Ameyawand Chan 2013

Journal of Facilities Management
Identifying public-private partnership (PPP) risks in managing water supply projects in

Ghana
Ernest Effah Ameyaw Albert P.C. Chan
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Ernest Effah Ameyaw Albert P.C. Chan, (2013),"Identifying public-private partnership (PPP) risks in
managing water supply projects in Ghana", Journal of Facilities Management, Vol. 11 Iss 2 pp. 152 - 182
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JFM
11,2 Identifying public-private
partnership (PPP) risks in
managing water supply
152
projects in Ghana
Ernest Effah Ameyaw and Albert P.C. Chan
Building and Real Estate (BRE), The Hong Kong Polytechnic University,
Hong Kong, China
Abstract
Purpose – The public-private partnership (PPP) procurement approach enables the development and
management of public infrastructure and services through leveraging private capital, management
expertise, and creative commercial skills. This approach, pursued by the Ghanaian Government in the
development and management of water supply services, contains a plethora of risks resulting from the
complexity and dynamic interactions between municipal and central governments (pursuing
monetary and political goals), public movements, private water operators, and international donors
pursuing their own objectives. The paper seeks to increase awareness of the risks that can erode or
reduce potential benefits of PPPs in the water supply sector.
Design/methodology/approach – A research approach integrating a literature survey and case
study is adopted. A rigorous literature review of PPP risks is first undertaken. Based on six case
studies carried out in the Ghanaian water supply sector, this paper identifies and categorises the risks
specific to water supply PPP contracts in Ghana.
Findings – A total of 40 risk factors are identified, classified into eight categories based on their
sources and their content presented in detail. Common risks which are worth practitioners’ attention
include weak regulatory and monitoring regime; financing; absence of risk allocation mechanisms;
inexperience in PPPs; public opposition; delayed and non-payment of bills, etc.
Originality/value – A comprehensive list of risks associated with water supply projects in Ghana
has been identified. This list will aid practitioners, municipal and central government authorities, and
the domestic and the (potential) international private sector audience in managing risks involved in
such projects.
Keywords Ghana, Water supply sector, PPP, Risks, Risk identification and categorisation, Government
Paper type Research paper
1. Introduction: background
“High costs, low efficiency and unreliability [. . .] are the characteristics of many public
utilities in developing countries” (United Nations Children Fund (UNICEF, 2001)). By the
end of the 1980s, public water systems in most cities across the world were beset with
access, quality and reliability problems, and moreover, undue political interferences and
clientelism had resulted in overstaffing and low labour productivity (Nickson, 1996;
Mustafa, 1993; Marin, 2009a). For political expediency, governments kept tariffs below
Journal of Facilities Management
Vol. 11 No. 2, 2013 This paper forms part of a PhD research project entitled “Risk Allocation Model for
pp. 152-182 Public-Private Partnership (PPP) Water Supply Projects in Ghana”, which is fully supported by
q Emerald Group Publishing Limited
1472-5967
the International Postgraduate Scholarship from The Hong Kong Polytechnic University,
DOI 10.1108/14725961311314651 Hong Kong.
cost recovery levels while public water utilities exhibited failures to cope with the Water supply
grave deficiencies in water supply for the poor (Cheema, 1988). The financing of projects in
publicly-owned and operated water and wastewater utilities overwhelmed the
capabilities of the public sector, giving rise to lower-than-expected performance and Ghana
low productivity by a number of public sector utilities in most countries (Coyaud, 1988;
Idelovitch and Klas, 1995). In response, governments around the world turned to the
private sector in the form of public-private partnerships (PPPs) to address public water 153
utilities’ operational failures, infrastructural backlogs, and funding gaps in the provision
of water supply and sanitation services, since the early 1990s (Nickson, 1996;
Braadbaart, 2001; Haarmeyer and Mody, 1998; Shendy et al., 2011). In the context of this
paper, a PPP in the water sector “involves transferring some or all of the “assets” or
“operations” of public water systems into private hands” (Palaniappan et al., 2006).
Chong et al. (2006) and Zhong et al. (2008) stated that the UK’s water privatisation in
the late 1980s triggered the spread of various PPP options in the developing world,
particularly following its promotion by the World Bank and other international
financial institutions. Advocates of water PPPs argued that the private sector would
inject experience and operational efficiencies, extend water supply services, provide
the much needed capital for water-related infrastructure development without
public subsidies, generate income for governments, and relieve poor governments
of budget constraints (Idelovitch and Klas, 1995). In effect, the aim was to transfer
design, construction, financial, commercial, operating and maintenance and other risks
to the private sector, depending on the contractual arrangements, and to ensure
value-for-money (VfM) through leveraging the management and technical skills of
competent private sector firms (Tahir, 2007). In the case of the UK’s water
privatisation, the fundamental motive was to limit the role of the state, and reduce
government borrowing to the minimum, allowing the private sector to finance the huge
water investments needed (Lobina and Hall, 2001).
Compared with other sectors such as telecommunications, energy/power plants and
road transportation, private investment in the water sector has been modest, yet
private activity continues to increase in various dimensions (Haarmeyer and Mody,
1998). While literature comparing public and private sector efficiency in developing
countries remains limited, vast documentation exists on the prominent role of private
involvement in several cross-country studies and in developed nations (Shendy et al.,
2011). For example, in the USA and UK water industries, Hassanein and Khalifa (2007)
based on 234 cases observed better performance by the private sector than its public
counterpart regarding labour productivity, tariffs imposed, and return on equity.
Estache and Rossi (1999), based on 50 utilities from Asian Development Bank’s (ADB)
1995 survey, found that the private sector is more efficient in water services delivery in
the Asia Pacific region. Through nine water utilities experiences, Haarmeyer and Mody
(1998) observed that private sector capital has relieved governments of budgetary
pressures while improving operational efficiency.
Some evidence exists for better performance in private utilities in Africa and other
developing countries. A comparative study, private vs public sector water provision in
Africa, by Kirkpatrick et al. (2004) revealed better performance in private utilities than
publicly-owned utilities. Their study was based on statistical and data development
analysis (DEA) performance measures. However, based on stochastic cost frontier
analysis, the authors found no statistically significant cost differences between public
JFM and private utilities. Furthermore, Clarke and Wallsten (2002) studied water supply in
11,2 Africa and reported greater service coverage with private sector ownership, particularly
among low-income households, than where there is heavy reliance on pure public
utilities. A World Bank study in the 1990s observed that private sector participation had
resulted in “substantial benefits to consumers in terms of expanded coverage and
quality of services as well as significant improvements in productive efficiency” (Rivera,
154 1996). The study argued that the sustainability of these gains requires continuous
commitment from governments and financial institutions in implementing economic
water pricing, financing, and regulatory reforms.
Overall, private participation in water services, based on case studies and
statistical or econometrical analysis, have produced mixed outcomes (Marin, 2009a;
Kirkpatrick et al., 2004): some improvements in quality and reliability of water services
and improved coverage are reported, but cases of high unaccounted-for-water, high
water tariffs, low water quality and lower-than-expected private sector performance
attracting public opposition and subsequent contracts cancellation are commonplace.
Moreover, despite their instrumental role in some countries, PPPs in urban water supply
present a new set of challenges (collectively “risks”) for the parties involved, such as the
implementation of effective regulatory frameworks by the public sector (Shendy et al.,
2011). PPPs in water supply have been very controversial (Prasad, 2006; Marin, 2009a),
with a large number falling short of original targets, for example the anticipated surge in
private investment flows only partially materialised (Hall and Lobina, 2006). The
difficulties and controversies encountered by the PPP projects initiated over the last two
decades have resulted from a poor understanding of the risks involved by private sector
participation in a complex sector (OECD, 2009).
The public and private sectors must be mindful of the plethora of risks and
uncertainties associated with water supply projects (Wibowo and Mohamed, 2010;
Haarmeyer and Mody, 1998). Typically, water supply projects are characterised by
significant initial fixed cost, low rates of return, regulatory hurdle rates, arbitrary
political interference, risk of asset-stranding as conditions change, diverse users of
service and institutions, long lead times for upgrading, high sunk costs, high asset
condition and consumer base uncertainties, and externalities not reflected in tariffs
(Clough et al., 2004 cited by Wibowo and Mohamed, 2010). The water sector is risk-prone
and differs from other sectors because it accumulates most of the risks that apply to
infrastructure (OECD, 2009). Moreover, the interaction of state and non-state actors,
coupled with diverse institutional arrangements for delivering water supply services
has given birth to a complex sector (ADB, 2009). Therefore, drawing favourable
conclusions on the sound performances of PPPs in the water sector without examining
actual and potential risks is misleading. The Government of Ghana, overwhelmed with
the financial, managerial, and technical challenges of meeting national water needs,
has turned to both domestic and international private water operators for relief
(Ameyaw and Chan, n.d.; Zaato, 2011).
The paper seeks to increase awareness of the risks that can erode or reduce the
potential benefits of PPPs in the water supply sector. It identifies and categorises risks
specific to water supply PPP contracts in Ghana, drawing on a comprehensive literature
review and case studies. Given the complexity and high risk profile of the water sector
(Haarmeyer and Mody, 1998), it is imperative for both public and private clients to be
aware of and understand the multiple risks associated with water supply projects, and the
risks presented in this paper are not intended to be exhaustive. This study is important Water supply
because the identification and presentation of a relevant list of risks will afford projects in
practitioners and private investors a valuable tool in conducting water PPP projects, as
they will serve as the basis for risk allocation (though not treated at this stage). Ghana
Ghana’s water sector consists of two subsectors, namely urban subsector and
small-town and rural subsector. According to a national definition, a small-town refers
to a settlement of between 2,000 and 50,000 inhabitants that requires improved water 155
services (Community Water and Sanitation Agency (CWSA, 2005)) while towns and
cities with populations above this threshold fall under the urban water subsector.
Responsibilities for urban water supply rest with the urban water utility, Ghana Water
Company Ltd (GWCL), and small-town and rural water services are provided by
respective local government authorities with assistance from the CWSA – the
instrument in driving service coverage in small-towns and rural communities. The

