Benefits of Water Service Public-Private Partnerships: Presented To The Walkerton Inquiry

Benefits of Water Service Public-Private Partnerships
Presented to the Walkerton Inquiry
The Canadian Council for Public Private Partnerships
January, 2001
Canadian Council for Public-Private Partnerships
Paper to Walkerton Commission on PPPs
1. Introduction..................................................................................1
Water Service in Ontario........................................................................................................ 1
Public-Private Partnerships are a Proven Alternative......................................................... 2
About the Canadian Council for Public-Private Partnerships............................................ 2
2. Public-Private Partnerships in Water Services .........................3

Traditional Private Sector Participation in Ontario’s Water Industry.............................. 3
Private Sector Participation in Other Essential Services..................................................... 4
Spectrum of Water Service PPPs........................................................................................... 4
Service Contracts..................................................................................................................... 5
Management Contracts........................................................................................................... 5
Leases ....................................................................................................................................... 5
Concessions .............................................................................................................................. 6
Build-Operate-Transfer Arrangements ................................................................................ 6
Full Privatization..................................................................................................................... 7
Determining PPP Type and Structure................................................................................... 7
3. Global and Canadian Trends in Water Service PPPs ...............8

Private Sector Interest and Availability in Canada.............................................................. 9
Why Aren’t Water Service PPPs More Common in Canada?............................................ 9
4. Basic Characteristics and Strengths of Water Service PPPs 11

Underlying Characteristics of PPPs..................................................................................... 11
5. Benefits of Water Service PPPs ...............................................13

Additional Sources of Financing .......................................................................................... 13
Improved Speed and Efficiency of Procurement................................................................ 14
Improved Operational Efficiency ........................................................................................ 14
Highly Qualified Personnel................................................................................................... 15
Additional and More Specialized Governance ................................................................... 16
Transfer of Risk from the Public Sector ............................................................................. 16
Clear Accountability ............................................................................................................. 17
Improved Regulatory Compliance....................................................................................... 18
Protection of the Public Interest .......................................................................................... 18
Evidence of PPP Benefits ...................................................................................................... 19
6. Considerations for Successful PPPs.......................................20

Type of PPP ........................................................................................................................... 20
Willingness to Change........................................................................................................... 20
Clear Communication to Stakeholders ............................................................................... 20
Competitive Process .............................................................................................................. 20
Performance-Based Agreements.......................................................................................... 21
Asset Protection ..................................................................................................................... 21
Mutual Benefit ....................................................................................................................... 21
Major Capital Investment .................................................................................................... 21
7. Summary ....................................................................................23
References .............................................................................................................................. 24
1. Introduction
The dominant model for providing water service in Ontario is public, with
water systems owned and operated by local governments through their public
works departments and public utility commissions (“PUCs”). Alternative
models that include the participation of the private sector are used world-wide,
and have proven effective in addressing challenges similar to those now being
faced in Ontario.
This paper describes Public-Private Partnerships (“PPPs”) and how they can
be of benefit to water delivery in Ontario. A companion publication of this
paper, Overview of Successful Public-Private Partnerships in the Water
Sector, describes a sample of successful PPPs that have improved water
service delivery in Canada and the United States. The companion publication
will be submitted to the Walkerton Commission, and is available through
The Canadian Council of Public-Private Partnerships.
Water Service in Ontario

Among many other local services and infrastructures, Ontario’s municipal
governments are responsible for making water service1 available within their
jurisdiction. Assets owned and operated include intakes and wells, water
treatment plants, pumping and distribution systems, sewer collection and
pumping systems, wastewater treatment plants, and effluent outfalls.
Provincial responsibility for water is regulatory in nature, with the mandates

of several ministries covering water delivery in one way or another. These
include the Ministry of Environment (water and effluent standards, resource
stewardship), Ministry of Natural Resources (resource management), Ministry
of Health and Long Term Care (public health), and Ministry of Municipal
Affairs and Housing (municipal service delivery). Municipalities must meet
various requirements of these ministries in their execution of water service
delivery.
In addition to its regulatory role, the provincial government (“the Province”)

continues to have an operations role through the Ontario Clean Water Agency
(“OCWA”), a Schedule 4 agency of the Province formed in 1993. OCWA
operates water and wastewater treatment infrastructure for approximately 200
municipalities on a contract basis.
As enumerated by the Walkerton Commission, there are many challenges

facing the water industry in Ontario in the areas of resource management,
1
In this paper, “water” refers both to water services and wastewater services. They are both typically
provided by the same public sector provider in Ontario municipalities, and are analogous in their
physical and operational characteristics, consisting of expansive underground pipe networks (water
distribution and sewer collection) and centralized treatment plants.
Page 1 of 26
capital investment, cost recovery, technology, monitoring, training, reporting,

and accountability. Responsibility falls both to municipalities (as service
providers) and the Province (as regulator, a source of capital funds, and in the
case of OCWA, as operator as well).
Public-Private Partnerships are a Proven Alternative

Throughout the world the private sector is involved in many aspects of water
and wastewater service delivery through arrangements known as Public-
Private Partnerships. Both developed and undeveloped countries are using
PPPs in water delivery to exploit the knowledge and financial capital of the
private sector with the objective of improving value and accountability to
taxpayers and water users.
While PPPs are not a panacea, when effectively structured and employed they
can contribute solutions to some of the issues facing water delivery in Ontario.
PPPs can offer:
! additional sources of capital;

! operational efficiencies and cost savings; and
! clear paths of accountability and remedy.
This paper explains the various common forms of water service PPPs, the
underlying factors that make PPPs a different and advantageous way to
deliver water services, and the benefits that water service PPPs offer.
About the Canadian Council for Public-Private Partnerships

The Canadian Council for Public-Private Partnerships (“CCPPP”) was
founded on the belief that there are many benefits to be gained when the
spheres of government and business interact. The CCPPP was established in
1993 as a non-partisan, non-profit body. National in scope, membership is
drawn from the public and private sectors in almost equal numbers. As
proponents of PPPs, CCPPP conducts research to gain a greater understanding
of how to capitalize on the strengths of these two sectors to serve the public
interest. This paper was prepared for submission to the Walkerton
Commission by PricewaterhouseCoopers LLP, as commissioned by CCPPP,
and reviewed by members of CCPPP.
Page 2 of 26
2. Public-Private Partnerships in Water Services

