Potential benefits of public-private partnerships to improve the efficiency of urban wastewater treatment

The study addresses how and to what extent public-private partnership (PPP) models for constructing and operating wastewater treatment infrastructures (WTIs) improve urban wastewater treatment efficiency (UWTE) in emerging economies with constrained public budgets. While governments employ penalties, subsidies, and regulations to curb wastewater discharges, unilateral governmental regulation struggles to enhance UWTE due to complex bureaucratic oversight of WTIs. The paper highlights a gap: prior work often focuses on enterprise-level performance under PPPs, but citywide impacts on UWTE remain underexplored. The authors pose four research questions: (1) Is UWTE significantly higher in cities implementing PPPs for WTIs than in those that do not? (2) Which PPP return, procurement, and operation mechanisms are optimal for wastewater treatment? (3) Do PPP demonstration projects improve UWTE? (4) What policy insights for cities in emerging economies can be derived? The study motivates the importance of improving UWTE for environmental quality, public health, and achievement of SDGs, especially under fiscal constraints and growing urban wastewater loads.

The paper situates its contribution within literature linking institutional arrangements to WTI capacity and performance, including river chief systems, diversified financing, preventive maintenance, and eco-industrial policies. Prior studies have assessed PPP impacts using case analyses, performance rating tools, lifecycle performance metrics, AHP, observational studies, and fsQCA. Evidence indicates that high institutionalisation and technological advantages can improve water utility efficiency, and some studies show higher efficiency of individual utilities under PPPs. Ownership and private participation may enhance economic efficiency but raise concerns over public value and regulatory oversight. However, a systematic city-level assessment of PPPs’ effect on UWTE has been lacking. The study also draws on PPP theory regarding risk-benefit sharing, procurement competition, and residual control rights, positing that feasibility gap subsidies, competitive procurement, and privatised operations could yield higher efficiency. It further references policy practices of demonstration projects in China and regional heterogeneity in marketisation and development levels affecting PPP outcomes.

Design: The study evaluates causal impacts of PPP adoption on UWTE across 283 Chinese prefecture-level cities (2014–2019) using a DEA-Tobit framework with instrumental variables for endogeneity checks and multiple robustness tests. UWTE measurement (DEA): UWTE is measured via Data Envelopment Analysis using the BCC (variable returns to scale) model. Inputs: (i) length of urban wastewater network, (ii) daily treatment capacity of wastewater treatment plants. Output: total amount of urban wastewater treated. Efficiency scores (0–1) are calculated for each city-year DMU. Econometric model (Tobit): Because UWTE is bounded [0,1], panel Tobit regressions with random effects are estimated: uwte_it = β0 + β1 PPP_it + γ'X_it + ε_it. PPP_it is measured three ways: (a) presence/absence of wastewater PPP, (b) number of wastewater PPP projects (PPPn), (c) investment amount in wastewater PPPs. Controls follow IPAT: population density, urbanisation rate, GDP per capita (ln), industrialisation rate, openness, and green innovations (ln green patents). Random effects are used per guidance for DEA-Tobit panel estimation. Endogeneity and instruments: Two-stage IV regressions address potential reverse causality. Instruments include: (i) presence/absence and (ii) number of solid waste treatment PPP projects in the same city (correlated environmental infrastructure decisions but not directly affecting UWTE), and (iii) mean number (or mean investment) of wastewater PPPs in neighbouring prefecture-level cities within the same province (policy diffusion among local officials). First-stage F-statistics indicate strong instruments; second-stage coefficients remain significant. Robustness: Alternative PPP intensity measures (investment amounts), alternative spatial instruments (province-level means including the city), and instrumenting PPP presence/number with waste PPP investment are tested. Results remain robust. Mechanism analyses: Separate Tobit regressions stratify PPP projects by: (i) return mechanism (feasibility gap subsidy, user payment, government payment), (ii) procurement mechanism (competitive vs single-source), (iii) operation mechanism (outsourcing, franchising, privatised), and (iv) demonstration status (demonstration vs non-demonstration). Heterogeneity analyses split samples by macro regions (east/central/west), marketisation (top/bottom 30%), and precipitation (top/bottom 30%). Data sources: PPP data from China Ministry of Finance PPP Center; WTI inputs/outputs from China Urban Construction Statistical Yearbook 2014–2019; socioeconomic controls from China City Statistical Yearbook 2015–2020; green patents from China National Intellectual Property Administration; dataset publicly available (figshare DOI).