rationale for the separation is to attract big water players to the urban subsector and
the domestic private sector to the other subsector. The current discussion does not
cover rural communities but focuses on urban and small-town water supply which is
attractive to the private sector. In the urban water subsector, economic regulation rests
with the Public Utilities Regulatory Commission (PURC) which approves water rates,
regulates and monitors the operations of GWCL and embarks on public sensitization
regarding its activities (Ainuson, 2010). GWCL uses increasing block tariff structure
for domestic consumers in the urban sector irrespective of income levels (Whittington,
1992; Nyarko et al., 2006). This tariff regime entails “lifeline” for the first 20 m3 of water
per capita per day, and in principle, the monthly quantity of water subject to the lifeline
tariff must satisfy the basic needs of a consumer. On the other hand, commercial and
industrial entities, public institutions, and non-metered domestic customers are
charged flat rates (Boakye and Nyieku, 2010), probably influenced by the nature of
industrial activity, area and location of property and the quality of construction
of buildings (Rivera, 1996). Regulation in the small-town subsector is the responsibility
of respective local governments and the served communities. As of July 2012, the
official customer base of GWCL was estimated at 438,034, out of which 315,384 are
billed and 122,650 are unbilled (Today Newspaper, 2012). This figure shows that the
utility has unreliable customer database and is also an indication of grave management
deficiencies. The total installed capacity of 737,000 m3/day (Ainuson, 2010) of the
existing urban water systems continues to decline. Currently, one-third is inoperable
(Whitfield, 2006), putting GWCL’s average daily production capacity at 551,000 m3
against average demand of 939,000 m3/day (Water Business, 2010; GII, 2011).
Moreover, over 50 percent of the amount of water produced is lost to leaks and
widespread commercial theft (Ameyaw and Chan, 2012). The diminishing capacity of
GWCL, high system losses and the population explosion suggest that a large urban
population faces acute water shortages, evidenced by chronic service intermittency. As
of 2009, coverage rates in the urban and small-town and rural subsectors were
estimated at 59.0 and 58.98 percent, respectively, (Ministry of Water Resources, Works
and Housing (MWRWH, 2009)). For current information on the Ghanaian water sector,
interested readers can refer to Ameyaw and Chan (2012).
Overall, the application of PPP in the water sector of Ghana has been limited. Table I
summarises some of the projects in the sector. The move toward PPP began in the early
1990s, but the first contract (case 2) was not implemented until 2005. Initial ambitious
11,2
JFM
156
Table I.
1999-present
water supply sector,
Some PPP projects in
Parameters
Private
No. Case Contract status Project scope PPP model operator mix Subsector Year Populations
1 Urban water supply Attempted but Water Lease contracts (ten International Urban 1999-2002 7.5 million
lease contracts failed to be supply þ investment and 30 years)
implemented
2 Urban water supply Implemented Water supply þ limited Management International Urban 2006-2011 NA
management contract investment contract (five years)
3 Atebubu water supply Implemented but Water Management Small local Small- 2002-2007; 29,595
management contract not renewed production þ distribution contract (five years) private town 2008-2013
O&M company
4 Bekwai water supply Implemented and Water Management Small local Small- 2003-2008 30,000
management contract renewed production þ distribution contract (five years) private town
O&M company
5 Wassa Akropong water Implemented but Water Management Small local Small- 2003-2008 6,170
supply management terminated after production þ distribution contract (five years) private town
contract a year O&M company
6 Tumu water supply Implemented Water Management Small local Small- 2008-2013 12,000
management contract production þ distribution contract (five years) private town
O&M company
7 Seawater desalination Signed Bulk water supply BOOT (25 years) International Urban 2011- NA
project (60,000 m3/day)
Notes: NA – not available; BOOT – build-own-operate-transfer
Source: Adopted and updated from Ameyaw and Chan (n.d.)
contracts with a high level of risk transfer were deserted following fierce public protests Water supply
and unfavourable investment environment during this period. In 1999, for example, Azurix projects in
submitted an unsolicited proposal to undertake a 20-year build-own-operate-transfer
(BOOT) project in the national capital, Accra. However, the process was halted following Ghana
corruption allegations. However, realising the potential of the private sector’s contribution
to resolving the sector’s inefficiencies and infrastructure development, the government is
making conscious efforts to attract more private participation. A National PPP Policy was 157
enacted in June 2011 to facilitate private sector involvement in infrastructure and services
delivery. This move reflects the government’s desire to meet the water needs of the growing
population through private capital and managerial expertise. The Ghanaian experience of
water PPPs indicates dominance by management contracts with public ownership of
assets (Ameyaw and Chan, n.d.). Currently, there are a number of projects in their early
stages, including the first Seawater desalination project (case 7)[1], a 25-year BOOT water
purchase agreement between GWCL and Befesa Desalination Developments Ghana
Limited (Befesa Agua of Spain). The US$110 million project was signed on 25 February
2011, and involves the design, construction and operation of a 60,000 m3/day capacity
potable water reverse osmosis desalination plant.
To put the study in a clear context, the research methodology is presented in Section 2.
Section 3 provides an understanding of the water supply sector risk environment, giving
snapshots of the supply chain and unique characteristics of the sector. This section
informs readers why the sector is risk-prone. Through a review of the literature, ongoing
research interest in PPP risks is captured and risk identification and classification is
explored in Section 4. Practical insight into the risks associated with some past
and ongoing projects are examined in Section 5. Finally, conclusions and future research
are presented in Section 6.
2. Methodology
A research approach integrating a literature survey and case study was adopted.
The study began with a comprehensive literature review to provide an understanding
of the water supply sector risk environment, to identify the risks associated with
PPP projects, and to identify the methods of identifying and classifying PPP
risks. This informed the risk identification and classification approaches adopted later
in this paper. In all, the literature review drew on over 22 empirical studies on risk
identification and classification between 1996 and 2011. Case study is the main research
technique adopted to identify the relevant risks associated with Ghana’s PPP water
supply projects. A case study is a well-established research approach where the focus is
on a live case (Tahir, 2007; Baxter and Jack, 2008), and it is also an effective approach to
study PPP applications to capture relevant project risks and features (Gomm et al.,
2000). This approach afforded an in-depth and clear understanding of risks associated
with the cases. In the current study, six case studies are carried out, two of which are
urban water supply projects while four are small-town projects. These projects, to a
large extent, represent the practice of PPP in the water sector of Ghana, as they are
selected from different geographical regions of the country. The four small-town
projects cover four different administrative regions: case 3 (in the Brong Ahafo region),
case 4 (in the Ashanti region), case 5 (in the Western region) and case 6 (in the Northern
region). A summary of these cases is provided in Table I. The choice of a case study is
based on at least one of the following criteria:
JFM .
It had to be a water supply PPP project of any model or contractual arrangement.
11,2 .
It must have been attempted, or implemented and operational for a year or more.
It is possible to filter the relevant risks based on this criterion.
.
Information regarding the project’s nature and contractual structure is readily
available. There are several town water supply projects without enough
documentation and therefore not suited for this study.
158
Each of the six case studies satisfied at least one or all of the above-mentioned selection
criteria. Collection of evidence for the six case studies was achieved by reviewing the
reports and documentation (Baxter and Jack, 2008) obtained from the urban water
company, the MWRWH, the domestic private operators of the small-town water
systems and general projects’ literature (Akabang, 2010; Public Private Infrastructure
Advisory Facility (PPIAF, 2011); Tuffour, 2010; Adinyira et al., 2008). Cases 1-4 have
been presented in previous papers as part of this overall study. Case 1 (urban water
supply lease contracts) was hotly contested from 1999 to 2002 but subsequently
cancelled (Ameyaw and Chan, n.d.). Case 2 was implemented from 2006 to 2011 under
the management of Aqua Vitens Rand Ltd (AVRL), a South African-Dutch joint
venture and has been assessed to be less successful with regard to its contractual
targets (ISODEC, 2011; Ameyaw and Chan, 2012).
3. Understanding the water supply sector risk environment

