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doi: 10.1680/jmapl.18.00042
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Proceedings of the Institution of Civil Engineers - Management, Procurement and Law

 Accepted manuscript
doi: 10.1680/jmapl.18.00042
Submitted: 07 September 2018

Published online in ‘accepted manuscript’ format: 11 January 2019

Manuscript title: An Analytical Review of Failed Water Public−Private Partnership in

Developing Countries

Authors: Salman Tariq, Xueqing Zhang, Raymond HM Leung

Affiliation: Department of Civil and Environmental Engineering, The Hong Kong University of

Science and Technology, Clear Water Bay, Kowloon, Hong Kong.

Corresponding author: Xueqing Zhang, Department of Civil and Environmental Engineering,

The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong.

Tel.: (852) 2358 8480

E-mail: zhangxq@ust.hk

Proceedings of the Institution of Civil Engineers - Management, Procurement and Law

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Abstract

Developing countries have adopted public−private partnerships for water infrastructure utilities

because of rapid urbanisation and economic growth along with the public sector’s lack of

capital and technical capacity. However, water public−private partnerships have shown mixed

results; many of them have encountered problems and even failed. Motivated by such failures,

this study aims to explore the reasons behind failed water public−private partnerships in the

last two and a half decades. Cases of 16 failed water public−private partnerships from different

developing countries and regions have been compiled and thoroughly investigated, which

disclosed a number of potential failure reasons: soaring tariffs, non-payment of bills,

incapability of the public sector, poor technical performance of the private sector,

macroeconomic instability, conflicts between public and private sectors, social and political

opposition to privatisation, lack of transparency, fluctuations of exchange rate, change of

related laws and others. The failure reasons identified are further analysed to develop their

casual inter-relationships through events mapping. Outputs of this study would facilitate

stakeholders of water public−prviate partnership in taking appropriate actions to overcome

these failure causes and ensure the success of future projects.

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1. Introduction

Adequate infrastructures (water utilities, roads, ports, communication and energy utilities) are

indispensable for the economic upturn, poverty reduction, and social well-being. Recent

decades have witnessed upwards trends in the engagement of the private sector in the form of

public−private partnerships (PPP) to deliver such services. However, PPPs in the water sector

have attracted criticism in the past due to its sensitive nature concerning the human rights to

access water and pro-poor governance, and the ability to evoke political and social unrest

(Prasad, 2006; Wibowo and Mohamed, 2010). In spite of the controversy, water PPPs gained

acceptance in governments after 1992 Dublin International Conference on Water and

Environment in Ireland, which declared water as an economic good to address misuse and

scarcity issues (Wibowo and Mohamed, 2010). With considerable embracement of water PPP

policy in developing countries since then, following its backing from the World Bank and

OECD in the wake of low coverage and quality, public sector inefficiencies, and insufficient

funding (Ameyaw and Chen, 2015), 962 projects have been realised with a modest investment

of about US$83 billion (World Bank PPI database, 2016).

Empirical literature and econometric studies conducted on water PPPs reported mixed

experiences in terms of the interdependence of PPP implementation and outcomes (Bayliss,

2003; Casarin et al., 2007; Kayaga, 2008) and PPP implementation and private capital (Hall

and Lobina 2006; Casarin et al. 2007). Published case studies have reported below par

performance of water PPPs, disputes during project execution, and contract terminations

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(Pigeon et al., 2012; Lobina et al., 2014). Kayaga (2008) stated that many water PPPs enacted

in developing countries, in particular, suffered from conflicts and faced cancelations.

Consequently, the researchers have strived hard on designing water PPP protocols,

exploring success factors, and devising policies, in different sociocultural settings and in

general. For instance, Ameyaw et al. (2017) explored critical success factors for attracting the

private sector in water supply PPPs in developing countries. Zhong et al. (2008) examined how

to successfully involve the private sector in water PPPs in China. Lee (2010) and Lobina (2005)

investigated the interaction between government and the private sector in water PPPs in China

and Latin American respectively. Wibowo and Mohamed (2010) focused on risk allocation in

water PPPs in Indonesia. Despite all such code of conducts and procedures delineated through

extensive research, considerable water PPP attempts have resulted in failures. Flawed project

designs and inappropriate circumstances have led several governments to remunicipalise water

projects, such as in Buenos Aires and Cochabamba.

