PPP Development Stage – Selecting Options
11.4 What are the key steps in selecting options?
The key steps in selecting a PPP option are presented in the diagram,
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
- the duration of the contract/license (years);
- 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:
- A. the state of the utility,
- B. the regulatory framework,
- C. the role of stakeholders,
- D. financial viability of different options, and
- E. 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
- 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
- human resources (numbers, skills, wage rates, conditions of
service and pension arrangements);
- tariffs (level and structure, subsidy arrangements and disconnection
- 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
A critical step in selecting the best of the possible options
for PPP is to test their financial viability [Tools
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
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