3.1 Value chain of the water supply sector
The entire water sector focuses on sustaining economic development through
investments in drinking water supply, sanitation services and wastewater
management, and environmental protection and enhancement (ADB, 2009). The
value chain of the urban water supply consists of four components (ADB, 2009):
(1) water abstraction and storage;
(2) water treatment;
(3) treated water transmission and distribution; and
(4) customer interface, shown in Figure 1.
This section gives readers a good understanding of the stages involved in getting
water to the final consumer. It paints a picture of the functions and structure of the
water supply value chain. All or specific functions can be handled by the public or
private sector, or both, with a common goal of getting water of acceptable quality
standard to the consumer.
Water abstraction and storage. The water abstraction and storage component of the
value chain refers to tapping raw water from surface water (lakes, rivers and springs)
or from underground and storing it in reservoirs and built tanks. Depending on the
source, this may entail high energy usage. Further, water is a natural resource, and
Figure 1.
Value chain of water Water Transmission
Water Customer
supply sector based on abstraction and
treatment interface
ADB (2009) and storage distribution
therefore legal licences are required for abstraction. This may prove difficult to obtain Water supply
in areas where water resources are stressed. projects in
Water treatment. Treatment adds value to the raw water to make it wholesome in
order to protect public health. Treatment costs (about 32 percent of operational costs) Ghana
and procedures (technology) are influenced by water source (Mukokoma, 2010) and
degree of treatment. Cost of chemicals for treatment may be associated with inflation
risk. Using a three-year data for 12 drinking water treatment plants in Texas, USA, 159
Tolman et al. (1998) established that the cost of chemical for water treatment expands
by US$95/mg from a base of US$75 when regional raw water is contaminated.
Common procedures used by water utilities include screening, clarification, filtration
and disinfection.
Treated water transmission and distribution. The transmission and distribution
stage of the chain involves infrastructure (mains) to move bulk water from the
production source and then distribute it to consumers through supply networks.
This requires large investments, particularly where a new system is required. This
might explain why low coverage levels are reported in poor countries, where economic
resources are scarce. Per an arrangement, a utility may buy bulk water from another,
which may be moved over a long distance at significant monetary, energy and
environmental costs. For instance, the California State Water Project (SWP) conveys
water from San Francisco Bay-Delta to Southern California and is the largest
single energy consumer in the state. Reportedly, it uses an average 5 billion kWh/yr
(i.e. 2-3 percent)[2] of total electricity consumed in California (Cohen et al., 2004).
Customer interface. Customer interface is the last stage of the value chain and
includes customer connections, metering, billing for water delivered, bill collection
and other services to make customers happy. Water distribution to consumers is
done through household connections, utility standpipes, and utility tanker supply;
small-scale private water carriers; privately-managed standpipes and kiosk networks;
and community-managed organisations (ADB, 2009; The World Bank, 2010). All or
some of these are found in low-income countries. In developing countries, it is not
uncommon for some customers (domestic or industrial) to bypass the chain and tap
their own water supply from rivers, springs, lakes, private wells, etc. which may be
unsafe and a threat to their health. This happens when continuity of supply from public
or private water supply utilities is poor or when the customers’ location is cut off from
the water distribution networks (ADB, 2009). The unique characteristics distinguishing
the sector from other service and infrastructure sectors are discussed in the following
section.
3.2 Characteristics of the water supply sector

The water supply sector is distinctive from other infrastructure sectors (such as
power/energy, telecommunications and transportation) because it is the source of
many risks (Haarmeyer and Mody, 1998; Wibowo and Mohammed, 2010). The authors
claim that these risks underscore the lower levels of investment by the private sector in
the sector, and hence, a need for government’s commitment to put in place pragmatic
approaches to risk reduction or mitigation in an effort to attract more private
participants. This section of the paper discusses the characteristics of the water sector
in relation to risks, revealing why it is different from other infrastructure and service
sectors of any economy.
JFM 3.2.1 High capital intensity and large sunk costs. The water sector is capital intensive
11,2 (Hassanein and Khalifa, 2007; Brocklehurst and Janssen, 2004) and associated with
large sunk costs (Haarmeyer and Mody, 1998). The authors claim that this limits direct
competition in the sector and calls for governments to play a regulatory role to protect
the public from exorbitant tariffs and private investors from political risks such
as expropriation. According to Hassanein and Khalifa (2007) the ratio of fixed assets
160 to annual tariff revenue is 10:1, against 4:1 and 3:1 for the electricity and
telecommunication sectors, respectively. Most assets of the sector are underground,
rendering it difficult to move once installed or know their status at any point in time
(Haarmeyer and Mody, 1998); and assets have a life-span of between 30 and 50 years
(or 80 years if well maintained), with depreciation rates ranging from 3 to 5 percent per
year (Hassanein and Khalifa, 2007; Ménard and Peeroo, 2011).
Furthermore, keeping tariffs below cost recovery and compounded by inadequate

collection, as observed in many developing countries, means that the payback period
for investments in the sector is lengthy, amortized between 15 and 30 years (Idelovitch
and Klas, 1995; Haarmeyer and Mody, 1998; Hassanein and Khalifa, 2007). Long-term
private capital is indeed crucial in financing these large and bulky investments
(Haarmeyer and Mody, 1998), but will “generally depend on the perceived risks and the
rewards in compensation” (Idelovitch and Klas, 1995). Absence of domestic capital
markets – small size of local commercial banks; short tenors of loans; financial bodies
lacking expertise and experience in project financing – in developing countries hinder
private participation (Shendy et al., 2011; Haarmeyer and Mody, 1998). On the other
hand, heavy reliance on foreign lending poses currency risks (Haarmeyer and Mody,
1998). The development of the capacity of local financial institutions will help mitigate
these risks.
3.2.2 Multiple public policy objectives. Public water systems have mixed policy
objectives – economic efficiency; resource and environmental protection and
enhancement; security; affordability, particularly for the poor; political goals; and
public health protection from contamination – highlighting political as well as
regulatory risks and uncertainties (Haarmeyer and Mody, 1998; Lobina, 2005). Water has
been critical to poverty alleviation, improved health status and sustainable development
strategies. To ensure growth and development, all infrastructure and service sectors of
an economy ought to satisfy multiple public policy objectives; however, the case of the
water sector is more acute as a result of dire public health and environmental concerns
resulting from poor service delivery (Haarmeyer and Mody, 1998).
In response, countries have developed construction and operating standards, tight
and extensive systems of regulations governing maximum contaminant levels,
monitoring, emergency response planning, training, and public education and research
to better protect drinking water supply and receiving waters and ecosystems, with
strong participation of sector stakeholders. For example, the US Environmental
Protection Agency (EPA), an active water sector partner, “is working with its security
partners to coordinate protection of the nation’s drinking water supply from terrorist
attacks, other intentional acts, natural disasters, and other hazards” (Homeland Security
and EPA, 2007). Another example is the EU Water Framework Directive, covering 27
countries, which is an important trend towards an ecosystem-based approach to water
resource management. It has an ultimate objective of a “good” overall quality of
all waters, the fulfilment of which involves high costs to public water supply users
(who bear full capital and operational costs), agricultural and industrial water users Water supply
(where the full-cost recovery principle is applied) (Kallis and Butler, 2001). projects in
3.2.3 Highly fragmented sector, plus diverse institutional setups. Unlike
other network industries (gas or electricity), the high costs associated with water Ghana
transportation limits the scope for long-distance transmission, rendering water systems
localised or decentralised (Ménard and Peeroo, 2011; Haarmeyer and Mody, 1998).
Ideally, water is transmitted to water-stressed areas but at high cost, as indicated 161
previously. Generally, water supply systems benefit from very sizeable economies of
density, so that private entities are less incentivised to extend the networks to locations
with small and/or dispersed inhabitants (Ménard and Peeroo, 2011). Localization of
water systems limits economies of scale and investments, particularly in dispersed
settlements, small towns and rural communities.
Additionally, the sector is institutionally fragmented, manifested in a range of