The term “public-private partnership” applies where private sector businesses
participate with government in the delivery of infrastructure or services that
have traditionally been provided by governments alone. Under PPPs, the
particular strengths of the private and public sectors are combined to
maximize value to the public on a project or program basis.
PPPs can be implemented in virtually any part of the water service delivery
chain, bringing commercial discipline and resources to design and
construction, financing, operations, management, maintenance, marketing and
retailing, billing, and communications. Examples of water service PPPs
include:
! service or management contracts for short term operation and maintenance

of facilities and networks;
! leases and concessions for long term management, operation, and
upgrading of facilities and networks;
! build-operate-transfer and similar hybrids such as design-build-operate of
new infrastructure with or without interim or long term private financing;
and
! full privatization of facilities and networks.
Each of these arrangements involves the private sector in areas that have
traditionally been the domain of the public sector in Ontario.
Traditional Private Sector Participation in Ontario’s Water

Industry
The private sector has traditionally been involved in many non-operational
aspects of Ontario’s water industry. Municipalities have typically utilized the
private sector to provide some or all of the following:
! consulting engineering services (e.g. process selection, infrastructure

design, system planning, operational audits);
! construction services (e.g. pipeline, treatment plant, and building
construction and rehabilitation);
! material supply (e.g. equipment, construction materials, treatment
chemicals);
! repair services (e.g. electrical, mechanical);
! testing and laboratory services (e.g. materials, effluent); and
! field services (e.g. pipe inspection and cleaning, hydrant maintenance,
flow monitoring).
These goods and services are crucial components of the water service delivery
chain, but are not generally considered PPPs. They do however illustrate that
Page 3 of 26
the private sector is currently extensively involved in the non-operational

areas of water service delivery.
Private Sector Participation in Other Essential Services

The private sector has long been involved in the provision of essential services
analogous to water services in both operating and non-operating roles.
Natural gas and telecommunications are analogous in terms of physical
infrastructure. Food supply is analogous in terms of the use of the product
and its correlation with human health. In each of these cases, the role of
government is that of a regulator, rather than a direct service provider. While
Ontario has not traditionally involved the private sector in water and sewer
service delivery, these examples illustrate the effectiveness of the private
sector in delivering similar services.
Spectrum of Water Service PPPs

A wide spectrum of water service PPP arrangements is possible, with the
allotment of responsibility between the private and public sectors varying
considerably. For water and wastewater service delivery, the alternative
forms include:
Operations & Capital Commercial Risk
PPP Type Asset Ownership Typical Duration
Maintenance Investment Inputs Outputs
Service contract Public Public and private Public Public Public 1-2 years
Management
Public Private Public Shared Public 3-5 years
contract
Lease Public Private Public Shared Private 8-15 years
Concession Public Private Private Private Private 25-30 years

Build-Operate-
Shared Private Private Private Private 20-30 years
Transfer
Private or
Full Privatization Private Private Private Private Indefinite
Shared
Source: World Bank, PricewaterhouseCoopers
Commercial risk refers to risk caused by changes in the market for business
inputs (costs) and outputs (revenues). For water services, input risks could
stem from changes in the cost of power, materials, outside services, and
construction. Output risks might be variation in water demand or wastewater
volumes, or consumer response to price changes.
Countries that have formed PPPs to help meet these types of demands include:
PPP Type Examples where Water Services PPPs In Place
Service contract or Canada, Columbia, Gaza, Malaysia, Mexico, Puerto Rico, Trinidad and Tobago, Turkey, United
Management Contract States
Lease Czech Republic, France, Guinea, Italy, Poland, Senegal, Spain, United States
Concession Bulgaria, France, Macao, Malaysia, Spain, Philippines, Argentina, Buenos Aries
Australia, Canada, China, Chile, Malaysia, Thailand, Mexico, New Zealand, South Africa, United
Build-Operate-Transfer
States
Full Privatization United Kingdom, Chile
Operational involvement, financial involvement, and risk allocation vary

depending on the form of PPP. Consequently, the benefits of each vary as
well. Each type of PPP is briefly described in the following sections. It is
Page 4 of 26
worth bearing in mind that each PPP arrangement is (or should be) uniquely
tailored to the needs of both partners, and that the classifications often blur in
practice.
Service Contracts
Service contracts are the simplest form of PPP, where the private sector is
contracted to perform a specific service for a short period of time or to
complete a specific project. Examples include consulting assignments,
construction contracts, and “contracting out” of services such as hydrant
maintenance, pipeline inspection and rehabilitation, and laboratory services.
Service contracts enable governments to accomplish tasks for which there is

insufficient demand to develop internal resources. Intermittently required or
specialized expertise can be contracted on an as-needed basis. An additional
benefit is the cost savings that can be realized by opening the services to
competition through a tender process.
While, as previously stated, PPPs are not extensively used for water services
in Ontario, service contracts are the exception. As the simplest form of
public sector participation, the “partnership” element is very limited, since the
relationship between the public and private sectors is a straightforward
purchase of service. All management and investment responsibility remains
with the public sector, therefore benefits are limited to the context and
structure of the way the public sector does business.
Management Contracts
Management contracts extend the responsibility of the private sector into the
operation and maintenance of government-owned infrastructure or operation
of government-owned businesses. In Ontario, the contracted operation of
municipal water and wastewater infrastructure in Goderich, Hamilton, and
Haldimand-Norfolk by the private sector are examples of management
contracts.
Compared to service contracts, management contracts transfer greater