- Descriptive: By end-2019, wastewater treatment projects comprised 43% of all PPPs in China; 253 of 283 cities (89%) adopted wastewater PPPs; 75 cities had demonstration PPPs. Average UWTE was higher in PPP-adopting cities (0.651) than non-PPP cities (0.619). - Benchmark Tobit: PPP presence positively associated with UWTE at 1% significance; with controls, PPP cities have UWTE higher by 0.046 units on average. Using PPP count, each additional wastewater PPP project increases UWTE by 0.011 units (p<0.01). - Controls: GDP per capita and green innovations are positively significant; industrialisation and openness are negatively significant, aligning with expectations. - Endogeneity checks (2SLS/IV): Instruments (waste PPP presence/number; neighbouring cities’ mean wastewater PPPs) pass weak instrument tests (e.g., first-stage F=63.58, 98.05, 22.69). Second-stage coefficients for PPP measures remain positive and significant at 1%, supporting a causal interpretation. - Robustness: Alternative PPP intensity via investment amounts and alternative instrumental specifications confirm positive, significant effects (e.g., IV second-stage coefficients: PPP presence 0.227; PPP number 0.038; wastePPP investment 0.256; all p<0.01). - Mechanisms: - Return mechanism: Feasibility gap subsidy yields the largest marginal effect (per additional PPP: +0.023 UWTE), exceeding government payment (+0.010) and user payment (+0.007). - Procurement: Competitive procurement significantly improves UWTE (+0.011 per project); single-source procurement is not significant. - Operation: Only privatised operation is significant (+0.011 per project); outsourcing and franchising are not significant. - Demonstration: Both categories positive, but non-demonstration projects have larger effect (+0.011) than demonstration (+0.008). - Heterogeneity: - Region: West (+0.024), Central (+0.021), East (+0.008); all significant (West/Central stronger effects). - Marketisation: Significant in high-marketisation regions (+0.009); not significant in low-marketisation regions. - Precipitation: Less precipitation regions show larger gains (+0.016) vs more precipitation (+0.009). Overall, sustained PPP engagement and specific institutional designs (feasibility gap subsidies, competitive procurement, privatised operation) deliver greater UWTE improvements.

Findings directly address the research questions by demonstrating that PPP adoption for WTIs causally increases city-level UWTE and that specific institutional designs amplify this effect. The results validate theoretical expectations about risk-sharing, competition, and residual control rights: feasibility gap subsidies optimally balance cost risk between government and private partners; competitive procurement induces innovation and cost-efficiency; and privatised operation aligns incentives via greater control, increasing efficiency. The stronger effects in less-developed, high-marketisation, and drier regions suggest that institutional capacity and environmental context mediate PPP effectiveness. The study corroborates prior evidence of PPP efficiency gains at enterprise and infrastructure levels and extends it to citywide wastewater efficiency. Policy-wise, PPPs can help fiscally constrained local governments improve UWTE while mitigating implicit debt risks, offering guidance for emerging economies balancing infrastructure needs and budget limits.

The paper provides causal evidence that PPPs in wastewater infrastructure construction and operation improve urban wastewater treatment efficiency across Chinese prefecture-level cities, with larger gains where PPP engagement is sustained. It identifies institutional designs that maximise efficiency improvements: feasibility gap subsidy return mechanisms, competitive procurement, and privatised operation, with non-demonstration projects showing strong incentives. The work contributes a DEA- and IV-enhanced Tobit framework for city-level efficiency analysis and offers actionable policy insights for emerging economies on structuring PPPs to enhance UWTE. Future research should examine micro-level mechanisms within enterprises, assess post-2019 regulatory impacts on PPP-UWTE links, and test generalisability with cross-country data.

- Temporal scope: Data end in 2019 due to regulatory tightening of PPPs in China thereafter; impacts under changed policy regimes remain uncertain. - Micro-level mechanism: Lack of enterprise-level survey data limits insight into how PPP-adopting firms diffuse efficiency improvements to non-PPP peers. - External validity: Evidence is from China; broader generalisation to other emerging economies requires additional cross-country, city-level datasets and causal analyses.