Public-Private Partnership in Water and Wastewater Industry Transaction Costs, Antitrust, and Nonlinear Pricing

Document Type : Research Paper


Assist. Prof., Department of Economics, Institute for Management and Planning Studies (IMPS), Tehran


Adopting a long-term horizon in planning for investment in water and wastewater projects is especially important in Iran beacause of the nationwide water scarcity and the high water losses due to the worn out water supply networks and the traditional irrigation methods still in practice. One method commonly used to ensure enhanced and efficient investment in this sector is the Public-Private Partnership (P3) model which has proved to be successful in many cases but failing in others. The question that arises at this juncture then is what kind of contractual framework, if any, could enhance the likelihood of success in such partnership schemes. The traditional framework for public-private partnerships involves independent contractual agreements for each of the manufacturing, service delivery, and operation components, all of which would be reflected in the ultimate unit water price. In the modern framework, however, an integrated partnership is practiced which allows for the private sector partner to make more efficient use of nonlinear water pricing. The present study investigates the effects of different contractual frameworks from a pricing viewpoint. For this purpose, a theoretical model is initially developed of the water demand and cost structure for the construction and service delivery components. Social welfare will then be used as a measure to assess the endogenous results of both long-term and short-term contracts within the integrated and independent contractual frameworks which employ the nonlinear and the per-unit water pricing policies, respectively. Comparisons are then made using simulations based on numerical maximization methods. It is found that long-term contracts and deregulation of nonlinear pricing entail social benefits that ensure the success of the P3 framework under integrated contracts. Traditional methods of partnership or direct public investment may prove superior to the P3 framework from a social welfare perspective if the social costs of operation in water and wastewater projects exceed certain limits.


Main Subjects

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