WSSB Capacity Enhancement Workshop 1

Definition: Public-Private Partnerships (PPPs) are a form of legally enforceable contracts between the public and private sectors, which requires new investments by the private contractor (time/expertise, technology, money, reputation, etc.) and which transfers key risks to the private sector (operation, service delivery, design, construction, etc.), by which payments are made in exchange for performance, for the purpose of delivering a service traditionally provided by the public sector.

Under publicly-provided services, the Govt. decides the INPUTS to be used (#staff hired, chemicals purchased, when equipment gets maintained or not)

Under PPP, the private operator is told the OUTPUTS to meet (# new connections, collection rates, NRW levels, etc.) but it is the private operator, NOT the client water authority that decides what inputs to use to meet those specific output standards.

Value comes from telling the operator “WHAT needs to be achieved” and NOT “HOW to achieve it.”

1. Improving the value for money that end-users receive from their public services

2. Additionality: More public services are available than without PPPs

3. Avoided Public Borrowings: Attracting new private investment into public services sectors

4. Improved management, technology, & performance: clearer standards and force of contract

5. BUT, the private sector is NOT always more efficient & effective than the public sector. Analysis and comparison of performance is needed first to determine which is better!

Value for Money Comparision for Different Water Delivery Options (Public & PPPs)

Public

PPP#1

PPP #2

PPP #3

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

UGX 1,500 UGX 2,000 UGX 2,500 UGX 3,000

Average Price per Cubic Meter of

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De

live

red

(S

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ut

of

po

ss

ible

10

0)

•QUESTION: Which Option Provides the “Best Value for Money?”•The lowest-price may mean low value & highest value may be unaffordable

By contracting with the private sector to undertake a cost-recovering economic infrastructure project, scarce Government capital budgets can be directed to other priority social services (education, health care, etc.)

Without a PPP With a PPP:Govt. Capital

Budget

Govt. CapitalBudget

Private PPPDeveloper

OR AND

PPP

Project A:Water System

Expansion

Project B:Health ClinicsConstruction

Project A:Water System

Expansion

Project B:Health ClinicsConstruction

BUT Beware: PPP Options should still pass the test of offering “better value for the public’s money”…

PPPs require contracts that include clear performance (output-based) standards to meet

If the private contractor does not perform, it should not be paid

This incentivizes private contractor to perform better. Any mistakes will have direct financial costs.

Experience shows that making service providers accountable for meeting specific performance standards reduces the frequency of problems in service delivery (better prevention of risks and problems)

“RISK”(Private Sector Investment Required)

“REWARDS”(Returns toThe Private

Sector)

High

Low

ServiceContract

Lease/Operating

Contract

Concession

Divestiture

(Investor-Owned Utility)

Low High

Design-Build-Operate(BOT)

ManagementContract

A specific water utility service is “unbundled” (i.e. billing & collections, leak repair, new connections, equip. maintenance, customer service, etc.)

A prior full cost analysis of the specific service must be performed to benchmark current performance levels to compare with competitive bids. Must include indirect costs (i.e. overhead costs)

Private (and Public) firms competitively bid on providing the service

Capital requirements are very low, asset lives of < 3-5 years Operating efficiency & lowering indirect costs is usually the goal Labour participation/opposition issues are critical Repeating the process throughout the organization can make a

public water authority more competitive overall

PrivateService

ContractorService3

Service1

Public Services Corp.

Service2

Service3

Service1

Service1

Service2

Fees

ServicePub. Services Corp.

Board

Public Water Corp.

MANAGEMENT

Employees

Board

SENIORMANAGEMENT

PrivateManagementContractor

ManagementFees

IndependentManagementEmployees

A public water corporation identifies specific, priority operating problems

Private firms competitively bid for the right to provide the senior management services in exchange for a “Management Fee”

The Contract identifies specific minimum performance levels that the Contractor must meet (ie UFW, Collections, New Connections. etc.)

Most management contracts include performance-based incentives (payments for superior performance)

The Contractor needs authority to make all operating decisions (including hiring & firing), Government owns assets and makes long-term decisions

Contract terms usually 2 - 5 years Keys to success: Sound Corporate Governance & a detailed

contract

A private firm(s) establish a new “Special Purpose Project Company” to Build/Expand & Operate a water system.

The new Project Company must provide the long-term financing (from its own equity and new debt) to finance all new long-term assets (treatment plants, water mains, pumps, pipes, etc.)

Contract Term: usually 10 – 25 yearsPriv.

Sponsor1

$

Users

Priv.Sponsor

2

ConcessionContract

Equity

Loan

Repayment

Energy/WaterServices

Rates

Equity

Special Purpose Project Co.

GovernmentLenders

PlannedServiceLevel

Time

4. Post-Award Monitoring of ACTUAL PPP Performance delivered

Actual

Water’s key role in public health, a “public good”◦ Limited affordability to pay for the full cost of water

Water as a “Local-level” service:◦ Limited Local Funds to Prepare PPPs◦ Limited Local-level capacity to Administer PPP Contracts

Attracting long-term private investment will require more risk-sharing ($) by Govts. Water user-fees will not be enough

Benchmarking & Monitoring Sector Performance

Funding Environmental Challenges:◦ The need to pay for more water treatment◦ Limited water resources available◦ The need to pay for more wastewater treatment

Comments/Questions?