Public-Private Partnerships in the Water Sector - Bush School
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Public-Private
Partnerships in
the Water Sector Desalination plant Carlsbad, California
ROBERT A. GREER and LINDSEY PRESSLER
The Bush School of Government & Public Service WHAT’S THE TAKEAWAY?
PPPs shift costs and risks of
Public-private partnerships (PPPs) have grown in populari-
desalination facilities between
ty as a method to leverage private-sector actors in the pro- public and private sector
duction of government services. With the global challenge partners.
of water insecurity, PPPs are becoming more common for PPP structures differ across
large-scale water infrastructure projects such as desalina- regions based on the needs and
tion. Desalination facilities are complex and expensive op- risk preferences of communities.
erations, which means that understanding the appropriate Whether PPPs should be used,
context for PPPs is increasingly important. should be based on how much
public entities want to shift the
Traditionally, governments fund the cost of new water infra- financial risks and control of
structure by issuing debt and repaying that debt with water core public assets to private
fees and taxes. The rising costs of infrastructure, increasing organizations.
water scarcity, and financial constraints of governments have PPPs are not a “one size fits all”
led to the consideration of non-traditional financial innova- solution and may not be
tions, one of which is public-private partnerships (PPPs). appropriate in every scenario.
While PPPs are most commonly used for housing and trans-
portation infrastructure, state and local governments are in-
VOLUME 12 | ISSUE 2 | MARCH 2021
http://bush.tamu.edu/mosbacher/takeaway
The Takeaway © Mosbacher Institute
2 creasingly turning toward PPPs to offset the PUBLIC-PRIVATE PARTNERSHIPS
high cost of desalination stemming from both Public-private partnerships are joint arrange-
facility construction and maintenance. ments between the public and private sector to
work toward a common goal while sharing the
To understand how different PPP arrange-
risks, resources, and liabilities of the projects.
ments are used in the water sector, a team of
Depending on the model, the contracts transfer
researchers at Texas A&M University examined
various risks and responsibilities from public
the global desalination sector and select cities
agencies to private firms. A key risk factor for
around the world using PPPs for desalination.1
water infrastructure is demand and revenue.
This brief summarizes what they learned about
Common PPP structures and their level of
how risks are shared between the private and
transferred financial risk are shown in Table 1.
public sector, how those risks vary globally, and
PPPs also have shifts in equity, affordability,
current trends in water infrastructure finance.
access, and sustainability of water infrastruc-
DESALINATION ture—which may or may not benefit the public.
Desalination is a growing industry around the These shifts have largely been unstudied in the
world as arid regions with water scarcity con- PPP context, especially in the water sector.
cerns seek alternative sources for water. The
PPP TRENDS IN DESALINATION
Greer and Pressler | Public-Private Partnerships in the Water Sector | Volume 12 | Issue 2 | March 2021
desalination process removes salts and miner-
The most common PPPs in the desalination in-
als from seawater and brackish water, making
dustry are Build-Own-Operate (BOO) and Build
otherwise unusable water drinkable. However,
-Operate-Transfer (BOT) arrangements, but
the process is costly, energy intensive, and re-
PPP structures tend to vary by geographic re-
quires specialized knowledge. In 1996, there
gion. The BOT model is most prominent in the
were only 92 plants globally mostly located in
Middle East and North Africa; Design-Build
the Middle East. Today, due to technological
(DB) is most common in North America; and
advances that make the process more accessi-
Design-Build-Operate (DBO) is preferred in
ble, there are more than 15,000 plants world-
Western Europe and East Asia.
wide.
Table 1: Public Private Partnership Forms and Revenue Risk Transfers
Type Description Financial Risk Transfer
Design-Build Design and construction phases are combined into one fixed-fee
(DB) contract.
Public entity owns and finances the construction, but the private
Design-Build-
entity designs, builds, and operates the asset to an agreed upon
Operate (DBO)
level of output.
Build-Operate- Private entity is responsible for the design, construction, opera-
Transfer (BOT) tion, and maintenance of the facility for a specified time.
Build-Own- The private partner owns the facility and is assigned all operating
Operate (BOO) revenue risk and any surplus revenues for the life of the facility.