authority for operational decision-making to the private sector. With the
empowerment to change how operational objectives are met, management
contracts allow the private sector to develop improvements in efficiency and
technical ability. With a management contract, the public sector generally
bears the output risk of operations, as the private sector is guaranteed payment
for the service provided regardless of changes in the demand. The private
sector usually bears some input risks associated with its model for
management of the business.
Leases
Leases take management contracts a step further by transferring output risk to
the private sector as well. The private sector leases infrastructure assets from
Page 5 of 26
the government, and is compensated with the revenue stream that the assets
generate, rather than on a fee-for-service basis. Asset ownership remains with
the public sector, introducing complexities when investment in asset renewal
or expansion is required. The incremental benefit of leases over management
contracts is that the private sector is additionally motivated to reduce costs in
the face of revenue risks.
Concessions
Concessions are similar to leases, with the additional transfer of responsibility
for infrastructure investment to the private partner. Conceptually, the private
sector has full and complete responsibility for operating the business,
including asset renewal and expansion as needed to maintain the integrity of
the infrastructure. Since ownership of the assets remains with the public
partner, ultimate control of the water systems remains in the public domain.
By placing responsibility for operations and investment with the private

sector, incentives are created for efficiency throughout the entire business,
including procurement and financing. This provides the opportunity for the
private sector to fully optimize service delivery, balancing investment against
operations for the optimal combination of labour, materials, and capital.
Concessions are the point in the PPP spectrum where the full scope of
commercial discipline of the private sector is harnessed.
Build-Operate-Transfer Arrangements
Build-operate-transfer (“BOT”) arrangements combine concessions with
initial procurement of assets. The private partner is responsible for designing,
constructing, then operating and maintaining facilities for a long period of
time. Ownership of the assets is transferred to the public sector at the end of
the operating period. These are typically used as a procurement mechanism
for new water or wastewater treatment plants that have easily-measured
outputs and physical boundaries, but can be used for pipe networks as well.
The objective is to introduce private sector efficiencies into the earliest

possible point in the service delivery chain, when facilities are designed and
built. A BOT allows the private partner to optimize the total cost of service
delivery by trading initial investments with operational needs over a long
period. This flexibility is not afforded by the traditional procurement process,
where designer and operator are different parties and not necessarily
motivated by a common goal.
“Design-build” procurement for infrastructure, while sometimes considered to

be a PPP, does not entail operation by the private sector and is less a
partnership than a procurement strategy. A BOT or design-build-operate
takes design-build further by including facility operations and maintenance for
a period of time following construction.
Page 6 of 26
Full Privatization
Privatization is full divestiture of public infrastructure assets and operations to
the private sector (which means transferring monopoly rights from
government to the private sector). Government maintains necessary levels of
control through regulatory rather than contractual means. Existing regulatory
structures may not be adequate to protect the public good in this case,
requiring significant regulatory reform in concert with full privatization.
A variation of full privatization is a joint venture where the water service

company is operated on a private model but jointly owned by a private sector
firm and the previous government owner. Protection of public interests is
maintained through ownership of the operating company, rather than the
assets directly.
Determining PPP Type and Structure

Each type of PPP offers different benefits and requires a particular level of
effort on the part of both partners. Selecting an appropriate PPP depends on
the problems that need to be solved, the needs of the public partner, and the
capabilities of the private sector. Each case is unique, requiring significant
efforts to develop a successful partnership that meets the legitimate objectives
of both partners.
Page 7 of 26
3. Global and Canadian Trends in Water Service PPPs

Public-private partnerships in water services are becoming increasingly
common around the world. The primary drivers are similar everywhere, in
both developed and undeveloped countries: the need for infrastructure
investment and operational improvement is high, and governments are less
willing or able to supply the necessary capital and expertise. This creates a
need both for efficiencies in operation and investment, and for additional
sources of investment.
Capital and operational demands stem from:
! increasing performance and prescriptive standards;

! more stringent human and environmental health regulations;
! need to renew ageing infrastructure that has not been provided for
financially;
! extension to unserviced areas to improve access; and
! population growth and densification.
Private-sector water utilities provide 99 percent of the UK’s and 75 percent of

France’s population with water and wastewater services (Neal et al, 1996).
The UK’s transfer in 1989 of all water and wastewater assets to the private
sector was driven by the huge need for investment created by impending
European Union (“EU”) standards. The companion document to this paper
includes a review of the UK’s success with full privatization of water services.
France has a long history of private sector participation in water services, with
some of today’s water companies having their origins as private firms in the
1800s.
In other European countries, there is a trend of increasing private sector

participation in water services. Members of the former Eastern Bloc countries
face the dual pressures of EU standards and the infrastructure deficit left by
years of communist rule. Private sector participation is providing some of the
capital and operations expertise to improve these systems.
Large scale PPPs involving municipal water systems are on the increase in
Canada and the United States as well, although public sector delivery is by far
the dominant service model. The PPPs in place are generally either
management contracts for treatment plants and/or pipe networks, or BOT-type
arrangements for treatment plants. Canada’s first water treatment plant BOT
was in Moncton, New Brunswick in 1998. Major U.S. cities using PPPs for
water service delivery include Atlanta, Indianapolis, Milwaukee, Seattle, and
Tampa.
Page 8 of 26
There is some experience with fully privatized water service in North

America, although the fraction of the population served is small. In the U.S.,
several small water utilities (in communities of less than 3,500) have been
“investor-owned” since their inception2. In White Rock, British Columbia, a
private utility has been extracting, treating, and delivering water to the city of
18,000 for over 80 years.
Private Sector Interest and Availability in Canada

There are approximately eight major water companies operating globally,
most of which have their roots in the private water companies of France and
the UK. Most of these have local points of presence in Canada. In addition,
there are several North American based companies capable of financing,
building, and operating water infrastructure, most of which are based on the
competencies of parent consulting engineering or construction firms. In
general, there is no shortage of private sector interest and ability in delivering
water services in Canada.
Why Aren’t Water Service PPPs More Common in Canada?

