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Implementation Guidelines for Private-Sector Participation in Sustainable Urban Water Supply and Sanitation Services Contents 1 OBJECTIVE AND CONTEXT

Goal: Sustainable water supply and sanitation services Focus of content and target audience Policy Principles document Limitations

2 STRUCTURE OF THE IMPLEMENTATION GUIDELINES General structure and link to Policy Principles Guideline notes

3 WHERE COULD THESE IMPLEMENTATION GUIDELINES MAKE A DIFFERENCE? a) Setting up and implementing PSP b) Restructuring public services c) Continuous improvement of existing service operation arrangements

4 OVERVIEW OF GUIDELINE NOTES PHASE I PREPARATION PHASE II PLANNING, STRATEGY, PROJECT DESIGN PHASE III PROCUREMENT PHASE IV OPERATION & MONITORING PHASE V RENEGOTIATION, TERMINATION

5 ANNEXES

Overview of proposed groups Abbreviations

List of contributing experts (of draft V_06): Jim Lamb, Consultant, former Manager Severn Trent; Luis Uzin, Consultant, former head of Bolivia’s regulatory authority; Peter Gleick, Garry Wolf and Meena Panaliappan, Pacific Institute; Richard Franceys, University of Cranfield; Neigel Scott, Tearfund/Gamos.

Implementation guidelines for PSP in sustainable WSS Introduction and Overview


1 OBJECTIVE AND CONTEXT Goal: Sustainable water supply and sanitation services

Making safe water accessible to all is not only one of the UN´s Millennium Development Goals but a core responsibility of both national and local government. Governments are increasingly seeking the expertise and experience of the private sector in their search for sustainable – and affordable –ways to deliver water and sanitation services to their populations. While this approach promises several benefits, experience shows that involving the private sector in the provision of basic services beyond case-by-case subcontracting of specific tasks needs to be care-fully planned and monitored if the benefits of such a model are to be full realized and the numerous potential pitfalls avoided. This publication focuses on four key challenges that have proven to be critical for successful and sus-tainable water supply and sanitation service delivery and which shape the trust of customers and in-vestors in water and sanitation service providers. Although most of these points apply in equal meas-ure to public providers, we shall restrict ourselves in this publication to analyzing their relevance to private-sector participation. These challenges are:

• Achieving economic efficiency by reducing transaction costs caused by friction between stakeholders

• Effective delivery of services to customers • Equitability in responding to needs, especially those of the poor • Transparency in processes, structures, responsibilities and results

Focus of content and target audience

The Implementation Guidelines focus clearly on urban and semi-urban settings in which municipalities and local governments are faced with the task of setting up reliable services for the entire population. These Guidelines are designed primarily with concession contracts in mind as these are generally the most complex, however some of them may also be applied to less complicated contract forms. Pulling together best practice cases, information gathered from failed scenarios, and contributions from international experts from many relevant fields (including local government, regulatory, private sector, financial sector, donors, consumers, NGOs, researchers, etc), these guidelines are designed to assist all actors involved in supplying water and sanitation services by

• Paying special attention to success factors throughout the different phases of a PSP proc-ess

• Setting out options for action • Providing supporting materials

The target audience of these Implementation Guidelines is therefore: (a) legally and contractually re-sponsible actors (local governmental staff in charge of preparing and implementing PSP projects, pri-vate operators, regulators), and (b) other actors in the water supply and sanitation sector and affected stakeholders (civil society groups such as development organizations, consumer and environmental groups, donors, the financial sector and other relevant stakeholders).

Link to Policy Principles document

Underlying the Implementation Guidelines, which focus on sound PSP implementation on a practical level, are the so-called “Policy Principles”. These principles, aimed at high-level representatives and decision makers from governments and water authorities, provide a common meta-framework for PSP projects in water supply and sanitation services. Among other things, the Policy Principles elaborate out “Basic Values” (Human Rights, Good Govern-ance, Sustainable Development, Fair and Equitable Partnership, Sustainable Service for Safe and Affordable Water Supply and Sanitation), and define “Key Factors” for PSP processes. Since the Key Factors are the “backbone” of the Implementation Guidelines and the ToolContainer (a database con-taining additional material such as checklists, tools, further literature and best practice), they have been summarized in alphabetical order below:



Figure 1: Overview of the relationship between the Policy Principles, Implementation Guidelines and ToolContainer

Accountability Accountability means that each partner/stakeholder must fulfill its responsibility. More specifically, this means: (a) Being accountable vis-à-vis consumers for service delivery (b) Striving for long-term decision making (c) Respecting ecological requirements (d) Respecting existing laws, regulations and contracts (e) Defining and following mechanisms and procedures, as well as being present at hearings demanded by consumers

(f) Informing consumers in advance if problems arise

Customer orientation Gaining the long-term support and acceptance of consumers is vital for any organization wishing to provide services on a sus-tainable basis. Customers are only willing to pay if they perceive both service level and quality to be adequate. Any service should therefore be shaped around local demand. Customer orientation includes: (a) Investigating consumers’ needs and expectations (b) Offering a choice of options to enable consumers to make an informed decision about service levels and tariffs involved (c) Communicating performance (as well as achievements that are not directly visible to customers) proactively; setting up

easily accessible customer complaint centers (d) Adapting to changing customer requirements/preferences

Poverty responsiveness Poverty responsiveness is a cross-cutting issue and should therefore be considered in all other Key Factors too. In recognition of the importance of the issue, poverty responsiveness is mentioned as a separate key factor. Since poverty and the inability to access safe water go hand-in-hand, water projects should pay special attention to: (a) The needs of poor consumers (b) Direct or indirect effects of any project activity on the poor, and (c) Integrating project design into national poverty reduction strategies

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Regulatory ProcessFunction of and cooperation with regulatory body

Support Processes 1) Stakeholder cooperation 2) Communication 3) Capacity-building procedure

Main Process (1) Preparation; (2) Planning, Strategy; (3) Procurement; (4) Operation and Monitoring; (5) Termination

Application of Key Factors on the Dimensions of a PSP Process

Key Factors for PSP processes Accountability; Customer Orientation; Poverty Responsiveness; Power-Balanced Partnership; Proactive risk management; Resource Conservation; Result Orientation; Shared Incentives;

Players in PSP Roles, responsibilities, rights and incentives of the main actors

Framework Legal and political pre-conditions for successful PSP

Tools Checklists, tools, templates, models, further reading, etc.

Cases Best practice illustrating one or several of the Guidelines

i

Basic Values

Criteria for selection of Tools and Cases(among others congruence with Key Factors)



Power-balanced partnership PSP refers to a constellation in which a number of additional stakeholders (eg consumers, regulators, NGOs, unions, environ-mental groups, independent providers, donors) are involved in a project in addition to the contracting parties. The quality of cooperation between these participants is crucial for PSP success. Continued attention should be paid to “soft factors”. If such partnerships are to be stable, reliable and equitable all participants must be committed to: (a) Working within an agreed and defined framework in which roles and responsibilities are clearly allocated (b) Collaborating in an effective, respectful and fair manner (c) Resisting outside (political) pressure (d) Mediating potential conflicts Successful partnership also requires the participants to be balanced in terms of power, means, and capacity.

Proactive risk management Risks are an inherent part of any business activity and partners will be exposed to them during the entire process cycle. In addition to commercial risks, water service management is also exposed to a broad range of non-commercial risks (eg political, macroeconomic and environmental, etc). Risk mitigation makes the service more sustainable by reducing potential costs in the event of loss or damage. Proactive risk management should: (a) Assess a project’s risk exposure (b) Take all possible measures to minimize risk (c) Define how risks should be spread among the partners (d) Monitor shifting risk exposures in order to adjust risk allocation, where necessary, and (e) Define procedures for how to react if unanticipated risks come to light

Resource conservation Resource conservation is a central part of integrated water resources management and encompasses questions such as: (a) What should be done to improve both the quantity and quality of water resources? (b) How can decisions, activities, planned investments or other measures be designed in order to minimize their negative

impact on water quality and availability? (c) How do such considerations affect project priorities (ie sanitation, water treatment, fixing of leakages, etc) (d) How should conflicts between financial and ecological goals or between competing water uses be settled? The integrated

water resources management approach advocates applying the precautionary principle wherever direct ecological impact cannot be ascertained.

Results orientation Wherever possible, activities should be defined not by input or means but by output and targets, as this increases scope for appropriate, flexible, innovative, and less expensive implementation solutions. The following must be observed if results orienta-tion is to be an effective steering mechanism: (a) Unambiguous measurement criteria (b) Complaint channels and fines for non-compliance (c) Built-in flexibility to review and adapt goals regularly to changes in the framework conditions (d) Continuous improvement process during the lifecycle of a PSP

Shared incentives PSPs should not only deliver the best value for money but should ensure that they provide value added over and above that provided by previous water supply and sanitation service providers. PSP projects should offer both financial and non-financial incentives for participants: (a) Expectations should be transparent (b) Participants need to negotiate for and agree upon reasonable expectations (c) Mechanisms should be put in place to monitor these expectations In any project there will inevitably be winners and losers (eg informal water vendors). It is vital not only to address the benefits, but also to explicitly address the possible negative impact on stakeholders.

Socially responsible financing Sound financing in investment and operation (ie financing that is economically viable for the operator, socially acceptable for poor consumers and politically feasible in terms of protecting the public budget) is crucial for long-term operation, maintenance, replacement and possible extension. Firstly, when procuring investment, special attention must be paid to the loan architecture (securities, recourses, exposure to foreign-exchange risk) and ensuring that these investments are harmonized with project priorities linked to other Key Factors such as poverty responsiveness. Secondly, overall income from water services must allow cost recovery and generate sufficient cash flow to ensure sustainable, long-term operation. The sources of revenue are customers or subsidies (tariffs/fees or taxes). Pricing for services is a political



decision that must balance social and economic factors and be designed in a transparent formula. Equally, subsidies should be tailor-made and targeted at those most in need. Thirdly, return on investment must be kept transparent.

Transparency Transparency is achieved through access to high-quality information which should: (a) Be organized in a structured and systematic way (b) Take into account the limitations of poor and illiterate consumers (c) Be maintained throughout the whole project lifecycle (d) Provide rationale behind decisions (e) Cover all procedural, financial, organizational, operational and regulatory aspects (f) Create clear data protection rules to ensure that legitimate corporate secrets are not divulged

The Implementation Guidelines give a more detailed operational description of each Key Factor and describe related activities to be undertaken when designing a PSP project. The following figure gives a brief overview of the distribution of the various Key Factors across the various phases of the PSP process.

Main phases of PSP process

Key Factors Preparation Planning Procurement Opera-

tion/monitoring Termination

Accountability

Customer orienta-tion

Poverty respon-siveness

Power-balanced partnership

Proactive risk management

Resource conser-vation

Results orientation

Shared incentives

Socially responsi-ble financing

Transparency

crucial very important important Figure 2: Relative distribution of Key Factors throughout project lifecycle

Limitations The Implementation Guidelines focus on process-related aspects and “soft factors” of project devel-opment, as well as on transaction processes and contract management. They do not offer technical guidance, detailed contract guidance or contract templates. Likewise, the Guidelines do not cover more general aspects of water supply and sanitation policy.



2 STRUCTURE OF THE IMPLEMENTATION GUIDELINES General structure Firstly, the Implementation Guidelines are structured around the PSP project life cycle (preparation, planning, procurement, operation, monitoring, termination) and these areas dictate the chapter form. Secondly, the PSP process itself is divided into the following three parallel process lines:

• The Main Process, covering the core business of service delivery • The Regulatory Process, addressing the enforcement of the contract between the private

and the public partner and regulatory functions • Three support processes: (a) stakeholder cooperation, (b) communication among stake-

holders, (c) capacity building (for all stakeholders except specific professional capacity de-velopment)

Thirdly, one or more of the Key Factors (eg what should be done to achieve transparency during the Preparation Phase?) is/are systematically applied to each stage of the project life cycle, resulting in numerous single Guideline notes, the smallest unit of the Implementation Guidelines. Figure 3: Structure of Implementation Guidelines

Main process

Project design Risk analysis Finance architecture Investment, operation, tariffsModel PSP yes/no; PSP type

Termination

Procurement process design

Bidding, negotiation

Award of contract

Implementation, construction

Operation, maintenance

Monitoring (Definition, measurement Nonconformance)

Conflict resolution

Renegotiation

Arbitration

Support Processes Communication management

Capacity-building procedures

Regulation process

Function of and cooperation with regulatory body (eg supervisory authority)

Preparation Planning Strategy

Procurement Operation & monitoring

Stakeholder cooperation structure and mechanism

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Analysis social, technical, financial, environmental

Needs, objectives, obstacles

Follow the contractPrepare for contract



Guideline notes A “Guideline note” normally contains the following elements:

3 WHERE COULD THESE IMPLEMENTATION GUIDELINES MAKE A DIFFERENCE? There are three situations in which the Implementation Guidelines provide assistance:

a) Setting up and implementing PSP Urban and semi-urban municipalities intending to restructure water service delivery and considering involving the private sector. The Implementation Guidelines assist staff in preparing and executing process design and process management throughout the PSP process lifecycle. They may be used as checklists for due diligence in water service governance.

b) Restructuring public services Most of the underlying success factors are the same in public and private service delivery. Transpar-ency, accountability, customer orientation and poverty responsiveness – to name but a few – are cen-tral to sustainable water supply and sanitation services. Thus, although the Implementation Guidelines are mainly intended for private-sector participation purposes, they are equally useful for organizations seeking to move away from traditional, public service management structures towards greater auton-omy. This may, for instance, apply to (a) a municipal department: a separate body with separate ac-counts that enjoys a certain degree of autonomy in routine management, or (b) a municipal utility, established under public law, which is a legally autonomous statutory body and independent corporate supervisory board, but whose assets remain the property local government, or to (c) a municipal com-pany: a government-owned public limited company created under company law, the shares of which are owned by national, regional or local government authorities.

c) Continuous improvement of existing service operation arrangements Service delivery can always be upgraded and refined on an ongoing basis. Continuous improvement of existing service delivery processes is an effective way to optimize services to customers in cases where a complete restructuring cannot be justified or is too expensive. The ToolContainer contains several tools, one of which is designed for self-assessment in water service governance. This tool helps utility managers and their stakeholders to assess the quality and level of the governance of the water service and to establish and maintain state of the art governance.