Water PPPs are complex projects and do not always lead to success until rigorously

planned, carefully considering a wide array of factors ranging from purely social issues to

precise technical parameters. Therefore, finding and analyzing such potential failure reasons

has become necessary to comprehend the phenomenon behind water PPP failures. For this

purpose, a case study analysis of 16 failed projects from developing countries have been

undertaken, which revealed several potential failure reasons pertaining to PPPs in delivering

water infrastructures. The study examines the potential failure reasons in connection with their

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casual inter-relationships based on collective understanding from the case studies in different

regions.

2. Literature review

The literature on critical success factors (CSFs) for PPP project delivery is enormous, covering

both general PPPs and specific models/types. Tiong (1996) revealed six CSFs in winning

built-own-operate (BOT) projects: 1) entrepreneurship and leadership, 2) right project

identification, 3) strength of the consortium, 4) technical solution advantage, 5) financial

package differentiation, and 6) differentiation in guarantees. Zhang (2005a) through solicitation

from experts explored CSFs for general PPPs and disclosed five key CSFs groups: 1) economic

viability, 2) appropriate risk allocation, 3) sound financial package, 4) reliable concessionaire

with strong technical strength, and 5) favorable investment environment. Li et al. (2005)

investigated the significance of eighteen CSFs for the UK construction industry and found

strong private consortium, appropriate risk allocation, and available financial markets as the

most important factors. Chan et al. (2010) adopted factors from Li et al. (2005) and surveyed

from experts in China. The responses highlighted favorable legal environment, appropriate risk

allocation and risk sharing, commitment and responsibility of public and private sectors, and

stable macroeconomic conditions as the most critical factors. Ameyaw and Chan (2016)

derived 14 CSFs for water PPPs from case studies and literature. Verification from experts

established government political commitment, adequate financing, and public acceptance as

the top-ranked factors.

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Apart from the extensive research on CSFs, other key areas were explored thoroughly

such as risks (Ameyaw and Chan, 2015), government roles (Kumaraswamy and Zhang, 2001),

concessionaire selection (Zhang, 2004a; 2004b), and finance (Zhang, 2005b). These

investigations made a huge contribution to the development of success frameworks for

realising effective PPPs, but the bitter truth is, despite all this massive research, the actual

ground execution in the water sector has witnessed failures especially in developing countries.

Therefore, it was imperative to investigate the underlying reasons that drove water PPPs to

failure.

3. Data and research methodology

The World Bank’s Private Participation in Infrastructure (PPI) database is used as a primary

source which contains data on more than 7000 projects in various infrastructure sectors,

including 962 water PPPs from 1990 to 2016. The database provides useful statistics for each

project such as investment details, type of PPP contract, sponsor, debt provider, and

government support. However, the PPI database has certain limitations. For instance, it does

not contain detailed descriptions about what exactly happened in the project. Basically, this

data can be used as a reference and details about the projects could be obtained through online

available documents such as journal papers, conference papers, books, dissertations, websites,

news articles, organisational and non-organisation reports, and other sources such as interviews.

Therefore, the search for cases is then extended to online archives containing ‘failed water

PPPs’ tags which yielded hundreds of documents citing water PPP failures.

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All of the identified water PPP projects, searching through the World Bank PPI database

and available online documents, are passed through two phases to assess. Phase one is

designed to determine if the project is really a failure as per the criteria established through

literature review in Table 1. Initially, 71 projects fulfilling the criteria were placed in the list of

failed water PPPs.

Phase two is to map the stories for the projects that have successfully satisfied phase 1.

Sketching individual events in timeline sequence for each case then allowed in the

determination of the failure scenarios. Events were placed in the descending order of time of

their occurrence, and any missing information was searched through online documents. Cases

still with incomplete stories, not being able to fully illustrate the failure scenarios, were

removed from the list. For the cases with complete stories, a, non-negative events which did

not bring any ill-effect to the project were separated and negative events representing the same

domain were consolidated and termed as potential failure reasons. In this way, we were left

with potential failure reasons and the casual inter-relationships between them. Ultimately, 16

case studies in total were finalised with complete pictures of the failure scenarios, are listed in

table 2. Case studies followed the World Bank’s geographical categorisation of developing

countries, depicted in Figure 1. Potential failure reasons found through phase one and phase

two are further analyzed region wise.

