Water Provision and Design, Build and Operate Schemes: Statement by Dr. Eoin
Reeves to the Joint Committee on Environment, Transport, Culture and the Gaeltacht
Tuesday, 10 January, 2012.
Introduction
Since the late 1990s the Design, Build, Operate (DBO) model has been adopted as the
preferred method of procurement of water and wastewater treatment facilities in the
Irish water services sector.
The adoption of DBO constitutes a marked shift in
procurement practice away from traditional procurement methods towards models of
public private partnerships (PPP) that have become increasingly popular in Ireland
(and elsewhere) over the last 10-15 years.
Under traditional procurement methods local authorities enter into separate contracts
for the design and build elements of a given infrastructure (for example, a wastewater
treatment plant). Once the facility is constructed and fit for use the local authority takes
over the operation of the facility. PPP models such as DBO differ from traditional
procurement methods as the local authority enter into a single contract with a private
entity that designs, builds and operates the infrastructure over a 20-25 year period.
PPP therefore involves a much greater degree of private sector participation in the
delivery of public services and in that regard they fall within the broad rubric of
privatisation.
The DBO model represents one variant of PPP. Others include (i) Design, Build (DB), (ii)
Design, Build, Operate and Finance (DBOF) and (iii) Concession models and the precise
definition of each model depends on the degree of private sector involvement in the
delivery of infrastructural assets and asset-based services. The latter two variants
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(DBOF and concession) are particularly attractive for policy makers as the private
sector provides some or all the finance for investment under these models. In some
jurisdictions (including Ireland) politicians have justified the use of such models on the
grounds that capital investment can take place without recourse to public borrowing.
This contention is false as the exchequer or the end-user (e.g. toll roads) still pays for
the asset and service over time.
PPP Activity in Ireland
Since the announcement of the first PPP projects in June 1999, the planned Irish PPP
programme expanded rapidly.
Table 1 shows that in March 2010 there were
approximately 39 PPP projects at different stages of the procurement and project lifecycle (excluding the water services sector). This of course has changed in the context of
the scaling down of the public capital programme in recent years but the table does
provide an indication of the scope of the PPP model which has been adopted or mooted
as the procurement model in areas such as road and rail transport, waste management
(including incineration), education (school and university buildings), health (a national
radiotherapy network), social and affordable housing, and courts facilities. Attaching
reliable values to these PPP projects is not possible before contracts are awarded but
some indication of the commitment to planned investment under PPP can be gauged
from the last two national development plans, which covered the period 2000-2013 and
included provisions of €14.8 billion in private finance under PPP. In addition, before
the global financial crisis of late 2008, the Department of Finance forecasted that PPP
investment would account for 13.6 per cent of the public capital programme over the
period 2008-2012.1
Although the scale of PPP investment appears ambitious it can be noted that progress to
date has been slow with just 11 projects (outside of the water and wastewater sector) at
the stage where assets were in operation by March 2011 (see table 1).
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Table 1: Number of PPP Projects in Ireland in March 2010.
PreTender
Procurement Construction Operation
Total
Roads
1
3
2
7
13
Rail
3
1
0
0
4
Waste Management
1
1
0
0
2
Courts
1
0
1
0
2
Education
4
1
1
3
9
Health
1
0
0
0
1
Arts
1
1
1
0
3
Prisons
2
0
0
0
2
Housing
0
0
0
1
1
Development
1
0
1
0
2
Water
-
8
1
2
11
Wastewater
-
16
15
24
55
Total
15
31
22
37
105
Harbour
Re-
Notes: (1) Data derived from the PPP website housed by the Department of Finance (2) Data for water
and wastewater was provided by the Department of the Environment, Community and Local
Government in November 2011 (3) Pre-tender projects are at various stages of the appraisal
procedures for investment under PPP.
PPP in the Water Services Sector
Table 1 shows that the water services sector accounts for the majority of PPP contracts
procured in Ireland with 66 contracts (covering 138 plants) at different stages of the
project life cycle. The high incidence of PPP contracts in the water services sector can
be attributed to two factors. First, high levels of investment have been directed to the
water services sector since the early 1990s.
