The experience of the People's Republic of China in water and sanitation PPPs shows that having credible regulatory mechanisms are essential for the sustainability of these partnerships. One of the country's costliest PPP mistakes was the failure to implement a unified regulatory mechanism. This may have been due to path dependence because most foreign companies in the first wave of water PPPs were French. Discretionary regulatory mechanisms are largely nonexistent in France, where contracts are the sole form of regulation. Under the French model, PPP contracts suffice to govern rates, service requirements, and procedures; as such, separate regulatory agencies are not deemed necessary. Yet, it is unrealistic to expect that contracts can specify all contingencies, especially in developing countries, given the changing circumstances over long time frames of most PPPs.
Credible discretionary regulatory mechanisms can be adapted to remediate system problems that arise and change. The lack of these mechanisms has affected progress being made in the People's Republic of China on efficiency gains in utility operations; for example, where water companies are not contractually bound to improve efficiency. This is one reason why nonrevenue water remains a big problem in many cities, despite the injection of massive investments into the sector.
Setting up competent regulatory agencies will be a long-term process, given the lack of regulatory capacity in many cities that host PPP projects. Even so, some regulatory functions can be performed while efforts are underway to set up a formal system, as is being done in Guangzhou. Its city government discloses to the public detailed cost information on water utilities as an effective transparency check in the absence of an official regulatory system. A proposed initiative by Guangzhou's provincial government to benchmark water utilities according to performance indicators to put pressure on utilities to reduce costs and improve services sounds promising.
Intergovernment support, coordination, and oversight are essential for promoting PPPs and for managing regulatory risks. The experience of the People's Republic of China shows that strong support and oversight from the central government is essential to smooth operations and for lasting project success. The country has supported the proliferation of PPPs by several policy choices affecting their operations and general operating conditions. The Asian Development Bank's support for the government's efforts to draw up national guidelines for setting water tariffs through two technical assistance projects was instrumental in improving policy for reforming these tariffs.
Because local governments are responsible for supplying water, the central government may not be able to set up a robust regulatory framework for water and sanitation PPPs. Even so, these frameworks and the guidelines for them can be used as models by local governments and domiciled in contracts until a regulatory framework is set up. And, once the process matures, a regulatory system can be passed into law. Doing this will send a strong signal to the public and private sectors that the country's PPPs process is not ad hoc, but clearly thought out at the highest levels of government.
The main lesson from the experience in the People's Republic of China is that there are no shortcuts in introducing private participation into water and sanitation. Certain fundamental steps, such as tariff reform and creating effective regulatory systems, are difficult to implement but critical to success in the sector. To achieve this, the government needs to increase spending on water and sanitation, raise tariffs further, and seek ways to increase efficiency in operation and management-and this all needs to be done on the back of a strong communication strategy to stakeholders. The government also needs to recognize that water tariff subsidies are not reaching the poor, who may not even be connected to subsidized supply systems, but depend on expensive unorganized suppliers.
The increase in water tariffs by many cities has been one of the main drivers for the boom in investments in PPPs and better service delivery since 2010. And that boom happened despite guaranteed rates of return being no longer allowed. In India, conversely, water tariffs are still generally too low for cost recovery.