Module 11: Selecting Options

11.4. What are the key steps?

The key steps in selecting a PPP option are presented in the diagram Tool 11-2.

1. Determine the objectives of the option selection

Governments seeking to involve the private sector in water and sanitation, for example, may have a range of objectives [Tool 6]. Thus, the municipality should set clear priorities in its objectives and consider and discuss them with potential partners while negotiating the contract. Organisational and contractual options should cover all questions and issues related to these objectives. In order to guarantee that all interests are considered, it is advised to divide all objectives on six groups and clarify them: economic, environmental, financial, social, political, and institutional.

2. Choose appropriate PPP option

To make the correct selection of PPP option it is necessary to define main features and potential benefits of various PPP options, including the following parameters:

– financing investments;
– financing working capital;
– contractual relations with retail customers;
– private sector responsibility and autonomy;
– the need for private capital;
– the financial risk involved for the private sector;
– the duration of the contract/license (years);
– ownership;
– management;
– setting retail water tariffs;
– collecting retail water tariffs; and
– the main objective of PPP.

3. Determine which private sector options are feasible

For the option feasibility, the government needs to analyse the existing situation, which could be described using five main categories:

◊ the state of the utility,
◊ the regulatory framework,
◊ the role of stakeholders,
◊ financial viability of different options, and
◊ risks.

A. Analysis of the state of the utility

The government needs to assess the utility’s current performance, the quality and quantity of information available about the utility and the feasibility of changing the factors that would make the utility unattractive to potential private sector partners. In this respect, the government will need to gather information on such matters as:

– the utility's current and proposed service area;
– the current characteristics of service (quantities supplied, metered and paid for);
– a basic inventory of the assets and their condition and serviceability;
– current performance standards and the record of achievement (relating in the case of water and sanitation to quality, pressure, supply security, interruptions, sewer flooding, sewer collapse and the like);
– human resources (numbers, skills, wage rates, conditions of service and pension arrangements);
– tariffs (level and structure, subsidy arrangements and disconnection arrangements); and
– financial performance.

B. Analysis of the existing regulatory framework

The effectiveness and consequences of a private sector arrangement depend on the regulatory mechanisms used to influence private sector decision-making and on how they are implemented.

C. Analysis of the role of stakeholders

Governments need to identify the key groups of stakeholders and assess their potential support for, or opposition to, PPP [Tool 9]. Once a government has identified the key stakeholders and assessed their stance, it needs to evaluate where safeguards for specific interest groups will be needed to win support or diffuse opposition. Five kinds of safeguard might be needed.

– Protection for labour and management (redundancy and superannuation packages, worker share allocations, minimum wages and working conditions and health and safety measures).
– Protection for contractors or suppliers (regulatory rules to ensure competition in subcontracting and procurement).
– Protection for customers (tariff adjustment rules, subsidy policies and complaint mechanisms).
– General health and environmental protection (regulation of service standards and penalties for default).
– Protection for other government agencies (a regulatory role to compensate for loss of direct control, rules allowing the local authority's labour force to bid for contracting tasks).

D. Analysis of the financial viability of alternative options

A critical step in selecting the best of the possible options for PPP is to test their financial viability [Tools 12 and 13].
Preparing a private sector arrangement requires detailed financial work – assessing the financial status of the service utility, testing the financial and tariff implications of hoped-for service expansions and efficiency gains (and the implications for the subsidies needed) and preparing the financial specifications for the final bidding documents.

E. Risk management

It is important for governments to recognise risks, consider how they might best be allocated between the public and private sectors and to develop a clear risk management strategy. The assessment of risk for a project and the allocation of that risk will depend on the project conditions – including the type and location of the project, whether (in the case of water and sanitation services) bulk water supply and off-take agreements are used, the negotiating position of the parties and the proposed technology.

The risk analysis highlights many of the key risks and details: how they may arise; how they can be mitigated; how remaining risks are allocated typically; and what steps can be taken to minimise them.

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