Lead: which entity or stakeholder group should take responsibility?

Subject: what is this guideline- about?

Links to existing checklists, tools, literature, best prac-tice, templates, models, websites

Link to the Key Factors

Measures and methods What needs to be done? Which options should be considered? What are the crucial points to be aware of? What common mistakes should be avoided?

Implementation Guidelines for PSP in Sustainable WSS Overview Guideline Notes


OVERVIEWIEW GUIDELINE NOTES

PHASE I: PREPARATION ........................................................................................................... 11

Guideline notes for the Main Process of the Preparation Phase ................................................... 12 I_01 Present motivation for project and expected nature of outcome..................................... 12 I_02 Establish a comprehensive analysis processes .............................................................. 12 I_03 Review current technical status ....................................................................................... 13 I_04 Review current economic status...................................................................................... 13 I_05 Review environmental situation ....................................................................................... 13 I_06 Analyze existing and potential customer structure .......................................................... 14 I_07 Explore public attitude towards current situation, proposed project and PSP options .... 14 I_08 Identify the poor ............................................................................................................... 14 I_09 Integrate informal providers ............................................................................................. 15 I_10 Address potential disadvantages for stakeholder groups................................................ 15 I_11 Respect customs and cultural issues related to water .................................................... 16 I_12 Seek funds for conducting a thorough assessment......................................................... 16 I_13 Establish a transparency policy and define how it will be financed................................. 16

Guideline notes: regulation process for the Preparation Phase.................................................... 17 I_14 Review the current legal situation.................................................................................... 17 I_15 Review regulatory arrangements..................................................................................... 17 I_16 Assess independence of existing regulatory arrangements............................................ 18 I_17 Assess the legal status of small-scale operators............................................................. 18 I_18 Address political and legal issues relating to illegal settlements ..................................... 18

Guideline notes: Support Processes for the Preparation Phase ................................................... 19 I_19 [stake] Identify and analyze relevant stakeholder groups ............................................... 19 I_20 [stake] Where necessary, establish representation groups............................................. 19 I_21 [stake] Enable effective participation ............................................................................... 20 I_22 [stake] Set up a stakeholder cooperation structure ......................................................... 21 I_23 [stake] Consider creating a Poverty Advisory Group....................................................... 21 I_24 [stake] Include stakeholders in needs assessment ......................................................... 22 I_25 [stake] Establish consensus on key issues ..................................................................... 22 I_26 [stake] Establish a Stakeholder Dispute Commission ..................................................... 22 I_27 [comm] Transparent access to information ..................................................................... 23 I_28 [comm] Start public awareness campaigns ..................................................................... 24 I_29 [cap] Organize systematic capacity building.................................................................... 24 I_30 [cap] Set up a public education program ......................................................................... 24

PHASE II: PLANNING, STRATEGY, PROJECT DESIGN........................................................... 25

Guideline notes for the Main Process of the Planning Phase ........................................................ 26 II_01 Evaluate and select consultants................................................................................... 26 II_02 Develop and agree target framework........................................................................... 26 II_03 Propose preferred service arrangement (type and duration)....................................... 26 II_04 Define the roles of alternative providers in your preferred model ................................ 27 II_05 Design an investment model, including a business plan ............................................. 28 II_06 Explore ways to mobilize local funds ........................................................................... 29 II_07 Define a local tariff policy ............................................................................................. 29 II_08 Design effective subsidy policy .................................................................................... 30 II_09 Set out and agree the tariff calculation and adjustment formula.................................. 30 II_10 Explore appropriate payment mechanisms.................................................................. 31 II_11 Analyze relevant risks .................................................................................................. 32 II_12 Prepare for risk allocation ............................................................................................ 32 II_13 Establish a “transition” process for employees ............................................................ 33 II_14 Address sensitive issues explicitly ............................................................................... 33 II_15 Establish procedures for resolving disputes ................................................................ 33



Guideline Notes for the Regulation Process of the Planning Phase ............................................. 34 II_16 Where necessary, seek to effect changes in legislation .............................................. 34 II_17 Put regulation in place.................................................................................................. 34 II_18 Establish water resource management standards....................................................... 34 II_19 Oversee public consulting process .............................................................................. 35 II_20 Involve the regulatory authority in project preparation................................................. 35 II_21 Regulate the regulators................................................................................................ 35

Guideline notes for the Support Processes of the Planning Phase............................................... 36 II_22 [stake] Test readiness of cooperation instruments ...................................................... 36 II_23 [stake] Cross-check representation ............................................................................. 36 II_24 [stake] Set up a Tariff Commission .............................................................................. 36 II_25 [stake] Include stakeholders in assessment of impact on vulnerable customers ........ 36 II_26 [stake] Include stakeholders in risk identification......................................................... 37 II_27 [stake] Review all draft project documents .................................................................. 37 II_28 [stake] Find agreement on basic approach and role.................................................... 37 II_29 [cap] Build knowledge around tariff issues................................................................... 38 II_30 [comm] Communicate expected benefits..................................................................... 38

PHASE III: PROCUREMENT ......................................................................................................... 39

Guideline notes for the Main Process of the Procurement Phase ................................................. 40 III_01 Design procurement processes in a transparent manner............................................ 40 III_02 Actively prevent corruption........................................................................................... 41 III_03 Create explicit poverty incentives for the private operator........................................... 41 III_04 Invite the bidders to use innovative approaches.......................................................... 42 III_05 Make sure the contract contains clear definitions and targets..................................... 42 III_06 Define termination procedures in the event of breach of contract ............................... 43 III_07 Define termination procedures in the event of “termination for convenience” ............. 43 III_08 Award the contract in a traceable manner ................................................................... 44

Guideline notes for the Regulation Process of the Procurement Phase....................................... 44 III_09 Oversee the accuracy and transparency of the procurement process ........................ 44 III_10 Review the arrangements for the poor and the transparency clauses in the contract. 44 III_11 Avoid regulation vacuum.............................................................................................. 45

Guideline notes for the Support Processes of the Procurement Phase ....................................... 45 III_12 [stake] Involve stakeholders in the design of the procurement process ...................... 45 III_13 [stake] Allow public review of the bidding, negotiation and contract............................ 45 III_14 [stake] Negotiate participation level in the contractual arrangement ........................... 46 III_15 [cap] Elicit capacity-building needs for contract management..................................... 46 III_16 [cap] Offer professional assistance to community ....................................................... 46 III_17 [comm] Publish financial results of the bidding process .............................................. 46

PHASE IV: OPERATION & MONITORING.................................................................................... 47

Guideline notes for the Main Process of the Operation & Monitoring Phase ............................... 48 IV_01 Appoint a qualified contract manager .......................................................................... 48 IV_02 Fulfill the terms of the contract ..................................................................................... 48 IV_03 Implement the tariff system.......................................................................................... 48 IV_04 Implement customer-friendly payment systems........................................................... 49 IV_05 Continuously improve customer service and service awareness ................................ 49 IV_06 Take advantage of local entities................................................................................... 49 IV_07 Introduce agreed systems for routine measurement ................................................... 50 IV_08 Introduce a performance incentive program for staff ................................................... 50 IV_09 Provide information on project progress ...................................................................... 50

Guideline notes for the Regulation Process of the Operation & Monitoring Phase..................... 50 IV_10 Grant water licenses .................................................................................................... 50 IV_11 Start monitoring the operations from the beginning..................................................... 51



IV_12 Manage price reviews effectively ................................................................................. 52 IV_13 Survey the effectiveness of subsidies.......................................................................... 52 IV_14 Introduce a system for continual performance improvement....................................... 52 IV_15 Improve water use efficiency........................................................................................ 53 IV_16 Define procedures for customer complaints ................................................................ 53 IV_17 Establish direct contacts with customers ..................................................................... 53 IV_18 Publish outcome of regulation process ........................................................................ 53

Guideline notes for the Support Processes of the Operation Phase............................................. 53 IV_19 [stake] Set up a Community Liaison Group within utility management........................ 53 IV_20 [stake] Continue regular communications with stakeholder groups............................. 54 IV_21 [stake] Evaluate the adequacy of stakeholder cooperation ......................................... 54 IV_22 [stake] Initiate public discussion on tariff changes....................................................... 54 IV_23 [stake] Consider a public performance assessment (PPA) system............................. 55 IV_24 [stake] Discuss effectiveness of the regulation process .............................................. 55 IV_25 [cap] Educate water users............................................................................................ 55 IV_26 [cap] Train local contractors or local laborers .............................................................. 56 IV_27 [cap] Train communities ............................................................................................... 56 IV_28 [comm] Communicate tariff systems and consumer rights .......................................... 56 IV_29 [comm] Maintain a continuous information flow........................................................... 57

PHASE V: TERMINATION ............................................................................................................ 58

Guideline notes for the Main Process of the Termination Phase................................................... 59 V_01 Hand-over after contract completion............................................................................ 59 V_02 Follow defined arbitration procedures.......................................................................... 59 V_03 Conduct renegotiations equitably................................................................................. 59 V_04 Take precautions.......................................................................................................... 59

Guideline notes for the Regulation Process of the Termination Phase ........................................ 60 V_05 Carry out a review of the project(s)............................................................................. 60 V_06 Enable constructive renegotiation................................................................................ 60 V_07 Qualify the infractions leading to breach of contract .................................................... 60 V_08 Keep full transparency ................................................................................................. 61 V_09 Initiate new bidding process......................................................................................... 61

Guideline notes for the Support Processes of the Termination Phase ......................................... 61 V_10 [stake] Keep the stakeholder network alive ................................................................. 61 V_11 [stake] Involve stakeholders in exit strategy evaluation............................................... 62

Implementation Guidelines for PSP in Sustainable WSS Phase I: Preparation


PHASE I: PREPARATION

Figure 4: Tasks and result of the Preparation Phase

Tasks and challenges during the Preparation Phase At the start of any process designed to improve the quality of water supply and sanitation services, it is crucial to carry out a comprehensive review and analysis of the current state of service provision. Ac-curate planning – planning that will genuinely lead to a system’s shortcomings being addressed – can only be conducted on the basis of reliable data gathered from all relevant areas and in conjunction with appropriate stakeholders and experts. Problems and obstacles that are not detected at the outset may cause difficulties later in the process and lead to delays, disputes and conflicts. Main tasks:

- Needs assessment and analysis of project environment: social, technical, economic, and environmental status of the existing water supply and sanitation provision system.

- Identification of objectives: define desired gains in coverage extension, operation efficiency, and resource protection; identify the skills and resources needed to meet these needs as well as possible sources of those skills and resources.

- Identification of weaknesses and obstacles Main challenges:

- Time constraints: If insufficient time is allocated to preparation, issues that were not ad-dressed during the planning phase will cause problems during implementation. This may jeopardize the project.

- Financing for thorough preparation: Analysis and preparation are upfront investments. As such – and irrespective of whether the organization is publicly or privately operated – they are independent of the business model. Special financing must therefore be arranged for this phase.

- Information gaps: Information gaps will always exist, no matter how thoroughly a project is planned. Dealing with such information gaps is thus one of the most challenging tasks facing a project team.

- Hidden agendas: Parties with vested interests may supply misleading information. - Prejudging: Avoid making any judgments at this stage about the desirability of private in-

volvement. Consider the full range of service delivery mechanisms.

Information procu-rement Technical Financial

Environmental

Stakeholder cooperation

Stakeholder analysis Cooperation structure

Needs Objectives

Obstacles & constraints

Social analysis Customer structures

Poverty mapping

Implementation Guidelines for PSP in sustainable WSS Phase I: Preparation (Main Processes)


Guideline notes for the Main Process of the Preparation Phase

Reference to Key Factor TOOLCONTAINER REFERENCE

I_01 Present motivation for project and expected nature of outcome • Define the nature of expected project outcomes together with an ap-

proximate timetable for completion and communicate this to stake-holders. Outcomes would normally include: ⇒ Provision of safe drinking water to a specified population (extension) ⇒ Possible reduction in cost of drinking water below existing vendor charges ⇒ Time saved (mostly for women) in carrying water ⇒ Provision of hygienic sanitation to a specified population ⇒ Improved health for the population (lower infant mortality rate which facilitates

introduction of birth control measures) ⇒ Improved water resource quality resulting from installation of sewage treat-

ment plant ⇒ Increased availability of clean water for industry and agriculture

• Ensure that the planned project takes account of national poverty reduc-tion strategy. Water supply development projects should tie in with PRSPs agreed by local government and donors. ⇒ The participatory processes used in compiling the poverty reduction strate-

gies are extremely important and may be re-used for future water service pro-jects.

⇒ Influence PRSP development to integrate water supply and sanitation ser-vices.

• Engage in discussion with potential customers to establish whether there are any obstacles (eg land tenure, water rights, extreme poverty, caste issues) which might prevent them from taking advantage of new facilities.

Responsible/lead: Local government Possible actors: Local government

Results orientation Poverty responsive-ness

[Further reading] WSP: WATER SUPPLY AND SANITATION IN PRSP INITIATIVES

[Further reading] WATERAID: PRSP AND WATER – FAILING THE POOR?

