Sector:

Water and Sanitation

Name of Agreement:

Performance Based Management Contract for Water Supply and Wastewater Services

Type of Agreement:

Management contract

Region (if known):

South America  

Year of Agreement/ Draft:

2002

Annotation by:

Victoria Delmon, LEGPS, World Bank LEG VPU

Purpose and Context:

The host government is seeking (i) to improve and expand the existing system for drinking water to achieve 24 hour supply, improve drinking water quality, expand customer base, ensure effective treatment and disposal of sewage, improve water supplies to poor and hinterland communities and achieve financial self-sufficiency.

Circumstances where this contract may be appropriate:

This form of contract is useful as an initial management contract, as part of a process for introducing private sector involvement, where a water system’s performance is uncertain and the government is willing to maintain the risk of cost of operation of the assets and. It has some clear incentives for improvement of standards and efficiency.

Main  Features:

• The contract is for 5 years.

• This is a true performance-based management contract – with little operational risk being transferred to the Operator but with performance incentives built into the contract.

• The Operator is to manage and maintain the water and sewage network for the country. The Operator is to provide the project manager who is to act as managing director of the Employer and be a member of the board of directors of the Employer the services are to be provided to the employer (clause 3.1.2) and the Operator will not have a direct relationship with the customers. [this is unusual arrangement as the project manager may find itself with conflicts of interest]

• The Operator is to provide personnel for management and also work with the Employer’s own staff [exactly how this is achieved is unclear]. The contract is however much more than a technical assistance arrangement for improving systems as the Operator has extensive duties to manage and maintain the systems and is subject to detailed performance obligations (set out in Schedule H), which is supported with incentive payments.

• The Operator submits each year a plan setting out external resources that will be required for the following year.

• There is no reference to exclusivity of the Operator – however this is implied as the Operator provides the managing director of the Employer.

• The operator is paid a base fee (adjusted in line with official index for salaries) plus the Incentive Compensation (cl 6). The fixed costs are to cover personnel etc – so the Operator does not bear the risk of the cost of operations such as power

• Liability of the Operator is unclear as the Operator has a performance obligation of “best endeavours” to provide the services. There is also a limitation of liability provision excluding liability for things which were not in the operator’s control – this provision is rather unusual and unclear.

• The operator does not take on the risk of the cost of operation and maintenance or of financing improvements. The risk for the operator is to be able to achieve and maintain the Service Standards.

Possible additional provisions that it might be appropriate to include:

A stated objective of the contract is to extend services to low income ands rural areas – there is no detail of how this is to be achieved, whether through traditional service delivery or through standpipes etc, although part of the performance standards is increased service delivery to the hinterlands. It might be useful to include a more detailed plan of service delivery to poor areas, service standards to be applied, billing arrangements in those areas etc.

It is unclear how the operator will assert its authority on the utility employees and how discipline will be dealt with. This is a critical area as the operator will be dependent partly on performance of the staff to achieve the performance standards. The clearest solution is to transfer employees to the operator, however there are often legal/ union/ political restrictions on this and it is rare, in management contracts at least, that this will be practical. Secondment of staff to the operator is often the most practical approach to short-term management contracts and may sometimes be the only method available in law. However, difficulties may still arise in ensuring that staff feel that they report to the operator, rather than their employer. This may be mitigated by the operator deciding salary levels and requiring the employer to act in disciplinary matters. However, it is not clear how the parties would resolve a dispute in the event that the operator recommended a member of staff for discipline and the authority refused to take action.

Clause 8 introduces concepts of the parties acting in fairness and good faith. The benefit of such a provision is questionable because – if the contract is located in a civil law system then there is likely to be a similar concept enshrined in law anyway and therefore reference here to it will not add anything (and may cause confusion as to whether the parties were trying to include an obligation different from that in law); in common law, there is no general principle allowing a contract to be avoided by reason of a party not acting in good faith (unless they are fraudulent or have made a misrepresentation prior to contract signature) and so the courts might find it hard to interpret the provision.

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

N/A

Provisions of wider general use:

The draft agreement contains provisions relating to exemption from tax (cl.1.10) and has a well drafted dispute resolution provision (cl 9).

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

N/A

Tracking Number:

water management contract 2 pdf