Governments have historically been responsible for the development,
financing, and operation of water systems in Canada. Reasons for this include
the following:
! Water is a very capital-intensive business, requiring levels of investment

that at some points in history may have been the domain of governments
only.
! Considered a public good, water provision is often an element of nation-
building and community-building, and may not have been supportable on
a commercial basis in the early years of community development.
! Many municipalities in Ontario face a new situation, where capital and
technical needs are for renewal and performance improvement, where
ownership of major assets has been transferred from the Province, and
where cost-effectiveness is the concern of both ratepayers and senior
governments. Until these factors combined, there may have been little
stimulus to investigate PPP alternatives.
! Proposed PPPs often face opposition from those opposed to changes to the
traditional public sector model for water service delivery.
! Over the past 10 years or so water service has become a competitive
global industry with many companies seeking business opportunities
worldwide. The offerings of these firms have become more attractive as
2
There are a great many very small user-owned water and wastewater systems in North America that
service single buildings or developments such as resorts, camps, and trailer parks. These are owned and
operated neither by governments nor private water service firms, but by the water users themselves.
These have traditionally been considered sub-standard by health and environmental agencies as
compared to government-owned systems, and are generally phased out as government water and sewer
systems are expanded to unserviced areas. The Canadian Water and Wastewater Association estimates
that approximately 90 percent of the population is served by government water systems, and 85 percent
by government wastewater systems. The majority of the remainder are likely served by user-owned
systems.
Page 9 of 26
efficiencies and competencies have been developed as the industry has

matured.
The recently announced Municipal Performance Measurement Program, an

initiative of the Ministry of Municipal Affairs and Housing, will collect and
compare municipal efficiency in the delivery of several services, including
water. There has historically been little pressure on the public sector to
investigate alternative means of delivering water services, and few alternatives
for providing those services. Both of these conditions have now changed,
making water sector PPPs both possible and of interest to governments.
Unfortunately, it often takes a widely recognized crisis (Gentry et al, 1997) to

stimulate unfamiliar working relationships such as water sector PPPs. Recent
large-scale water quality events in Walkerton (2000, E.coli), Collingwood
(1996, Cryptosporidium), Cranbrook (1996, Cryptosporidium), and Kelowna
(1996, Cryptosporidium), can fairly be described as unprecedented localized
crises. If the crisis hypothesis holds some truth, the relatively uneventful (until
recently) long-term public record of government water delivery may partially
explain the dominance of the public model for water services in Canada.
Page 10 of 26
4. Basic Characteristics and Strengths of Water Service

PPPs
In the water industry, the private sector and the public sector have different
motivations to perform. The public sector’s motivations are public service,
benevolence, tradition, and the need to provide essential services when and
where they are not otherwise available.
The private sector is motivated in two ways that contribute to improved

performance in water service delivery. The first is profit motive. Profitability
is enhanced by developing efficiencies during the course of a PPP’s duration.
When the time comes for competitive contract renewal, profitability gets
“reset” to normal market levels, and the drive for efficiency continues into the
next contract period. Profit motive benefits both the public and private sector
partners, driving costs down over time.
The second motive is avoidance of operating risk (i.e. political, legal,

financial, and regulatory risk). Private sector firms cannot afford to under-
perform, as their profitability, solvency and future as a going concern depends
on meeting their obligations and satisfying both their public sector partners
and the water users. If they do not, they risk fines, forfeit of bonds, contract
default, damage to their corporate reputation, and legal actions. The concerns
of private sector managers are therefore very much aligned with those of the
water user.
Underlying Characteristics of PPPs

There are four underlying characteristics that make partnerships with the
private sector an attractive way to deliver water services: competition;
economies of scale; clear paths of accountability; and de-politicizing of
decision-making.
Competition forces private sector firms to continually improve processes and

technologies as they work toward providing the best value in the marketplace.
Competitive forces are introduced to water services through competition
either for the market (where companies compete for the right to operate a
monopolistic business for a period of time), or competition in the market
(where companies compete against each other for the business of water users).
Most water service PPPs are of the former type, since water and sewer
systems are by nature monopolistic. A competitive process is used to select
the service provider, “testing the market” each time the agreement is
renewed3. Competition drives continuous improvement of processes,
3
In the case of full privatization, there is a need to provide competitive forces through regulatory means
such as “yardstick competition” and price capping to protect the public from detrimental monopolistic
practices.
Page 11 of 26
technologies, and staff, harnessing market forces to assure value to the water
users.
Private sector water firms, because they operate many water and wastewater
systems, develop economies of scale that further contribute to efficiency and
quality of service. Stimulated by competition and supported by multiple
customers, they can afford to invest in research and development of
technology, processes, training, and practices that can be applied across all of
their operations. In addition, many of the major water service firms have a
breadth of resources that goes beyond operations, with divisions specializing
in areas such as research, equipment manufacturing, and engineering. The
specialized resources of private sector water firms and their associated
businesses can be employed in publicly-owned water systems through PPPs,
bringing expertise that is not available to a single water utility acting alone.
A clear path of accountability inherently results from a partnership

arrangement. This is a product of outcome-based contractual agreements that
bind the private sector partner to a performance specification, and the
softening or elimination of conflict of interest that frees regulators to monitor
and enforce as intended.
De-politicizing of water system operations allows the merits of operational

and investment decisions to be weighed strictly on a business-like basis that is
not complicated by political concerns. PPPs achieve this by transferring
decision-making authority (the extent of which depends on the type of PPP)
from the public to the private sector. If political input becomes necessary, it
can be achieved through contract negotiation between partners or a new
competition - transparent and accountable processes that contribute to rational
decision-making.
These four underlying characteristics are the foundation for the many benefits
that water service PPPs can offer to help address current issues with water
delivery in Ontario.
Page 12 of 26
5. Benefits of Water Service PPPs

Benefits that accrue to the public sector partner and water users through the
use of well-structured water service PPPs include:
! additional sources of financing;

! improved speed and efficiency of procurement;
! improved operational efficiency;
! highly qualified personnel;
! additional and more specialized governance;
! transfer of risk from the public sector;
! clear accountability;
! improved regulatory compliance; and
! protection of the public interest.
This section describes how these benefits come about.
Additional Sources of Financing