4. Analysis and discussions

4.1 East Asia and Pacific, and South Asia

Asia’s earliest water PPP was signed in the Philippines in 1960; however, water PPPs gained
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wide popularity in the 1990s. Malaysia embraced water PPPs as a part of their policy to

deregulate and stimulate investment in infrastructure; others started to adopt them on ad-hoc

and trial basis, while China becoming one of the largest water PPP markets in the world

(Jensen, 2016). According to the World Bank PPI database, from 1990 to 2016, the East Asia

and Pacific (EAP) region has gained a significant share, i.e., 38.8% of the total water PPP

investments in developing countries. Roughly, 54% of the water PPPs in the region are BOTs,

i.e., 281 out of 523. This appetite for BOT projects shows the insufficiency and demand for

new water infrastructure in EAP countries. Rehabilitate-Operate-Transfer (ROT) is the second

most popular water PPP model with 134 projects. The database also depicts a handful of

management and lease, and Build-rehabilitate-Operate-Transfer (BROT) contracts.

A large number of BOT and ROT projects shows that private investors have full

confidence in this region and they view this region’s potential for PPP business. Investors have

shown much interest in China, Indonesia, Malaysia, Philippines, Thailand, and Vietnam;

especially in China where about 90% of the regional projects are located. Furthermore, it is

also to be noted that China has the largest number of water PPP projects in the whole

developing world.

On the other hand, in the South Asia (SA) region, although 90% of the population has

access to water, the quality is questionable since much of the water is supplied through public

stands. Only 25% of the water is supplied through piped networks and continuous water supply

is rare (Andres et al., 2014). Therefore, a huge investment is required to overcome the water

infrastructure deficit in the SA region. According to the World Bank PPI database, SA water

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PPPs attracted a total investment of US$624 million between 1990 and 2016. Currently, most

of the water PPP projects are located in India; however, investors have shown interest in other

large metropolitan cities such as Karachi (Pakistan) and Kathmandu (Nepal) (Budds and

McGranahan, 2003).

Both EAP and SA have to offer excellent PPP business opportunities that may profit

investors and bring solutions to water infrastructure deficits. However, the often occurrence of

water PPP failures is an alarming sign that may restrict the potential investments from

international markets. In the seven sampled case studies, i.e., five from EAP and two from SA,

‘incapability of the public sector’ is identified as the major contributor to failure in water PPPs.

Examples are the cases of ‘Project_EAPCh2’ in China, where the public sector was unable to

draft the proper PPP contract (Meng et al., 2011); ‘Project_EAPMa3’ in Malaysia in which

public sector partners were unable to make proper cross-subsidy strategies for users (Tan,

2008); and ‘Project_SAIn2’, India where an existing deficient system is privatised without the

provision of significant funding for improvement (Kacker et al., 2014). In ‘Project_EAPCh2’,

China, in spite of having no prior experience, the municipal government directly negotiated

with the private company without employing or taking advice from legal and investment

consultants. Because of this act, the company drafted the contract which was later agreed upon

by both parties. The company was promised a high return rate by the municipal government,

averaged at 18.2% and maximal at 21%. To ensure a high rate of return, the government had

two options; either increase the tariff or provide a subsidy. Both options were unacceptable to

them and this led to the termination of the agreement (Meng et al., 2011; Wei, 2014). In

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‘Project_SAIn2’, India, the private operator was given the task of operations, billing, and

metering; however, no significant investment for network extension and improvement was

included in the contract even though an efficient network is a prerequisite for ameliorating

service quality and revenue collection. It was because of this deficiency that the private sector

failed to supply water continuously even for one hour, which led to a violent political and

public opposition to the project. High meter cost was another reason cited for this public outcry.

Political opposition started as soon as the PPP contract was signed in 2008. Protests escalated

in 2010 after the elections and eventually a state-owned public company took over the project

(Kacker et al., 2014).

Apart from such problems, one PPP (Project_SAIn1) witnessed ‘lack of transparency’.

Other problems, related to the private sector and the socio-political nature, such as provision of

poor water and low service quality (Project_EAPIn5, Indonesia), political interventions

(Project_SAIn2, India and Project_EAPIn5, Indonesia), and non-payment of bills by users

(Project_EAPMa3, Malaysia), were also found as shown in Table 3.