vertical and horizontal stakeholders (ADB, 2009). Stakeholders range from individual
water users to national and international institutions such as multilateral and bilateral
donors. Existing public institutions, sometimes with conflicting roles and diverse
interests, cross-public departments and ministries for health, education and
environment, local government, and agriculture. Power relationships between these
multiple state and non-state stakeholders indicate significant sector risks (ADB, 2009).
On the other hand, the sector combines different sources of funding (from donor
agencies, community, private and public sector investment which may be poorly
coordinated) and service delivery using a mix of market mechanisms and tight public
regulation to ensure universal access to water and to control resource utilisation (Boesen
et al., 2008; ADB, 2009).
3.2.4 Asset condition uncertainty. One significant characteristic of the water sector
is the high degree of uncertainty about asset condition and thus exact investment
needs. Because most assets are buried in the ground, this presents difficulties for
private investors to obtain detailed information on the state of the physical asset (pipes,
underground tanks, valves) and customer base (Haarmeyer and Mody, 1998),
particularly where the existing public utilities maintain poor records. The situation is
further worsened by massive underinvestment, and poor and untimely maintenance
leading to asset deterioration and subsequent high water losses (Idelovitch and Klas,
1995). As argued by Haarmeyer and Mody (1998), the private sector’s inability to
generate realistic rehabilitation costs of an existing infrastructure may result in tariff
setting and adjustment uncertainty, hence increased renegotiations[3]. Poor asset
condition poses unexpected operational challenges and losses. The authors further
suggest that regulatory provisions for tariff adjustment and contract renegotiation
could attract and retain private capital and expertise.
3.2.5 Numerous sector performance indicators. The sector has multiple performance
indicators, which “can provide first order signals on sector risks” (ADB, 2009). These
include:
.
cost recovery;
.
non-revenue water (NRW) levels;
.
billing and collection practices;
.
cross-subsidies;
.
water supply duration;
JFM .
labour productivity;
11,2 .
metered coverage;
.
water supply coverage;
.
water quality;
.
cost (tariffs); and
162 .
water quantity (Marin, 2009a; Haarmeyer and Mody, 1998; Hassanein and
Khalifa, 2007; ADB, 2009; Idelovitch and Klas, 1995).
These are quantitative performance indicators for a water supply system and can be
used as the basis for setting performance targets for water supply utilities. They are
useful for comparing the efficiencies of water utilities, offering customers a measure of
the quality of the overall service they receive and the level of public health protection
afforded by utilities (World Health Organisation (WHO, 1997)).
For example, NRW (the combined effects of physical leaks and unauthorised
consumption) is used to measure the operational efficiency of a utility. Previous studies
indicate that public utilities in developing countries have high NRW levels, ranging
between 40 and 60 percent of water produced (Haarmeyer and Mody, 1998). NRW for
the water supply sector of Ghana falls within this range. An efficiently managed
system’s water loss ranges from 10 to 20 percent (Idelovitch and Klas, 1995). The above
indicators may point to underinvestment in new capacity, weak financial management
and commercial systems, inefficient business processes, lax sector regulation, and
corruption (Marin, 2009a; ADB, 2009).
Based on these characteristics, the sector is institutionally, socially and technically
complex to develop, manage, and regulate (Ménard and Peeroo, 2011), presenting
numerous risks to either the public or private sector or both based on the organisational
structure of a utility. This explains why the sector is less prone to private sector
participation. For water supply PPP projects, the complexities and risks are further
compounded by additional external uncertainties and risks occurring in the contractual
relationships between the private and public sector as a result of the inherent
differences in working practices and strategies (Ibrahim et al., 2006; Thomas et al.,
2006). The next section of the paper surveys the pertinent literature and identifies the
risks associated with PPP projects as well as the methods of identifying and classifying
PPP risks.
4. Overview of risks in water supply PPP projects

4.1 Literature survey: risk identification and classification
According to Al-Sharif and Kaka (2004), the PPP papers published during 1998-2003 in
selected construction journals can be grouped under three headings: risk, procurement,
and financial with 44, 35, and 21 percent proportions of papers, respectively. From their
analysis, risks associated with PPPs are of interest to the research community. This is
further confirmed by Ke et al. (2009) in a study based on a two-stage literature review, in
which PPP papers from “1998 to 2008 were analysed in terms of the annual number of
PPP articles published, the writers’ contribution, and the research focus in their studies”.
The authors noted that risk management regarding risk identification, risk evaluation,
risk allocation, risk management, financial risk, political risk and market risk is one area
being explored by researchers. This is due to the significance of effective risk
management as a condition for successful PPPs. However, Unkovski and Pienaar (2009) Water supply
argued that there is limited research on risk identification and assessment in PPP projects in
projects. Haarmeyer and Mody (1998) argued that regardless of the challenges
associated with water PPP projects, pressures to keep them going have led to robust risk Ghana
management – risk reduction and risk-sharing – in several contexts, giving a bright
future. Khasnabis et al. (2010) also recommended future research into transportation
infrastructure PPPs to consider risks and uncertainties. 163
PPP project risks concern risk assessment: risk identification, identifying critical risk
factors associated with projects; risk evaluation, evaluating how identified critical risk
factors affect the success of the projects by determining their probabilities of occurrence
and impact; and risk allocation, establishing sensible risk sharing mechanisms
between direct project participants (i.e. public and private sectors) (Roumboutsos
and Anagnostopoulos, 2008; Xu et al., 2011). Regarding risk identification, various
classifications and categorisations exist in published literature. Several authors have
proposed detailed risk factors (risk registers), assessed their impacts on projects and
developed risk allocation mechanisms and preferences (Ibrahim et al., 2006; Ng and
Loosemore, 2007; Roumboutsos and Anagnostopoulos, 2008; Xu et al., 2011).
Consequently, this section of the paper explores some of the works that have been
conducted by previous researchers in the area of PPP risk identification, narrowing
down to water supply projects – the focus of the overall research study.
UNIDO (1996) proposed a build-operate-transfer (BOT) project risk checklist,
grouping them under two categories – general/country risks and project-specific risks.
Each category has three sub-categories: commercial, political, and legal risks are
classified under the former, whereas construction and completion risks, developmental,
and operating risks come under the latter. Based on an extensive literature review,
Ibrahim et al. (2006) presented 61 risk factors associated with PPP projects and
classified them as exogenous – risks external to a project – and endogenous – risks
occurring within the boundaries of the project under consideration plus risks arising
from the relationship between the private and public sectors. Through a literature
review, telephone interviews and a two-round Delphi survey with experts, and
previous works (by the same authors) Ke et al. (2010) identified 37 risk factors in PPP
projects in China. The authors noted that 13 risks out of the total are actual risks
encountered in past PPP projects in the country and include corruption, change in law,
public opposition, tariff change, and financial risks.
Through several project cases Xenidis and Angelides (2005) offered practical
insights into 27 financial risks associated with BOT projects in their lifecycle, which
were reviewed and evaluated by four experts with rich BOT experience. The authors
further categorised the risks into two: according to the lifecycle stage at which each risk
occurs and the source of origin of each risk. In BOT projects, the state (government,
public agencies, society) as client, the concessionaire (including all project participants
from the private sector) and the market as the economic framework within which
the project will operate are the three major sources of financial risks (Xenidis and
Angelides, 2005). In examining the complexity of risk-sharing mechanisms in PPPs,
Grimsey and Lewis (2002) identified nine risk factors and classified them into two
broad categories: first, the developmental phase of a project where the majority of risks
relate to capital costs, e.g. design and construction costs; and second, the operational
JFM phase where most risks relate to revenue and recurrent costs, such as wages, asset
11,2 operation, maintenance and insurance.
Unkovski and Pienaar (2009) explored the analysis and management of PPP
infrastructure project risks in South Africa. Data for the study were collected on the
first PPP project (Department of Education office accommodation) in the country
through workshops and questionnaires with relevant participants. They found that
164 there are significant risks associated with PPP projects, but are less expensive
and more manageable compared to adopting a traditional procurement method to
implement public infrastructure projects. Unkovski and Pienaar acknowledged the
need for risk identification in PPP projects, and presented three broad categories of
risks: financial, technical, and legal.
Li et al. (2005) also presented different classification of risk factors through a
questionnaire survey. A study to establish the risks allocation preferences of PFI/PPP

