Sector Name

Water and Sanitation

Management Contract for Urban Water

Parties/ Region

Water management contract between private operator and public utility

Africa

Date of draft

2005

Author:

N/A

Annotation by:

Victoria Delmon, LEGPS

Brief Description of Purpose and Context:

The host government is seeking (i) to expand and rehabilitate the existing system for delivering safe water to urban areas, (ii) to involve the private sector initially via a five year management contract, with the intention to eventually move to an affermage contract for the urban water sector.

Main Features

• The operator is (i) to operate and maintain the facilities in order to preserve service standards, (ii) to invoice customers and collect revenues and take meter readings, and (iii) to prepare a suggested capital investment report (cl 3.1.1 and sched 2).

• The draft agreement provides that the operator will have an exclusive right to provide the services in the designated service area ((cl 4). The operator is entitled under the terms of the contract to conclude contracts with customers in the name of the authority, to collect revenue and to disconnect customers for non-payment (cl 3.1.2).

• The agreement sets out service standards (sched 4), including quality of treated water and reduction in non-revenue water. It also sets out incentive compensation categories where actual performance is compared to a baseline case to be agreed between the parties once the operator has produced baseline figures in the first 6 months of the contract sched 5B). This reduces the risk to the operator of being required to outperform unrealistic base performance standards.

• The operator is paid a base fee (adjusted in line with official index for salaries) less any Penalty Reductions, plus the Incentive Compensation (cl 6). It is paid in the currency of the bid price. In the fifth year 25% of the base fee is to be paid in the local currency. The base fee covers management services – operational expenses (other than the cost of electricity, which is a capped amount to be paid by the operator) are paid out of the revenues collected and the Operator Working Capital Fund.

• Penalty Reductions (sched 5A) are deducted from the base fee for failure to meet the various service standards. Incentive Compensation is paid for improved collection rates. The parties are to agree incentive compensations for reductions in chemical usage, power consumption and public sector consumption (once the baseline for such usage has been established, within 6 months of commencement of the contract).

• 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.

• Specified staff of authority are to be seconded (cl 7.2) and not transferred to the operator but their salaries shall be determined by the operator in consultation with authority. The operator recommends promotion , suspension and termination of seconded staff to authority and authority may act upon any such recommendation, subject to applicable law (but is not required to).

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 limited incentives for improvement of standards and efficiency.

Possible additional provisions that it might be appropriate to include

A stated objective of the contract is to extend services to low income areas – there is no detail of how this is to be achieved, whether through traditional service delivery or through standpipes etc, and there is no incentive structure to encourage the operator to reach these poor areas in the life of the contract. It does provide that the Capital Investment Program determined and carried out by the Government through the authority will be designed to support extending the service to low income areas but this is the only reference to the poor.

Secondment rather than transfer of staff is often the most practical approach to short-term management contracts and may sometimes be the only method available in law. However, difficulties may 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 etc, 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.

There is no provision for a general change of law that might affect the operator, there is only provision relating to changes of law the results of which are principally borne by the operator.

The operator is accepting the risk of reaching water quality standards within the distribution network (sched 4B). Where a 24 hour supply is not available this could be difficult to achieve due to the potential for infiltration of contaminants into the distribution system when flow is not continuous. While  the operator may be able to claim relief from this standard under other provisions in the contract, it is likely that a private operator would be unwilling to bear this risk until it had been able to assess the actual performance of the system. This could be of particular concern as liability to third parties is unlimited and therefore any contamination going through the system could be deemed to be the responsibility of the operator. While this liability should be covered by insurance, there is still reputational risk to be concerned with and the potential for facing penalty reductions that reduces the operator’s fee considerably.

Provisions useful generally in contracts

The draft agreement contains provisions relating to procurement of subcontracts (cl 3.4.5) and conflict of interest (cl 3.9), currency of payments (cl 6.1.4), comprehensive right of access to and use of facilities (cl. 4.1 and 4.2), sets out useful carve-outs of operator responsibility (cl 5.1.3), deals with secondment of staff (cl 7.2), limitation of liability of operator (with exclusion for consequential loss) (cl 8) [although no limitation of liability as regards liability to third parties for injury or death etc], provides for handover of assets and staff on termination (cl 9.4), compensation on termination (cl 9.2), a dispute resolution clause (cl 11), a confidentiality clause (cl 12.3, an entire agreement clause (cl 12.3), priority of documents (cl. 1.2.1) and other useful general provisions.

Experience Since Coming Into Force (including any amendments)

N/A


 

Additional Comments:

None.

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