I_02 Establish a comprehensive analysis processes • Particular attention should be paid to the outcome of the review and

analysis of the current situation as this serves as the basis not only for planning but also for consensus about goals, measures and priorities. All analyses should be: ⇒ Conducted in an independent and cooperative manner ⇒ Transparent in terms of processes and results (see GL note I_13 below) ⇒ Subject to public consultation (findings, results)

• Be aware of limitations in information procurement: although accurate in-formation is key for successful PSP preparation, provision and control of financing, risk mitigation, etc, information gaps will always remain a fact of life.

• Information gaps may persist for the following reasons: ⇒ Only insufficient funds are available to procure the required information ⇒ Vested interests: Information providers (eg utility staff opposing restructuring)

might supply inadequate or misleading information ⇒ Information cannot easily be checked for reliability

• Consider how to approach the remaining information gaps: ⇒ Wherever possible, try to find alternative sources for the same information ⇒ If some basic information is already available, awarding a short-term man-

agement contract (eg 3-5-years), which includes the task of information pro-curement, may be a pragmatic way of addressing information deficits. (Cf GL note II_03 below, on “phasing-in” approaches).

⇒ Build some flexibility into the project and contract. This will allow you to adjust

Accountability, Transparency



plans in response to changing information/circumstances without having to renegotiate.

Responsible/lead: Local government Possible actors: Local government, consultants

I_03 Review current technical status

The condition of existing assets, technical losses, existing service levels and covered service areas are often not really known but are key for designing improvements. The technical analysis should assess: • Infrastructure status, including connection rates/types (with a special fo-

cus on poor areas), intake and treatment facilities, pipe network, waste-water treatment facilities, water losses

• Service levels in terms of quality (standards, control facilities) and quan-tity (hrs/day, etc)

• Sanitation: Systems used and coverage • Operational procedures and overall performance • Order of magnitude of uncertainties and risks

Responsible/lead: Local government Possible actors: Water utilities, technical experts

Results orientation

I_04 Review current economic status Reviewing the financial situation and performance, including direct and indi-rect subsidies, reveals the current extent of cost recovery and enables a comparison with other utilities. The economic analysis should assess: • The business model of existing water supply and sanitation service pro-

vider • Cost and income structure of the utility: operational expenditures, tariff

structures and collection rates by customer segment, as well as subsi-dies

• The valuation and ownership structure of existing assets • Investment requirements for renovation or extension of the infrastructure • The macro-economic market for investments and political interference

with these markets • Existing financial liabilities and debts (maturity, interest, recourse situa-

tion, lenders, etc) in relation to the current value of the water supply and sanitation utility

• Possibilities for dealing with these liabilities (eg transferring them to the public partner or to the new utility)

Responsible/lead: Local government Possible actors: Water utilities, financial experts, donors

Results orientation Socially responsible financing

I_05 Review environmental situation The environmental review has to focus on raw water availability (quality and quantity), source protection, as well as sanitation and protection of water bod-ies (surface water and aquifers). • Analyze water sources: Quantity, quality and exposure to contamination

through settlements, industry, deposits • Identify competing uses/shortages which could cause conflicts or neces-

sitate tapping new sources • Analyze quantity and quality of wastewater discharge: how much is col-

lected and treated (centrally and locally); what is the extent of pollution? • Sanitation: Systems used and coverage • Collect baseline data on water use (by sector and over time)

Resource conserva-tion Results orientation

[Tool] ONLINE IWRM-TOOLBOX UNDER WWW.GWPFORUM.ORG



Responsible /lead: Local government Possible actors: Water utilities, local government, environmental experts and NGOs

I_06 Analyze existing and potential customer structure Knowing the composition of the customer portfolio helps to assess the risk situation. The following should be investigated: • Bulk versus retail consumers • Poor versus rich households • Industries, public institutions • Industries with own supply • Potential future customers: Currently “unserved” populations in newly

developed urban areas; poor that may be served by alternative providers • Comparison of existing consumer portfolio and projected portfolio follow-

ing extension of delivery network • Overestimation of future water sales and projected revenues (a common

problem in the past)

Responsible/lead: Local government Possible actors: Water utilities

Results orientation Proactive risk man-agement

I_07 Explore public attitude towards current situation, proposed project and PSP options Conduct a needs assessment with community residents to incorporate their objectives and constraints. Stakeholders’ views, expectations and prefer-ences should be taken into account from the beginning. Local support is cru-cial for the long-term success of any PSP project as it is ultimately the locals who will benefit from and pay for the services. If the proposed project is given low priority by the various stakeholder groups, it will be difficult to engage stakeholders during the remaining stages of the project life cycle. Possible approaches are: • Use participatory needs assessment techniques • Organize focus group discussions with representatives from different

consumer groups (poor, industry, etc) • Hold public hearings, conduct public surveys (including interviews) • Communicate the goal of the assessment and what the results will be

used for early on in order to avoid generating false expectations Avoid common mistakes where public input is sought in the interest of trans-parency: • The local community must be given the resources to review the materials

and be provided with technical assistance • Seeking – but not responding to – stakeholder input. • Transparency is useless if assessment results are not accessible to or

understood by a majority of the population

Responsible/lead: Local government Possible actors: Independent specialists in social interaction and/or NGOs with close contacts to the poor

Customer orientation Transparency Proactive risk man-agement

[Checklist] PARTICIPATORY NEEDS ASSESSMENT

I_08 Identify the poor Special efforts are needed to identify the poor in order to (a) prioritize water and sanitation service provision in those areas, and (b) to create effective subsidies. Common methods include: • Poverty identification and assessment using appropriate indicators:

⇒ Economic factors: Income, consumption, amounts currently paid for service

Poverty responsive-ness



⇒ Social factors: household characteristics (size, composition), employment situation

⇒ Physical factors: Dwelling quality, overcrowding, infrastructure • Poverty mapping: Poverty maps can increase the quality and transpar-

ency of public decision making, as they provide a visible and direct inter-face which can be used to target assistance.

• Surveys on willingness and ability to pay: Such cross-checks allow pro-ject participants to identify where financial savings will be made and this, in turn, may be used to pay additional costs and enhance the team’s un-derstanding of the possible consequences of price increases. 5% of in-come is generally seen the upper limit people should be expected to pay for water services.

• Disaggregate and respond to different poverty levels: Destitute, very poor, poor, developing/better-off poor, lower middle-income/vulnerable non-poor.

Responsible/lead: Local government Possible actors: NGOs, consultants, local government

[Checklist] POVERTY MAPPING

[Checklist] WILLINGNESS TO PAY SURVEY

I_09 Integrate informal providers Very often, a significant share of the market in urban areas is serviced by in-formal water providers. These range from individuals to local enterprises to NGOs or customer groups that operate via small-scale networks, trucks, wa-ter vendors, etc, and may serve groups of anywhere between ten and several thousand customers. They frequently contribute significantly to investment in the sector. • Analyze the existing water distribution network of the various private,

small-scale and informal providers and the scope of competition among them (or restriction thereof via cartels, entry barriers, etc). Map the re-sults against the service area of the public utility. Then compare this with the results of a poverty map (see GL note I_08 above).

• Assess the product and service lines of informal providers: Tariffs (the popular cliché that informal providers charge grossly inflated prices is not always) and service levels, access to funds, investment levels, efficiency and effectiveness.

• Assess ownership patterns and size (company, infrastructure) • Recognize informal providers as legitimate actors and motivate them to

organize themselves • Explore ways to integrate them into a broader framework of

⇒ Professional development ⇒ Coordination ⇒ Technical and quality inspections ⇒ Financial audits

• As formal providers, check the possibility for sub-contracting, franchising or other forms of cooperation.

Responsible/lead: Local government Possible actors: Public utility, ministry for urban planning, consultants, NGOs

Results orientation Shared incentives Poverty responsive-ness

[Checklist] PERFORMANCE INDICATORS

[Best practice] ASSOCIATION OF INDE-PENDENT WATER PROVIDERS IN UGANDA

[Best practice] CCAEP, MAIL; SEE: WSP 2000: INDEPEND-ENT WATER AND SANI-TATION PROVIDERS IN AFRICAN CITIES

I_10 Address potential disadvantages for stakeholder groups Anybody who stands to lose out personally as a result of a change process is likely to oppose it. It is important to identify and communicate with potential losers in order to seek solutions and mitigate potential negative impact for both parties. • Public utility employees may lose their jobs. Ascertain whether these in-

dividuals have the skills to take over different tasks in the new structure (eg “insourcing” or hiring them as a subcontractor or franchisee).

Shared incentives Proactive risk man-agement



• Avoid putting former public utility employees in positions for which they do not possess the required professional know-how.

• Informal providers may – at least temporarily – lose their business (see GL note I_09 above)

Responsible/lead: Local government Possible actors: Local government, unions, independent providers

I_11 Respect customs and cultural issues related to water

The restructuring of water services may be undermined by traditional water rights and informal structures, hierarchies and customs. Be sure to contact community leaders and informal figureheads and conduct surveys on issues such as:

⇒ Existing responsibilities for water management ⇒ Sanitation practices ⇒ Current levels of understanding on basic hygiene ⇒ Domestic and manufacturing water use ⇒ Irrigation for small-scale urban farming and livestock production ⇒ Cultural aspects: How is the notion of “paying a water bill” perceived by locals

Responsible/lead: Local government Possible actors: NGOs, local government, community leaders

Customer orientation

I_12 Seek funds for conducting a thorough assessment In addition to time constraints, financing is one of the most crucial precondi-tions for effective information procurement. Possible sources of financing: • Overseas development aid (ODA) may be used for the Preparation

Phase, provided it does not prejudice the business model to be selected later at a later stage

• Upfront public investment that has to be paid back (either partially or to-tally) by the selected operator

• National revolving fund for water assessment

Responsible/lead: Local government Possible actors: Local governments, donors

Socially responsible financing Costumer orientation

I_13 Establish a transparency policy and define how it will be financed A written transparency policy renders the public partner (and later on the pri-vate operator) more accountable vis-à-vis local residents and civil society. • Define the transparency policy with respect to:

⇒ The construction/subsequent provision of water supply and sanitation ser-vices

⇒ Public education on water service issues • Include measures for monitoring the enforcement of the transparency

policy (see GL note I_15 below). • Before entering into the PSP process, document the resources to be al-

located to the transparency, public education and input stages of the process. ⇒ Estimate costs for conducting outreach/public education/input processes re-

quested by the community, including the cost of reproducing educational ma-terials, translating all of them into major languages, holding public input events, live translation at events, as well as responding to public input during the procurement process.

⇒ These funds should be set aside at the start of the process

Responsible/lead: Local government Possible actors: Local government, donors

Transparency costumer orientation

Implementation Guidelines for PSP in Sustainable WSS Phase I: Preparation (Regulation process)


Guideline notes: regulation process for the Preparation Phase

I_14 Review the current legal situation Laws and regulations must be clarified early as the legal framework will de-termine the scope of any action. Assess: • The existing institutional/legal framework for:

⇒ Water supply and sanitation services ⇒ PSP (investments, foreign company law, etc) ⇒ Regulation law ⇒ Environmental legislation that is relevant for water supply and sanitation ser-

vices, wastewater, pollution, etc • Overlapping responsibilities between local, regional and national gov-

ernments • The scope of political interference • The need for legal reform • Unwritten laws and local customs in the water sector

Responsible/lead: Local government Possible actors: Legal experts, national government

Accountability

I_15 Review regulatory arrangements Regulation is required to protect the public interest in a situation of ‘natural monopoly’ where the market creates undesired effects. • Main objectives of regulation include

⇒ To ensure that water/wastewater services are delivered at a fair and reason-able price

⇒ To protect the short-term and long-term interests of customers ⇒ To ensure that customers receive the expected levels of service ⇒ To provide certainty for public and private sector investment ⇒ To increase the accountability and transparency in the sector

• Check what regulation is in place and ascertain whether there is a need for adjustment. ⇒ It is possible to ensure universality and consistency of standards, compari-

sons between providers and extensive customer involvement where there is a single national regulator.

⇒ Where individual contracts are regulated via special-purpose entity, it may be easier to tailor these regulations to specific circumstances and accommodate local needs and priorities to a greater extent; however, under these types of regulatory set-ups, greater attention is sometimes paid to interpreting and ap-plying contract terms than to pursuing wider regulatory principles. Exposure to political pressure is also greater.

• Check existing regulatory functions, their responsibility and scope and ascertain whether there is a need for adjustment. ⇒ Economic regulation, including setting/adjusting tariffs and charges; control-

ling asset investment; monitoring and controlling operating costs and profits; monitoring financial transactions to ensure there is no corruption. Consider whether existing economic regulations are appropriate for achieving the fi-nancial, institutional and technical objectives designed to benefit the poor identified by Stakeholder Committee and poverty advisory group (see GL note I_22, I_23 and I_24 below).

⇒ Quality regulation, including monitoring the quality of treated water and sew-age effluent.

⇒ Environmental regulation, including controlling the extraction of water from rivers, lakes and aquifers; monitoring the condition of habitats; monitoring the quality of rivers receiving effluents; and monitoring the quality of water re-

Accountability Socially responsible financing



sources used as sources for drinking water. • Check for existence of and importance attached to process regulation:

Process regulation goes beyond economic, quality, and environmental regulation and covers topics such as transparency of communications, accountability and the extent of public involvement. Ensure that: ⇒ All analysis documents are made public ⇒ Stakeholder input is sought and integrated into the needs assessment ⇒ Procedural, financial, organizational, operational, and regulatory information

is made public ⇒ Financial transactions are monitored in order to prevent bribery and corrup-

tion • Where no process regulator exists to monitor transparency:

⇒ Define how transparency and public input are to be regulated. Then assign this new regulatory function to the relevant regulatory body before proceeding with the PSP project.