In ‘Project_EAPMa3’, Malaysia, after the privatisation in 1993, the government

increased commercial user tariffs to subsidise the household tariffs. Subsequently, commercial

users refused to pay. Household users, which were not billed before privatisation, also refused

to pay. Due to non-payment, the government reduced the tariff increase several times. However,

the revenue collection remained lower than expected; only 37% of customers paid their bills in

1998 (Tan, 2008). Furthermore, the government later promised to pay compensation to the

private sector for lower revenue collection; nevertheless, it failed to do so. Consequently, the

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private sector suffered huge financial losses. Arrears from commercial users in 1999 and

household users in 2000 escalated to RM72 million and RM144.3 million, respectively (Tan,

2008). Non-payment of bills by the users seriously affected the financial stability of the private

partner, and the government was not willing to do anything about it. At first, government

authorities were reluctant to enact legislation on penalties for non-payments, and second, when

they did enact legislation, they were not willing to enforce it. Hence, the users continued not

paying outstanding bills without having any fear of being penalised. Non-payment of bills,

tariff reductions and the government’s failure to enforce payments caused an accumulated loss

of RM332.9 million, and ultimately the private operator withdrew with the ministry of finance

purchasing its shares after only seven years into the contract (Tan, 2008).

The Asian financial crisis of 1998, hit two projects in the region; ‘Project_EAPPh4’,

Philippines, and ‘Project_EAPIn5, Indonesia. In ‘Project_EAPPh4’, Philippines, as a part of

the deal, the private consortium inherited US$800 million of foreign denominated debt of the

public utility, MWSS. The local currency devaluated by 56%, as a result of 1998 Asian

financial crisis, which doubled consortium’s debt and resulted in a serious financial crisis for

them (Negishi, 2010; House, 2014). Consortium then asked for an immediate increase in tariff

for exchange rate loss recovery but was only granted a small tariff increase; i.e., Peso (local

currency) 0.26 to cover the loss throughout the remaining project contractual duration.

Consequently, Maynilad declared force majeure and halted paying the concession fee on

account that its concerns were not addressed, which caused agitation in the relationships

between the public and private sector. In October 2001, MWSS and consortium renegotiated

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and was allowed tariff increase of Philippines-Peso 4.71 for an immediate foreign exchange

recovery in the following 18 months. Apart from this, MWSS also relaxed some capital

expenditure requirements, but consortium still did not pay the concession fee, which reached

US$200 million in 2005 (House, 2014). Later, consortium’s negotiations with the regulatory

office in 2002, intended for resetting the rates so that the concessionaire could acquire

sufficient return while meeting targets, did not go smoothly. Shortly afterward, consortium

filed a lawsuit against MWSS, on account of breaching the contract and failing to cooperate

during the rate resetting negotiations, and demanded reimbursement of US$303 million for

capital expenditure. MWSS, which was already furious on the private sector for not rendering

concession fee, responded by citing consortium breaches of the contract, and non-payment of

the concession fee. The case went to international arbitration which ruled that neither of them

was at fault and in November 2003 ordered consortium to pay the concession fee immediately.

Upon hearing this, consortium declared bankruptcy and exited from the contract (Wu and

Malaluan, 2008; Negishi, 2010; House, 2014).

In ‘Project_EAPIn5’, Indonesia, due to the 1998 Asian financial crisis, inflation rose to

120%. However, public sector did not increase the tariff because of public opposition but had

to pay the adjusted payment, due to inflation, to the private sector due to the discrepancy in the

tariff mechanism in the contract. According to the contract, ‘water charges’ and ‘water tariffs’

were interpreted separately. ‘Water charges’ were the charges paid by the public sector to the

private sector, subjected to change after every six months. Whereas ‘water tariffs’ were the

charges paid by the consumers to the public sector. Due to the fact that consumers were already

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paying high tariffs, ‘water tariffs’ could not be further increased parallel to the increase in

‘water charges’ after every six months. This resulted in the public sector’s huge financial loss

accumulated to around US$54 million by 2010 (Leong, 2015; Zamzami and Ardhianie, 2015).

The provincial government later covered the loss from public money. Apart from this,

consumers were dissatisfied with the poor water quality and billing inefficiency. Besides

consumers, staff workers were not satisfied as well. 2,800 workers were transferred to the

private company after the PPP was finalised, but none of them got a basic salary increase

during the privatisation. On the other hand, the workers directly hired by the private company

later received better incentives (Nugroho, 2010; Zamzami and Ardhianie, 2015). The flustered

water workers and consumers later formed an organisation called KMMSAJ aiming to end the

privatisation and took the case to the court. This lawsuit put pressure on the government, and

the Governor of Jakarta declared in March 2013 that privatisation would be terminated

(Zamzami and Aedhianie, 2015).

