Regulatory barriers for PPPs and the perspective of private sector companies

However, the priorities for public money in most Governments have changed, investing in other sectors such as health, pensions, or migration, replacing the corresponding allocation funds for infrastructure. Investment in infrastructure has been gradually down from 7% to less than 3% in the previous decade (over the annual budget in developed countries).

Partnerships can accelerate water infrastructure development and the uptake of innovative technologies through knowledge transfer, entrepreneurship, and applied research. The financial sector is highly interested in penetrating the water industry to finance the sector.

Governments and businesses must work together to expand investments into clean water and sanitation systems that can reach everyone, everywhere. This includes resilient infrastructure and drinking water and wastewater treatment plants. There is a need to explore opportunities through partnerships and cooperation. Cooperation improves water governance and decision-making, stimulates innovative solutions, and leverages efficiencies.

The evolution of the PPP model in the non-conventional water resources sector, especially in desalination, is evident. This delivery method has gone from zero in 2001 to 75% of the projects developed under the PPP model today. However, it must be considered that there is a critical weighting factor since, in the Middle East (which accumulates 70-80% of the market), almost all desalination projects are developed using this model.

On the other side of the spectrum are wastewater projects, which do not reach 20-30% of projects developed under the PPP model. And we are now starting to see water transport projects under this same scheme.

The question is obvious: what is the reason why some countries develop projects under PPPs and others do not? It is confirmed that this financial model divides the risks and chooses the most appropriate players for each phase of the project, not having to put all the risks on the investor side or in the off-taker. However, we found some barriers and threats depending on the geography:

• Middle East: The PPP is a very mature model in the Middle East, but recently, very aggressive rates have been reached, running the risk of this model dying of success. But the fact is that the more projects, the higher the profitability and the less risk for investors. There are doubts about the future of the PPP model in the Middle East if the tariffs continue the trend down with meagre returns in a world with other alternatives.
• India - Asia Pacific: The problem in the region is that 100% of the tariff is not guaranteed in the long term. There is a significant market risk of failing to ensure the investor's return, thus breaking the universal principle of PPPs.
• Africa: In Africa, there are no guarantees from utilities; therefore, investment and guarantees are needed at the state level. We see many projects stalled in Africa because of this problem, with real consequences, where citizens with no water and sanitation pay 10-20 times the price for poor water quality.
• Spain: This market has a particularity that can be extended to the rest of Europe and Latin America, where PPPs have not been implemented as a model to finance water infrastructure.

In Spain, a series of regulatory problems prevent the successful tendering of this type of contract, unjustifiably limiting the possibilities for the public administration to undertake new projects necessary and in demand by citizens. These barriers are:

1. Definition and consequences of the de-indexation regulation in the public procurement framework.

 In Spain, a 2015 law introduced an essential change in the price review regime, substantially limiting the cases in which price reviews could occur and establishing time restrictions. This law aims to link the revision to the actual costs of the activity and not to other indices or external factors, eliminating the possibility of carrying out non-predetermined or non-periodic revisions.

PPPs divide risks and choose the appropriate players for each project phase, but face barriers and threats depending on the geography

On the other hand, there is also a linking of the term of contracts to the payback period, limiting the duration of a concession to avoid market foreclosure and restriction of competition. Although there is a justification for extending the time to allow the concessionaire to recover the investments foreseen for the execution of the concession, the current model is not free but requires a justification of this period, linking it to the investments made.

2. The difficulties in applying formulas for rebalancing concessions.

There are only minimal chances where the economic rebalancing of the concession can happen: either the public administration modifies the works contract or introduces changes in the contracted service into the service contract; or the public administration directly determines the substantial rupture of the contract economy.

Therefore, unforeseen events or extraordinary situations that may arise are not taken into account. This situation introduces a very rigid, inadequate structure in a complex and uncertain world with pandemics, natural disasters, wars, and other extreme circumstances.

3. Absence of clauses modifying the contract due to unforeseeable circumstances.

This formula generates enormous controversy about the scope of predictability and the possibility of rebalancing.

4. Investment recovery in case of early termination or because the asset does not work.

Traditionally, concessions for works and services have entailed the recognition in favour of the concessionaire of a right to financial compensation for the investment in the event of early resolution.

But currently, a compensation regime is established that introduces a fundamental distinction between causes of resolution attributable to the public administration and not attributable to it.

5. Off-takers establish the maximum returns on equity/debt, which does not correspond with the risk assumed by the investors.

As long as financial sector risks are accommodated, PPPs will not only provide water services: they also create jobs and opportunities

A regulatory reform is needed to resolve the existing problems in implementing the PPP model. Water has circumstances that make PPP model use difficult in different countries. However, a proposal exists to respond to these barriers and implement public-private collaboration mechanisms in the water sector. Other beneficial circumstances exist to implement it because public investments are now more focused on other sectors, such as health or pensions, and the financial sector is highly interested in entering the water industry. According to the United Nations, investments in infrastructure and water management must be multiplied by 14 to reach the Sustainable Development Goals of the 2030 Agenda.

The future of PPPs is straightforward as long as the risks to the financial sector are accommodated. PPPs do not only provide water services: they create jobs and opportunities for all. A sector betting on this is the industrial sector, which has become a great driver, competing with great force for water against utilities and governments.