Responsible/lead: Local government Possible actors: Local government, regulation experts, Stakeholder Committee

I_16 Assess independence of existing regulatory arrangements

It is important that any regulatory authority not only is, but is also perceived to be, independent. Assess whether the regulator: • Is sufficiently autonomous to be effective in political, administrative and

financial terms. ⇒ Under no circumstances shall the regulator be the public partner or any de-

partment linked to this partner. ⇒ Political control of the public partner and regulator must be formally separate. ⇒ The regulator must be independent of local government, both in organiza-

tional and personnel terms, and must have its own (independent and geo-graphically distinct) offices.

• Occupies the middle ground between government, private firms and civil society.

• Is paid from revenues raised from the regulated water utility or by local government. ⇒ It is preferable to pay a fixed fee rather than a percentage of the tariff to en-

sure consistent regulation irrespective of the amount of water sold or bills col-lected.

Responsible/lead: Local government Possible actors: Local government, regulation experts, Stakeholder Committee

Accountability

I_17 Assess the legal status of small-scale operators While independent small-scale operators often play an important role in water provision (see GL note I_09 above), they often operate illegally or semi-legally. • Check legal status and potential restrictions (eg service area of public

utility) • Check security of investments made by small-scale providers • Check monitoring and regulations applying to independent providers

Responsible /lead: Local government Possible actors: Legal experts, national government, local government, NGOs

Shared incentives

[Best practice] VIETNAM SSIPWP REGULATION

I_18 Address political and legal issues relating to illegal settlements Poor, informal settlements often do not receive water supply and sanitation services due to: • Legal and political constraints limiting public provision




⇒ Do existing laws restrict water supply and sanitation provision to illegal set-tlements?

⇒ Develop a clear strategy for service provision in informal settlements • Obstacles faced by dwellers connecting to the grid:

⇒ Insecure land tenure prevents dwellers from investing in infrastructure. ⇒ Explore mechanisms that allow community groups in illegal settlements to get

access to secure and fair credit in order to pay for the capital costs of service provision, eg payment of connection fees.

Responsible/lead: Local government Possible actors: Legal experts, national government, local government, NGOs, donors

Guideline notes: Support Processes for the Preparation Phase

I_19 [stake] Identify and analyze relevant stakeholder groups Develop and communicate systematic criteria for identifying legitimate stake-holders. Stakeholder analysis: • Identification of stakeholders: check which of the following may have an

interest in your project: ⇒ Local and national governmental bodies concerned with water and sanitation ⇒ Governments in neighboring countries that may share the resources (e.g. a

river) ⇒ Existing water supply and sanitation service providers ⇒ Regulators ⇒ Communities to be served ⇒ Upstream/downstream communities ⇒ Agriculture in the area ⇒ Industry in the area ⇒ Environmental groups ⇒ Conservation groups ⇒ Civil rights groups ⇒ Women’s groups ⇒ Labor organizations, unions ⇒ Donors ⇒ Are new stakeholder groups likely to emerge as a result of the project?

• Interest in project: What are stakeholders’ expectations of the project? • Resources/mandates: What resources will the stakeholder wish to com-

mit (or avoid committing) to the project? • Potential conflicts: What other interests do stakeholders have which may

conflict with the project? How does the stakeholder perceive others on the list?

• Existing platforms: Do stakeholder forums already exist that could be used as platform for this project or be integrated into it for certain pur-poses like consultation, training, awareness raising etc (see also I_22 below)?

• Avoid marginalizing certain stakeholder groups



[Checklist] STAKEHOLDER ANALY-SIS AND EVALUATION TOOL

I_20 [stake] Where necessary, establish representation groups Set up consumer representation groups to provide a formal channel for dia-logue. • Formal structures in residential communities tend to be political (in which

case they may not truly reflect the views of local consumers), or weak,

Accountability

Implementation Guidelines for PSP in Sustainable WSS Phase I: Preparation (Support Processes)


especially where populations are transient or have migrated from all over a country resulting in a mix of languages and cultures (in which case the role of civil society is minimal). ⇒ In such instances it may be necessary to set up special representative groups

eg “neighborhood committees”. ⇒ Accountability can be conferred on these groups by giving them some form of

recognized legitimacy. ⇒ These groups need not be exclusively concerned with water. They may also

deal with other sectors of urban infrastructure. ⇒ Such groups enable communities to communicate more widely and more ef-

fectively (eg with the regulator). ⇒ Neighborhood committees will need training, as the individuals comprising

them will probably lack the skills necessary to act effectively (eg literacy, nu-meracy, democratic processes, participatory approaches).

• NB: ⇒ Take account of traditional leadership structures when establishing such

committees but avoid simply replicating existing power structures. It will be necessary to include powerless groups eg women, ethnic minorities, etc.

⇒ Manage expectations: Communication is essential to ensure that communi-ties (and groups representing them) are clear about their role and what is ex-pected of them at all stages of the project (eg time commitment).

⇒ Avoid duplication: Similar initiatives may be underway relating to other as-pects of urban development (eg surveys, liaison committees).

Responsible/lead: Local government Possible actors: Stakeholder Committee, facilitators, TA providers, utility

I_21 [stake] Enable effective participation

Participation can take many forms and the degree of involvement may range from very intense to minimal, depending on the objectives and constraints of the project. • Decide on how much participation you want/need to achieve your goals:

⇒ Information (passive participation): You tell people what is going to happen, is happening or has happened.

⇒ Involvement (participation by consultation): People are consulted, and exter-nal professionals listen to their views. These external professionals define both the problems and possible solutions; the institutional power holders make the decisions.

⇒ Partnership: Local residents negotiate with institutional power holders on roles, responsibilities and levels of control with the aim of reaching decisions by consensus.

⇒ Delegated power: Some power is delegated ⇒ Citizen control: Full delegation of all decision-making and resulting actions ⇒ Joint implementation: Stakeholders are directly involved in realizing the pro-

ject and are invited to make a significant contribution towards its realization. • Identify, appoint and train facilitators to promote activities and mobilize

communities. ⇒ Extension workers may be drawn from professionals circles (eg local gov-

ernment departments, NGOs), or from local residents in the region or country. ⇒ Local residents will need training in mobilization techniques, but will be better

able to penetrate target communities. ⇒ Previously trained workers will be familiar with mobilization techniques, but

will still need training to help them understand how the utility will operate. ⇒ Appropriate incentives will need to be devised.

• Create a clear awareness of what the participation model is designed to achieve by stating unambiguously: ⇒ The goal of planned participation ⇒ The degree of participation

Power-balanced partnership Transparency

[Further reading] AARHUS-CONVENTION



⇒ The planned procedure for participation • Procure feedback from residents and stakeholders about how the PSP

process should proceed, including details on obtaining public input and ensuring transparency at each stage of the process.

• Avoid: ⇒ Letting the participatory processes be manipulated by existing power struc-

tures ⇒ Excluding marginalized groups from processes ⇒ Imposing unrealistic deadlines on participatory activities.

Responsible/lead: Local government Possible actors Local government

I_22 [stake] Set up a stakeholder cooperation structure

Form a stakeholder cooperation structure. This structure, designed to span the entire life cycle of the project, should be the central mechanism for ascer-taining customers’ needs and preferences and for answering their queries. • Establish a Stakeholder Committee comprised of representatives from

the communities that are to be served and from all other groups who have a legitimate interest in the project (see GL note I_19 and I_20 above). NGOs should only be accepted as representatives of individual stakeholder groups if the groups are unable to represent themselves.

• Make it clear to stakeholders that this committee will exist for the dura-tion of the project.

• Define the degree of involvement (see GL note I_21). The process should take the form of a dialogue where views and information are ex-changed; it should not be a one way flow of information.

• Decide on a structure: Platform, round table, forum, etc. • Define the frequency of meetings and/or distribution of information. • Choose a chairperson for the Stakeholder Committee. • Avoid making commitments to accept the demands of certain stake-

holders. • Any decisions – especially those concerning demands made by stake-

holders – should be explained, justified and discussed within this com-mittee.

• The local government can enter into partnerships with local CSOs (eg NGOs) or use consultants to establish participatory processes for the project.

• Draw up a set of participation indicators as a way of demonstrating to consumers, shareholders, and the regulator that best practice has been observed.

Responsible/lead: Local government Possible actors: Appoint staff responsible for stakeholder relationship management


I_23 [stake] Consider creating a Poverty Advisory Group Poverty issues (see GL note I_08 above) need to be considered throughout the project. Project participants should assess the direct and indirect impact of any decisions on poor consumers. • Discuss whether it would make sense to establish a Poverty Advisory

Group • Include CBO and NGO representatives • Since “the poor” are not a homogeneous group, it will be necessary to

⇒ Identify traditional power structures and vested interests ⇒ Pay attention to gender issues ⇒ Manage conflict between various segments of the poor (see also GL note




I_26 below) • Check how the Poverty Advisory Group fits into the wider stakeholder

network and how it relates to the Stakeholder Committee.

Responsible/lead: Local government Possible actors Local government, NGOs, social workers

I_24 [stake] Include stakeholders in needs assessment

As part of the assessment described in GL notes I_06, I_07, and I_08 above, residents – particularly the underserved – should be surveyed. This will allow PSP organizers to ascertain their needs, concerns and constraints regarding water supply and wastewater service provision. • Conduct analyses using participatory processes:

⇒ It may be expedient to use local CSOs, but these may not be have experi-ence of working together with local government or private-sector entities. In such cases, some capacity building may be required for all parties to enable organizations to maximize contributions to the project process.

• Ask residents to identify: ⇒ Their objectives (vision) for water management in the community ⇒ Problems or obstacles to providing water supply and wastewater services ⇒ Economic and social factors that might limit residents’ ability to take advan-

tage of improved water supply and sanitation services • Reflect issues brought up by residents in the assessment • Avoid:

⇒ Discussing the needs and obstacles exclusively within the confines of the wa-ter authority or among agencies to the exclusion of public end users.

Responsible/lead: Local government Possible actors: Stakeholder committee stakeholder organizations, local service provider, moderators, interviewers

Power-balanced part-nership


I_25 [stake] Establish consensus on key issues It is important to reach robust consensus on all key issues through consulta-tion/dialogue with the Stakeholder Committee. Common key issues: • Analysis of current situation and need for action • Desired gains in coverage extension (water supply, sanitation) • Establishing priorities where resources are limited • Process design: Accountability and transparency

Responsible/lead: Local government Possible actors: Stakeholder Committee, communication specialists, local government

Customer orientation Transparency Accountability

I_26 [stake] Establish a Stakeholder Dispute Commission In any process of consultation with stakeholders disputes and conflicts will in-evitably arise as a result of differing priorities and agendas and limited re-sources. Such conflicts need to be actively managed to ensure that the pro-ject is not slowed down excessively or jeopardized, and to prevent a situation arising in which stakeholder consultation is avoided altogether. Preconditions for effective conflict management: • A forum for negotiation and some basic rules to be observed by actors in

their meetings and discussions • Reliable data on points of conflict • Whenever conflicts become serious and the parties involved are remote

from and hostile to one another, a facilitator, mediator or arbitrator is highly recommended. These key persons in conflict management will of-ten be private individuals (religious leaders, retired judges, local wise-


[Further reading] GETTING TO YES: NEGOTIATING AGREE-MENT WITHOUT GIVING IN



men and women, etc) who are respected for possessing special charac-teristics and skills. ⇒ Facilitators - assist only in the running of a process and never allow them-

selves to be drawn into the arguments. ⇒ Mediators - act as facilitators, but also help develop a wide range of options

for the parties to discuss and choose from. They help conflicting parties to reach an agreement that is satisfactory to everyone.

⇒ Arbitrators - act as judges: They listen to the various parties, review pertinent documents and issue a decision, which is treated by all concerned as an ex-pert opinion or an obligation, depending on what was decided in advance.

⇒ Instructors - help the parties (usually in separate sessions) to learn the ele-ments of conflict management. These parties then apply their knowledge to their own conflict situation.

• Steps to be taken in resolving conflict: ⇒ Shift the attention from positions to underlying interests. ⇒ Appreciate the merits of fair compromise. ⇒ Address both the procedural and substantive dimensions of conflicts. ⇒ Include all significantly affected institutional actors in devising solutions. ⇒ Understand the power of various institutional actors, and take that into ac-

count in the process.

Responsible/lead: Local government Possible actors: Mediators, facilitators, arbitrators

I_27 [comm] Transparent access to information

It is vital that stakeholders have transparent access to information throughout the entire project and basic principles should be defined at the beginning dur-ing the exploration phase: • Consider your information policy (see also GL note I_13 above)

⇒ Communicate proactively ⇒ Make all existing analyses of the water system available to the public in forms

and at venues requested by stakeholders, particularly resident users. ⇒ Ascertain the most appropriate way to communicate throughout the process

by talking to local residents; special attention should be paid to the planning and procurement process.

• Communicate effectively: ⇒ All communications must be understandable to all stakeholders. The PSP

participants should focus less on “informing” and more on “getting the mes-sage across”.

• Define channels for disseminating information actively: ⇒ Make use of complementary information channels: Public meetings, road

shows, television, radio, community radio, press, Internet. ⇒ Use innovative techniques such as mobile information points, theatres, soap

operas, radio drama or celebrities. ⇒ Illiterate audiences require special attention. Use local artists to maximize

non-written content in preparing printed promotional material. ⇒ Residents should identify through which media they wish to receive commu-

nication (Internet, written, presentations), and at which venues (libraries, community centers).

⇒ Establish possibilities for interactive communication when canvassing the opinion of target groups. Be careful not to “preselect” or exclude certain groups by using certain technologies that are not available to everyone (eg phone in radio chat shows, SMS voting, Internet discussion forums, etc).

⇒ In some societies, traditional leadership structures and word of mouth are a highly effective means of communication.

• Define the channels for disseminating information passively: ⇒ Design and implement standard procedures for responding to data requests

made by individuals, the media, and citizens’ groups.

Transparency, ac-countability

[Further reading] WWW.ACCESS- INITIATIVE.ORG

[Best practice]



Responsible/lead: Local government Possible actors Local government, communications professionals

SOUTH AFRICA?