Water and sewer systems are very capital-intensive, and many systems have
significant immediate upgrading needs stemming from years of deferred
investment. Where governments are unwilling or unable to increase public
debt to meet investment needs, the private sector can supply capital through
PPP arrangements without impacting municipal balance sheets.
Treatment plants are particularly suited to private financing through BOT

arrangements, as they are discrete facilities with large capital costs,
identifiable income streams, and measurable outputs. Through a BOT, a
municipality can secure the provision and operation of a major facility without
up-front capital cost. Of course, capital costs are eventually borne by end
users and government through a combination of direct user fees and
subsidies4.
Even in cases where municipalities are willing to increase debt to finance new
facilities, private sector funding may still be beneficial depending on the terms
that can be attracted to the project. A private sector partner’s total package of
financing, construction, and operation may be more cost-effective than a
combination of public debt and private partner construction and operation.
This can be tested through a competitive bidding process that requests both
financed and non-financed proposals from the private sector.
4
Full cost recovery is not uniformly practised across the Ontario municipal water industry. The user fees
paid by water users may only pay a portion of operating costs and sustaining capital costs. The gap
between true costs (including capital and renewal) and fee revenue is covered by subsidies and/or
deferral of investment.
Page 13 of 26
Private capital and investment is available through the full spectrum of PPPs,
even in the simpler types where financing is not an explicit component of the
specification. For instance, with a management contract the private partner
may be required or may choose to make immediate equipment upgrades in
order to meet its obligations for service and price.
For water systems in need of significant refurbishment or expansion, access to

capital through PPPs can assist in developing the needed infrastructure when
it is needed, with creative repayment structures, and with overall cost-
efficiency in procurement and operation.
Improved Speed and Efficiency of Procurement

PPPs can significantly speed up procurement (design, construction, and
commissioning) of water and sewer infrastructure as compared to the
traditional model of separate design and construction phasing. The
“design/build” component of BOT arrangements places responsibility for
design and construction with a single private sector partner, who has the
opportunity to optimize design with material and construction costs,
delivering one end product (the completed facility). Integrating operations
into the partnership allows further optimization of design, material and
construction costs, and operational considerations, often resulting in
significantly lower procurement and life-cycle costs.
PPP procurement models provide the private sector with greater latitude to
solve problems creatively through integration of design, construction, and
operations principles. The traditional approach with separate design and
construction phases put up barriers to creativity that reduce opportunities for
efficiency, regardless of the talents of those involved.
There are many examples of design-build procurement and BOTs delivering

infrastructure faster and/or at less cost than the traditional method. For
example, the City of Dartmouth procured a water treatment plant 40 percent
faster than its schedule under a traditional approach (CCPPP, 2000). Faster
procurement is advantageous because it brings benefits (such as health and
environmental protection) to the community sooner, and reduces procurement
costs. The Tolt River water treatment facility in Seattle, which under
conventional procurement was estimated to cost $100M USD, under the
eventual BOT cost $65M USD. Compared to Seattle’s original traditional
approach, total savings under the BOT are estimated at $70M USD over 25
years (Seattle Public Utilities, 2000).
Improved Operational Efficiency

By automating, cross-training staff, investing in time and labour saving
equipment, reducing staff levels, implementing organizational best practices,
and exploiting economies of scale, significant operational savings can be
obtained by private sector operators. This is not to suggest that public sector
Page 14 of 26
water utilities are not capable of developing efficiencies, however the non-
competitive environment does not appear to stimulate efficiencies to the
extent generated by the private sector. Existing management contracts are
direct evidence of this, for most of these PPPs would not have been entered
into unless the private partner could guarantee significant savings over the
status quo of public sector operations.
Operating exactly the same infrastructure, often with the same staff, the
private sector has proven its ability to operate more efficiently. For example,
Ontario’s Regional Municipality of Halimand-Norfolk is saving 34 percent
compared to its in-house costs with a management contract for operation of its
wastewater facilities (CCPPP, 2000), which is a typical level of savings
achieved by management contracts.
Efficiency is very important to both partners. For the public sector, it frees up
resources that can be reinvested in water and sewer infrastructure, used to
lower user fees for water and sewage services, or used for other municipal
purposes as the case may be. No matter where the savings are directed, the
result is greater value for water users and taxpayers.
Highly Qualified Personnel

Developing and retaining a highly qualified staff complement is critical to
private sector water companies because it is a primary front upon which they
can build competitive advantage, develop efficiencies and manage corporate
risk. Meeting government standards is the minimum level of acceptability for
the private sector, rather than the target, because staff expertise contributes to
profitability and performance.
Under-qualified or ill-suited staff put private sector companies at enormous

risk. In the public sector, the consequences of poor performance are generally
neither swift nor clear, which allows multiple objectives to creep into the
management of human resources. The recent Ontario Ministry of
Environment inspection program (Ontario Ministry of Environment, 2000)
found that “in 10 cases, plant operators were not appropriately certified by the
ministry or had inadequate ongoing training”. In contrast, underqualified staff
would be an intolerable risk to private sector operators, and are therefore such
situations are extremely unlikely in a PPP.
Higher training standards do not merely protect the private sector partner by
reducing corporate risk. Well-trained and cross-functionally trained staff are
better equipped to protect human and environmental health through their work
functions. This illustrates the alignment of private sector interests with those
of the public sector and the public itself.
Page 15 of 26
Additional and More Specialized Governance

With public sector water service delivery, high-level governance rests at the
PUC or municipal council level. The ability of these entities to assess
operational risks and respond in kind can depend solely on the qualifications
of the municipal staff advising them, which may not be adequate especially in
smaller communities. PPPs can offer an additional form of high-level
technical and performance governance through the management and
monitoring systems of the private sector partner.
Transfer of Risk from the Public Sector

There are risks to operating any business, and water services are no exception.
The purpose of transferring risk is to allocate each type of risk to the party that
is best equipped to mitigate it, or in other words, to the party best qualified to
undertake the activity. This approach minimizes the overall risk and cost for
water services, benefiting all parties including the water user.
Roughly categorized, there are commercial risks that stem from changes in the
market for inputs to the business or its outputs, and operating risks that stem
from the processes used in the business and the regulations and specifications
that must be met. PPPs by definition transfer the majority of water system
operating risk from the public sector to the private sector.
As risk is transferred, so is liability, so that if mistakes do happen, taxpayers