This has been due to the legacy of
historically low levels of investment; rapid growth in the demand for water services due
to inter alia very strong demographic and economic growth; increased tourism
numbers; record levels of new residential growth and the requirement to meet
environmental standards set out in EU directives. The Department of the Environment,
Community and Local Government (DOE) oversees the provision of water services and
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is currently responsible for the Water Services Investment Programme which is a three
year rolling plan for the provision of major water and sewerage schemes.2 According to
the DOE, €6.2 billion was invested in the water services sector between 2000-2010
Second, the relatively high incidence of PPP projects in the water services sector can
also be attributed to the DOE’s stated policy of considering PPP as the preferred method
of procurement for water and wastewater treatment works. According to the DOE,
PPPs in the water services sector can
“offer value for money through the use of more technically innovative and lower
cost solutions and greater efficiency and cost effectiveness in the operation of
works….the Department informed local authorities in January 1999 that the
Department’s policy will be to favour the DB/DBO approach for projects involving
the provision or upgrading of major water or waste water treatment works, unless
there are strong reasons against it” (DOE, 1999: 19).
Examining the Justification for PPP
The widespread adoption of PPP in the Irish water services sector can be questioned for
a number of reasons including.
1. The international experience with PPP in the water services sector has been
unimpressive.
2. The potential for accruing value for money under PPP/DBO is limited or nonexistent.
3. In Ireland, the DOE’s preference for DBO is at odds with official guidelines for
procurement under PPP and has delayed the procurement of vital infrastructure.
I will briefly deal with each of these points.
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1.
Preference for PPP/DBO is not based on a positive international experience with
PPP in the water services sector.
In international terms, there was significant experimentation with different forms of
privatisation (including PPP) of water services during the 1980s and 1990s. A number
of points about the international privatisation experience are worth noting.

The wave of privatisation witnessed in the 1990s was significant. Whereas
cumulative new capital expenditure in private water services totalled less than
$1 billion between 1984-1990, this increased to $25 billion by 1997. By the end
of the decade the World Bank estimated that 93 countries had privatised some of
their piped water services.3 These included Australia, Argentina, Chile, China,
Colombia, the Philippines, South Africa, the United Kingdom and the transition
economies of Central Europe.4

Most of the privatisation witnessed in the 1990s occurred in low and middle
income countries and was attributable to the promotion of privatisation by the
World Bank and donor agencies.

Private sector investment in water services peaked in the late 1990s. This is
explained by a number of factors, including the low rate of returns on private
infrastructure investment (including water) in developing countries and highprofile public campaigns against water privatisation.

These factors were associated with a growing trend of contract terminations and
reverse privatisations which have continued in recent years.
Examples of
reversals include Cochabamba (Bolivia) in 2002, El Alto (Bolivia) in 2003, Manila
(Philippines) in 2006, Buenos Aires and Santa Fe (Argentina) in the early 2000s.
In Africa, contracts were terminated in Gambia, Mali, Chad, Tanzania and South
Africa. Examples from developed countries include the cities of Atlanta (USA)
and Halifax (Canada). More recent examples of reversals/terminations include
the City of Paris and Pecs (Hungary) in 2010 as well as Tblisi (Georgia), Almaty
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(Kaxakhstan), Odessa and Kirovograd (Ukraine), and Bukhara and Samarkand
(Uzbekistan).
Despite the wave of privatisation in the 1990s, the water services of the world remain
overwhelmingly provided by the public sector. With the exceptions of France and the
UK, 90–100 per cent of water services in most countries (developed and developing) is
provided by the public sector.
2.
The potential for accruing value for money under PPP/DBO is (at the most)
limited.
PPP/DBO models are adopted for a number of reasons but the achievement of value for
money (VFM) vis-à-vis traditional procurement is arguably the principal objective of
procurement under PPP.
Evidence regarding the relative merits of PPP/DBO in terms of achieving VFM is scarce.
As most contracts run for durations in excess of 20 years it is not possible, at this stage,
to gather sufficient data that will facilitate rigorous statistical analysis.
The VFM
question can however be examined by consideration of the arguments advanced in
favour of PPP/DBO in this context.