I_28 [comm] Start public awareness campaigns Open communication with the general public (beyond stakeholder groups, etc) contributes to building awareness, interest and support for the project. • The following topics should be covered as a minimum during the prepa-

ration phase: ⇒ Results of the various assessments ⇒ Intention and goals of the project ⇒ Options for reaching the goals

• Keep public awareness campaigns alive during the whole project ⇒ Information about project progress, milestones, challenges and backlogs ⇒ Sensitize the public to water conservation and water use efficiency issues

Responsible/lead: Local government Possible actors Communications professionals

Accountability Transparency

I_29 [cap] Organize systematic capacity building Developing effective and sustainable water supply and sanitation services re-quires public awareness of both, the problems and the implications of working together with a private-sector provider. Whilst capacity building cannot re-place local ownership, it can certainly contribute towards fostering it. During the preparation phase, it is important to: • Establish clear responsibilities for capacity building by appointing a man-

ager to oversee all such activities; investigate establishing a working group to analyze needs and plan activities.

• Invest in public education as well as institutional capacity building for lo-cal government, the regulator, local private-sector players, etc. This will ensure that key stakeholders are informed and will smooth cooperation.

• Adapt methods to the training issues and target groups; make use of in-teractive workshops, on-site training, information delivery channels, etc.

• Educate community representatives in specific water-related know-how/skills.

Responsible/lead: Local government Possible actors Local government, trainers, NGOs


I_30 [cap] Set up a public education program This is an appropriate way to ensure that residents are well informed and in a position to make decisions on water-related services. • Provide training sessions or workshops to outline the current state of the

water system, including information on social, environmental, economic, and infrastructure conditions.

• Develop fact sheets and educational materials on the current state of the water system, explaining why the public partner is exploring PSP, and outlining a proposed process for this option.

• Provide training and workshops on sanitation issues. • Stakeholders and residents should participate in these workshops and

give feedback on their capacity-building needs.

Responsible/lead: Local government Possible actors Trainers, education institutes

Transparency

[tools] WWW.WASH.ORG PROVIDES MATERIAL FOR SANITATION CAM-PAIGNS.

Implementation Guidelines for PSP in Sustainable WSS Phase II: Planning, Strategy


PHASE II: PLANNING, STRATEGY, PROJECT DESIGN Tasks and challenges during the Planning Phase

Figure 5: Tasks and result of the Planning Phase

Once key information has been gathered during the Preparation Phase and the basic cornerstones are in place, it is time to start making important strategic decisions. Main tasks:

- Engineering, project design: Water intake, treatment, delivery, network extension, sewage collection, treatment

- Financial architecture o Analysis of budget implications and availability of project finance o Investment/project finance o Business plan costs/revenue, tariffs

- Risk transfer: Detection, analysis and distribution of risks - Model: Costs and benefits of PSP, PSP yes/no, type of PSP, PSP components

Main challenges:

- Priorities: Creating a list of priorities that is financially sustainable, fulfils poverty responsive-ness criteria and is agreed on by all stakeholders.

- Forecast: Realistic estimates for service demand (predictions are frequently overoptimistic).

Project design

Technical design

Investors Funders

Risk analysis Tariff implications

Service arrangement options

Business plan

Preferred service arrangement

Priorities

Needs Objectives

Affordabilitycheck

Implementation Guidelines for PSP in Sustainable WSS Phase II: Planning, Strategy (Main Process)


Guideline notes for the Main Process of the Planning Phase


II_01 Evaluate and select consultants Since technical assistance (TA) providers play an important role in any PSP process, it is in the interest of all stakeholders that they be selected carefully. Optimize the selection process by: • Proposing a selection of independent TA providers that have no prior as-

sociation or financial relationship with any of the potential private part-ners, and have a fair and balanced view of the risks and benefits of pri-vate sector participation. ⇒ Disclose the offers of the consultants in the Stakeholder Committee and

reach a final agreement on the preferred consultant(s). • Go for a “second opinion” approach if the consultants are appointed by

the local government. ⇒ Grant funding to community organizations to enable them to hire an inde-

pendent TA provider (in addition to the consultants of the local government) to conduct an independent analysis of planning documents. (see GL note II_19 below)

⇒ The independent TA provider will do its own analysis of the costs and benefits of PSP, consider various PSP options, and devise a structure for the ar-rangement.

Responsible/lead: Local government Possible actors: Local government, Stakeholder Committee

Results orientation Power-balanced partnership

[Checklist] PPIAF TOOLKIT: A GUIDE FOR HIRING AND MAN-AGING ADVISORS FOR PRIVATE PARTICIPATION IN INFRASTRUCTURE

II_02 Develop and agree target framework Prepare a framework for delivering project targets based on consultations with the Stakeholder Committee (see GL note II_28 below). Performance should be measures against these targets and reported to the residents. • Targets should, as a minimum, include:

⇒ Project timelines and key milestones ⇒ Priorities and programs to connect customers to facilities ⇒ A logframe to provide a brief overview of outputs and activities, using objec-

tively verifiable indicators

Responsible /lead: Local government Possible actors: Stakeholder Committee, local government, private operator

Customer orientation Transparency Accountability

[Checklist] LOGFRAME DEVELOP-MENT

II_03 Propose preferred service arrangement (type and duration) Once the local requirements have been ascertained in the Preparation Phase and the target framework (see GL note II_02 and II_28 below) has been agreed, the following options for water supply and sanitation services should be explored:

⇒ Concession contract (15–30 years): The private sector both operates the sys-tem and is responsible for new investment for a period of time defined in the concession agreement. At the end of the contract, the concessionaire hands over the system.

⇒ BO.. contracts (for greenfield investments): The private sector builds and op-erates infrastructure and transfers it to the public sector (BOOT: [Build own, operate transfer]; BOT [Build operate, transfer]; BLOT [Build, Lease, Operate, Transfer]; DBFO [Design, Build, Finance, Operate]; ROT [Rehabilitate, Oper-ate, Transfer]).

⇒ Lease contract (10–12 years): The private sector operates the system for a given period, but assets remain state-owned. The public sector generally re-mains responsible for financing new investment, and the private company for working capital and maintenance. The private sector is also responsible for collecting revenue that it used to fund its operations.

Results orientation

[Checklist] OVERVIEW OF PSP MODELS AND RISKS/RESPONSIBILITIES

[Checklist] DECISION TREE FOR MODEL SELECTION PSP-PROFILER



⇒ Management contract (3–5 years): Management contracts extend a service contract to include the management of the utility as a whole. Management risk is thereby transferred to the private sector. The private partner is usually paid a fixed fee, though a portion of the total compensation may be covered by a bonus.

⇒ Service contracts (2–5 years): Private companies are employed under service contracts to carry out certain narrowly defined tasks (eg billing services). The public authority pays a fixed fee to the private utility to fulfill the service con-tract. The degree of risk transferred to the private sector is limited to the par-ticular service task.

⇒ Consultancy contract: Private-sector companies act as consultants to or con-tractors for a publicly owned and operated water services network.

• Assess pros and cons: ⇒ Which model best suits the situation in hand? ⇒ What consequences does the selected model have (financially and in terms

of the distribution of responsibilities)? ⇒ What kind of risks are linked to the selected model? ⇒ Evaluate potential disputes over responsibility (eg the distinction between

“maintenance” and “renewal” may not always be clear in a lease contract). • Small towns: Consider aggregating water supply and sanitation services

with other neighboring towns. ⇒ Functions that can be aggregated include: Operations (eg system operation,

maintenance, quality control, billing, customer relations); management (eg fi-nancial and technical management, strategic planning, human resources, le-gal departments); procurement (eg acquisition of regular or special inputs, goods and services); investment (eg for maintenance operations, new pro-jects, projects at municipal level or shared projects); financing (identifying and procuring financial sources).

⇒ The advantages of aggregating service providers include: Economies of scale, increased efficiency, access to finance, access to PSP (especially in small towns), more effective IWRM, greater scope for cross-subsidization.

⇒ Challenges include: Designing an appropriate structure (new entity, grouping, clustering for a specific purpose, etc); allocation of voting rights; resistance to cost-sharing and potentially high transaction costs.

• Consider a phasing-in approach: Award clear and focused short-term contracts initially with the option of converting to a concession contract at a later date. This approach: ⇒ Helps to improve local knowledge ⇒ Creates more equal partners, helps to build up trust between the parties and

greater information symmetry for a future PSP contract ⇒ Helps to show the public operator how to work in a more flexible framework

(eg with new staffing policies and different career opportunities) ⇒ Helps to foster competition for the assignments and contracts ⇒ Might encourage the involvement of local, private service companies, thereby

promoting local development • Check the preferred PSP model and compare it with public provision:

⇒ To the extent that this is possible, assemble information on future tariffs, reve-nues, and expenses without PSP.

• Decide whether provision is to be public or private


[Further Reading] WB2004: MODELS OF AGGREGATION FOR WATER AND SANITATION PROVISION

II_04 Define the roles of alternative providers in your preferred model • The roles of existing small-scale providers must be clearly defined under

the new model (see GL note I_09 above). ⇒ Where necessary, define amount and time of compensation if livelihoods are

negatively impacted. • The potential role of other stakeholders (eg CBOs) in delivering water




supply and sanitation services must be defined (eg construction, mainte-nance, billing, etc)


II_05 Design an investment model, including a business plan

As private partners are to be employed, for each project the following invest-ment planning issues will need to be addressed: • Debt/equity ratio for project finance

⇒ Consider the amount and possible sources of equity for the private water util-ity (or project company) (see also GL note II_06 below) to ensure a sound debt-equity ratio.

⇒ Decide whether local government should contribute equity to the project company (and thereby retain some degree of control); investigate possible conflicts of interest.

⇒ Try to achieve a balance of liability between sponsors and government. En-suring that sponsors bear a portion of the liability in the utility beyond their share capital, may serve to foster their results orientation.

⇒ Debt service cover ratio: Align the timing of investments with project priorities and the availability of cash flow for debt service (interest and principal).

• Propose financing arrangements that are perceived to be socially re-sponsible. Such arrangements should include, as a minimum: ⇒ Service levels by customer segment ⇒ Future tariffs by customer segment ⇒ Connection charges ⇒ Sources of additional financing ⇒ Compensation structure for the private partner (eg regulated rate of return or

fixed annual fee with inflation adjustment) ⇒ ROI: The target return on investment (ROI) rate must be agreed among the

partners and discussed with the Stakeholder Committee, and negotiation cri-teria should be stipulated. (What should be considered “investment” – grants/ODA, soft loans, public contributions, private operator´s money, etc? – when calculating ROI and to whom should it be allocated.)

⇒ Are efficiency gains to be passed on to consumers, or retained as profits; will local government gain from taxes on profits?

• Account for non-financial costs borne by customers or third parties (eg losses to downstream fishermen resulting from water extraction) as de-termined by stakeholder and political processes.

Establish incentives for fostering the project goals by selecting an appropriate payment structure: • Consider using output-based aid (OBA), where disbursement of public

funding is tied to specified outputs or services delivered by private opera-tor. ⇒ Target intended beneficiaries/outcomes (eg OBA funding per new connection

in defined area/customer segment) ⇒ Define performance requirements (eg the connection has been installed and

the customer is receiving water) ⇒ Disbursement of public funding can be tied to achievement of specific envi-

ronmental targets (eg quality and volume of wastewater treated) ⇒ Designing payment mechanism and structure: The OBA should cover not

only the cost of wastewater connections per household but should also factor in the cost of upgrading the capacity of the production and distribution sys-tem.

• Be aware of the challenges linked to OBA: ⇒ Ensure basic safeguards ⇒ Credible commitment is critical in private financing. The political risks associ-

Socially responsible financing Shared incentives

[Further reading] FIGURE WITH GENERAL PROJECT FINANCE STRUCTURE SCHEME

[Further Reading] WORLD BANK 2002: OBA– POSSIBLE APPLI-CATIONS FOR THE DESIGN OF WATER CONCESSIONS

[Further reading] GLOBAL PARTNERSHIP ON OUTPUT-BASED AID WWW.GPOBA.ORG



ated with OBA could be reduced by using a foreign donor or an independent trust fund institution to manage the scheme.

⇒ Ensure effective performance monitoring; involve regulators, NGOs, commu-nity groups.

Responsible/lead: Local government Possible actors: Local government, financing institutions

II_06 Explore ways to mobilize local funds

Since foreign exchange risk can seriously affect operators and customers and may even jeopardize an entire project, it is vital for long-term viability that project finance funds are available in the local currency. Although local capital markets are often underdeveloped or, in some countries, virtually non-existent, PSP managers should nevertheless investigate the following sources of local funds: • Pension funds as investors in water infrastructure • Sub-sovereign lending by donors in local currency (eg. World Bank’s

GuarantCo facility) • Local private companies as utility shareholders • National and/or local water-sector development funds (WSDF) such as a

revolving fund designed to cross-subsidize new connections for poor people or enable urban-rural transfer.

• Micro-lending for small projects • For governments of HIPC countries: Consider negotiating with lender

countries on project financing via a “debt for water” mechanism.

Responsible/lead: Local government Possible actors: Local government, national government

Socially responsible financing Proactive risk man-agement

[Best practice] NWP: SUCCESS FAC-TORS IN SELF FINANC-ING LOCAL WATER MANAGEMENT

[Further reading] ADB: PENSION FUNDS IN INFRASTRUCTURE PROJECT FINANCE

II_07 Define a local tariff policy National tariff policy is formulated by central government. Local government then adapts this overarching policy to factor in the particularities of the sys-tem and the social and economic conditions of the population, affluent and poor consumer groups, etc. A tariff strategy should: • Generate enough revenue to cover:

⇒ Maintenance of an appropriate infrastructure ⇒ Depreciation of assets ⇒ Operating costs ⇒ Rate of return (which must be agreed between the private partner and the lo-

cal government as well as accepted by the customers) ⇒ Environmental costs: From source protection to operation and the final de-

posit. The partners must discuss to what extent such activities should be con-sidered “environmental costs”.