(the public sector) are not liable for compensating taxpayers – the private firm
is. However, the underlying intent of the public sector in transferring
operating risk is not to hire a scapegoat but to minimize the chance of
mistakes occurring at all.
The presence and transfer of commercial risk varies depending on the type of
project and PPP being contemplated. Commercial input risks are transferred
where the private sector has agreed to provide services or facilities at a fixed
price regardless of changes in its cost base5. Output risks (due to price or
demand changes) can be transferred through the payment structure: volume or
usage based payments transfer risk, while fixed price contracts do not.
While the concepts of risk transfer may seem somewhat arcane, the key point
is that through PPPs the public can better protect itself by transferring risk and
responsibility to private sector firms that are better equipped to mitigate it. At
the same time, the direct risk faced by the public through public sector
operations can be reduced.
5
Agreements may allow for the “pass through” of some cost elements, such as energy, depending on the
optimal balance of risk in each particular situation.
Page 16 of 26
Clear Accountability
PPPs create a clear path of responsibility and remedy through the partnership
agreement. With public sector operations, it can be difficult to allocate
responsibility between the interlinked political, governmental, regulatory,
financial, and operational elements of service provision when something goes
wrong or improvements are to be implemented. While PPPs cannot bring
clarity to blurred responsibility between government tiers, agencies,
departments and ministries, they do offer clarity around operations,
investment, maintenance, and any other functions that are encompassed by the
partnership.
All PPPs are based on a contract that defines what outcomes the private sector
partner must achieve, and the boundaries around what methods they may use
to achieve them, if any. Penalties for not meeting the specified outcomes are
specified. Division of responsibility between the public and private partners is
explicitly defined. Standards for reporting and performance monitoring are
set out. With such a contract in place, there are clear commitments to specific
levels of performance, a basis for monitoring, a chain of command that can be
followed in the event of problems, and an understanding of the ramifications
for under-performance.
Both the private partner and public partner make commitments through the
PPP agreement that improve the overall accountability of water system
operations. The accountability of the public partner to its water user and
taxpayer base improves, because duties and procedures for water system
operations are clearly defined. But more significantly, the role of the public
partner transitions from one of operations manager to contract manager.
This transition relieves conflict of interest in the municipal environment. It

allows the municipal partner to monitor and enforce the quality of service
delivery with considerably less concern for the costs and practicalities of
meeting objectives. The difficulties and costs that may be associated with
corrections are the responsibility of the private sector partner who must
address them or risk default. The municipal partner becomes more
accountable to its taxpayers and water users, as it can act on their behalf
through the provisions of the PPP contract without internal opposition. The
combination of a performance-based contract and a competitive selection
process demonstrates a municipality’s accountability for both quality and
value.
The accountability of the provincial regulatory enforcement regime is also

improved through PPPs. The provincial government faces conflict of interest
with public sector water operations because enforcement orders can create
operational and capital needs that trigger government expenditures. The
common goals, constituents, and funding sources of both tiers of government
make it difficult and often illogical for one to act strongly against the other.
Page 17 of 26
The number of Ontario water treatment facilities found to have operating,

equipment, or performance deficiencies in the recent Ministry of Environment
inspection program suggests that the province has had difficulty in enforcing
regulations, at least until recently. As a direct example, the Walkerton Inquiry
has heard that despite regulator knowledge of monitoring and operating
deficiencies in the Walkerton water system, legally binding orders for
correction were not issued (Canadian Water and Wastewater Association,
2000).
Where water operations are run by private companies, the effectiveness of the
existing regulatory regime improves through elimination of conflict of interest
between the regulator and the regulated. Accountability of the private sector
firm through the PPP contract ensures an appropriate response, while
accountability of the regulatory agencies comes through their empowerment
to act without conflict (because the risk of fines and costs of compliance are
not borne by government).
Water service delivery by municipalities (or by OCWA under contract to

municipalities) is in essence a self-regulated industry. Where water services
are delivered through PPPs, the environment becomes that of a regulated
industry, improving accountability of all participants to each other and to
water users.
Improved Regulatory Compliance

Through improved accountability of the regulator and public partner,
contractual performance obligations of the private partner, and relief of
conflict of interest in the enforcement regime, regulatory compliance can be
expected to improve significantly under a PPP arrangement. For example, the
transition of the UK water industry to a fully privatized and government-
regulated industry has brought significant improvements in drinking water and
wastewater effluent quality, as was intended.
PPPs not only enhance the enforcement capabilities of the provincial

government, but they create an additional level of monitoring as municipal
governments cease being water system operators and become contract
managers. Enforcement of the contract at the municipal level, combined with
enforcement of regulations at the provincial level, can be expected to improve
compliance.
Protection of the Public Interest

Only one form of PPP, full privatization, has the potential to transfer full
control and ownership of infrastructure assets out of the public sector. To deal
with this, an enhanced regulatory environment is necessary to provide the
controls needed to ensure continued protection of the public good.
Alternatively, the public sector can take ownership in an operating company
jointly with the private sector.
Page 18 of 26
With all other forms of PPP, the public sector retains ownership of assets and
has additional control of water services through the contractual arrangements.
This provides the public partner with a single point of contact for addressing
water delivery issues, increasing control by reducing complexity. Rather than
making multiple decisions and co-ordinating many facets of management
(labour, technology, budgets, etc.) to address an issue, the public partner need
only make the issue known and then monitor the actions of the private partner
to ensure compliance.
For due diligence, a thorough PPP contract will contain provisions for
monitoring the compliance of the private partner on a regular basis. This
mechanism increases control by providing a feedback loop between objectives
and performance that is not clouded by conflict of interest. Such mechanisms
are not necessarily in place in publicly run water systems, where the utility is
assumed to have the expertise to monitor itself.
As a last resort and as a demonstration of ultimate control, if a private sector