In general terms, the PPP model is advocated on the grounds that it exploits a number of
VFM drivers. These include competition for contracts and risk transfer. The potential
effectiveness of these drivers is however debateable.
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Competition for Contracts
It is widely accepted that competition for public sector contracts can yield cost savings
(value for money). There are however a number of factors that potentially reduce the
degree of competition for contracts. These include: (i) insufficient numbers of bidders;
(ii) low-balling (i.e. submitting low-priced bids to secure contracts with the intention of
renegotiating terms after contract award); (iii) collusion amongst bidders; (iv) poor
public sector management of the competitive process due to inexperience or lack of
expertise.
The potential for these factors to reduce the extent of competition for contracts applies
to both PPP and traditional procurement models. Given today’s focus on the DBO model
however, it is worth nothing that there is evidence that the market for PPP contracts in
water services sector is imperfect.
According to the Public Services International
Research Unit at the University of Greenwich, the ownership of private companies in
Europe has become increasingly concentrated in recent years and is now
overwhelmingly dominated by the French multinationals Suez and Veolia.56 They also
highlight how water and energy multinationals have been fined and/or investigated by
the European Commission and national anti-competition authorities. These findings
have important negative implications for the market for DBO contracts in Ireland.
Risk Transfer
As the PPP/DBO model is based on a single private contractor taking responsibility for
the design, build and operate elements of the project life cycle there is potential for
greater transfer of risk to the private sector compared to traditional procurement
methods. For example, the PPP contract can include provisions for non-payment until
the infrastructure is up and running satisfactorily. This ensures that the contractor
takes on construction risk and incentivises the contractor to deliver the asset on time
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and to the required standard. In addition, the contractor can carry operating risk if the
contract contains provisions for penalties in the case of underperformance.
The importance of risk transfer as an argument in favour of PPP cannot be overstated
but a number of important points merit attention. First, there is a significant difference
between ‘agreed’ risk transfer and ‘de facto’ risk transfer. The early experience with
schools PPPs in Ireland illustrate this point with available evidence indicating that
private contractors were not penalised over the first three years of the contract despite
evidence of underperformance. The de facto enforcement of risk transfer requires
adequate flows of information and strong management of contracts by the public sector.
These are by no means guaranteed. While a degree of ‘give and take’ is required if
successful contractual relations are to be sustained, there are risks attached to the
public sector being ‘locked in’ to long-term contracts and public sector managers can be
reluctant to penalise contractors and enforce risk transfer.
A second factor that undermines the ‘risk transfer’ argument for PPP also relates to the
‘lock-in’ effects of long-term contracts. Economic theory draws attention to the fact that
once contracts are signed there is potential for one of the parties to exploit the other’s
dependence on the transaction. In the context of PPP this form of exploitation can take
the shape of contract re-negotiation. The World Bank has estimated that between the
mid-1980s and 2000, 74.4 per cent of water and sanitation concession contracts in Latin
America were re-negotiated. Moreover, on average, re-negotiations took place 1.7 years
after contracts were signed.7 There is anecdotal evidence of renegotiations of PPP
contracts in Irish water services. The potential for contract re-negotiations reduces the
scope for risk transfer and undermines the case for PPP in terms of achieving VFM.
A final point in relation to risk transfer is of particular relevance in the context of DBO in
the water services sector. Risks vary over the life of PPP contracts and it is generally
recognised that the highest risk is in the construction phase usually through cost
overruns and late completion. Under the ‘new forms of construction contracts for
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public works’ which came into effect in 2008 there is now greater transfer of
construction risks under traditional procurement. The previous advantage accruing to
DBO in this regard has therefore been considerably reduced.
In summary, the VFM-based case for PPP/DBO is debateable. There is no guarantee that
the main drivers of VFM will work effectively and the advantages of PPP over traditional
procurement are open to question.
3. In Ireland, the DOE’s preference for DBO is at odds with official guidelines for
procurement under PPP and has delayed the procurement of vital infrastructure.
Since the official launch of Ireland’s PPP programme in 1999 a detailed institutional
framework has developed to support the adoption of the PPP model. This framework
includes the establishment of PPP units in government departments and bodies such as
the National Development Finance Agency which oversees the procurement of large
PPP projects. In addition, a detailed regulatory framework has evolved which includes
the publication of guidelines that must be followed by public bodies considering the
adoption of PPP.
