Utility Restructuring, Corporatization, Decentralization, and Performance Contracts
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A government considering ways of improving performance in its utilities may seek to achieve this by involving the private sector through one the forms of PPP Project discussed in Agreements.
Involving the private sector may, however, not be possible, practical or desirable, as is discussed in Government Objectives.
In such cases the government will need to consider whether it can improve performance through sector reform or restructuring. This may be as a first step towards involving the private sector, once assets have been ring-fenced and performance standards established, or it may be a solution in itself.
Below are descriptions of different models of sector reform and useful links
The features that often define a well-run utility, whether fully public or one with some private sector involvement, include: When a public utility is not performing well, it is difficult to make recommendations for reform unless and until it has clearly defined incentive and management reporting structures and a separate budget. A utility may be part of a larger government ministry or local government structure, with pooled funding and accounting. In some cases, workforces may even be combined with other municipal services or utilities. In order to establish how a utility is performing, it is necessary to separate the assets, liabilities, workforce, costs and revenues attributed to that service. Described below are the more common forms of utility reforms that all involve some degree of identification of costs and revenues. It is possible to have utility reforms that fall short of restructuring, and contain features of utility restructuring. However, if there is no separation and clarity of reporting and management lines from other utilities, parts of a ministry or municipality, then any reforms are likely to have little or short-lived impact. For more on the different forms of Utility Reform, go to World Bank Presentation on Reform of Public Utilities. The aim of utility reform is to create transparency in all the areas listed above and to allow accountability to stakeholders. The most modest method of reform would be to improve the management processes by: While these reforms may make modest improvements, it is unlikely that they are going to be dramatic or enduring as the management will not have real accountability and there will be little transparency if there is no separate accounting and reporting structure. Further reading: Where there is a desire to create greater transparency, while keeping the utility within the larger department or municipality, a solution is to restructure the Utility into its own separate reporting unit. This involves: This is often used as a first step towards greater autonomy or introduction of private sector. Separating the cost, reporting and accounting base of the utility allows the utility to build up a transparent operating history, with a more accurate cost base. However, the disadvantages with this system include: Further reading: Some Options for improving the Governance of State Owned Electricity Utilities Characteristics of Well Performing Water Utilities A more enduring model of reform is to transfer assets and liabilities, staff and the ongoing business of the utility into a corporation. This is known as "Corporatization". The entity would have a separate shareholding, board of directors and accounting and reporting lines. It may also be helpful as a first step towards private sector involvement. It is a process similar to this that was followed prior to Privatization in a number of jurisdictions. Corporatization has the following key features: Below is a checklist of issues to consider when contemplating corporatization: Corporatization has been adopted in a number of countries. Lessons learnt from corporatization in different sectors around the world show that it must be carefully tailored to the situation in order to be effective in meeting the government's goals: [1] [1]Innovations in Health Service Delivery : The Corporatization of Public Hospitals / Alexander S. Preker, April Harding, editors. Aggregation is defined as the grouping of several municipalities into a single administrative structure for the provision of a particular service. The main driver for aggregation is usually the potential to realize economies of scale by providing services to a larger customer base and therefore to render services more efficiently and at a lower cost. Another driver is to attract funding for projects for which one of the entities on its own would be unlikely to be able to raise funds. Aggregation has been used most commonly in relation to raise finance for water and wastewater services, where it often makes sense to pool resources and assets, such as reservoirs. In countries with developed local bond markets exist, local authorities and utilities have combined together to raise finance for building jointly-owned infrastructure. Aggregated structures can vary greatly, but are usually based on one of the following: There is potential, however, in aggregation for conflict between the parties if rights and obligations of each entity are not clearly established. It must also be emphasized that investments in infrastructure are long-term and that any relationship that is brokered for aggregation purposes will need to be enduring and flexible. These will be issues of concern for any funding institution as the success of the project will depend largely on the entities working towards common goals. For more discussion on aggregation and to explore 14 case studies spanning various geographies, go to Whatever model of reform that is chosen for reforming public utilities, it has been found that these reforms can be made more effective if there is a performance contract in place between the utility and the government or regulator with incentives to meet and outperform that plan. This performance plan may be included in an informal Performance Contract, Contract Plan or a more formal, legally binding intergovernmental loan or grant agreement. Find more Find sample raw or treated water bulk supply agreements between neighboring utilities or counties, as well as further reading materials on the topic here.Features of a Well-Run Utility
Utility Reform
Utility Restructuring into Separate Reporting Unit
Corporatization
Corporatization — Key Features
Corporatization — Checklist of Issues
Corporatization — Lessons Learnt
Aggregation
Contract Plans & Performance Contracts
Bulk Supply Contracts between Public Utility and Public Water Distributor or Wastewater Service Provider
Further Reading
Related Content
PPP Arrangements/Types of PPP Agreements
Page Specific Disclaimer*Note: Although the key features of each category are summarized, there is overlap between the categories and the name given to a particular agreement may not reflect this classic categorization. Care should also be taken to identify whether a specific classification is enshrined in the laws of the host country, as in the case of many civil law jurisdictions where there are strict definitions of "concessions" and "affermages". The sample agreements included in this section are not the full range of agreements associated with infrastructure projects. They agreements are NOT intended to be used as "models". Legal advice should be sought in the preparation and drafting of an agreement to ensure that it is appropriate and workable in the circumstances of a particular project, sector and country. Find Terms and Conditions of this website here.
Utility Restructuring, Corporatization, Decentralization, and Performance Contracts
Type of ResourceCivil Works and Service Contracts
Type of ResourceManagement/Operation and Maintenance Contracts
Type of ResourceLeases and Affermage Contracts
Type of ResourceConcessions Build-Operate-Transfer (BOT) and Design-Build-Operate (DBO) Projects
Type of ResourceJoint Ventures / Government Shareholding in Project Company
Type of ResourceFull Divestiture / Privatization
Type of ResourceContract Plans / Performance Contracts
Type of ResourceStandardized Agreements, Bidding Documents and Guidance Manuals
Type of Resource
Additional Resources
Energy and Power PPPs
Type of ResourceSub-national and Municipal PPPs
Type of ResourceTelecommunications / Information & Communication Technology PPPs
Public-Private Partnerships for Transport
Type of ResourceWater & Sanitation PPPs
PPP Reference Guide