Note: Figure modified from Page et al. (2008) incorporating information from Algarni, Arditi, & Polat (2007) and the
authors’ own observations.Using global desalination data we find that climate change and population growth, but dif- 3
2.7% of all desalination projects use some PPP fer in their institutional governance models for
arrangement, which is similar to large scale in- water. Israel, for example, has highly central-
frastructure projects in other sectors. The sig- ized governance. The state owns all the coun-
nificant growth in the use of PPPs, especially try’s water and has authority in deciding where
since 2000 (as shown in Figure 1), also follows the next facility will be built and for soliciting
the overall trend of infrastructure projects ex- bids from private corporations. In their PPP
ploring partnerships during that time. Most fre- deals, they prefer the BOT model, and water is
quently, PPPs were used for large projects— purchased by the state at a fixed amount even if
approximately 30% of extra-large projects it is not needed immediately. This has the bene-
(producing 50,000 m3/day or more of desali- fit of increased revenue stability for the private
nated water) and 12% of large projects use sector partner and gives more of an incentive
PPPs, compared to only 2% of medium projects. for facilities to remain operational all year long.
PPPs are also more common for seawater de- After 25 years of ownership, the facility is
salination than other types of desalination. Mu- transferred back to the government which then
nicipalities are the most common government has the option to enter into a new contract with
entity to use PPPs for desalination projects. a private entity for operation.
Greer and Pressler | Public-Private Partnerships in the Water Sector | Volume 12 | Issue 2 | March 2021
Figure 1: The total number of all desalination The most decentralized and fragmented institu-
projects and PPP projects per year (1945-2019)
tional arrangement of the case sites is the Carls-
bad facility in southern California. This facility
has a DBO arrangement where water from the
plant is purchased by the San Diego County Wa-
ter Authority (SDCWA), which is an independ-
ent water authority. SDCWA then sells water to
cities. Similar to Israel, the SDCWA contract
guarantees a minimum level of water they will
purchase from the private company. But, the
DBO model ensures that the SDCWA does not
have any liability or financial risk in the design.
After ten years, SDCWA can assume ownership
of the plant. Institutional arrangements of this
Source: Author’s calculations based on data from Global type add additional layers of political and finan-
Water Intelligence’s www.DesalData.com
cial risk for both public and private partners.
CASE STUDIES
For a more in-depth look at how PPPs are used CONCLUSION
in different countries, the Texas A&M research The decision to use a PPP for large-scale water
team conducted case studies in several coun- infrastructure such as desalination depends on
tries around the world. The selected sites were specific goals, operating environment, and risk
in semi-arid regions that adopted desalination levels. The cases demonstrate different meth-
early and face water scarcity challenges due to ods of sharing risks and responsibilities in the4 construction and maintenance of water infra- likely to be case specific depending on geogra-
structure. The institutional arrangements range phy, water scarcity, political will, and fiscal
from highly centralized funding and negotiating health. Currently, PPPs in water infrastructure
power at the national level as in Israel, to highly are understudied. More research is needed in
decentralized and fragmented where the role of order for government leaders to make in-
local governments greatly increases as in Cali- formed decisions about PPPs and new water
fornia. These varying institutional arrange- infrastructure, including research on what
ments and country-specific laws influence the models of PPPs are most successful and how
types of PPP arrangements that are likely to be geographic regions influence model success. By
implemented. Despite the potential benefits of understanding the risks and benefits of each
PPPs in the desalination sector, some potential PPP model, municipalities and governments
downsides include the possibility of a high total can determine what model will have the most
cost, financial risks from debt and default, and efficient and equitable outcome.
political risks from public perceptions. There
also may be obstacles to establishing partner- Robert A. Greer is an associate professor in the
ships initially, legal hurdles, and regulatory bar- Bush School of Government and Public Service at
riers. Establishing PPPs can be difficult due to Texas A&M University and a Mosbacher Research
Fellow. His research interests are in state and
Greer and Pressler | Public-Private Partnerships in the Water Sector | Volume 12 | Issue 2 | March 2021
the need for public support and special legisla-
tion. An enabling regulatory, legal, and political local government financial management,
specifically in the areas of debt management,
environment is necessary for success. municipal securities, and infrastructure finance.
Ultimately, whether or not a public-private Lindsey Pressler is a master’s in Public Service
partnership is a good fit for a particular project and Administration student at the Bush School.
depends on the amount of risk the public and
Notes:
private sector are willing to accept for the pro- 1
Greer, R.A., Lee, K., Fencl, A. & Sneegas, G. (2021). Public-
ject. A variety of risk factors exist including en- Private Partnerships in the Water Sector: The Case of
vironmental, political, and financial, which are Desalination. Texas A&M University working paper.
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