Role of transfers in the provision of water: An application to public-private partnership and its impact on social welfare

• Main Author: Cho, Won Hee
• Format: text
• Language: English
• Published: Animo Repository 2019
• Subjects: Information asymmetry; Public-private sector cooperation; Human services; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/6447; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=13507&context=etd_masteral
• Institution: De La Salle University

With the increasing concerns on water stress amid rising water demands influenced by various socio-economic factors, it is vital to address limitations in access to water supply and sanitation. Since the 1990s, Public-Private Partnerships (PPPs) became a popular contractual agreement in providing water supply and sanitation services, especially in developing countries given its realities of poor water supply and budget constraints. However, despite the advantages of the PPP framework, critical challenges remain. One distinct challenge in executing a PPP project is the presence of information asymmetry. Withstanding the fact that the two entities may have varying motives, wherein the government’s objective is to maximize project benefits and the concessionaire’s objective is to maximize profits, the information gap widens. The existence of hidden action and hidden information hinders the project from realizing its optimal results. Consequently, to address information asymmetry, having a well-structured contract plays a key role in ensuring that provision of water services under PPP is welfare-improving. By the principal-agent framework, using transfer as an instrument to elicit truthful information from the concessionaire minimizes the information gap. By examining two transfer schemes, namely, fixed payment transfer and cost-sharing transfer, we characterize optimal levels of effort that would maximize social welfare under each scheme. Concessionaires prefer the cost-sharing transfer scheme as it allows them to exert less effort while receiving a higher level of transfer. Meanwhile, the general public prefers the fixed payment scheme as it has no welfare loss arising from cost-sharing of disutility factors.