Sector:

Water and Sanitation

Name of Agreement:

Management Contract for Urban Water

Type of Agreement:

Lease Agreement

Region (if known):

Middle East  

Year of Agreement/ Draft:

2004

Documents included:

Main documents included - general conditions, special conditions, services schedule, compensation index, performance standards index, form of contract)

Annotation by:

Purpose and Context:

Agreement was to introduce a private operator for a municipal water authority in a country in Africa. The purpose was to improve water quality, efficiency and collection.

Contract went out to tender but there were no bidders. Possible reasons for this are political instability and dangerous operating conditions, but also that operator was being asked to take on full risk of the asset condition and collection risk, without any transition period to test authority’s data. This was probably too ambitious in the context.

Circumstances where this contract may be appropriate:

Where the host Government is: -

· seeking to outsource water and sanitation operations over a relatively long period

· willing to transfer control of day to day operations.

· willing to retain responsibility for financing investment.

Where it is possible in law for operator to collect bills and enforce bill collection.

Where tariff levels and collection rates sufficient at least to cover operating costs, operator’s fee and lease fee. If not, will need to consider increases in tariffs.

Where sufficient resources are given to government entity monitoring arrangements to monitor effectively.

Main  Features:

Operator to operate whole water and wastewater network and bill customers

Term for 12 years (this is quite a typical period for a lease)

Operator receives a fee from revenues collected based on the amount of water and wastewater billed and the fraction of revenue collected divided by the total amount of fees billed.

Water authority is paid a fixed fee for lease + a variable amount which is the excess between total revenue collected and the operator’s fee

Cost of improvements are supposed to be borne by Water Authority – but not clear where this revenue comes from

Performance standards anticipate that different performance indicators will improve over the course of the agreement

Water Authority with right to suspend services and/ or terminate the agreement at will at any time

Periodic review period every 4 years to review costs and performance.

Operator takes risk of initial data, collection risk, water quality at outset etc.

Possible additional provisions that it might be appropriate to include:

Transitional period for verifying data/ performance standards etc - the Operator is assumes the risk of inaccuracies in the data provided at the beginning of the contract and has no recourse if the water quality/ billing figures/ state of the assets etc are not as they had been described in the data. Potential bidders will be unwilling to accept such risk, unless the data has been audited or where there are clear auditable records and assets registers. A possible solution is to include an initial verification or due diligence period during which the Operator can check the data (which could then be reviewed by the monitoring unit) and performance standards and compensation schedule can be adjusted to take into account certain discrepancies.

Existing employees – the contract is silent as to whether existing employees of the Water Authority are to be taken over by the Operator and, if so, on what basis

Specific performance criteria – an operator will operate in response to incentives and penalties – one of the cited motivations for the lease agreement was expansion of the network to reach underserved areas. However, there were few specific performance requirements focused on this.

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

GC 12.2.1 (termination at will) – if the Government wishes to include such a provision then it is more usual to have a reasonable notice period – also some form of compensation for loss of profit of Operator and compensation provision needs to ensure that Operator will be made whole – otherwise Operator is unlikely to accept such a provision

Periodic Review panel – there is no form of appeal contemplated against their findings – therefore almost like an arbitration panel. This gives certainty – but the Operator will only be willing to accept this if independence of the panel can be guaranteed.

Provisions of wider general use:

There are a number of useful provisions –

· periodic review process (GC 13)

· adjustment formula for indexation (compensation and payments index)

· Interpretation clause (GC 1.3)

· Settlement of disputes (GC 1.6)

· Intellectual property and confidentiality (GC 7.1)

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

N/A

Tracking Number:

Water lease [001]