Sector:

Water and Sanitation

Name of Agreement:

Performance Based Management Contract for Water Supply and Wastewater Services

Type of Agreement:

Performance based management contract

Region (if known):

Middle East

Year of Agreement/ Draft:

1996 

Documents included:

Synopsis, general conditions, appendix 1 (special conditions), appendix 8 {services appendix), appendix 8 (incentive compensation)

Prepared by:

Annotation by:

World Bank Staff with input from external law firm.

Victoria Delmon, LEGPS, World Bank LEG VPU

Purpose and Context:

The scope of this contract is quite extensive and the services provided by the contractor make this more of a performance based operations contract than a management contract.

The contract was implemented in circumstances where it was recognized that involving the private sector would be the only way to rapidly improve a badly performing system, but where divestment or anything approximating it would not have been politically acceptable. The contract creating a balance between creating real performance incentives while acknowledging that private water operators would be hard to attract due to low water tariffs and instability in the region.

The contractor is taking over operating an existing system during a transitional period where several utilities have been combined into one. The contractor is taking risk on the asset condition and performance levels. The contractor has had access to a data room in advance of the contract signature and the authority is undertaking to provide an asset register – which is unusual as asset registers are often not forthcoming (or are inaccurate and out of date) but part of the contractor’s scope of services is to review the various registers. A contractor may resist taking such risk where data is not accurate – in such circumstances it may be necessary to allow for differences between the data and practice through a fee and performance standard adjustment provision, or by creating a benchmarking period at the commencement of the contract. Both of these solutions have the drawback that transparency in procurement of the contract could be affected.

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 and the condition of assets is reasonably certain and the government is willing to maintain the risk of cost of operation of the assets and. It has good incentives for improvement of standards and efficiency.

The Services schedule is drafted to meet the circumstances, ie a transition period where utilities have been merged. This will need to be crafted to meet the context of the contract.

Main  Features:

• The contract is for 3 years, which is a relatively short time period given the extent of the Operator’s obligations.

• This is a performance-based operations contract – more of the operational risk is being transferred than would be usual for a management contract: The Operator accepts the risk of inaccuracies in Employer data, collects revenues on behalf of the Employer, is to manage the Utility Staff and has performance-based performance incentives and liquidate damages built into the contract. However, the Operator does not bear the risk of the cost of operations as it is paid a fixed fee for its own personnel and other operating costs are covered by the Employer.

• The Operator is to implement the capital investment fund, and carries liability for defects in workmanship (6.1.1). It is unusual in a management contract for there to be such an extensive obligation on the Operator to implement a capital investment program.

• The location of the contract is volatile and so there are specific provisions in the Force Majeure clause (9.7) that deal with war risks. This may also explain why the Operator is given an extension of the contract term as a consequence of force majeure, together with receiving its fees (which is unusual – usually the operator will not receive both).

• The Operator is to provide personnel for management and also work direct the activities of the Employer’s own staff in accordance with the Staff Manual. The staff are not seconded or otherwise placed under the formal authority of the Operator and so it is not clear exactly how discipline issues will be dealt with and whether the Operator has any scope to provide incentives to the staff.

• The Operator is paid a fixed fee which is designed to cover staff costs, and incentive compensation for achieving improvements in performance.

• The Employer is creating a project management unit (PMU) to represent the Employer on a day to day basis and to assess operator performance and overcome potential tensions between the parties. The PMU is to be made up of suitably qualified professionals. In the case where this contract was used, a reputable international audit firm was appointed and the PMU served well to overcome the absence of a clear regulatory framework.

• The contractor does not take collection risk - it is paid a fee by the authority – but it faces liquidated damages for failure, and incentives, to meet performance standards.

• The liability of the Operator shall not exceed US$3 million (other than liability for patent infringement) and excludes indirect and consequential loss.

• The Employer has the right to suspend performance of any or all of the Operator’s obligations at any time (but it is not clear whether the Operator will still be paid during that period and to what extent it will still be responsible for performance (§11.1.1).

• The Employer may terminate for convenience (§11.2.1) – an operator may typically resist this provision unless it receives some compensation for loss of profits on the remainder of the contract term.

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:

Staffing - It is not clear how the Operator will exercise authority over the Employer’s staff – there is no secondment or transfer contemplated. Difficulties may arise in ensuring that staff feel that they report to the Operator, rather than their Employer. This is a key problem given that this is a performance based contract as the Operator will be relying on the staff to do their job efficiently. This problem can be mitigated by allowing the Operator to decide salary levels (although presumably they will need to follow civil service pay scales) and to recommend a member of staff for discipline and an obligation on the Employer to take action. Secondment or transfer of staff is a more clear cut approach to giving the Operator authority – but this can give rise to difficulties under the law, with unions and raise political tensions and so is often unpalatable.

There are no conditions precedent to commencement of the contract. This may give rise to difficulties if the Operator requires certain licences under law before it can start performance.

The authority may consider giving it the power under the confidentiality clause to publish the contract/or some of the provisions thereof (whether on a government website, World Bank website or otherwise) in the interests of transparency.

If the existing data in the context is not accurate or extensive, it may be appropriate to include a benchmarking period at the beginning of the contract during which the operator would have reduced responsibility. For a more detailed discussion of this, and sample wording, go to the World Bank Infrastructure and Law website and click on Sample Clauses, Benchmarking Period.

Provisions of wider general use:

The general conditions contain useful provisions relating to “boilerplate” (clause 1.3), conflict of interest (cl 3.3), set out clear limitation of liability (with exclusion for consequential loss) (cl 9.2), force majeure (cl 9.6), war risks (cl. 9.7) compensation on termination (cl 9.2), an adjudication and arbitration clause (cl 1.6), a clear Intellectual Property and confidentiality clause (cl 6), an entire agreement clause (cl 1.3.6), a suspension clause (cl. 11.1), priority of documents (cl. 1.2), handover on termination (cl.2.2.4)

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

This contract proved to be successful, with reduction of leakages, illegal connections and more accurate metering.

Tracking Number:

water management contract 3 pdf
water management contract 3 appendices pdf