For the other two cases, ‘Project_EAPIn1’, Indonesia and ‘Project_SAIn1’, India, they

failed in the early stages of the PPP process. ‘Project_EAPIn1’ in Indonesia, failed due to one

private consortium partner not being able to secure funding for investment, as required for

running the project. The private company withdrew from the 30-year concession project in

2002, which was only signed in 2001 (Food & Water Watch, 2008). Whereas in

‘Project_SAIn1’, India, public protest as a result of the lack of incentives for poor communities

in the contract led to the cancellation of the privatisation process. The whole process was kept

secret by the bureaucracy and politicians, but eventual leakage to the public resulted in massive

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public protests. The government had to cancel the whole privatisation scheme (Teltumbde,

2007).

4.2 Europe and Central Asia

Europe and Central Asia (ECA) is distinct from other regions due to having sophisticated urban

systems with high network coverage. However, these systems are breaking down because of

aging and poor maintenance. Private sector participation in the water sector has shown diverse

results in different ECA countries; some countries have achieved success in institutional and

financial performance while others have suffered from bad privatisation experiences. This

difference in outcome can be attributed to the fact that some of the countries were under the

control of the former Soviet Union, which had a central planning system. At the time of

transition, satellite countries had no prior experience of the market system. Other countries,

especially those in Central and South East Europe, were affected less severely from the Soviet

Union economic dissolution because of fewer economic links (Maslyukivska et al., 2003). In

general, this region was able to attract decent investment after the transition. As reported by the

World Bank PPI database 2016, ECA shared a fair 6.16% of the global water PPP investment

among developing countries from 1990 to 2016.

Our sample case studies highlighted some failures reasons resulted in the downfall of the

projects in this region, as listed in Table 4.

In this region, tariff hikes as a result of privatisation was the major failure reason found in

three sample cases, ‘Project_ECATr3’, Turkey, ‘Project_ECAHu4’, Hungary, and

‘Project_ECAHu5’, Hungary. In ‘Project_ECATr3’, Turkey, tariffs grew dramatically as a

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result of high inflation rates after the private operator started operating in 1996. However, the

public sector had to reduce tariffs due to public dissatisfaction in 1999, which became a major

point of contention between the public sector and private operators. In 2002, operators insisted

that the public sector should double the price of water supply and tenfold for sewerage and

supported their argument by referring that the high inflation rates justify this demand. But the

public sector refused to increase the rates. Eventually, operators declared bankruptcy and

thereby withdrew from the contract (Cinar, 2009; Ilhan, 2015). Similarly, privatisation resulted

in significant tariff increases in ‘Project_ECAHu5’, Hungary. Apart from tariff increases, the

company failed to meet investment obligations and did not reveal financial reports in a

transparent way. When the city management attempted negotiation, in the light of these issues,

the private company refused to start negotiations. City lawyers interpreted it as ‘a breach of

contractual obligations to undertake negotiations in good faith’. The City decided to buy back

the shares from the private owners resulting in legal proceedings. Finally, both parties agreed

on a compensation of EUR 10 million, out of court, paid by the National Government (Water

Remunicipalisation Tracker, 2013). In ‘Project_ECAHu4’, Hungary, high tariffs, overestimated

bills, and too high management fees guaranteed to investors became the reasons for the

political demand for remunicipalisation. The city council of Budapest guaranteed a high

management fee to the private companies on a yearly basis. More than EUR100 million had to

be paid to companies by the end of the contract. Furthermore, the tariff rates were hiked more

than double, between 1997 and 2012, adjusted for inflation and exchange rate loss, but the

increase was criticised for being too high in comparison with other developing countries and

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the rate of inflation did not justify the increase. In 2010, conservatives, after winning the

elections, accused private companies of exploiting their dominant position to overestimate

prices. The contract was terminated in 2012, before its legal termination date in 2022 (Susanne

and Hauenschild, 2014).