⇒ Regulation: Financing • Protect consumers:

⇒ Define the tariff and its development over time in relation to the purchasing power of consumer groups (rich, industry, poor).

⇒ Set targets for (improved) billing and collection efficiency. ⇒ Define a cut-off policy that strikes a balance between efficiency and social

acceptability, eg long enough payment terms (cut-off after the third bill) and reasonable debt repayment options.

• Be fair: ⇒ Promote solidarity among consumers ⇒ Take account of consumers’ ability to pay. Subsidies: see GL-Note II_08 be-

low • Protect the resource: consider introducing a tariff for raw water: Introduc-

Socially responsible financing

[further reading] ADB 2004: BEYOND COST RECOVERY: SETTING USER CHARGES FOR FINAN-CIAL, ECONOMIC, AND SOCIAL GOALS



ing a raw water tariff to be paid by the utility operator is positive in as much as it: ⇒ Creates incentives for efficient operation by (a) preventing over-abstraction

and (b) reducing losses in the water production process (treatment) as well as in distribution (leakages)

⇒ Generates resources for source protection and resource conservation


II_08 Design effective subsidy policy

The goals described in the tariff policy may conflict directly since the full cost for water services may lead to tariffs that are not affordable for poor custom-ers. The gap between affordability and the full cost must be made up via tai-lor-made subsidies. • Part of the tariff policy, subsidies targeted at the poor should:

⇒ Not interfere with economic incentives ⇒ Together with tariffs, cover the total costs as described in GL-Note II_07

above • Avoid relying on a single source of subsidies as this increases risk and

renders the system vulnerable. ⇒ Cross-subsidies between customer groups (rich > poor in a given service

area or through a nationwide fund) are only effective when there is a suffi-ciently large middle-income consumer base. However, if cross-subsidies be-come too large, are badly communicated, or cause prices to develop in a way that encourages industrial users to dig their own wells, they may be counter-productive.

⇒ Consider using tax money to subsidize part of the consumption tariff or con-nection charges for poor customers. Relying heavily on tax money can make a utility more beholden to those in charge of authorizing transfers than to con-sumers.

⇒ Use bilateral ODA or IFI funds to subsidize connection charges for poor cus-tomers.

• Subsidize connection charges rather than consumption tariffs ⇒ Make sure subsidies do not motivate users to consume more water or un-

dermine incentives to conserve it. • Choose a channel for delivering subsidies that is as close as possible to

the individual recipient: ⇒ If a customer database is available, deliver the subsidy straight to the cus-

tomer. ⇒ Deliver subsidies directly to the utility based on the amount of water delivered

in a target area (in the form of OBA, it could be an incentive to the utility to serve the poor)

⇒ Increasing block tariffs (IBT): The first block is set at a low level covering ba-sic daily needs (be aware of difficulties related to IBT where connections are shared or a household with metered connection supplies unconnected neighbors or vendors).

• Provide for the possibility of subsidy adjustment as conditions change or existing subsidies turn out to be ineffective.

Responsible/lead: Local government Possible actors: Local government, Stakeholder Committee, Tariff Commission


[Best practice ] WSP-FIELD-NOTE: URBAN WATER SUPPLY INNOVATIONS IN COTE D IVOIRE – HOW CROSS-SUBSIDIES HELP THE POOR [BEST PRACTICE] SUBSIDY-DESIGN IN CHILE, SEE: PPIAF 2001: PUBLIC POLICY FOR THE PRIVATE SECTOR, NOTE NR 232, INCENTIVE BASED SUBSIDIES

II_09 Set out and agree the tariff calculation and adjustment formula The tariff structure has to be calculated on the basis of the full cost of service delivery and any subsidies. • A successful tariff structure has five key characteristics:

⇒ Public acceptability: It is non-controversial and does not lead to public criti-cism of the water supply agency.


[Further reading] ADB 2004: BEYOND COST RECOVERY: SETTING USER CHARGES FOR FINAN-



⇒ Political acceptability: A tariff structure that is objectionable to political leaders will lead to loss of political support and may cause increased political interfer-ence in the agency’s operations.

⇒ Simplicity, predictability and transparency: A tariff structure should be easy to explain and easy to understand. It should be possible for most users to know what price they are paying for their water.

⇒ Net revenue stability: When water use changes as a result of weather or eco-nomic conditions, revenue and cost should change proportionately. If this does not happen, cyclical changes will result in net revenue volatility, creating cash flow and financing difficulties for the utility.

⇒ Ease of implementation: The promulgation and implementation of the revised tariff should not encounter significant barriers in terms of legal authority, ad-ministration, information requirements, or billing procedures.

• Make the calculation of the water tariff more transparent towards stake-holders by breaking down costs and investments for each project along the water production and distribution chain (potable water production, water distribution, waste water recollection, wastewater treatment, re-source protection). Communicate this information clearly to the Stake-holder Committee.

• This makes it possible to build an adequate tariff structure that includes: ⇒ Water connection fees ⇒ Fixed payments for water supply and for sewerage, irrespective of consump-

tion/output ⇒ Payments for water consumption per unit consumed ⇒ Payments tailored to customer segments ⇒ Subsidies and cross-subsidies ⇒ Tariff adjustment formula that poor customers can afford ⇒ Exposure to exchange rate risk

• A calculation method must also be devised for raw water charges, where applicable.

• Define possible reasons for tariff adjustment: ⇒ Automatic adjustments: When changes in the following areas exceed agreed

levels: inflation, demand, operational costs, interest rates, collection rates. ⇒ Extraordinary adjustments: Amendments to service obligations; changes in

the law and other government regulations that affect cash flows; below-market interest rate financing from any multilateral or bilateral sources; erro-neous bidding assumptions provided by local government prior to the bid; in-creases in concession fees, and increases in the operational cost as a result of an uninsured “force majeure” event.

⇒ General price review after a first contract period (eg three or five years) • Be aware of the strength of the remaining informal service providers who

may be able to organize resistance groups against the project and pro-test against the tariff system.

Responsible/lead: Local government Possible actors: Local government, Stakeholder Committee, Tariff Commission, financial experts

CIAL, ECONOMIC, AND SOCIAL GOALS

[Checklist] TARIFF FORMULA USED IN LA PAZ, BOLIVIA

[Further reading] REGULATORY SCHEMES FOR WATER PROVISION IN THEORY AND PRAC-TICE

II_10 Explore appropriate payment mechanisms For many poor customers, affordability is not simply a matter of price but also of customers liquidity. Appropriate payment mechanisms are also vital in situations where customers have neither addresses nor bank accounts and conventional bill-ing systems cannot be used. It is thus important to discuss the following points with the Stakeholder Committee and/or the poverty advisory group:

• Methods of payment for water services: ⇒ Frequency ⇒ Location ⇒ Charge collectors (local representative who collects payments installments

Customer orientation Shared incentives Poverty responsive-ness

[Best practice] MICRO-CREDIT EXAMPE IN XY

[Checklist] REQUIREMENTS FOR MICRO CREDIT PRO-GRAM

[Further reading] WWW.MICROFINANCE.ORG



from community members) • Methods for connecting to water supply and sanitation systems:

⇒ Payment plan for connection fees over a certain period of time with reason-able interest (to be paid with the tariff invoice), offered by the private operator

⇒ Micro-credit program in collaboration with financial institutions or NGOs ⇒ Reduced connection charges in cases where consumers perform part of the

labor themselves.

Responsible/lead: Local government Possible actors: Poverty Advisory Group, Tariff Commission, local government

II_11 Analyze relevant risks

Identify the various risks and set up regular review sessions during the pro-ject cycle. Including all stakeholders (through the Stakeholder Committee) enables a more comprehensive view of the risk landscape. • Commercial and non-commercial risks:

⇒ Design/development risk (eg fault in RFP, incomplete information, unachiev-able objectives)

⇒ Construction risk (eg cost overrun, delay, failure to meet performance criteria) ⇒ Operating risk (eg raw water quantity/quality, operating cost overrun, interrup-

tion) ⇒ Revenue/demand risk (eg increased operating costs, bad debt, fall in reve-

nue, lower-than-expected demand) ⇒ Financial risks (eg exchange rate, interest rate fluctuations, bad debt [non-

payment by consumers]) ⇒ Political risks (eg change in government, political interference) ⇒ Legal risks (eg contract disputes) ⇒ Environmental risks (eg pre-existing liability, site remediation, pollu-

tion/discharge) ⇒ Force majeure (eg flood, earthquake, riot)

• Establish a risk matrix in order to develop a common understanding of your exposure. ⇒ Weight the identified risks against their impact and probability. (Where a risk

cannot be accurately quantified it should be addressed through qualitative assessment.)

⇒ Summarize the risks and their weight in a risk assessment matrix. Create a risk landscape with “red”, “yellow” and “green” areas and establish priorities for action.


Proactive risk man-agement

[Checklist] RISK DETECTION MA-TRIX AND RISK LAND-SCAPING

II_12 Prepare for risk allocation The assessed risks (see GL note II_11 above) must be mitigated and allo-cated to the various partners who must also be clear on who is liability for fines in the event of non-compliance with regulations. • Risk mitigation:

⇒ Changing the project profile (service levels, time scale, PSP model, etc) ⇒ Partial risk guarantees: These can bridge credibility gaps until a policy track

record has been established, leading to longer credit terms and lower interest rates.

⇒ Third-party financial guarantees: These guarantee that the private partners perform to a reasonable level

• Allocate risks to the party that can minimize and manage them most ef-fectively. Where no party has a clear comparative advantage in manag-ing the risks, they should be shared equally. Assess: ⇒ Risks arising from factors actually or potentially under the control either of the

public or the private partner (eg inadequate information, poor design, ineffec-


[Further reading] WWW.WORLDBANK.ORG/GUARANTEES



tive management, poor communications, poor performance in construction, operation, etc)

⇒ Risks arising as a result of broader policy/institutional framework (eg poor pol-icy environment, institutional weakness, political interference) which are only controllable by external decision makers.

⇒ Risks that are essentially uncontrollable (eg natural disasters, political insta-bility, currency devaluation)

• Risk transfer must be agreed upon by the public and private partners – and in conjunction with stakeholders – during the procurement phase. Possible risk allocation: ⇒ Public partner: Influent water quality and quantity; mandated change orders ⇒ Private partner: “As is” condition of plant; non-performance; deterioration of

asset value; costs in excess of budget; non-compliance with safety or envi-ronmental regulations

⇒ Shared risks: System repairs/replacement; system expansion • Establish procedures and define responsibilities in the event of unantici-

pated risks. • Establish a balance between risks and penalties/incentives. • Define safety protocols for operations.


II_13 Establish a “transition” process for employees

Some of the former public utility staff will inevitably move to the new operator. • PSP managers must develop and review partnership contracts for em-

ployees. These contracts will typically include: ⇒ Limits on layoffs ⇒ Benefits and compensation protection ⇒ Salaries, holidays ⇒ Social security ⇒ Preservation of union rights

Responsible/lead: Local government Possible actors: Local government, public utility, unions, future operator


II_14 Address sensitive issues explicitly In the course of the Preparation Phase certain reservations will have been voiced and obstacles will have arisen. These need to be addressed in a prac-tical way in the project design. • Announce measures to overcome obstacles that might prevent custom-

ers from connecting to new facilities (land tenure, etc). • Agree on systems and procedures with Stakeholder Committee to en-

sure that concerns arising from project delivery are handeled in an ef-fecttive way.



II_15 Establish procedures for resolving disputes Since minor disputes will inevitably arise between the contracting parties, it is important to put a framework in place to settle them quickly and efficiently without recourse to the courts: • Consider setting up a Contract Dispute Commission. The following points

should be borne in mind: ⇒ Composition (eg financial, technical and legal expert)




⇒ Appointment procedure (eg agreement of public and private partner) ⇒ Rules of conduct and procedure, including timetable ⇒ Are the Commission´s decisions binding? ⇒ Funding

• The Dispute Commission should meet regularly.

Responsible/lead: Regulator Possible actors: Regulator, regulation experts

Guideline Notes for the Regulation Process of the Planning Phase

II_16 Where necessary, seek to effect changes in legislation Contractual arrangements between formal and informal private-sector entities and NGOs may need to be amended to allow community-based organiza-tions to become involved in PSP processes. Check • Infrastructure legislation • Service legislation

Responsible/lead: Local government Possible actors: Regulatory authority, local government, national government

Accountability

II_17 Put regulation in place The Procurement Phase should not begin until: • The regulator has been identified and its duties defined and agreed (see

also GL note I_15 above. Duties normally includes: ⇒ Setting tariffs for water supply and wastewater services ⇒ Ensuring compliance with licenses and/or contracts ⇒ Monitoring levels of service and operational performance (including customer

services) ⇒ Compiling and publishing information on sector & service provider perform-

ance ⇒ Addressing disputes between companies and consumers

• Methods have been defined for monitoring outcomes and the achieve-ment of targets

• Metrics/indicators have been proposed for financial accountability • The regulator has been authorized (ie given legal authority for financial

auditing)

Responsible/lead: National / local government Possible actors: Regulator, national government, local government

Accountability Socially responsible financing

II_18 Establish water resource management standards • Institute environmental impact assessments and identify protection

needs. This will include: ⇒ Setting water abstraction limits ⇒ Protecting habitats during construction ⇒ Defining minimum flow levels in rivers ⇒ Establishing water resource quality standards

• Establish drinking water and sewage effluent quality standards. These will include: ⇒ Setting standards for drinking water quality, including maximum permissible

levels of certain substances and microorganisms ⇒ Setting limits on volume and concentration of effluents to be discharged from

sewage treatment plants

Resource conserva-tion Results orientation

[checklist] WHO GUIDELINE STAN-DARDS FOR WATER AND WASTEWATER QUALITY

Implementation Guidelines for PSP in Sustainable WSS Phase II: Planning, Strategy (Regulation Process)


⇒ Limiting the volume and toxicity (for humans and ecosystems) of effluents discharged into sewers by industry

• Establish charges for: ⇒ Direct abstraction from water sources (flat fee or metered) ⇒ Discharging trade waste into sewers ⇒ (see also GL note II_07 and II_09 above)

Responsible/lead: Regulator Possible actors: Regulatory authority, local government

II_19 Oversee public consulting process

There will be a need for regulation in the area of procedures and process control before PSP becomes a reality: • Require that community input as described in the this guideline publica-

tion, especially from poor communities, be procured throughout the PSP process, and particularly where alternative service delivery arrangements are used for low-cost services.

