alone basis because of low profitability, frequent service tively large, the average is three schemes per operator. disruptions, high water losses, and old equipment requiring frequent repairs. It was decided, therefore, to form com- mercially viable clusters comprising sites with different lev- Common Pitfall: Ignoring Service Sustainability els of profitability to facilitate (1) cross-subsidy between Attention should be paid to avoid too narrow a focus water systems, (2) sharing resources to optimize operating costs, and (3) bundling sites to create transaction packages on maximizing the attractiveness of a proposed PPP of sufficient scale to attract experienced and financially transaction and ignoring other important factors robust operators. influencing service sustainability. This clustering approach received support from potential bidders because of its scale (customer base and investment In Senegal, the government is clustering rural schemes into requirement), and it received support from public author- three large-scale regional affermage PPP contracts. The ities whose objective was to ensure equitable access to Gorom-Lampsar (GL) Notto-Diosmone-Palmarin (NDP) improved water services (including the people living in cluster, for example, will group 14 rural WSS systems the least profitable sites). 40 Water and Sanitation Program Delivering Universal and Sustainable Water Services Smaller-Scale PPP Challenges PPP Capacity Gaps assistance to meet the regulatory requirements of the NWRB, Chapters 2 and 4 noted the critical importance of both the (2) strategic business planning, (3) performance improve- public and private sectors having sufficient technical, ments, (4) review and rationalization of tariffs, and (5) financial, commercial, and legal capacity to develop and improvements to systems for financial management. implement successful PPP initiatives. In smaller-scale PPPs, many of the firms interested in, or actually providing, water Access to Finance and sanitation services may need support to develop their Accessing finance is another major challenge for smaller-scale technical skills to improve service delivery, as well as sup- PPPs, and can limit the potential for service expansion and port for building general management skills. for PPP to go to scale. In Cambodia, 75 percent of water ­ operators cited access to finance as an obstacle to further WSP, through its Business Development Services activities, investment. Operators expressed concern about collateral has recognized that, before developing smaller-scale PPP requirements because commercial banks require land or initiatives, governments often need to assess the private sec- building ownership to provide a loan. Only 23 percent of ­ tor’s capacity to prepare, bid for, and operate or finance Cambodian water operators have a line of credit or loan from PPPs; they also often need to consider developing programs a financial institution. Most investments are financed with to fill private sector capacity gaps. cash on hand. This is not an unusual situation for smaller-scale private operators. Clustering can help, but thought should In Cambodia, for example, many water operators lack the also be given to designing PPP initiatives to improve access to technical and business expertise needed to operate, manage, finance, which would greatly improve market readiness. and expand their enterprises successfully. Strengthening capacity in the sector will help expand investment and When looking to improve access to finance it is important improve service quality. WSP has recognized that organiza- to recognize and work with the three key stakeholders in tions such as the Cambodian Water Supply Association building a market place for WSS commercial finance: the (CWSA) can help facilitate networking, knowledge borrowers (service providers), lenders (typically local exchange, and cross-learning among water operators, and banks), and government (which shapes the regulatory and has been working with the government and development legal environment and can play an important role as co- partners to encourage expansion of the CWSA to provide financiers with banks). at-scale business development services to water operators. This has involved supporting domestic private water opera- Figure 5.1 highlights some of the stakeholders’ critical tors to professionalize their service delivery and improve constraints from the demand and supply sides of WSS their operational performance, and developing investment finance, and proposes a range of interventions and instru- and business plans to support access to commercial finance. ments that together can help unblock the flow of finance. This will promote market readiness for mainstreaming PPP in Cambodia—building the capacity of private operators to A great example of adopting this holistic approach to WSS bid for new licenses, thereby increasing competition and finance for smaller-scale operators is the Kenya community