Reducing Water and Sanitation Gaps in Asian Cities through PPPs
Published: 29 April 2022
To mainstream PPPs in the water sector, implement a holistic governance framework, foster an enabling environment, and incorporate transaction design.
Asia’s unprecedented urbanization and rapid population growth have exposed the water and sanitation access deficits in the region. During a period of strong economic growth, developing Asia’s urban population increased five-fold to 1.84 billion in 2017 from 375 million in 1970. According to an Asian Development Bank (ADB) study, 2.1 billion people in the region lacked access to adequate water supply and sanitation. Recent estimates indicate up to 3.4 billion people could be living in water-stressed areas of Asia by 2050.
The region’s water investment needs are pegged at $800 billion between 2016 and 2030, or $53 billion annually. This is several times higher than current investment levels. Effectively structured and implemented public–private partnerships (PPPs) can help fill the financing gap. However, limited technical and practical capacity and understanding hold back Asian cities to widely adopt PPPs.
This article is adapted from the study A Governance Approach to Urban Water Public–Private Partnerships: Case Studies and Lessons from Asia and the Pacific published by the Asian Development Bank (ADB).
Asian cities have been slow to embrace PPPs for urban water development. Asia implemented $12.6 billion worth of PPP project transactions between 2010 and 2019, with the People’s Republic of China (PRC) accounting for close to 76% of this amount in value terms. The value of PPPs in the rest of Asia (about $3 billion) is miniscule in comparison. Latin America and Caribbean (LAC) reported $17 billion—almost 6 times the value of projects in the rest of Asia—during the same period. Further, treatment plants accounted for nearly 83% of the value of PPPs in water in Asia between 2000 and 2019, in sharp contrast to trends from the LAC region where PPPs in water distribution accounted for 78% of implemented PPPs by value. Therefore, even within the relatively smaller base, PPPs focused on distribution have been harder to implement in Asia.
Three constraints limit wider adoption of PPPs in much of developing Asia. First, most cities struggle to reconcile water’s characteristics as a public good necessity and the economic cost of providing access. Water utilities across Asia rely excessively on fiscal transfers and have poor cost recovery (often less than their operations and maintenance cost obligations), low employee productivity, and high nonrevenue water levels. Second, these policy and institutional weaknesses perpetuate a vicious cycle of low investment, poor service delivery, and low cost recovery. Third, people resort to coping solutions, such as bore wells and tanker supply, that lead to informal and unregulated privatization by neglect and further weakens incentives for public service delivery. Framed against this difficult backdrop, even the few PPPs developed often become vulnerable to a “set up to fail” syndrome.
Global experience and from select project cases in Asia suggest that water PPPs can yield positive outcomes when effectively structured and implemented. By 2007, over 84% of 260 PPP contracts awarded since 1990 had remained active and served over 160 million urban residents in developing countries. Nearly one-third of these projects, catering to over 50 million residents, were classified as broadly successful. Water PPP cases from varied regions of Asia including in Armenia (Central Asia), Malviya Nagar Delhi (South Asia), and Manila (Southeast Asia) also report opportunities and challenges in attaining positive value for money, including operational access and financial performance outcomes.
Asia’s diversity is reflected in its multitude of different contractual arrangements with context-appropriate structuring
- In water treatment, Indonesia has implemented the Umbulan water supply project, where construction is complete, and projects are under development in Sembarang, Jatilahur, and others. These projects are structured with strong government support mechanisms, including guarantee support from the Indonesia Infrastructure Guarantee Fund; viability gap support and project preparation support from the Ministry of Finance, Government of Indonesia; and offtake commitments from the city-level utilities to partly help offset and delink tariff risks.
- In wastewater treatment, long the domain of the public sector, India has implemented sewage treatment projects in cities along the river Ganges using hybrid annuity model concession contracts. Under these contracts, 40% of the project cost is paid upfront as compensation for construction, while the remaining 60% is paid over the life of the contract and linked to performance and service outcomes. While expeditious implementation of the network to feed these new plants and financial reforms at the level of utilities are critical, these projects have helped crowd-in private financing in an under-invested sector.
- Water distribution, the toughest segment to structure PPPs, has a variety of contracts including concessions (Nagpur, India and Manila, Philippines), management/lease contracts (Yerevan, Armenia) and performance-based annuity contracts (Coimbatore, India). ADB has also supported design-build-operate (DBO) contracts and performance-based construction and operation contracts in South Asia (Ilkal, India) as possible transitioning structures to full-PPP contracts. In distribution, the focus has been on bringing in private expertise for operational efficiency and service quality, rather than on investment financing.
Mainstreaming PPPs and scaling their development impact require concerted actions from governments concomitantly along three pivots.
First, they need to put in place a holistic water governance framework that encompasses three actions: (i) an expressed policy commitment to water security and inclusive access; (ii) empowered and capable public counterparty institutions mandated with delivery and regulation; and (iii) a buoyant revenue regime and transparent targeted subsidies.
Second, they need to foster an enabling environment for PPPs comprising three aspects: (i) a sector-specific PPP strategy that enunciates clear objectives and a pipeline of projects to aid programmatic implementation; (ii) greater rigor in project preparation; and (iii) fiscal support and frameworks to manage fiscal costs and contingent liabilities.
Third, transaction design should incorporate bankability, balanced risk allocation, and outcome focus through (i) competition efficiency; (ii) clear performance linkages and post-award management; (iii) contract sanctity and payment security; and (iv) contextual fit and appropriateness.
Asian Development Bank (ADB). 2022. A Governance Approach to Urban Water Public–Private Partnerships: Case Studies and Lessons from Asia and the Pacific. Manila.
ADB. 2017. Meeting Asia's Infrastructure Needs. Manila.
D. Wiberg et al. 2017. Water Futures and Solutions: Asia 2050 (Final Report). Knowledge and Innovation Support for the Water Financing Program of the Asian Development Bank (RETA 6498). IIASA, Laxenburg.
P. Marin. 2009. Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries. Trends and Policy Options. (8). World Bank.
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