• Require that all planning documents are made public. • Ensure that there is adequate time for community residents to respond to

planning documents and that they have the capacity to do so. • Provided this has been agreed between stakeholders as described in GL

note II_01 above, request that a fee be paid by the public partner con-sidering PSP to community organizations to enable them to hire an inde-pendent TA provider. This funding, while originating with the local service provider or charitable entity, should be fully under the control of the regu-lator who will delegate it to the independent TA provider.

Responsible/lead: Regulator Possible actors: Regulator, Stakeholder Committee, local government

Transparency

II_20 Involve the regulatory authority in project preparation All regulatory bodies with jurisdiction over any part of the PSP process shall: • Participate in stakeholder meetings during the preparation phase

⇒ If necessary, the potential public contracting party shall fund this participation. • During the preparation phase, lay down in written form the rules – both

current and, wherever possible, future – with which the contracting par-ties will be required to comply.

• Comment on the tariff policy and tariff calculation formula.

Responsible/lead: Regulator Possible actors: Regulator, local government

Accountability, proac-tive risk management

II_21 Regulate the regulators The regulatory process needs to strike a balance between predictability and flexibility in order to minimize regulatory risk and allow for project design to be amended in response to unexpected outcomes. It is thus important to de-mand: • Certain basic steps the regulatory bodies must observe before it can take

a decision (eg submissions by operator and other stakeholders; sufficient time for preparing submissions; obligation to publish and justify its deci-sions, etc)

• Transparent criteria for the regulators´ decision-making process • An effective appeal process

Responsible/lead: Local government Possible actors: Local government, regulation experts


Implementation Guidelines for PSP in Sustainable WSS Phase II: Planning, Strategy (Support Processes)


Guideline notes for the Support Processes of the Planning Phase

II_22 [stake] Test readiness of cooperation instruments The cooperation structures agreed with stakeholders during the Planning Phase (see GL note I_20, I_21, I_22, and I_23 above) should now be imple-mented: • Relevant stakeholders/participants must be identified. • Appropriate systems for communicating project information, financial in-

formation and water use information to all stakeholders must be de-signed and tested.

• The first meetings of the Stakeholder Dispute Commission (see GL note I_26 above) should be held.


Accountability

II_23 [stake] Cross-check representation It is important to be sure that representatives in the Stakeholder Committee accurately represent the views of their constituencies. This can be achieved by organizing occasional public meetings at which all stakeholders can wit-ness on what proposals are being made.

Responsible/lead: Local government Possible actors: Stakeholder Committee, local government

Transparency

II_24 [stake] Set up a Tariff Commission Since tariffs can be a highly sensitive matter, customers must understand the issues that affect and determine them and agree to a given tariff structure (see GL note II_07, II_08, and II_09 above). Forming a Tariff Commission is a good way of encouraging greater customer involvement and helping custom-ers to understand how prices are calculated. • The committee should be comprised of: The relevant ministerial and mu-

nicipal representatives, private operator manager, regulators, consumers association representatives, and other CSOs (women, neighbors, un-ions).

• Meetings and tasks: ⇒ Call a public meeting (if useful: together with the stakeholder committee) on

the tariff system when it is being established or should being changed: Ex-plain the proposed tariff system and solicit input from consumers.

⇒ Conduct meetings every six months to check whether tariffs are generating sufficient revenue to cover all of the operating costs and investments, includ-ing the private operator’s return.

⇒ Organize consultation meetings whenever tariffs are being changed to ex-plain economic needs, the investment situation and how – and by how much – tariffs will need to be adjusted to meet financial targets.

⇒ Check the usefulness of payment systems (see GL note II_10 above).

Responsible/lead: Local government Possible actors: Stakeholder Committee, regulator, Poverty Advisory Group


II_25 [stake] Include stakeholders in assessment of impact on vulnerable customers Invite together with the stakeholder committee and the poverty advisory group (see GL notes I_22, I_23 above) stakeholder representatives to ex-press their concerns about the project´s potential consequences for the poor. • The analysis should be based on the needs assessment (see GL note

I_24 above) and focus on social, financial and other objectives, obsta-cles, and constraints.




• Stakeholders should refrain from prejudging the desirability of PSP in the abstract. Rather, they should seek to describe, as comprehensive as possible, the problems/benefits that could arise as a result of the PSP project.

• This “invitation” should include allowances for participants that cannot af-ford to contribute without receiving financial support.

Responsible/lead: The potential public contracting party Possible actors: Poverty advisory group, local government, moderator

II_26 [stake] Include stakeholders in risk identification

Use the Stakeholder Committee to identify forms of risks, and stakeholder groups likely to experience those risks. Gathering perceptions of risk expo-sures can help managers gain a clearer picture of their project’s risk land-scape. • The procedure is described in GL note II_11 above. • This stakeholder participation process can make use of established

structures and procedures (GL note I_22 above).

Responsible/lead: Local government Possible actors: Stakeholder Committee, local government, moderator


II_27 [stake] Review all draft project documents Solicit broad community input before making a recommendation as to whether to proceed with PSP or not, and decide on the type and structure of PSP, along with the financial mechanisms and tariff structure. • Make all planning documents available to all stakeholders in the relevant

languages, venues, and forms identified by the community (see GL note I_27 above).

• Special attention should be paid to: ⇒ The adequacy of the project’s improvement targets ⇒ Financial aspects and consequences of the proposed projects for (poor) con-

sumers. ⇒ Conducting a thorough evaluation of the quantitative costs and benefits of

PSP; consider re-engineering or restructuring the public system. ⇒ Resource conservation: This is a fundamental component of any water sys-

tem and is just as important as supply considerations/planning. • Give stakeholders sufficient time and support to:

⇒ Review all draft planning documents ⇒ Support or oppose the proposals of the public partner. Where stakeholders

oppose certain proposals, they should check the feasibility of their objections first.

• Host independently facilitated meetings within the framework of the stakeholder cooperation structure in which stakeholders present their views on the proposals, and other parties respond to those views. If nec-essary, the public partner or other local governmental or charitable entity shall pay for independent facilitation.

Responsible/lead: Local government Possible actors: Stakeholder Committee, facilitators, moderators, TA providers, utility

Transparency Socially responsible financing

II_28 [stake] Find agreement on basic approach and role On the basis of the consultation and discussion with stakeholders described above (GL note II_27 above), local government should agree, together with Stakeholder Committee, on: • An acceptable approach to PSP • The options for providing and paying for the water supply and sanitation

services




• The potential role of stakeholders in delivering water services. Stake-holders could, for instance, become involved in: ⇒ Monitoring and informally regulating the use of communal facilities ⇒ Sub-contracting labor or services for constructing or operating water service

facilities ⇒ Acting as small-scale providers (operating under license) of services to the

very poor ⇒ Collecting charges within communities ⇒ Micro-financing for connections, etc


II_29 [cap] Build knowledge around tariff issues

Conducting major tariff discussions requires a good understanding of the is-sues that affect prices (see GL note II_05, II_07, II_08, II_09, and II_10 above). It is therefore important to organize capacity-building sessions for stakeholders and interested residents. • Below are some of the wider issues that should be addressed in these

sessions: ⇒ What do we mean by adequate quantity and quality in water services? ⇒ How can we reduce water losses and excessive consumption? ⇒ How do we go about protecting the environment in the water system? ⇒ What do we mean by “appropriate infrastructure”? ⇒ How do we determine an adequate rate of return for the private operator? ⇒ How do we go about setting an appropriate regulation fee? ⇒ How do we ascertain the consumer´s capacity to pay? ⇒ How do we ascertain the consumer´s willingness to pay? ⇒ How can we promote a sense of solidarity amongst consumers?

Responsible/lead: Local government Possible actors: Development agencies, independent advisors, Tariff Commission, Stakeholder Committee

Socially responsible financing Power-balanced partnership

II_30 [comm] Communicate expected benefits • The quantitative benefits of the project should be communicated to

stakeholders. • Stakeholders should be informed about ways of overcoming obstacles

that may prevent them from connecting to new facilities. • Communicate to stakeholders how progress is to be monitored.


Results orientation

Implementation Guidelines for PSP in Sustainable WSS Phase III: Procurement


PHASE III: PROCUREMENT

Figure 6: Typical contract and financing structure for concessions following a procurement process

Tasks and challenges during the Procurement Phase Any successful public-private partnership starts with a transparent and effective process to procure a private operator. Procurement processes that are not properly designed often cause unnecessary expenditures and waste time and resources both for the public entity and potential private partners. The partnership should be based on a well-structured risk-sharing arrangement (including adequate supporting provisions) that is flexible enough to allow adoptions due to internal and external changes over the entire project life cycle. Main tasks:

- Process design: Procurement process, selection and evaluation criteria, procedure - Bidding, negotiation, contract

Main challenges: - Design: The design of the contract can make an enormous difference to the future success of

monitoring the contractor. Strategic thinking on monitoring needs to begin at the time the deal is structured – not after.

- Fair negotiation: Maintain a power balance during negotiations - Balance: Strive to find a middle way between obligation and flexibility when drafting the con-

tract - Enabling partnership: Although a well-drafted and unambiguous contract is key, productive

partnerships are the result of the constructive attitude of the people involved in the process, and not simply the terms of the contract. It is fundamentally important that governments estab-lish and cultivate this positive attitude during PSP procurement and subsequently during the entire term of the contract.

SubcontractorsSupply, Metering,

Billing, Construction

SubcontractorsSupply, Metering,

Billing, Construction

Contractor Agreement Water & sanitation

utility

Sponsors (Water companies, inves-

tors)

Local government(concession grantor)

Funders (IFIs, commercial banks,

bond issues)

Water users (Residents, industry,

institutions)

Concession agreement

Concession fee

Equity Funding

Shareholders’Agreement

(Recourse etc)

Financingagreements

Debt funding

Direct agreement (recourse, etc)

Sub-contractors(Supply, metering,

billing, construction)

Tariffs Charges

Water & sanitation services

Implementation Guidelines for PSP in Sustainable WSS Phase III: Procurement (Main Process)


Guideline notes for the Main Process of the Procurement Phase


III_01 Design procurement processes in a transparent manner A procurement plan must cover bidding, negotiation, and contract award • Organize the bidding process so that it is transparent and accountable.

⇒ This will normally include a formal notification of the proposed tender to po-tential bidders, a pre-qualification process, and a structured approach to re-questing and evaluating proposals.

⇒ Involve the Stakeholder Committee in designing a PSP procurement process that is most suited to current conditions. Develop a procurement plan based on this input.

⇒ Provide adequate time and support for public review of the process plan by residents and – if applicable (see GL note II_01 above) – the independent TA provider.

⇒ Disclose the final rules preceding to the procurement process. ⇒ Transparent procedures on how bidders’ proposals will be evaluated. ⇒ Do not modify the rules during the process. ⇒ Establish a Contract Evaluation Board (with representatives from the public

hand, stakeholder committee, and experts) responsible for the evaluation process appointed by the local government.

• Organize a cost-efficient bidding process: ⇒ The cost of bidding can be excessive, which may put off companies, espe-

cially SMEs. ⇒ The bidding cost problem can be alleviated by designing an effective bidding

process and, in particular, by providing good financial and operational data relating to the contract.

• The criteria against which bidders are evaluated may include one or more of the following: Concession fees, tariffs, investment programs and/or service quality standards.

• Draft a clear “request for proposal” (RFP), articulating the program objec-tives and defining explicit performance standards (service level agree-ment, SLA) that the successful bidder must meet. ⇒ Background and objectives ⇒ Description of the desired services (see target framework, GL note II_28) ⇒ Evaluation criteria and their relative importance ⇒ Insurance and bonding requirements ⇒ Financing responsibilities ⇒ Responsibilities for obtaining permits and complying with regulations ⇒ Information required (content, form, frequency) to evaluate whether the pri-

vate partner is performing in accordance with agreed standards ⇒ Terms of contract ⇒ Draft service agreement indicating mandatory and negotiable terms and con-

ditions ⇒ Instructions for submitting a bid

• Open the bidding to public as well as private service providers: ⇒ Explore the possibility of using local service providers wherever possible. ⇒ Discuss the reputation and performance of potential service providers with

the Stakeholder Committee to ensure that known underperformers are ex-cluded.

• If no bids are received: ⇒ Check whether the chosen PSP model is appropriate. ⇒ Go for direct negotiation. However, it is important to be aware that this ap-

proach may put municipalities at a disadvantage, as they have little experi-ence of negotiating; it also lacks transparency and gives rise to opportunities

Transparency Accountability Proactive risk man-agement

[Best practice] PUBLIC BIDDING IN RICHMOND (CALIFOR-NIA), NEW ORLEANS



for corruption.