ensuring long-term sustainability of service delivery. water supply microfinance initiative, which addressed the problem of small community-based water projects that lack In the Philippines, WSP and the National Water Resources access to necessary funding. In 2006, WSP began to work Board (NWRB), a government agency tasked with water with a local microfinance institution, K-Rep Bank, to explore resource regulation and economic regulation of private water structures under which a commercial financier would be service providers, have jointly developed an Accreditation interested in providing loan finance to small community- of Technical Service Providers (ATSP) Program to institu- based water providers. tionalize a sustainable capacity building program for water utilities. The ATSP Program targets small private water utili- K-Rep Bank introduced the Maji ni Maisha community ties requiring assistance on basic services such as (1) advisory loan program (Advani 2010) for communities with high www.wsp.org 41 Delivering Universal and Sustainable Water Services Smaller-Scale PPP Challenges Figure 5.1: Critical Constraints for Stakeholders in WSS Finance Constraints affect three critical water stakeholders Stakeholder Government Lenders Utilities/Borrowers $ Local and national laws Lenders perceive too Borrowers face What is the and policies hinder much risk and lack the capacity constraints, critical rather than catalyze market intelligence to especially around constraint? loans to water projects assess the technical loan management viability of projects and internal controls Focused policy Partial credit Technical assistance What will help reforms that guarantees, direct from governments, overcome encourage lending; lending, subsidies, donors, and other these technical assistance to technical assistance, utilities constraints? governments credit assessments Source: WSP 2016. willingness and ability to pay for clean water access. The From 2006 to 2014, K-Rep Bank and WSP worked together program offers a blend of commercial finance and an out- to make 35 loans valued at over $3 million for water projects put-based subsidy that was developed specifically to finance across Kenya’s rural communities, providing water services water infrastructure. K-Rep also benefited from a partial to over 190,000 people. The success of the Maji ni Maisha credit guarantee provided by USAID’s Development program demonstrates that a combination of technical Credit Authority to cover the construction period. The assistance, output-based grants, and partial-loan guarantees typical value of investments ranges from $75,000 to can mitigate credit risk and improve water projects’ access $170,000. Under the program, CBOs can borrow up to to commercial finance. Following a successful initial pilot, 80 percent of the cost of infrastructure rehabilitation and the scheme is now being expanded nationally. development. The remaining 20 percent of the project cost is financed by equity from the CBOs. Once a project is Key lessons learned from this project, which are readily successfully completed, an output-based aid subsidy of applicable to other WSS access to finance initiatives with 40 percent of the total project cost is extended to the com- private operators, include: munity and used to repay half the loan. Additionally, the • The lender should have in-house credit appraisal bank offers technical assistance to make the projects more skills typically used in project finance and should be viable and provides a small grant of $9,000 to help com- prepared to lend to projects without tangible collat- munities cover the cost of consultants hired for the devel- eral, because borrowers generally do not have a opment of a feasible project proposal. If the project gets financial track record or assets that support balance- approved, K-Rep offers a subsequent grant of $12,600 to sheet lending. pay for consulting oversight of project construction and • The willingness and ability to pay for water must management systems set up. be evident among the consumers being served by 42 Water and Sanitation Program Delivering Universal and Sustainable Water Services Smaller-Scale PPP Challenges the CBO; this drives the cash flows needed to repay “Models of Aggregation for Water and Sanitation the loan. Provision,” Water Supply & Sanitation Working • It is critical to have a pool of capable companies Note. 1, World Bank, Washington, DC. providing business development services to support Sylla, Mehita, Sylvain Adokpo Migan, Jane Jamieson, CBOs financed under the program, projects should David Bot Ba Njock, and Monyl Toga. 2014. “Doing be pooled to enhance their attractiveness to a spe- More with Less: Leveraging the Private Sector for Rural cialized operator, and qualified operators should Water Supply in Benin.” IFC SmartLessons, World be encouraged to undertake design-build-operate Bank, Washington, DC. contracts. • Disbursing subsidy funds on a pari passu basis with WSP (Water and Sanitation Program). 