Refusal of the concessionaire’s demand for guarantees by the government became the

reason of failure in ‘Project_ECAKh1’, Kazakhstan and ‘Project_ECAKh2’, Kazakhstan. The

private operator demanded a guarantee from the government in the form of future tariff

increments. However, the tariff calculation methodology presented by the operator was rejected

by the national regulatory agency, which led to the termination of the project, before any

investment was made, and before project operations began in 2003 (Maslyukivska et al., 2006).

4.3 Latin America and the Caribbean

According to the World Bank PPI database, between 1990 and 2016, the highest amount of

investment in water PPPs has been made in Latin America and the Caribbean (LAC) compared

to any other region in the developing world. A large number of contracts have been

implemented in Argentina, Brazil, Colombia, Chile, and Mexico, and a few projects have been

enacted in countries such as Bolivia, Ecuador and Peru. About 83.5% of the projects were

BROT, BOT, and ROT. BROT was the most adopted model with 139 projects. There are

several aspects which attracted large investment in this region. Firstly, many cities are large

with huge populations and a sufficiently large middle class. Secondly, existing systems are

poor and require change (Budds and McGranahan, 2003). Although LAC attracted a lot of

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foreign investors, some projects proved to be failures, and our four sample failed cases

observed several problematic issues as shown in Table 5.

In Mexico, a lack of transparency marked the ‘Project_LACMe3’ PPP process right from

the beginning of the contractual process. The PPP contract terms and the council decisions

were not disclosed to the general public. Moreover, tariffs were increased at least two-fold. For

some users, re-categorisation of customers for tariff payments after PPP, caused a four-times

increase in tariffs (Garza, 2015). However, the increase in tariff did not represent any

significant improvement in leakage reduction and water supply provision. Newspapers

published many articles showing public dissatisfaction with privatisation. Quite a number of

complaints were registered with the State Human Rights Commission and the Ministry of

Health requesting system rectifications. Some complaints were entertained but mostly ignored.

Ultimately, the municipality decided to remunicipalise the water services after popular and

political demand for remunicipalisation (Garza, 2015).

‘Project_LACBo2’, Bolivia, failed after violent public protests erupted due to high tariffs

and monopoly rights were given to the private sector. The project was badly affected by the

carelessness in awarding exclusivity rights to the concessionaire and the lack of integration of

local small-scale service providers in the system. The private operator was given the exclusive

rights to exploit water resources including the areas where the sources of irrigation water for

farmers and drinking water for small communities were located. Farmers felt threatened that

they would be charged for irrigation water usage. Furthermore, small-scale providers and

vendors who supplied water through tanks in houses were prohibited under the monopoly

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rights given to the private sector, which threatened their livelihood. Both farmers and the

vendors joined the massive protest against privatisation (Bustamante, 2004). In addition,

substantial tariff increases despite the low purchasing power of customers created much

discontent among users. An average tariff increase of 35% was imposed immediately after the

private operator took over; yet system improvement did not justify it. Low-income users faced

an increase of 10% but high-income customers faced as high as 106% increase in tariff. For

some people, the tariff approximated 20% to 25% of their monthly income. All these led to a

series of violent protests, famously known as the Cochabamba water war, which led to the

contract termination (Nickson and Vargas, 2002; Claridge, 2006; Bonnardeaux, 2009). In

‘Project_LACBo4’, Bolivia, the private consortium and the National Government negotiated

directly on contract terms without the participation of other stakeholders which marked a lack

of transparency (Hailu et al., 2012). The area that created much dispute was ‘no geographical

criterion in the contract’; the private sector exploited it and refused to provide network

coverage to poor areas which required extensive piping. In addition to this, poor classification

of users for tariff payment resulted in massive tariff hikes for many users. Also, a number of

hidden costs such as a 2% regulation tax imposed on the private operator was directly passed

on to the users (Laurie and Crespo, 2007). The private sector was also accused by the general

public of polluting Lake Titicaca, and household users complained about the low water

pressure. Consortium’s mediocre technical performance, tariff hikes and refusal to provide

coverage to poor areas led to a massive public outcry in August 2004 that resulted in the

termination of the contract (Hailu et al., 2012).

