Water and Sanitation Concession Agreement - Example 1



Water and Sanitation


Name of Agreement:

Concession Agreement for Water and Sanitation Services


Type of Agreement:

Concession Agreement


Region (if known):



Civil law/ common law:

Suitable for both


Year of Agreement:



Agreement prepared by:

International law firm


Annotated document prepared by:

Victoria Delmon, LEGPS, World Bank



Purpose and Context:

Municipality delegating its duties as water and sanitation provider to private sector concessionaire.   Intent is to improve services and expand services as well as to have some investment from private sector concessionaire.   Document drafted with developing country issues in mind such as informal connections, difficulty with ability to pay


Main  Features:

  • Concession for water and sanitation services.


  • Contract term is 30 years


  • Concessionaire to pay annual concession fee to Council (8.5), together with rental fee for lease of the assets (11.2)


  • Concessionaire to supply water and sanitation services to consumers in the Concession Area (9.1), to carry out Works ( in accordance with a Five Year Plan (which is updated periodically) and to legalize and improve informal connections (29.4)


  • There are detailed provisions dealing with expansion of services (8.2), which have been drafted with flexibility as to the level of service to be provided to New Areas and Expanded Areas and the process for agreeing expansion of service.   This is helpful to make possible connections to areas such as informal settlements that may not otherwise benefit from expansion of connections.   It may also reduce the cost of connections if alternatives to single dwelling connections are provided.


  • The Concessionaire is to suffer sanctions for failure to meet performance standards etc (47)


  • There are provisions for Material Adverse Governmental Action (56) as well as Force Majeure events (73)


  • There are detailed provisions re termination and consequences thereof (57 – 63)


  • Concessionaire is responsible for collection of revenue ( although in the initial phase the Council will be billing in its name until the relevant legislation is passed to allow the Concessionaire to bill in its name (81 – 83)


  • Concessionaire to have made available to it all grant funding received from central government in respect of supply of water services (44)


  • Concessionaire has exclusive right to deliver the service (8.4) in the Concession Area except for in relation to New Areas and Expanded Areas where it may be appropriate to maintain an alternative supplier for a period or where a consumer is using an alternative water source on the Effective Date (30.6)


  • An agreed list of employees of the council are transferred to the Concessionaire(21) and there are restrictions on termination of personnel, provisions relating to employment benefits such as pension funds and health care, together with provisions relating to recognition of trade unions and return of employees to Council at the end of the Contract (63)


  • The Operator is the entity within the Concessionaire consortium with substantial operating experience and so there are provisions tying it in for a period into the Concessionaire joint venture (7) restricting assignment of the operating agreement to a third party operator   (50)


  • There are contracting procedures and requirement for use of local contractors to encourage economic empowerment (49)


  • Dispute resolution (74) – arbitration is to apply at the instance of either party to disputes.  UNCITRAL rules are to apply and there is to be one arbitrator.   It may be deemed appropriate to have a panel of three arbitrators rather than one, and UNCITRAL rules are one of a number of sets of arbitration rules that can be used.   The right to recourse to the local courts is preserved – this is unusual as arbitration in these sorts of contracts is often the only last recourse – here referral to arbitration is a choice for the parties.   For a more detailed explanation of dispute resolution clauses go to the Dispute Resolution Checklist.


  • Regulation of the Agreement is to be by the Council – this may lead to disputes as the Council is likely to have difficulty in applying the provisions of the Agreement in an objective way (53)


  • The Concessionaire has the right to cut off supply to customers that are bad payers.   There are extensive restrictions on the circumstances where it can apply such powers (37)


  • Tariff policy (38) – the Council has the power to set Tariffs.   The contract has been based on the assumption that tariffs will be at specified levels during the contract.   In the event that the tariffs are at variance to the Charges applicable in terms of the Contract then the parties are to meet to seek to reach agreement on how to address the situation based on specific criteria (38.9).   If agreement is not reached then the Council is to pay the present value at the time of meeting of the difference between the Concessionaire’s budgeted revenue and the forecasted revenue for that year and subsequent years until the variance is removed (38.10).
  • This methodology seeks to deal with a difficult area of tariff setting and the reluctance often by legislators to set tariffs at the levels assumed at the time of contract negotiation.   The fall back is that the Council is required to pay the present value for the shortfall to the Concessionaire.   An alternative would be to appoint an independent expert to determine a fair contribution from the Council to make up the shortfall, which is likely to amount to the same thing.


  • There are restrictions on escalation of charges (41) and maximum prices, exceptions and discounts (42), together with provisions re modification of charges (43)


  • 30.2 – in the event that the actual pattern for supply of water services or the level of consumer payments for water services differ from the projected levels set out in the annexure, then the Concessionaire is entitled to adjust its capital expenditure program and to amend any current and future program accordingly in consultation with the Council and the Lenders provided that it meets the contracted performance levels


  • Concessionaire takes the risk of the condition of the assets as they are provide “as is” with limited warranties (12)


  • There is a form of Operating Agreement in the annexes which is between the Concessionaire and the Operator and contains some useful provisions


  • There are forms of lease agreement for moveable and immoveable property granting leases to the Concessionaire for the period of the Contract Term over the water and sanitation assets which are in the Annexes.  Cost of financing the existing assets remains the responsibility of the Council (11) and in the rental fee it seeks to recover some of this.

Circumstances where this contract may be appropriate:

This is a well drafted contract which recognizes the realities of operating in Africa.   It could also be appropriate with modification for most other developing countries.   There are a number of checks and balances within the provisions which seek to avoid some of the problems faced by other concession arrangements in the past.


Possible additional provisions that it might be appropriate to include:

It might be appropriate to change the Arbitration provisions (see above).



Provisions that may not be advisable to replicate/ may need further thought:

Employment provisions and some of the provisions re basic supply of water and country specific and will need to be adapted/ deleted according to the circumstances.


The Concessionaire is taking on asset risk and this is appropriate where there is a good record of performance of the assets/ inventory.   In most circumstances this is not going to be the case and the public utility will need to accept some risk for non-performance/ include a Benchmarking Period at the beginning of the contract allowing performance levels to be established, asset register to be created etc.


Provisions of wider general use:

It is generally well drafted and contains a number of useful provisions that could be used in different contexts, in particular: -

Provisions dealing with interim billing arrangements (81 - 83)


Obligations re informal connections (29.4), New Areas and Expanded Areas (8.2)


Detailed provisions re transfer and transfer back of employees during Contract Term (21 and 63)


Provisions re tariff policy and consequences of tariffs not meeting assumed levels (38)


Experience Since Coming Into Force (including any amendments)/ if draft form, whether it has been applied:

Draft was not entered into as there was a change or regime and the process was cancelled

Tracking Number:

Water concession [001]



Last Updated : Tue,2016-02-16