practitioners in the UK revealed 66 risk factors. They presented a meta-classification
method based on three levels of risk factors, with sub-categories: macro – risk factors
external to a specific project (exogenous) and associated with social, economic, political
and legal conditions; meso – risks associated with the project under consideration
(endogenous) and involve location, technology, construction, and demand/usage
concerns; and micro, which refers to risks arising from stakeholder relationships as a
result of differences between the private and public partners in PPP project
management. A similar classification was adopted by Ibrahim et al. (2006) in exploring
risk allocation preferences in Nigeria.
A three-level risk classification for international construction projects for developing
countries was presented by Wang et al. (2004). Through an extensive literature review,
interviews and discussions with academics, and international surveys, 28 risk factors
were identified and categorised as country, market, and project level risks. Country level
risks refer to changes in law, approvals and permits, corruption, government policies,
expropriation, etc. Corporate fraud, inflation and interests rates, human resources,
market demand, competition, etc. are some market-level risks, whereas project-level
risk factors include cost overrun, poor design, site safety, poor project management
and poor quality control.
A recent review of risk factors relevant to PPP construction projects by Karim
(2011) through mapping past influential studies around the globe revealed 81 risk
factors, classified under ten groups: operation; political; project selection; construction;
legal; economic; market; relationship; project finance; and natural factors. Each broad
category has some specific risk factors. The study indicated that the most frequent
risks fell within the political and construction groups, specifically change in law, delay
in project approvals and permits; and land acquisition.
However, few publications have focused on the water supply sector, despite its high
risk profile. Previous studies, as presented above, tend to generalise risks or focus on
specific infrastructure projects including transportation, telecommunications, power
and energy plants in established PPP markets (Roumboutsos and Anagnostopoulos,
2008). This paper therefore contributes to filling this research gap in the water supply
sector. ADB (2009) in its guidance note identified 49 generic risks in the urban water
supply sector under three classifications: institutional, organisational and sector
operations. Institutional risks arise from policy, law and regulation. Organisational
risks entail planning, financial management, procurement, contract management and
human resources. Finally, sector operation risks derive from water harvesting, water Water supply
treatment and distribution, and consumer interfaces. A country-specific study by projects in
Choi et al. (2010) explored factors holding back PPPs in China’s water sector,
particularly international water operators. These risks are broadly classified as PPP Ghana
project risks, and legal and regulatory hindrances. The study mentioned uneconomic
water tariffs, price adjustment complexity and revocation of the fixed return policy of
the Chinese Government as major risks in the water market. Government breach of 165
contract, weak local banking capacity, limited long-term financing, concessionaire
selection uncertainties and joint-venture risks are other barriers.
Drawing upon the experiences of nine case studies from eight provinces in China,
Xu et al. (2011) presented 11 critical risk factors impeding the performance of water
sector PPPs as:
(1) political risk;

(2) legal risks;
(3) government credit risk;
(4) market demand change risk;
(5) inflation risk;
(6) product price risk;
(7) poor market forecast risk;
(8) contract risk;
(9) financing risk;
(10) absence of supporting infrastructure risk; and
(11) technical risk.
The authors further classified the risks according to the three-level risk classification
proposed by Li et al. (2005). A comparison with earlier findings by Choi et al. (2010)
reveals financing, legal, water price, and contract risks as common barriers.
In a recent study, Cheung and Chan (2011) compared the severity of 20 risk factors
(sourced from the literature) between common public infrastructure projects delivered
via PPPs in China: water and wastewater, power and energy, and transportation.
Among all, public-related risks are the most critical. Regarding the water and
wastewater sector, financing, completion, poor project evaluation approach,
government intervention, and public credit risks (in order) emerged as the five most
critical risks, far different from the other two sectors. This indicates that “[. . .]
approaches successful elsewhere cannot be replicated directly in the water sector”
(Marin, 2009b).
Exploring risk criticality and allocation practice between four stakeholders – the
public, private firms, consumers and insurance companies – in the Indonesian water
supply sector, Wibowo and Mohamed (2010) established that water pricing uncertainty
is the most critical risk among 39 risk factors. Other severe risks (in order) are
government breach of contract, raw water scarcity, construction delay and
construction cost overrun (Wibowo and Mohamed, 2010). Six risk classifications
were proposed by the authors as political, operational, business, macro-economic, land
and construction, and force majeure, according to sources of risks along a project’s life.
JFM The findings reported here agree with studies in other countries (Choi et al., 2010;
11,2 Xu et al., 2011; Cheung and Chan, 2011).
A general review of risk management in the water and sanitation sector in the late
1990s by Haarmeyer and Mody (1998) highlighted six major risk classifications as
“market and payment, construction, operational, currency rate and convertibility,
regulatory and policy, and force majeure risks”. Later classifications, to an extent, are
166 in agreement with this taxonomy. Though the study did not rank risks, but maintained
that these are challenges encountered by the public and private sectors, and that the
identification, evaluation, and allocation procedure of regulatory and commercial risk
factors remains a daunting task.
Other researchers have identified the risks associated with water supply projects
based on specific PPP models. Looking into water supply BOT models in China,
Zeng et al. (2007) established a three-level hierarchy with an analytic hierarchy process
(AHP) to identify risk factors. There are diverse risks relevant to BOT projects
depending on the infrastructure sector in which the model is applied (Zeng et al. 2007;
Xenidis and Angelides, 2005). Zeng et al. (2007) identified 28 risk factors and
established eight classifications as political, bid and negotiation, economic,
construction, operating, policy and legal, credit, and force majeure risks. Tax policy
change, unstable interest rate, water resources price instability, etc. (in order) were
ranked the most critical BOT water supply projects risks in China. This suggests that
from project identification through transfer there is a plethora of risks. Also, Seyed et al.
(2010) summarised BOT project risks into two parts: the first concerns the character of
BOT arrangement, and thus risks are associated with technical and financial studies,
financing, and operations; and second, because BOT projects are mega they involve
political, government regulatory, and economic risks.
From the reviewed studies, most authors identified relevant PPP risks through
extensive reviews of extant literature (Ke et al., 2010; Ibrahim et al., 2006; Li et al., 2005;
Wang et al., 2004; Karim, 2011; Choi et al., 2010; Cheung and Chan, 2011; Wibowo and
Mohamed, 2010; Haarmeyer and Mody, 1998); interviews or surveys with experts
(Zeng et al., 2007; Choi et al., 2010; Wang et al., 2004; Ke et al., 2010); and case studies
(Xenidis and Angelides, 2005; Unkovski and Pienaar, 2009; Choi et al., 2010; Xu et al.,
2011). Usually, case studies analyses are sector- or country-specific (Xu et al., 2011;
Ke et al., 2010; Seyed et al., 2010; Abdul-Aziz, 2001; Zhong et al., 2008; Thomas et al.,
2006) by identifying and presenting most critical risks and local best practices in the
PPP arena (Roumboutsos and Anagnostopoulos, 2008). Furthermore, the popular
approach of risk classification is by using the source criteria, which several researchers
view as the most useful (Seyed et al., 2010; Karim, 2011; Xenidis and Angelides, 2005;
UNIDO, 1996; Wang et al., 2004). Finally, some reported risks are general to all PPP
projects, whereas others are sector-specific. For example, demand risk in toll road
projects is different from that of water supply projects, mainly due to sector differences
and the nature of the service or product. This situation may be responsible for the
inability of researchers and practitioners to propose a single risk register to replace the
multiple risk inventories applied by each participant in their risk analysis process for
PPP projects (Xenidis and Angelides, 2005).
To the best knowledge of the authors, no similar study has been conducted in the
Ghanaian water sector, hence the need for the current study. Also, from the few
published works reviewed as part of this study it is difficult to define any research
trend in the Ghanaian water supply sector. The next section identifies and classifies Water supply
risks in the sector. projects in
Ghana
5. Risk categories and risk factors associated with past projects in Ghana
Drawing on six water supply cases 40 risk factors were identified and classified into
eight categories as shown in Table II (all except case 1 are management contracts). The
risks are classified according to the sources of their origin (Seyed et al., 2010; Xenidis 167
and Angelides, 2005). These can be adopted as referential experience in water supply
projects in Ghana and other developing countries. This section of the paper discusses
the risk categories and risk factors in the Ghanaian context, and the impacts or
consequences of these risks on the performance of respective projects are summarised
in Table III. The paper does not intend to generalise the risk factors, and risk allocation
is not treated.
5.1 Political and regulatory risks