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The case of ‘Project_LACAr2’, Argentina provided striking evidence of how a change in

the exchange rate and other PPP associated laws can lead to a project failure. In January 2002,

the 9th year into the PPP, the new administrative regime passed an ‘economic emergency law’

to put an end to the ‘Peso pegged to USD at the rate of 1-1’. The Peso devalued massively 3.5

times which made private sector debt almost triple suddenly (Casarin et al., 2007). The only

way out for the private sector was to increase the tariff but the law forbade this and made it

obligatory that the tariff had to be calculated based on the previous conversion rate of 1-1. The

private firm asked for a tariff increase and attempted negotiations with the government.

Negotiations, however, failed and the private firm was not guaranteed any tariff increase. The

government canceled the contract and formed another state-owned firm which took over the

operations in March 2006 (Casarin et al., 2007).

5. Conclusions, recommendations, and further research

PPPs have grown in developing countries/regions; however, PPPs in the water sector had

remained modest in the past two and a half decades. This gap may be attributed to the fact that

many developing countries across different regions have witnessed bitter water PPP failure

experiences. Case studies showed that some failure reasons are specific to a particular region

while others are common, e.g., soaring tariffs after privatisation, which is a top failure reason

found in every region. Moreover, water PPPs rarely failed due to a single reason. It is normally

a combination of several reasons occurring simultaneously or successively.

The geographical analysis illustrates the dominance of certain failure reasons in particular

regions; e.g., in EAP and SA, the majority of failures occurred due to the incapability of the
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public sector. Poor cross-subsidy strategies, privatisation without sufficient investment

provision for network improvement, and insufficient incentives for the community all reflect

the incapability of the public sector. Whereas LAC and ECA regions dominate with ‘high

tariffs’, in LAC, ‘lack of transparency during the contract process’ also dominates equally.

With reference to the potential failure reasons revealed in this study, we propose the

following recommendations to improve the future PPP practices:

1. Financially stable and technically competent concessionaire is a must. Tendering

process should cover four evaluation criteria, 1) financial, 2) technical, 3) managerial,

and 4) safety, health and environmental, that reflects PPP objectives and

characteristics, and the composition of concessionaire as well as the role played by

each stakeholder (Zhang 2004a).

2. Risks should be meticulously identified and properly allocated between project parties.

Irwin (2007) stated that allocate the risk to the party that can best able to 1) influence

the likelihood of the risk occurrence, 2) anticipate the risk on project outcome, and 3)

absorb the risk at the lowest cost.

3. The prime objective of the private sector for participating in a PPP is to secure

reasonable profit. Government should consider providing sufficient guarantees to

make PPPs financially viable.

4. To avoid social opposition to water PPPs, community’ consultations should be done

before initiating the bidding process. Tariffs should be kept at an affordable level.

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Since many developing countries are facing poverty issues, governments should adopt

effective subsidy strategies.

5. Public sector’s capability can be enhanced by hiring external (legal, financial, and

asset appraisal) advisors.

6. Contract should be carefully drafted, clearly indicating the responsibilities of project

parties. Regular meetings should be hosted between the public and private sector to

share updates on project issues and success policies.

7. Government should formulate a standardised tendering process followed by stringent

negotiations. This process should ensure transparency and prevent unfair privileges

given to the concessionaire.

8. Private performance can be improved by introducing incentives and penalties for

fulfilling/breaching contract targets.

This research has analyzed and compared the failure reasons of water PPPs in developing

countries across regions based on case studies and provided some recommendations for the

improvement of future PPP practices. This is a preliminary study and there are some obvious

limitations. Currently, we only have focused on developing countries. Water PPP experiences

and lessons in developed countries will be explored in the future. In addition, we will conduct

interviews and structured questionnaire surveys of international PPP experts on the

significance of the identified failure reasons. Such future studies would facilitate the policy

development towards efficient and successful water PPPs by drawing more thoughtful insights

from a comparison of developing and developed countries and soliciting constructive opinion

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and advice from international PPP experts.

Acknowledgement

This study is financially supported by the National Natural Science Foundation of China

(Project Number: 71472052).