2010. “Public- commercial debt results in significant cost savings; Private Partnerships for Small Piped Water Schemes: paying the subsidy on project completion increases A Review of Progress in Seven African Countries.” overall project costs significantly. Water and Sanitation Program Field Note, World Bank, October 2010. WSP is developing further guidance on introducing commercial finance into the water sector (WSP 2016). WSP (Water and Sanitation Program). 2015. “Technical Assistance: Support to Professionalize Service Delivery in Senegal Rural Water and Urban Sanitation References Sectors - Levers of change in the Senegal rural water Advani, Rajesh. 2010. “Using Market Finance to Extend sector”. World Bank, Washington, DC. Water Supply Services in Peri-Urban and Rural Kenya,” WSP (Water and Sanitation Program). 2016. IFC SmartLessons, World Bank, Washington, DC. “Introducing Commercial Finance into the ERM, in association with Stephen Meyers Associates and Water Sector.” Under preparation. Word Bank, Hydroconseil, and William D. Kingdom. 2005. Washington, DC. www.wsp.org 43 VI. Forget Customers, Chapter Summary This chapter addresses communication and engagement Especially the Poor, with customers, including: • The customers’ role in the PPP process At Your Peril • Mechanisms for ensuring that customers are protected in PPP arrangements • Key issues for designing pro-poor PPP water interventions and policies • Pro-poor PPP structuring • Output-based aid (OBA) subsidies to reduce connection fees for poor households 6. Forget 2. Sector 3. Choice of customer, 1. PPP in the 4. Implementing 5. Smaller scale readiness for PPP structure especially the water sector PPP PPP challenges PPP model poor, at your peril A number of PPP initiatives have struggled or failed due, in initiatives through media manipulation and dissemina- part, to a lack of communication and engagement with tion of misinformation. customers and community/civil society organizations rep- resenting, among others, the poor (Gupta and Mehra Customers’ role in the PPP process can be particularly help- 2009; Kacker, Ramanujam, and Miller 2014). ful in: • Communicating an ability and willingness to pay for Customer Orientation in PPP services; It is all too easy to get lost in the details of policies, pro- • Expressing priorities for quality and level of service; cesses, and mechanisms of PPP and forget that the key and driver for PPP is to expand (equitable) access to, and • Identifying existing strengths and weaknesses in improve the quality and efficiency of, water and sanita- service provision. tion services—for the benefit of customers (or consum- ers) of these services. The raison d’être of private operators A range of mechanisms and policies can be introduced into is customer service. Customer orientation is a common the PPP process to ensure the customer is protected and attribute of well-performing service providers, and should represented in the PPP arrangements. These include: be a core principle in structuring sustainable PPPs— • Establishing contractual performance and customer within the PPP contractual arrangements and their regu- indicators and binding targets; lation. Customers, along with community and civil • Publishing and publicly displaying service society, should also be engaged from start to finish in the standards; PPP process, to anticipate their concerns and incorporate • Establishing contractual obligations on reporting their voices into community outreach programs and proj- and disclosing performance to customers and the ect structures. Educating and informing customers about public; the changes PPP will bring about (and its benefits and • Establishing sanctions and penalty mechanisms for limitations) is critical, and the process can help the gov- performance failures; ernment sound out proposed solutions and hopefully • Establishing customer complaints procedures and improve PPP structures through customer (and other reporting; stakeholder) feedback. It can also help manage customer • Establishing customer service contracts setting out expectations of the PPP process. This will help minimize the operators obligations on service standards and the potential for vested interests to undermine PPP customer rights; and 44 Water and Sanitation Program Delivering Universal and Sustainable Water Services Forget Customers, Especially the Poor, At Your Peril • Establishing customer consultative committees low revenues (low tariffs and consumption) and lack of that meet regularly with the operator (partnership ­ tenure. This is not a sustainable business model, and PPP approach). structures should be designed from the start to develop tar- geted approaches to meet the needs of all households. As The Poor and PPP Sustainability already noted, failure to listen to the concerns raised by cus- On the 28th of July 2010, through Resolution 64/292, the tomers (including the poor), NGOs, and