Political risk refers to risk(s) encountered by for-profit water operator(s) as a result of
undue governmental disruption, including breach of contract, political instability,
expropriation, etc. (Lobina, 2005) and remains a major concern in both the medium and
long term in developing countries which have been regarded as risky investment
destinations (Multilateral Investment Guarantee Agency (MIGA, 2009)). In the
Ghanaian context, they include change in government, termination by government,
political interference (e.g. regulatory interference), government corruption, etc. These
are risks that a private partner is unable to control or manage (Haarmeyer and Mody,
1998).
Early termination risk occurred in only case 5 which was awarded in mid-2003 and
terminated by the end of 2004 on the grounds of poor performance and lack of
transparency from the private operator (PPIAF, 2011), obviously activated by
consumers’ disenchantment with service levels. The water system suffered poor
conditions prior to contracting it out and therefore started with overwhelming
operational challenges (Tuffour, 2010; PPIAF, 2011). It is argued that early termination
by government is of paramount concern to private investors (Haarmeyer and Mody,
1998). Damaging local government interference in the activities of Water and
Sanitation Development Boards (WSDBs)[4] such as holding down realistic tariffs, for
political reasons, has undermined service delivery as observed in cases 2 and 3.
Similarly, a change in government has threatened the activities of WSDBs (in cases 3-5)
as new local government executives prefer to put their friends and political “faithfuls”
on the boards, and similar instances are reported in the urban water sector (Alidu,
2011). In case 1, political instability in neighbouring Côte d’Ivoire in 2002 prompted
international water operators to reconsider their investment decisions from a
previously envisaged affermage contract to a less ambitious management contract
with a low level of risk transfer (Fuest and Haffner, 2007; Fall et al., 2009).
Allegations of corruption practices have been reported in several cases of water
“privatization” in less developed countries, with transnational corporations and public
officials, in the form of laxer regulation, bypassing competition, procurement kickbacks,
monopoly benefits, and favourable contracts (Lobina, 2005; Susan, 1996; ADB, 2009).
Concerning cases 1 and 2, there have been allegations of corruption involving public
officials and water operators, which has strengthened public resistance (Ainuson, 2010).
JFM
Urban
11,2 subsector Small-town subsector Total
Risk categories and risk factors Case no. 1 2 3 4 5 6 frequency
A Political and regulatory risks

Political interference * * * 3
168 Termination of contract by
government * 1
Government’s commitment risk * * * * * 5
Change in government * * * 3
Regional political instability * 1
Corruption (government and private
* *
sector) 2
No baselines for performance
measurement * * * 3
Weak regulatory and monitoring
regime * * * * * 5
B Operational risks
High operational costs (energy) * * 2
Equipment defect and lack of
maintenance * * * 3
Obsolete technology * * 2
Reliability of service/water quality * * * * 4
Poor performance * * * * 4
Acceptability risk (aesthetics) * 1
Inability of private partner to honour
financial obligations (operator
default) * * 2
Poor asset condition * * * 3
Water theft * * * 3
C Market/revenue risks
Alternative cheaper water sources * 1
Low water consumption (fall in
demand) * 1
Delayed and non-payment * * * * * 5
Uncertain tariff reviews * * 2
Profitability of schemes * * 2
D Financial risks
Financial availability * * * * * * 6
Unfavourable global private
investment climate * 1
E Relationship risks
Strained relationships * * 2
Poor commitment from
private party * * 2
No risk allocation mechanism * * * * * * 6
Weak capacity of public and private
Table II. partners * * * 3
Classification of risks Inexperience in PPPs * * * * * * 6
encountered in F Project and private
past/ongoing water consortium selection
supply PPP projects in Suitability of operator * * 2
Ghana (continued)
Urban
Water supply
subsector Small-town subsector Total projects in
Risk categories and risk factors Case no. 1 2 3 4 5 6 frequency Ghana
Non-transparent and accountable
process * * * * 4
Private partners’ performance record * * 2
Unsuitable PPP model * * * 3
169
Competence of private consortium * * * * 4
G Social risks
Public opposition * * * * * 5
Delayed process * 1
No pro-poor measures * * * * 4
H Third party risks

Unreliable electricity supply * 1
Employee theft * 1
Total no. of risks in each case 12 24 28 15 21 11 111
Notes: 1 – urban water supply lease contracts; 2 – urban water supply management contract;
3 – Atebubu water supply management contract; 4 – Bekwai water supply management contract;
5 – Wassa Akropong water supply management contract; 6 – Tumu water supply management contract
Source: Authors Table II.
Reportedly, in 2000, the World Bank cancelled a US$100 million loan on the basis of
allegations of corruption against Azurix, a subsidiary of Enron. It was alleged that
Azurix paid US$5 million in bribes to government officials to win a contract to run the
public utility’s services in Accra (Stone & Webster, 2002). Furthermore, under the
five-year management of AVRL (case 2), a comprehensive water sector study
undertaken by the Ghana Integrity Initiative (GII, 2011) revealed corruption practices
including a single construction firm buying and pricing all bidding documents,
procurement kickbacks, awarding several contracts to a private firm under different
names, over-invoicing, tempering of water meters, side payments to meter readers, and
under-reporting of daily sales by water vendors of GWCL. There are good examples in
the sector and the authors aim to explore this risk further in the future.
Budgetary constraints on the other hand are responsible for the inability of central
and local governments to honour (government’s commitment risk) their contractual
obligations regarding investment finance for network extensions and major
rehabilitations. This is a popular risk that occurred in five out of the six cases.
Moreover, asymmetry of capacity (to regulate) is a major risk, as observed in four
cases. WSDBs of municipalities (at local government levels), GWCL and PURC with
little regulatory experience are in charge of regulatory functions in small-town and
urban subsectors, respectively. Unfortunately, analysts maintain that the small-town
and rural water subsector has no autonomous regulator as WSDBs lack legal backing to
impose sanctions (GII, 2011; Eguavoen and Youkhana, 2008) and also depend on
a 10 percent of revenue collected by the private operators, rendering them porous
to the interests of operators (Lobina, 2005). In the urban subsector, poor institutional
development and capacity is responsible for the failure of water regulation
(Nickson, 1996). The PURC as a multi-sector regulator (water and electricity)
regulates urban water tariffs and has been accused of lacking regulatory capacity and
JFM Risk factors Risk consequences/impact
11,2
Political and regulatory risks
Political interference Undermined service delivery as tariffs were held
down
Termination of contract by government The local government authority took over service
provision
170 Government’s commitment risk Public sector unwillingness to finance expansion/
rehabilitation programs
Change in government Undermined effective regulation of service providers
Regional political instability Limited private sector investment in the urban water
sector
Corruption (government and private Sustained public resistance to the PPP process
sector)
Affects the water sector integrity
No baselines for performance Hampered effective assessment of private sector
measurement performance
Weak regulatory and monitoring regime Failure to enforce the “rules” of the game
Operational risks
High operational costs (energy) Limited profitability
Equipment defect and lack of Raised O & M costs
maintenance
Obsolete technology Undermined service levels/failure to serve the
growing populations
Reliability of service/water quality Weakened consumer willingness to pay
Poor performance Resulted in public dissatisfaction and financial
operating imbalances
Acceptability risk (aesthetics) Resulted in reduced revenues
Inability of private partner to honour Generated strained relationship between local
financial obligations (operator default) governments and private operators
Poor asset condition Posed operational challenges and increased
operational costs
Water theft Commercial losses to private operators
Market/revenue risks
Alternative cheaper water sources Created low demand for piped water
Low water consumption (fall in demand) Sufficient demand becomes critical for project
profitability
Delayed and non-payment Constraints financial sustainability of water supply
services
Uncertain tariff reviews Undermined private sector confidence
Profitability of schemes Disincentive to both local governments and domestic
private sector
Financial risks
Financial availability Investment needs remain unmet
Unfavourable global private investment Difficulty in getting good bidders
climate
Relationship risks
Strained relationships Hampered successful implementation
of projects
Poor commitment from Failure to achieve contractual targets
Table III. private party
Consequences of the No risk allocation mechanism Poor management of ensuing risks
identified risk factors (continued)
Risk factors Risk consequences/impact
Water supply
projects in
Weak capacity of public and private Weak contracts planning, management and
partners enforcement
Ghana
Inexperience in PPPs Resulted in implementation difficulties
Project and private consortium selection
Non-transparent and accountable Public and civil society opposed the PPP process 171
process
Private partners’ performance record Operator’s experience in similar assignment is
critical for success
Unsuitable PPP model Unable to attract private sector capital
Competence and suitability of private Insufficient performance regarding service targets
consortium
Social risks
Public opposition Delayed, or stalled the implementation of projects
Delayed process Disincentive to the private sector
No pro-poor measures Disconnection of defaulted customers
High average tariffs for the poor
Third party risks
Unreliable electricity supply High diesel prices and interruptions in service s
following unexpected power breaks and persistent
power rationing
Employee theft Represented financial repercussions for the operator
Source: Authors Table III.
management autonomy as it commands inadequate human and financial resources