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Table 1. Types of failures

Type of Failure Abbreviation Definitions

Contract/Concession CT The Government/Public sector canceled the contract,
Terminated before the actual date of termination, and took over the
operations
Private Sector PSW The private sector could not continue the operations due
Withdrew to financial/social issues and withdrew from the
contract or sold its shares to the Government
Contract Abandoned CAES The government called off the PPP process at the initial
at Early Stages stage i.e. before the actual investment was made or
before the bidding process, due to disputes with the
private operator or other social issues
Contract CTP The Government/public sector already planned to
Termination terminate the contract and grounds are being set for
Planned actual termination such as the preparation of necessary
documents or other legal issues

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Table 2. Failed water PPP cases

Region Project Title ID Contract type Duration Investment Contract Failure

(US$ millions) period (years) type
East Asia and Pekanbaru Water Supply Services, Riau Project_EAPIn1 Concession 2001-2002 N/A* 30 CT
Pacific province, Indonesia
Shenyang No. 8 Water Plant, China Project_EAPCh2 BROT** 1995-1999 150 30 CT
Indah Wastewater Urban Sewerage Project_EAPMa3 Concession 1993-2000 2331.7 28 PSW
Rehabilitation, Malaysia
Manila Metropolitan Waterworks and Project_EAPPh4 BROT 1997-2005 4536 25 CT
Sewerage System (West Zone),
Philippines
Jakarta Water (Eastern district), Indonesia Project_EAPIn5 BROT 1998- 337 25 CTP
South Asia Sangli Miraj Water Supply System, India Project_SAIn1 Concession 2000 N/A 3/Phase1 CAES
30/Phase2
Latur Water Supply Scheme, India Project_SAIn2 RLT*** 1998-2011 8.75 10 PSW
Europe and Astana Water and Waste Water Project_ECAKh1 Concession 1999-2003 90 (expected) 30 CAES
Central Asia Management Services, Kazakhstan
Almaty Water and Waste Water Project_ECAKh2 Concession 1999-2003 100 (expected) 30 CAES
Management Services, Kazakhstan
Antalya Water and Sewage Services, Project_ECATr3 Lease 1996-2002 244.9 10 PSW
Turkey
Budapest Water Works, Hungary Project_ECAHu4 Concession 1997-2012 N/A 25 CT
Pécs Water and Wastewater Services, Project_ECAHu5 Lease 1995-2009 N/A 25 CT
Hungary
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Latin Cochabamba Water and Sewer System, Project_LACBo1 Concession 1999-2000 320 40 CT
America and Bolivia
the Buenos Aires Water and Sewer Services, Project_LACAr2 BROT 1993-2006 4000 30 CT
Caribbean Argentina
Ramos Arizpe Water and Sewerage Project_LACMe3 Joint Venture 2012-2014 N/A N/A CT
Services, Mexico
La Paz and El Alto Water Systems, Project_LACBo4 Concession 1997-2005 362 30 CT
Bolivia
Note: *Not available; **Built-Rehabilitate-Operate-Transfer; ***Rehabilitate-Lease-Transfer

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Table 3. Potential failure reasons in EAP and SA

Projects Main failure reasons

Project_EAPIn1, Funding issues with the private sector
Indonesia
Project_EAPCh2, China Incapability of the public sector
Project_EAPMa3, Incapability of the public sector, Soaring tariffs, Non-payment
Malaysia of bills by end users
Project_EAPPh4, Macroeconomic fluctuations, Conflicts between the public and
Philippines private sector
Project_EAPIn5, Macroeconomic fluctuations, Discrepancy in payment
Indonesia mechanism
Project_SAIn1, India Social/political opposition to the privatisation, Lack of
transparency
Project_SAIn2, India Social/political opposition to the privatisation, Incapability of
the public sector

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Table 4. Potential failure reasons in ECA

Projects Main failure reasons

Project_ECATr3, Turkey Conflicts between the public and private sector, Soaring tariffs
Project_ECAHu4, High management fees guaranteed to the private sector, Soaring
Hungary tariffs
Project_ECAHu5, Soaring tariffs, Conflicts between public and private sectors
Hungary
Project_ECAKh1, Refusal of concessionaire’s demand for guarantees
Kazakhstan
Project_ECAKh2, Refusal of concessionaire’s demand for guarantees
Kazakhstan

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Table 5. Potential failure reasons in LAC

Projects Main failure reasons

Project_LACBo1, Soaring tariffs, unfair privileges to the private sector, social
Bolivia opposition to the privatisation
Project_LACAr2, Change of exchange rate and PPP related laws
Argentina
Project_LACMe3, Lack of transparency, soaring tariffs, social opposition to the
Mexico privatisation
Project_LACBo2, Lack of transparency, soaring tariffs, Low network coverage, social
Bolivia opposition to the privatisation

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Figure 1. Types of failures observed in different regions

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