Pros and cons of PPPs in water sector

Zhang Yingxin Louisa and Asit Biswas

CHINA DAILY | May 2, 2013 

China has made great achievements in water supply and sanitation, and some of the important developments in the sectors have been possible because of private sector involvement.

Traditionally a public sector responsibility, the water sector has undergone major changes in the past two decades because of the continuing evolution of China into a market-oriented economy.

Before the 1990s, water was treated as a “sacred cow” and almost everyone believed that water should be provided free of charge. This view started changing in the 1990s as China started deregulating its water sector, opening it up to private players and subsequently to foreign companies. Public-private partnerships (PPP) started in China with the build-operate-transfer (BOT) model and progressed to other arrangements by 2002.

An important debate going on today is whether PPPs have benefited the water sector in China. The common perception is that while private involvement may have improved the efficiency and cost recovery of the water sector, it has led to a sharp increase in water tariffs, loss of decision-making authority and made it more difficult for the poor to access water.

But experience shows that this may not necessarily have been the case. Inherently, PPPs are neither good nor bad; what determines their effectiveness is how effectively they are regulated.

A case that exemplifies this point is the successful water sector reform in Ma’anshan city, Anhui province. In 2002, the existing State-owned Ma’anshan Water Supply Company embarked on a joint venture with Beijing Capital Group, forming the Ma’anshan Beijing Capital Water (MAS-BCW). At that time, MWSC was receiving heavy government subsidies and operating at a loss because of poor cost recovery, and its service quality left much to be desired.

The PPP started out with one water treatment and supply plant that sold purified water to MWSC. This joint plant performed significantly better than other water treatment plants managed by MWSC alone. In 2004, the joint venture cooperation was extended to all of Ma’anshan city’s water treatment plants under a 30-year concession, with BCG having a 60 percent stake in the company.

While the joint venture MAS-BCW was responsible for investing in, operating and maintaining the water treatment plants, the MWSC still owned the pipe network and the Ma’anshan government still controlled the water tariff. There were also provisions in the agreement with Beijing Capital Group to ensure that the concessionaire not change the public and social nature of water provisioning. MAS-BCW was to fulfill a set of social requirements such as employing all personnel from the old water company and reducing water bills of the poor. The deal was also to be evaluated at the end of each year to see if a set of performance targets in terms of quality, quantity, and cost recovery had been met. These were jointly mapped out by the government authorities and MAS-BCW.

Satisfied with the improved service quality of water provision by the PPP, the local government raised the water tariff from 0.83 to 1.08 yuan per cubic meter of water for household consumers. At that time, the average annual income of a household was 10,189 yuan ($1,650). Thus, the per capita daily use of 300 liters of water meant that 1.16 percent of a household’s income was to be spent on water. Compared with the global average of 2-4 percent of a household’s income being spent on water, Ma’anshan water services were very affordable.

In the case of Ma’anshan , a PPP for the water sector was a success since not only did the quality of service improve significantly, but also a loss-making operation was transformed into a financially viable one. Also, the typical risk of drastic increases in tariff for the people, especially for the lower-income groups, was avoided.

Nonetheless, the PPP in Ma’anshan is not without the risk of failure, because policies that govern PPP activities are based on inadequately and inconsistent laws, and can be changed unilaterally without consultation with the private sector or any consideration about the impact they would have on the private player.

The dearth of appropriate institutions and regulations governing PPP contracts led to the failure of the Beijing No. 10 water project. The project was awarded to a consortium of Anglian Water and Mitsubishi Corporation in 2002. The consortium failed to secure debt financing because of lack of proper financing policies and regulatory frameworks.

Improper planning of the terms of the PPP on the part of local governments has also led to disastrous outcomes. In 1998, the Chengdu No. 6 BOT water project, which was awarded to Veolia and Marubeni, resulted in massive economic losses for the municipal government as the price of water in the contract was set higher than what the municipality could afford to pay.

Whether or not PPPs lead to positive outcomes for China’s water sector depends on numerous factors, including the strength of the legal and institutional frameworks in place, effectiveness of regulation in keeping the private sector on its toes and the appropriate balance of operational and financial risk sharing. In this context, the Chinese experience in PPP is similar to that of many other countries where some efforts have been very successful and others dismal failures.

What is clear, however, is that by learning from experiences, both from home and other developing countries, China should be able to structure new generation of PPPs in the water sector which would be more successful than the existing ones.

Zhang Yingxin Louisa is a master’s student at the Lee Kuan Yew School of Public Policy in Singapore. Asit K. Biswas is distinguished visiting professor at the Lee Kuan Yew School of Public Policy and co-founder of the Third World Centre for Water Management.