(Fuest and Haffner, 2007). In case 2, for example, GWCL exhibited weak capacity to
monitor and review the performance of AVRL to ensure contractual performance. “[. . .]
almost three years into the management contract GWCL has not been able to establish a
baseline for AVRL on which to measure performance” (Ainuson, 2010). The same
situation is observed in the small-town subsector. It is common knowledge that GWCL
and WSDBs have not been conducting any performance analysis over the years and
have no reliable data. Capacities required by the public sector for managing water
supply contracts must be targeted by future research, if the sector is to benefit from
water supply PPPs.
5.2 Operational risks

Operational or performance risk comprises a multiplicity of risks related to the
commercial provision of water supply services to consumers (Lobina, 2005), and failure
to hit agreed performance targets is the major risk (Haarmeyer and Mody, 1998). All
except case 1 (not implemented) were unable to meet the agreed service targets. This
section therefore identifies the risk factors behind the insufficient performance of the
operators. High operational (energy) costs were recorded by the private operators in
cases 2 and 3. The water system in case 3 ran on two 60KV diesel generator sets at a
high cost, further compounded by frequent breakdowns[5].
Similarly, the urban operator failed to control electricity usage in the production and
distribution of potable water. Reportedly, there was an increase of 32.9 percent in
electricity consumption (based on 63 percent plants) (ISODEC, 2011). Between 2003 and
2009 water production cost/m3 increased from GH¢0.096 to GH¢0.39, while cost
JFM of chemicals per m3 doubled from GH¢0.02 to GH¢0.04 (MWRWH, 2009). Other factors
11,2 accountable for the failure to meet service targets in the respective cases are poor asset
condition, obsolete technology, equipment defects and poor maintenance.
Consequently, the operators in cases 3 and 5 were unable to honour their financial
obligations to the local governments.
Service reliability is another risk which manifested in four of the cases. Intermittent
172 service (with associated water quality problems) has become an operating pattern in service
areas due to the above-mentioned operational challenges. For instance, in case 2 AVRL was
unable to meet the water quality targets of the contract (ISODEC, 2011), while the operator
in case 5 supplied water for one hour per day (Tuffour, 2010). Dissatisfaction among
consumers is a predictable outcome which translated into non-payment of bills.
Furthermore, acceptability risk was encountered in case 3 where a change in colour
and taste (aesthetics) of the highly chlorinated water did not go down well with
the consuming public and was reflected in reduced revenue (Eguavoen and Youkhana,
2008). This risk has been reported in other PPP contracts around the world: in
the Tucuman (Argentina) 30-year water supply concession, “when water became
“inexplicably” brown, more than eight out of ten consumers stopped paying their bills
and the concession was terminated in 1998” (Lobina, 2005). Unsurprisingly, case 3 was
not renewed after the project term.
Poor performance risk resulted from the inability of operators to reduce NRW which
was key in all the cases. NRW was 49 percent in 2006 (Adam, 2011) when management
of the urban utility was transferred into private hands; however, it increased to
51 percent at the end of the contract in May 2011 (ISODEC, 2011) despite a contractual
target to reduce it by 5 percent annually. As of 2009, NRW levels for cases 3, 4 and 6
were 21, 23 and 50 percent, respectively, (van-Ess, 2009; Akabang, 2010). Similar
observations can be made around the world. Despite Maynilad’s (a subsidiary of Suez)
pledge to ambitiously reduce NRW by 15.4 percent within two years (from 57.4 percent
in 1997 to 42 percent in 1999), it rather rose from 63.3 to 67 percent (Lobina, 2005).
Finally, water theft (illegal consumption), a component of NRW, is another risk
encountered in three cases which translated into low revenues. Considering the nature
of operating risks in the water sector, they could be avoided to a large extent through
modest investment and performance targets (Lobina, 2005).
5.3 Market/revenue risks

In the water supply sector, market risks assume the form of water consumption, payment
(ability and willingness to pay), alternative cheaper water sources, and uncertain tariff
reviews. In the small-town water sector, tariff reviews in relation to rises in energy, labour
and material costs are at the “mercy” of local governments[6]. The obvious reason is that,
like many countries such as China, water tariffs remain volatile and politically sensitive
(Choi et al., 2010). In the urban sector, tariff hikes always attract strong public and
institutional opposition on the grounds of poor performance of the utility. In less
developed countries the cost of introducing economic water prices has been funded by
donors and international development credit (IDA) (Brook and Locussol, 2001).
Payment risk in the form of delayed and non-payment is a serious risk in Ghana.
Factors explaining this include: poor economic status of most domestic consumers and
increased tariffs which reduces their ability to pay (Osumanu, 2008; Haarmeyer and
Mody, 1998); poor service levels received by consumers thereby killing the willingness
to pay (Harvey, 2007; Lobina, 2005); and poor payment attitudes of public institutions Water supply
(PPIAF, 2011; Tuffour, 2010). In case 5, government institutions consumed over projects in
30 percent of water produced but made unreliable and late payments which adversely
affected the financial sustainability, reinvestment, operations and maintenance of the Ghana
system (PPIAF, 2011). Contractual and legal empowerment of private operators to
disconnect defaulting customers including public institutions is a countermeasure
adopted in some of the contracts (Eguavoen and Youkhana, 2008). 173
Alternative cheaper water sources, particularly in rainy seasons, and low water
demand in small towns are other relevant risks which translate into reduced revenue and
hence, low profitability of the schemes. For this reason, Laube and van de Giesen (2006)
argued that the small-town water subsector is less profitable, a rationale for separation
of large urban cities from rural and small towns in Ghana in order to attract large private
operators (Eguavoen and Youkhana, 2008). Per capita water demand for cases 3 and 4
were 6 l/c/d and 14 l/c/d, respectively, (Adinyira et al., 2008) against the international
basic requirement of 50 l/c/d. The above factors ought to be considered when estimating
and projecting demand. Moreover, faulty demand projection, particularly
over-estimation, is likely to affect the financial sustainability of water supply projects.
Siza Water, a subsidiary of SAUR, had to renegotiate its 30-year concession contract
with KwaDukuza Municipality in South Africa after two years and four months due to
faulty demand projection following actual demand falling behind that projected and the
operator’s annual revenue fell by R12 million (US$1,544,520) (Lobina, 2005).
5.4 Financial risks

The classification of risks under this category has seen different approaches (See Tiong,
1994; Zhang and Kumaraswamy, 2001 as cited in Xenidis and Angelides, 2005). For
example, Xenidis and Angelides (2005) presented financial risks as those that adversely
impact on projects’ cash flows and profitability. This definition is broad and covers
revenue/market risks. However, an attempt is made to separate financial and
revenue/market risks. In this paper, financing risks relate to the inability to secure
adequate funds from public or private sources, or both for water supply schemes.
Funding availability and unfavourable international private investment have been
encountered in past projects across the world, especially in the developing world.
Financing of PPPs is a condition for success (The World Bank, 2010; Xenidis and
Angelides, 2005) but remains a big challenge for the Government of Ghana. The
popularity of management contracts in Ghana indicates huge financial implications for
both central and local governments (Ameyaw and Chan, n.d.).
The case studies revealed the government’s failure to honour its financial
obligations in urban and small-town water contracts for investment in network
expansion and major rehabilitation. The public sector is unable to raise short- and
long-term funds which resulted in poor performance in all except case 1. For example,
during the development of case 1, only 20 percent (US$363.6 million) (Larbi, 2005) of
the required investment of US$1.818 billion was secured (ISODEC, 2001). Reasons to
explain this include reluctance of transnational companies to provide sizeable funds in
developing countries (Xenidis and Angelides, 2005; MIGA, 2009). Funding availability
is further worsened by the lack of creditworthiness of local governments and domestic
private operators which resulted in no or smaller loans and jeopardised the viability
and sustainability of the projects.
JFM With the current globalisation, national economies are more or less linked to each
11,2 other, so a recession of the international economic environment is a source of drawback
to successful partnerships (Xenidis and Angelides, 2005). An issue in case 1 was
“the general deterioration of the international investment climate, especially in the
infrastructure sector [. . .] [which] reduced the possibility of finding bidders or buyers
even for viable utility companies” (Fuest and Haffner, 2007, p. 179). This led to the
174 revision of the ambitious lease contracts (case 1) envisaged earlier to a short-term
five-year management contract (case 2).
5.5 Relationship risks