Value for money commands the focus of a significant number of guidelines. Before
adopting PPP a relevant procuring authority is required to demonstrate that PPP will
deliver VFM compared to traditional procurement. This demonstration of VFM requires
an objective comparison of the whole life costs of a project under the two procurement
models.
It is quite clear that the scope for objectively conducting VFM tests in the water services
sector is compromised by the DOE’s stated preference for DBO. This contention is
supported by the experience of a number of local authorities and has led to perverse
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investment decisions and delays in the procurement of vital infrastructure. Among the
issues that have arisen in local authorities are:
1.
Local authorities have conducted VFM tests and concluded in favour of
traditional procurement. However, the DOE has not granted project approval
because DBO is the ‘preferred method of procurement’.
2.
There are cases where VFM assessments have concluded in favour of
traditional procurement but the DOE has responded by conducting
correspondence with local authorities over a lengthy period of time with the
result that urgently required investment is delayed.
3.
One local authority that was aware of the DOE’s preference for DBO made a
recommendation in favour of DBO despite finding in favour of traditional
procurement when conducting the VFM assessment.
These examples highlight shortcomings of the PPP model in terms of public
accountability and resonate with evidence concerning the international experience with
PPP. As a new form of governance, PPP faces significant accountability challenges. The
Commission on PPPs in the UK asserts that:
“Public accountability is a pre-condition for the legitimate use of public authority.
It is the basis on which citizens are willing to delegate power to others to act on
their behalf.
It underpins government based on consent.
Without proper
accountability mechanisms organisations delivering services are not subject to
democratic oversight and control, the rights of citizens are uncertain and services
are unlikely to reflect the needs of service users. Accountability is therefore an
end as well as a means” (2001: 231).8
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The challenge of accountability is greater under organisational forms such as PPP. In
the Irish case policymakers have sought to ensure accountability under PPP through a
combination of market-oriented mechanisms such as contracts and competition, and
public sector instruments such as rules of transparency and public control (e.g. value for
money tests). The available evidence from the water services sector indicates that the
adoption of PPP is failing to meet required standards of accountability as local authority
managers are told that DBO is as the only available option.
In conclusion, it is clear that governments worldwide are under pressure to address
deficits of physical infrastructure. Given the constraints in relation to funding such
projects as well as the urgency of infrastructural investment it is not surprising that
governments are turning to private sector participation as one means of addressing the
problem. The adoption of the PPP model however results in a significant re-drawing of
the boundaries between the public and private sectors. In the case of Ireland the use of
PPP has resulted in private sector involvement in sectors that have previously been the
exclusive preserve of the public sector. Many of these sectors are important in terms of
determining the overall welfare of society (e.g. education, health, transport and
environmental services such as water treatment and provision). If the PPP model is to
meet the challenges of value for money and accountability there are many issues to be
resolved. The experience with procurement by DBO in the water services sector shows
that an open-minded approach to procurement would be a good start to meeting these
challenges.
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1
Department of Finance (2007) Multi-Annual Capital Investment Framework 2008-2012.
The largest component of the Programme relates to the provision of water and sewerage schemes with a
view to complying with both the EU Urban Waste Water Treatment Directive and the Drinking Water
Directive. The other main component is rural water services and group schemes.
2
World Bank (2004) Reforming Infrastructure – Privatization, Regulation and Competition, World Bank,
New York.
3
Brubaker, E. (2003) “Revisiting Water and Wastewater Utility Privatization”, Prepared for the
Government of Ontario Panel on the Role of Government, Presented at ‘Public Goals, Private Means’
Research Colloquium, Faculty of Law, University of Toronto, October.
4
Hall, D. and Lobina, E. (2011) Water Companies in Europe Public Services International Research Unit,
University of Greenwich, mimeo.
5
Guasch, J. (2004) “Granting and Renegotiating Infrastructure Concessions: Doing it Right” Washington
D.C.: World Bank Private Sector Advisory Services.
7
Commission on Public Private Partnerships (2001), Building Better Partnerships. London, Institute for
Public Policy Research.
8
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