32 (127) 2017
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Energy & Environment

Application of the public-private partnership model in the water and sewage management sector

By Agnieszka Ferek, partner at Baker McKenzie, and Inez Handzlik, associate at Baker McKenzie in Warsaw
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The water and sewage sector is commonly associated with the state.

Such connotations in the social consciousness are probably due to the fact that meeting the collective needs of the community actually belongs to the statutory tasks of local authorities. As part of the water and sewage management, these tasks include environmental protection, water management, water pipes and water supply, sewerage, municipal wastewater disposal and treatment, and maintenance of sanitary facilities.

The standards for water and sewage management were included in the Act of 7 June 2001, which sets out the conditions for collective water supply for human consumption and collective sewage disposal. This Act also regulates the operations of water supply and sewerage businesses, creating conditions for ensuring the continuity of supply and proper quality of water, reliable sewage disposal and treatment, requirements for the quality of water intended for human consumption, and the protection of interests of service recipients, including environmental requirements and cost optimisation.

Due to the lack of sufficient funds and limitations resulting from the Public Finance Act with regard to indebtedness of local authorities, municipalities are often unable to independently implement even the most urgent projects involving investment in water and sewage infrastructure –  this relates to both sewage treatment plants and the required repairs of water supply networks. On the other hand, under the current regulations, municipalities are obliged to take care of water quality, construction of treatment plants, sanitary collectors and modernisation of sewage treatment plants which are often obsolete and do not meet the EU norms.

The solution to this problem may be the application of a public-private partnership model which involves cooperation between a public entity and a private partner for the purpose of the joint implementation of the project, based on the appropriate allocation of tasks and risks. The PPP Act provides that the subject of such a project may be both the construction and repair of a building, the provision of services, the performance of work, in particular the fitting of an asset with a device which increases its value or utility, or other service – always connected with the maintenance or management of an asset which is used to implement a project or is associated with it. With regard to projects implemented in the water and sewage sector, this may mean the repair of water pipes or sewage treatment plants or the construction of new facilities, but also other projects as well. The PPP co-operation may also involve fitting of an infrastructure or part thereof with modern devices or providing services such as sewage treatment combined with the management or maintenance of the specific infrastructure.

In other words, municipalities do not have to finance the necessary investments from their own budget. A municipal property on which the infrastructure is located or is to be built can be used as its own contribution of the public entity to a PPP project. A PPP agreement may provide for a return of the property and infrastructure to a public entity at the end of its term. Therefore, the concerns sometimes communicated by public entities that the PPP is privatisation by the back door, are not justified. The fate of the assets involved in the project depends entirely on the decision of the public entity.

In addition to financing of the investment project, an important advantage of the PPP is the fact that the project will be implemented by a professional private entity, for its own gain. Because remuneration of the private partner depends on the quality and timeliness of the work performed, there is no risk that the private partner will save on the quality of the investment project, which it will then have to manage and maintain.

The management and maintenance period should be adjusted to market conditions and determined having regard to the value of the investment. The longer the management period, the lower the monthly remuneration of the private partner who will be able to spread the investment costs over time. To avoid possible increases in fees for residents, a PPP agreement may provide for different cost optimisation mechanisms by adjusting calculations to market conditions and forecasts. With respect to sewage treatment plants, for example, a mechanism can be envisaged, whereby the more waste water is discharged into the treatment plant, the lower the price of treatment is.

The cost of implementing a PPP project on the part of the private partner will depend to a large extent on the allocation of tasks and risks between the parties to the PPP agreement. Any risk to which a private partner will be subject will be appropriately included in the price. It is therefore a good idea for a municipality that is concerned about risks beyond the control of the parties, for example a change of law, not to transfer such concerns to private partners, because it will adversely impact the costs of the project and thus the residents who will eventually have to cover them.

We already have PPP projects in the water and sewage sector on the Polish market. For example, a successfully implemented PPP project in Mława can be shown, whereby the private partner has been obliged to finance, design, construct and operate a modern sewage treatment plant after the completion of the tender in accordance with the public procurement law. The municipality of Karczew is also following the example of the municipality of Mława. It has currently initiated a procedure for the selection of a private partner whose task will be to build and operate the sewage treatment plant and the sewerage network within the municipality.

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