Relationship risks arise from the inherent differences between the working practices or
strategies of the private and public sectors in the conduct of PPPs (Ibrahim et al., 2006). Such
risks encountered in Ghana include strained relationships, poor commitment from both
parties, weak capacity of public and private sectors, etc. Damaging political interference
has created strained relationships between WSDBs and local government executives. The
Government of Ghana, like other African Governments, exhibits weak capacity to plan,
negotiate, implement and police PPP contracts (Farlam, 2005). PPP is a new procurement
approach being pursued in Ghana so the central and local governments and the domestic
private sector lack rich experience. An important issue is the absence of risk allocation
mechanisms in all the cases analysed in this paper. This area requires further research in
order achieve VfM from the conduct of partnerships. Finally, weak commitment from the
private partners was exhibited in some of the projects which subsequently failed to meet
their service targets. As argued by Farlam (2005) water partnerships in South Africa thrive
with the commitment from both partners to deal with the huge problems.
5.6 Project and private consortium risks

These risks are associated with the selection of projects and private operators.
Analysis of the cases revealed the following risk factors: suitability of operators,
unsuitable PPP models, competence and performance record of private consortium,
and opaque and unaccountable processes. These risks have been reported by other
local researchers such as Zaato (2011), Tuffour (2010) and ISODEC (2011). The strong
national and international groups’ opposition to water PPPs in Ghana stemmed from
these risks. For example, Zaato (2011) criticised the competence and experience of
AVRL[7] (case 2) in Sub-Saharan Africa, and it is not surprising that AVRL performed
way below the expectation of the public. Moreover, considering the huge challenges of
the water supply sector and government’s inability to provide funding, it is argued that
business models to tap private capital are of utmost importance, rather than less
ambitious models that will not attract private finance and at the same time transfer less
risk and responsibilities to private partners (Fall et al., 2009). However, the issue of the
private sector’s willingness to invest in the sector cannot be ignored.
5.7 Social risks

Three social risks are identified: public opposition, delayed PPP reform process and
absence of pro-poor policies:
Groups ideologically opposed to PPP for water supply have been more vocal in Ghana [. . .]
and have succeeded in delaying a process aimed at improving the quality of service and
efficiency of operations (Fall et al., 2009, p. 27).
This resistance was championed by consumers and citizen groups, environmentalists Water supply
and non-governmental organisations. As reported in the literature, public resistance – projects in
stemming from fear of tariff hikes, staff layoffs, disenchantment with privatisation –
has resulted in the cancellation of private investments and should not be regarded as Ghana
resistance to economic development (Hall et al., 2005). The above-listed factors and
others have been the reasons for the opposition in Ghana; 1,600 workers of GWCL were
retrenched during the implementation of case 2 (ISODEC, 2011). Early South African 175
projects suffered flaws and pitfalls such as the absence of pro-poor approaches
(Farlam, 2005). Our case studies reveal the same pitfall and where pro-poor provisions
were made, they were never implemented. This risk partly results from application of
the increasing block tariff regime because the poor, who often live in “compound”
(high-density) houses, share one connection and therefore pay more per m3 of water
under this tariff structure.
5.8 Third party risks

Employee theft and unreliable electricity supply are identified. Employee theft is a staff
problem and all businesses are vulnerable to it (Li, 2003). Employee theft has been
reported among the staff of the urban utility which assumes diverse forms, including
cheating, fraudulent deals with customers, and “pocketing” consumers’ bills (Fuest and
Haffner, 2007). Moreover, electricity supply has been erratic and affects the production
and distribution of potable water (PPIAF, 2011). This risk may be outside the control
of private partners as electricity production, transmission and distribution is the sphere
of independent public utilities. Ghana’s energy crisis has been described as chronic, with
a national access rate of 72 percent as of 2012 (Oteng-Adjei, 2012). In small-towns
without access to the national grid, water supply services solely rely on diesel generator
sets, which suffer from frequent breakdowns and diesel prices volatility which are
beyond the domestic private operators’ control. In the urban sector, GWCL primarily
depends on the national grid and therefore the frequent and unannounced power breaks
result in interruptions in water services delivery. Case 5 was eventually terminated
following acute water service interruptions resulting from the electricity crisis.
6. Conclusion and future work

The paper has advanced the understanding of risk environment of the water supply
sector through the discussion of its value chain and unique characteristics, review of
relevant literature and analysis of case studies. Ghana has attempted two urban and a
sizeable number of small-town water PPP arrangements and the government has
resolved to close the infrastructural gap through partnership contracts with the private
sector in coming years. PPP infrastructural arrangements, particularly water-related
projects, are full of risks. Therefore, successful partnership contracts require appropriate
risk identification and analysis for the purpose of developing proper risk management
strategies. The paper has contributed to this need through the analysis of six case studies
from Ghana. A total of 40 risk factors were identified, classified into eight categories based
on their sources and their content is presented in detail. At this stage, the authors assume
that a risk factor with a frequency between 3 and 6 is common and worth attention
(Table II). Such risks include weak regulatory and monitoring regime; financing; absence
of risk allocation mechanisms; inexperience in PPPs; public opposition; delayed and
non-payment of bills, etc. Moreover, case 3 has the highest count of risks (28), while case 6
JFM has the least count of 11. This indicates that each project is subject to a varying number of
11,2 risks, depending on the project’s circumstances. Greenfield projects – which involve the
development of new water infrastructure of which ownership lies with the project
company during the life of the contract such as BOT – will include design, completion,
construction cost overruns, and transfer risks. The paper has provided practitioners,
municipal and central government authorities, and the domestic and (potential)
176 international private sector audience involved in water supply partnership contracts a
comprehensive list of risks associated with such projects in Ghana.
Being a review and analysis of real case studies, the paper has set the foundation for
empirical studies for water PPP practice in Ghana. An important area that merits
further empirical research is risk analysis, with a focus on risk allocation between the
public and private partners and mechanisms for risk mitigation and management.
Such a study should propose a risk allocation model for PPP water supply projects
based on the risks identified in this study. Research has established that risk allocation
is an important step toward achieving project success, because project performance is
dependent on whether the applied risk allocation strategy can result in effective risk
management and mitigation (Jin, 2011).
Notes
1. Project details at www.MIGA.org. The project is in its early stages and therefore not suitable
for analysis in this study.
2. This figure is more than 25 percent of the total electricity usage for the entire New Mexico
state. The amount of energy does not include energy used to deliver that water to residential
customers in Southern California.
3. See Lobina (2005, pp. 61-62) for renegotiation cases.
4. WSDB is responsible for regulating the operator at the local government level (in small-town
subsector). It recommends water tariffs and application procedures, connection and
reconnection fees subject to the approval of its local governments (Aryeetey and Ahene,
2005).
5. In 2007, one generator broke down and it took about three months to fix it due to the
financial constraints of the operator (Tuffour, 2010). Escalating prices of diesel on one hand
have affected the financial sustainability of the system (Eguavoen and Youkhana, 2008).
6. Tariff proposals are suggested by private operators and sent to local governments for
approval. Also, tariff adjust formulae stated in contracts are not adhered to Tuffour (2010).
7. The two companies that formed the joint-venture are new comers to managing water supply
services outside their home countries and have been attracted by the guaranteed source of
the World Bank external financing of management fees (Fall et al., 2009).
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About the authors

Ernest Effah Ameyaw is a PhD student at the Department of Building and Real Estate,
The Hong Kong Polytechnic University. Ernest Effah Ameyaw is the corresponding author
and can be contacted at: myernest2010@yahoo.com
Albert P.C. Chan is Professor and Associate Dean of Faculty of Construction and
Environment, The Hong Kong Polytechnic University.
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Identifying public-private partnership (PPP) risks in managing water supply projects in

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instrument in driving service coverage in small-towns and rural communities. The

3. Understanding the water supply sector risk environment

3.2 Characteristics of the water supply sector

Furthermore, keeping tariffs below cost recovery and compounded by inadequate

Additionally, the sector is institutionally fragmented, manifested in a range of

4. Overview of risks in water supply PPP projects

questionnaire survey. A study to establish the risks allocation preferences of PFI/PPP

(1) political risk;

5.1 Political and regulatory risks

A Political and regulatory risks

H Third party risks

management autonomy as it commands inadequate human and financial resources

5.2 Operational risks

5.3 Market/revenue risks

5.4 Financial risks

5.5 Relationship risks

5.6 Project and private consortium risks

5.7 Social risks

under this tariff structure.

5.8 Third party risks

6. Conclusion and future work

org.gh (accessed 16 November 2011).

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