partner is not fulfilling its contractual obligations and is in default, the
contract can be terminated and a new service provider found. Public control is
not sacrificed through well-crafted PPP agreements. The mechanisms of
control are different, and may in fact be more effective than those available
with traditional service delivery.
All PPPs, with the exception of full privatization, leave full control over water
user rates in the hands of the municipality. Rates or subsidies may need to
rise if new investment is required or operating standards are upgraded, or they
may fall if efficiency gains are not needed for new investment. The decision
whether to recover full costs of water provision through rates, or through a
combination of rates and subsidies is not materially affected by implementing
PPPs, except that they may present an opportunity to reduce rates. In the case
of full privatization, regulatory price controls may be necessary to protect the
public good.
Evidence of PPP Benefits
The companion publication of this paper reviews some water service PPPs in
Canada and the United States. The cost savings attributed to the Canadian
water service PPPs are summarized in the following table.
Location Project PPP Type Quantified Savings
Water and wastewater
Hamilton, Ontario Service Contract $12M over contract life
facilities
Wastewater treatment
Haldimand-Norfolk, Ontario Management Contract $1M per year, 35% savings
facilities
Wastewater treatment
Edmonton, Alberta Service Contract $0.4M per year average, 18% savings
facilities
Procured as Design-Build Finance
Dartmouth, Nova Scotia Water treatment plant $17.6% capital, 10.1% operating
Operate (BOT type)
Design-Build-Finance-Operate
Moncton, New Brunswick Water treatment plant $12M over contract life
(BOT type)
Page 19 of 26
In addition to cost savings, the record of environmental compliance for these

projects has been excellent, with wastewater effluent and drinking water
quality consistently meeting targets.
6. Considerations for Successful PPPs

Water service PPPs are not a panacea, but when carefully developed and
applied appropriately, they can make water delivery more cost-effective,
sustainable, and accountable to the public. This section outlines some
considerations for ensuring the success of PPPs in water services.
Type of PPP
The type of PPP must be appropriate for the situation at hand, and custom-
crafted to the specific deficiencies and strengths of the infrastructure and
public partner capabilities. Different areas of need that influence the
determination of an appropriate PPP structure include the need for technical or
managerial expertise, operating efficiency, investment in pipe networks or
central facilities, or organizational or regulatory reform.
Willingness to Change
The change of the municipal role from service provider to contract manager
must be philosophically and culturally accepted by the municipality. Without
this, it may be very difficult to develop and implement an effective PPP
structure.
Clear Communication to Stakeholders

The public is rightly concerned with the delivery of essential services such as
water. With PPPs representing a significant change to the traditional model of
service delivery, it is important that legitimate concerns be addressed through
clear communication of the need for and benefits of a proposed PPP.
Competitive Process
The competitive process for selecting a private sector partner is a key element
for success. The process must be transparent to all effected parties, fair, and
carefully designed to ensure that the true needs of the public sector are met.
The process and the PPP agreement itself can range significantly in
complexity, so there must be willingness to commit sufficient resources to the
process.
It is also very important to have a clear understanding of what the current

costs are for providing the service being considered for transfer to a PPP.
Without this, it can be very difficult to assess the benefits of private sector
proposals. It may require a significant effort to determine true current costs,
because of resource-sharing between municipal departments. Allowing the
current public provider to prepare a fully-comparable proposal for evaluation,
Page 20 of 26
or by having a “shadow bid” prepared to determine what costs would be

through the traditional procurement approach, can assist in this regard.
Performance-Based Agreements
Many of the benefits of PPPs stem from the private partner’s ability to
produce the required outcomes in a way that is different than the status quo of
public sector system management. To provide this flexibility, PPP
agreements must be outcome or performance based to the greatest possible
extent. Detailed specifications of how outcomes are to be accomplished will
limit flexibility, creativity, and savings, and should be avoided. Instead,
functional specifications should be used to encourage innovative and
imaginative solutions.
Asset Protection
Public assets must be protected from neglect during the course of a PPP, to
ensure that cost efficiencies are not developed at the cost of asset depletion.
This can be handled by specifying the required condition of assets at the end
of the contract, requiring financial guarantees or reserves, by specifying a
minimum operations and maintenance schedule, or requiring periodic
independent condition audits. This is primarily of concern for very long term
PPPs such as leases and concessions, where there is sufficient time for neglect
to cause material problems. In these cases, the complexity of an appropriate
PPP agreement for asset protection is warranted by the magnitude of
anticipated benefits.
Mutual Benefit
Each partner must be willing to accept the motives of the other and work for
mutual benefit. The public sector partner must willingly accept the need for
the private sector partner to make a profit, and consider their profitability a
success factor. In turn, the private sector partner must be willing to go beyond
the strict terms of the PPP agreement on occasion to support the public sector
partner. In other words, a true partnership approach is appropriate.
Major Capital Investment

The issue of major capital investment is relatively straightforward with a BOT
agreement, because new infrastructure is its reason for being. But in
concessions, where some major capital investment is encompassed by a PPP,
it is important to clearly determine the process by which the partners will
handle originally unforeseen needs and determine financing arrangements.
Needs could be stimulated by the public sector partner (e.g. service area
expansions), or revealed by the private sector partner (e.g. previously
unknown condition of assets). The agreement must therefore clearly state the
baseline conditions, and provide a means for adapting as the concession
proceeds.
Page 21 of 26
Because of the considerations noted, the importance of water services to

community and environmental health, and the unique situation that exists in
every municipality, it is crucial that PPP agreements be carefully structured to
meet the legitimate interests of both partners, as well as the public good. The
effort required to develop a successful partnership agreement can be
substantial. Professional assistance in the areas of finance, law, engineering,
and competitive process is required where municipalities have little prior
experience with PPPs or where municipal resources are limited.
Page 22 of 26
7. Summary
Public-private partnerships for water services are being used successfully in
many areas of the world, including Canada and Ontario. PPPs offer an
effective means of implementing improvements, such as those that may be
recommended by the Walkerton Inquiry or that are demanded by a more
aware public, and should be seriously be considered by municipalities facing
challenges in water and wastewater service delivery. By employing the
expertise of the private sector in delivering water services more widely,
Ontario can expect improved regulatory compliance, greater accountability for
public and environmental health, and cost savings.
Page 23 of 26
References
1. K. Neal, P. Maloney, J. Marson, and T. Francis, Restructuring America’s Water Industry:

Comparing Investor-Owned and Government Water Systems, Reason Public Policy
Institute Policy Study No. 200 (January 1996)
2. B. Gentry and L. Fernandez, Evolving Public-Private Partnerships: General Themes and
Urban Water Examples, Yale/UNDP Program on Public Private Partnerships for the
Urban Environment (November 1997)
3. Overview of Successful Public-Private Partnerships in the Water Sector, Canadian
Council for Public-Private Partnerships (November 2000)
4. Tolt DBO: Project Summary, Seattle Public Utilities (December, 2000)
5. Overview of Successful Public-Private Partnerships in the Water Sector, Canadian
Council for Public-Private Partnerships (November 2000)
6. Ontario Ministry of the Environment, News Release: Environment Ministry Orders
Corrective Actions at 50 More Ontario Waterworks (November 27 2000)
7. Ontario Ministry of the Environment, News Release: Environment Ministry Orders
Corrective Actions at 50 More Ontario Waterworks (November 27 2000)
8. Canadian Water and Wastewater Association, Snippings & Clippings: Infamous
Walkerton Well Never Meant to be Permanent, CWWA Bulletin (December 2000)
9. R. Poole Jr., Revitalizing State and Local Infrastructure, Reason Public Policy Institute
Policy Study No. 190 (May1995)
10. A. Orwin, The Privatization of Water and Wastewater Utilities: An International Survey,
Environment Probe (August 1999)
11. E. Bennett, Public-Private Cooperation in the Delivery of Urban Infrastructure Services
(Water and Waste), PPPUE Background Paper, UNDP/Yale Collaborative Program
(1998)
12. Contract Operations Save Towns Money, Headaches, WaterWorld (June 1999)
13. L. Moraru-de Loe, Privatizing Water Supply and Sewage Treatment Services in Ontario,
(March 1997)
14. L. Miljan, July 2000 Fraser Forum: I’ll Drink the Privatized Water, The Fraser Institute
(July 2000)
15. G. Silva et al., Private Participation in the Water and Sewerage Sector – Recent Trends,
Public Policy for the Private Sector, The World Bank Group – Finance, Private Sector,
and Infrastructure Networks (August 1998)
16. C. van den Berg., Water Privatization and Regulation in England and Wales, Public
Policy for the Private Sector, The World Bank Group – Finance, Private Sector, and
Infrastructure Networks (August 1997)
17. Toolkits for Private Participation in Water and Sanitation, World Bank (1997)
Page 24 of 26
Companion Document
The companion document to this submission, entitled, Overview of Successful

Public-Private Partnerships in the Water Sector, should be read together with
this submission.
This document was published by The Canadian Council for Public-Private

Partnerships in November, 2000.
Additional copies are available from:
The Canadian Council for Public-Private Partnerships

3400 One First Canadian Place, P.O. Box 130
Toronto, Ontario M5X 1A4
Tel: 416-777-4891 Fax: 416-863-1716 E-Mail: [email protected]
Website: www.pppcouncil.ca/~partners
Page 25 of 26
Page 26 of 26

Benefits of Water Service Public-Private Partnerships: Presented To The Walkerton Inquiry

Uploaded by

Copyright:

Available Formats

Benefits of Water Service Public-Private Partnerships: Presented To The Walkerton Inquiry

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Benefits of Water Service Public-Private Partnerships: Presented To The Walkerton Inquiry

Uploaded by

Copyright:

Available Formats

Benefits of Water Service Public-Private Partnerships

Presented to the Walkerton Inquiry

The Canadian Council for Public Private Partnerships

2. Public-Private Partnerships in Water Services .........................3

3. Global and Canadian Trends in Water Service PPPs ...............8

4. Basic Characteristics and Strengths of Water Service PPPs 11

5. Benefits of Water Service PPPs ...............................................13

6. Considerations for Successful PPPs.......................................20

Water Service in Ontario

Provincial responsibility for water is regulatory in nature, with the mandates

In addition to its regulatory role, the provincial government (“the Province”)

As enumerated by the Walkerton Commission, there are many challenges

capital investment, cost recovery, technology, monitoring, training, reporting,

Public-Private Partnerships are a Proven Alternative

! additional sources of capital;

About the Canadian Council for Public-Private Partnerships

2. Public-Private Partnerships in Water Services

! service or management contracts for short term operation and maintenance

Traditional Private Sector Participation in Ontario’s Water

! consulting engineering services (e.g. process selection, infrastructure

the private sector is currently extensively involved in the non-operational

Private Sector Participation in Other Essential Services

Spectrum of Water Service PPPs

Concession Public Private Private Private Private 25-30 years

Operational involvement, financial involvement, and risk allocation vary

Service contracts enable governments to accomplish tasks for which there is

Compared to service contracts, management contracts transfer greater

By placing responsibility for operations and investment with the private

The objective is to introduce private sector efficiencies into the earliest

“Design-build” procurement for infrastructure, while sometimes considered to

A variation of full privatization is a joint venture where the water service

Determining PPP Type and Structure

3. Global and Canadian Trends in Water Service PPPs

Capital and operational demands stem from:

! increasing performance and prescriptive standards;

Private-sector water utilities provide 99 percent of the UK’s and 75 percent of

In other European countries, there is a trend of increasing private sector

There is some experience with fully privatized water service in North

Private Sector Interest and Availability in Canada

Why Aren’t Water Service PPPs More Common in Canada?

! Water is a very capital-intensive business, requiring levels of investment

efficiencies and competencies have been developed as the industry has

The recently announced Municipal Performance Measurement Program, an

Unfortunately, it often takes a widely recognized crisis (Gentry et al, 1997) to

4. Basic Characteristics and Strengths of Water Service

The private sector is motivated in two ways that contribute to improved

The second motive is avoidance of operating risk (i.e. political, legal,

Underlying Characteristics of PPPs

Competition forces private sector firms to continually improve processes and

A clear path of accountability inherently results from a partnership

De-politicizing of water system operations allows the merits of operational

5. Benefits of Water Service PPPs

! additional sources of financing;

This section describes how these benefits come about.

Additional Sources of Financing

Treatment plants are particularly suited to private financing through BOT

For water systems in need of significant refurbishment or expansion, access to

Improved Speed and Efficiency of Procurement

There are many examples of design-build procurement and BOTs delivering