civil society repre- United Nations General Assembly explicitly recognized sentatives can undermine PPP sustainability. the human right to water and sanitation and acknowledged that clean drinking water and sanitation are essential to the The key issues in designing pro-poor PPP interventions are: realization of all human rights. The resolution calls upon • Affordable service access (network extension and states and international organizations to provide “financial new connections); and resources, capacity-building and technology transfer, through • Affordable service charges (tariff structures). international assistance and cooperation, in particular to developing countries, in order to scale up efforts to provide The government will also need to develop pro-poor policies safe, clean, accessible and affordable drinking water and sani- and regulations to support the private sector. For example, tation for all.” Some countries have already responded, and local governments in the Philippines and India have intro- the 2014 Water Bill in Kenya, for example, states that every duced some flexibility on land tenure regulations to permit person in Kenya has the right to clean and safe water in ade- operators to supply informal communities and slums with quate quantities, and to reasonable standards of sanitation, as piped water. In Vietnam, the government has decreed that stipulated in Article 43 of the Constitution of Kenya. operators cannot charge connection fees to any domestic cus- tomer, with connection costs being recovered through tariffs. Experience and evidence shows that poor households are disproportionately impacted by lack of access to safe drinking Governments can also use means-tested subsidies (subsidies water. In urban areas, those living in low-income, informal, that are granted only to those that demonstrably have or illegal settlements tend to have lower levels of access to an ­ limited means) to target consumption subsidies to poor improved water supply (WHO and UNICEF 2014). Wealth people. In 1988–90 the new Chilean government intro- underpins access to improved water supply and sanitation duced reforms in the water sector. One of the objectives and the ability to practice improved hygiene behaviors. was that the (then public) service providers should become self-financing through higher tariffs that represented the Public operators, for many reasons, have often failed the real costs of the services and more efficient performance. poor, and introducing PPP can sometimes be an opportu- Recognizing that the tariff increases would particularly nity to use private sector expertise, efficiency, and capital to impact poor households, means-tested subsidies were intro- improve and expand services for poor people, along with duced to cushion the effect of the tariff increase on poor the rest of the community. Poorer households, often the people (still used today). Poor households received subsi- majority of the unserved population, are frequently willing dies of between 40 and 70 percent on up to 15 cubic meters and able to pay for improved WSS services and constitute a of water consumed per month. This discount was applied to potentially huge, untapped market for private operators the water bills of eligible households by the utility, which (Sy, Jamieson, and Warner 2014). was subsequently reimbursed by the government (Komives, Foster, Haplern, and Wodon 2005). However, experience has also shown that many private operators may be unable or unwilling to improve or expand Pro-Poor PPP Structuring services to low-income groups, at least in the short to PPP contracts can be structured to contract for expansion, medium term. Similar to public operators, private opera- but whether this expansion benefits the poor will depend on tors often have little incentive to make investments into the extent, location, and timing of the network expansion— poor communities because of the associated high costs and pipework and connections. This is largely driven by the www.wsp.org 45 Delivering Universal and Sustainable Water Services Forget Customers, Especially the Poor, At Your Peril design of the PPP contract, which is under the responsibility PPPs where connection fees have been a barrier to poor of the public partner. In order to target the poor, contractual ­ household access (Menzies and Setiono 2010; Menzies service coverage targets could include obligations to supply and Suardi 2009). specific geographic areas with higher numbers of poor house- holds (e.g., Buenos Aries, Dakar, and Manila PPPs) or sup- To improve the efficiency of these OBA subsidies, larger ply particular household categories (e.g., Jakarta). Targeted operators can also be encouraged to offer poor households incentives, or bonuses, could also be offered to operators to installment payment schemes for connection fees, to offer connect poor households (see below). lower connection fees, and to offer subsidized loans to cus- tomers for connection fee payment (payable with monthly Contracts can also promote network expansion in poor service bills). Improving coverage in poor settlements may communities by incentivizing the operator to allow alterna- require other innovative approaches, such as pre-paid meter tive service providers to install secondary and tertiary services, pay-as-you-go services offered at water kiosks, or networks. In Manila, the concessionaires can help meet public water points as an intermediate step toward a higher coverage targets by selling bulk water to small-scale opera- level of service. tors that install their own network downstream of a bulk master meter. Manila Water has offered poor urban com- Pro-Poor Tariff Policies munities differentiated services: individual household con- Tariff affordability is usually a smaller obstacle for poor nections, meter/connection per four to five households, households, but when designing PPP initiatives consider- and a community “mother meter.” Maynilad Water Services ation must be given to service bill affordability. Tariffs will has also offered temporary facilities (TEMFACIL) to such be a hotly debated issue for PPPs and it will be important communities. that willingness-to-pay, ability-to-pay, and willingness-to- connect surveys are undertaken at the feasibility stage as Affordable Access and Output-Based Aid Subsidies part of the overall outreach program. One of the most common barriers to poor households accessing improved WSS is the cost of access: the connec- Rising-block and lifeline tariff structures are commonly tion fee. Unless the connection cost is recovered through applied as pro-poor interventions, but such mechanisms do the tariff (e.g., Vietnam), it is usually payable as a one-off not specifically target the poor and, thus, are inefficient up-front charge to the customer. The actual cost of connect- interventions. Another approach could be to link bill subsi- ing a household can often be well in excess of US$100 dies, if needed, directly to social safety net mechanisms (depending on the property’s distance from the network), whereby governments make water bill subsidies to officially and there may be additional costs relating to meters and designated poor households. security deposits. Box 6.1 summarizes the pro-poor strategy developed for Output-based subsidies, targeting poor households and introducing a performance-based management contract communities, can be used to reduce connection fees to an PPP in Karnataka State, India, under the World Bank’s affordable level. Such subsidies are publicly funded (donors, Karnataka Urban Water Supply Modernization Project IFIs, government), performance-based, and linked to the (KUWSMP). number of eligible (poor) households newly connected to the operator’s network. Pro-Poor Regulation Output-based subsidies have been applied to a number In addition to their primary duties of ensuring the finance- of WSS PPPs: output-based aid (OBA) subsidies have ability of operations, capital maintenance, and capital been used as the bidding variable (Ibuza, Mugabi, and enhancement, regulatory authorities can be mandated to Mumssen 2010); as part of PPP structuring prior to bid- oversee and facilitate a universal service obligation on ding (Drozdz, Loening, and Marin 2010); and to existing water service providers. In lower-income countries, such a 46 Water and Sanitation Program Delivering Universal and Sustainable Water Services Forget Customers, Especially the Poor, At Your Peril formal obligation could be a critical support mechanism Ibuza, Chris, Josses Mugabi, and Yogita Mumssen. 2010. for delivering the universal WSS access targets set out “Output-Based Aid for Water Supply in Uganda: under the new UN Sustainable Development Goal 6, with Increasing Access in Small Towns,” OBApproaches 35, special regard to poor and vulnerable people. This may World Bank, Washington, DC. require a more adaptive and flexible approach to economic Kacker, Suneetha Dasappa, S. R. Ramanujam, and Tracey regulation as “informal customers” (of alternative provid- Miller. 2014. Running Water in India’s Cities: A Review ers) transform into viable utility or formal service provider of Five Recent Public-Private Partnership Initiatives, customers, with evolving service levels and pricing and Water and Sanitation Program, Flagship Report. payment mechanisms. Washington, DC: World Bank. Care will need to be taken, however, to ensure that the Komives, Kristin, Vivien Foster, Jonathan Haplern, and regulatory framework maintains the financial sustainability ­ Quentin Wodon with support from Roohi Abdullah. of the service provider—typically through a mixture of tar- 2005. Water, Electricity, and the Poor: Who Benefits from iffs and targeted subsidies to fund service extension to the Utility Subsidies? Washington, DC: World Bank. poor— an issue which, of course, concerns both private and public services providers. 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