Responsible/lead: Local government Possible actors: Stakeholder Committee, local government, regulator

III_02 Actively prevent corruption

Concrete measures will be needed to reduce the risk of corruption in any PSP project. These measures must be applied right from the start to even the most provisional design documents to ensure that a dishonest consultant does not engineer the entire preparation process for the benefit of preferred contractors or suppliers. • Possible anti-corruption measures:

⇒ Maximize transparency of processes and transactions. ⇒ Make available to the public all financial transactions during the Procurement

Phase. ⇒ Include independent observers in the tender issuing and acceptance proc-

esses to reduce the likelihood of officials being bribed. Suitable, reputable NGOs can provide this service.

⇒ Independent process monitoring (eg through civil society organizations or contracted experts. Such a process gives civil society representatives access to confidential proprietary information. Appropriate contractual terms need to be in place to make sure that such data is secure and does not get passed on any further.

• Employ Transparency International’s (TI) “Integrity pact for public con-tracting”. This model may be applied when contracting consultants, awarding management contracts, licenses or concessions. It establishes the contractual rights and obligations of all parties vis-à-vis the local gov-ernment and eliminates uncertainties as to the quality, applicability and enforcement of criminal and contractual legal provisions in a given coun-try. The TI pact includes: ⇒ A model contract between a government office and companies submitting a

tender ⇒ A statement by each bidder committing it to abstain from paying/accepting

bribes ⇒ A provision on the disclosure of all payments made in connection with the

contract ⇒ A provision whereby each bidder explicitly acknowledges that the no-bribery

commitment, the disclosure obligation and the attendant sanctions remain in force for the winning bidder until the contract has been fully executed.

⇒ A pre-announced set of sanctions for a bidder violating its commitments. These sanctions include refusal to award or cancellation of the contract, for-feiture of the bid security and performance bond, liability for damages to the local government and competing bidders, debarment of the violator by the lo-cal government for an appropriate period of time.


Proactive risk man-agement Transparency

[Blueprint] TRANSPARENCY INTER-NATIONAL: INTEGRITY PACT FOR PUBLIC CONTRACTING

III_03 Create explicit poverty incentives for the private operator Define the incentives in the bidding document in a manner that makes serv-ing poor customers interesting to the private operator: • Award contract on the basis of the number of connections to be installed

instead of a lowest tariff basis. • Ensure that service and technology levels can be adapted to local re-

quirements. • Make provision for engagement of NGOs and CBOs which can play a

very important part in service delivery within these communities. • Foster the use of local labor forces. This will bring an immediate benefit

to low-income communities and will help to improve the profile of the pro-ject.


[Best practice] LA PAZ EL ALTO, BOLIVIA

[Further reading] IFC: OBA POSSIBLE APPLICATIONS FOR THE DESIGN OF WATER CONCESSIONS

|Best practice| CHILES APPLICATION OF



Be aware of the following: ⇒ Residents in low-income communities will tend to lack skills, meaning that

they will generally only be able to offer labor. ⇒ Avoid placing unreasonable obligations on contractors to use local labor, es-

pecially where need for labor is limited. ⇒ Quality control problems: Unskilled laborers will need training and extra qual-

ity control measures. ⇒ Avoid expecting residents in beneficiary communities to carry out tasks they

are not competent to perform (even if they have undergone training). • Consider the use of OBA as described in GL note II_05 above


OBA FOR CONSUMPTION

[Further reading] SECO/DIPLOMA THESIS DARESSALAM

III_04 Invite the bidders to use innovative approaches • Invite bidders to comment on ambiguities and internal conflicts in the

documents if they believe that such exist. • Where appropriate, bidders should be allowed to make counter-

proposals or put forward alternative financial arrangements, provided these are to the benefit of the poor and are economically feasible and al-low to achieve the requirements.

• Private partners should comment on the adequacy of the proposed fi-nancial arrangements in favor of the poor and on their economic feasibil-ity. ⇒ Failure to comment does not absolve the private party of responsibility for

problems caused by the financial arrangements for poor customers later. Only by commenting in this phase can private partners ensure that these ar-rangements will work from their perspective.

⇒ It is often too late to make these types of comments during the Procurement Phase; potential bidders should therefore be invited to comment during the Planning Phase.

• The public partner shall evaluate any comments or counter-proposals on financial arrangements in favor of the poor and clearly describe how they will resolve any problems, or change any part of the proposed final documents (contracts, ordinances, etc), before awarding a contract.

Responsible/lead: Local government Possible actors: Local government, bidders


III_05 Make sure the contract contains clear definitions and targets • There are normally five main criteria to be considered in a PSP tender:

⇒ Levels of service: Water (quality, pressure, continuity, maintenance, etc); sewerage (effluent, spillover, maintenance, etc); customer service (billing, re-sponses to queries or complaints, interruption notifications, etc)

⇒ Tariffs: Tariff formula and structure, indexation, adjustment and renegotiation criteria

⇒ Level of social commitment: Staffing, salaries, etc ⇒ Levels of investment: It is preferable to define targets (time, coverage, exten-

sion, quality, UFW, etc) rather than the actual amount or method of invest-ment in the contract.

⇒ Levels of maintenance (eg as percentage of defined asset value or as fixed annual amount, etc)

• Specify what is expected of the private partner rather than how it should meet the expectations. ⇒ Allow for innovative technical solutions or supply arrangements with sub-

contractors. ⇒ Make clear that the accountability for complying with the terms of the conces-

sion contract remains with concession-holder. • Further elements the contract should address:

Results orientation Power-balanced Partnership Proactive risk man-agement



⇒ Risk allocation: who carries which risks to what extent (see also GL note II_12 above)

⇒ Changes in the operating environment, including regulatory changes (see also GL note II_11 above)

⇒ Insurance and bonding requirements ⇒ Contract management and oversight ⇒ Contract termination (See GL notes III_06, III_07 below)

• The contract should contain clear details and guidelines on: ⇒ Who (public or private partner) will assume responsibility for communicating

with the public ⇒ Continuing the public consultation process throughout the contract on a quar-

terly basis and whenever major decisions are made that might cause rate in-creases or alter services

⇒ Transparency in relation to financial, process, system, and SLA information • The contract must stipulate that:

⇒ The private partner (a) accepts responsibility for operating facilities in compli-ance with all regulations, (b) commits to financial arrangements designed to benefit the poor, as described in the procurement documents.

⇒ The public partner accepts responsibility for its share of payments, granting licenses (see GL-Note II_18 above), etc.


III_06 Define termination procedures in the event of breach of contract

“Termination for cause” occurs when either the private or public partner fails to perform in accordance with the terms of the contract. • Causes for breach of contract by the private operator:

⇒ Failure to fulfill the terms of the contract ⇒ Changing the objectives of the contract without the authorization of the regu-

lator ⇒ The private operator makes a specified number of serious infractions in a de-

fined period of time ⇒ The private operator continues to commit serious infractions repeatedly ⇒ The private operator does not renew its performance policy ⇒ The private operator goes bankrupt

• Causes for breach of contract by the local government ⇒ The local government fails to fulfill the contract clauses on investment ⇒ The local government does respect certain contract clauses

• Termination criteria should be defined in advance, as should appropriate “exit strategies” and financial penalties/reimbursements. ⇒ Scope for corrective action must be determined in advance. ⇒ In the event of termination for cause, the public partner must be compensated

for the cost of correcting damages resulting from non-performance, and for transitioning back to public operation or to another private partner.

⇒ The public partner must demand assurances entitling it to compensation in the event of non-performance. These may include: A Letter of Credit, a Per-formance Bond, a Parent Company Guarantee, or other sureties.

⇒ Reasonable upper-bound estimates can be developed for damages resulting from contract termination.

Responsible/lead: Local government Possible actors: Local government, private operator, regulator, Stakeholder Committee


III_07 Define termination procedures in the event of “termination for conven-ience” This occurs when the public or private partner wishes to end the contract for




reasons other than poor performance. • If the public partner initiated the termination, the private partner must be

compensated for demobilization costs and lost revenues and profits. • If the private partner initiated the termination, the public partner’s costs

must be reimbursed to ensure continuity and replacement of contractor. • The contract should specify which standards are to be applied and define

the process for reaching a financial settlement.

Responsible/lead: Local government Possible actors: Local government, private operator, regulator, Stakeholder Committee

III_08 Award the contract in a traceable manner

The contract should be awarded in such a way as to maximize value for the community. • The awarding authority must be able to justify its choice of contract to

consumers. • The public should be made aware of where the responsibilities for the

various parts of the water system will lie post PSP. • See also GL note III_13 on appropriate stakeholder involvement meth-

ods.

Responsible/lead: Local government Possible actors: Local government, evaluation board, Stakeholder Committee

Accountability

Guideline notes for the Regulation Process of the Procurement Phase

III_09 Oversee the accuracy and transparency of the procurement process • Put in place legal requirements for contract review and public consulta-

tion, including a defined time frame for this process. • Prepare systems for monitoring bidding processes and ensuring that

budgets are met. • Make sure any violation of rules in the bidding/contract negotiations or

preparation phase are suitably penalized. • Ensure that all financial transactions are available public during the Pro-

curement Phase (see GL note III_02 above on corruption), and that all documents are released to the public in ways that are accessible and understandable.

• The regulator must make its evaluation of the transparency and public input process available to the public.

Responsible/lead: Regulator Possible actors: Regulator, local governments, bidders, Stakeholder Committee

Transparency

III_10 Review the arrangements for the poor and the transparency clauses in the contract The regulator must pay special attention to critical issues in the contract (see GL note III_05): • Review and comment in writing on the arrangements designed to benefit

the poor in the proposed final documents (contracts, ordinances, etc) prior to contract award. ⇒ In particular, the contract must stipulate performance measures for poverty

responsiveness (eg number of new service connections made in each time period) that are deemed adequate by the regulator.

• Review adequacy of transparency requirements in the contract: ⇒ Formulate explicit transparency guidelines throughout the Operation Phase,

and clearly state which parties are responsible for what. ⇒ Ensure that the regulator can continue to monitor adherence throughout the

Operation Phase.

Poverty responsive-ness Transparency Resource conserva-tion

Implementation Guidelines for PSP in Sustainable WSS Phase III: Procurement (Regulation Process)


⇒ Possible exceptions: Financial details should not be reviewed if disclosure would substantially impact the ability of the private or public partner to comply with their contractual or other legal obligations. (Divulging information on the cash flows of either party could aggravate borrowing necessary for fulfilling contractual obligations.)

• Review and comment in writing on the obligations related to the protec-tion of water resources

Responsible/lead: Regulator Possible actors: Stakeholder Committee, local government

III_11 Avoid regulation vacuum

In cases where the parties have decided to press ahead with a PSP project in the absence of adequate regulations (ie there is no satisfactory legal frame-work or regulatory authority in place), or where deficits in the regulatory defi-cits have not been remedied by the time the project is launched, the contract itself will be the only “regulatory” instrument. If this is the case: • Establish a special purpose entity, eg a Contract Monitoring Unit (CMU).

⇒ The CMU is responsible for monitoring the contract. ⇒ Decide how this body is to be appointed (eg mutual consent by public and

private partner) and what its status will be as an entity balanced between the public and private partners.

⇒ Define the CMU’s competencies: Monitoring and reporting only, setting penal-ties for non-compliance, decision making power in the event of dispute, etc.



[Best practice] CONCESSION MONITORING UNIT CMU IN SOFIA

Guideline notes for the Support Processes of the Procurement Phase

III_12 [stake] Involve stakeholders in the design of the procurement process Procurement rules must be consulted with the Stakeholder Committee, and their input should be communicated transparently. • Stakeholders’ feedback should be fed into the procurement process de-

sign to ensure that the process is most suited to the type of community in question and to its water/wastewater needs (see GL note III_01 above).

• Stakeholders should be consulted on how best to proceed with the bid-ding, negotiation.


Accountability Transparency

III_13 [stake] Allow public review of the bidding, negotiation and contract • Make all bidding, negotiation, and contract documents available to stake-

holders: ⇒ Disclose financial details of the current local provider, as well as the financial

and SLA details of the contract. ⇒ Ensure appropriate (but not excessive) protection of proprietary information.

• Allow sufficient time for open, public review of all bids and contracts. ⇒ If the review window is too short, the public may oppose or become skeptical

about their real involvement in the process. • If an agreement cannot be reached with the Stakeholder Committee, go

for an independent review of contracts by an neutral party (“second opin-ion”).

• Presentations made by the potential private partners during the Pro-curement Phase should be public so that all stakeholders have the chance to meet them face by face.

• Give stakeholders an opportunity to comment on any changes in the

Transparency Accountability Proactive risk man-agement

Implementation Guidelines for PSP in Sustainable WSS Phase III: Procurement (Support Processes)


procurement documents that occur during the phase prior to the award of the contract. ⇒ Investment plans ⇒ Tariffs, charges, and adjustment mechanisms ⇒ Subsidies

• Provide stakeholders with the final proposed documents (contracts, ordi-nances, etc) that are relevant to the situation of the poor and the natural environment. ⇒ Once adequate review time has been allowed, permit stakeholders to voice

any concerns directly to the final decision makers on the PSP contract, prior to contract award.

Responsible/lead: Local government Possible actors: Stakeholder Committee, local government, outside consultants/reviewer

III_14 [stake] Negotiate participation level in the contractual arrangement If a participatory approach is to be included as part of the contract arrange-ment for service provision, it will be necessary to draw up a range of indica-tors in order to measure the performance. This may be done through consult-ants or partnerships between the utility company and community-based groups (eg NGOs) with experience in working with beneficiary communities.

Responsible/lead: Local government Possible actors: Stakeholder Committee, local government, consultants, NGOs

Accountability Power-balanced partnership

III_15 [cap] Elicit capacity-building needs for contract management The request for proposals, service level agreements and other procurement documents, will reveal: • The competencies and training needs of the public partner for effective

contract management

Responsible/lead: Local government Possible actors: Stakeholder Committee, local government, consultants, NGOs


III_16 [cap] Offer professional assistance to community Groups that do not have the technical or financial capacity to evaluate any proposed changes may not be excluded from the process. • Fund independent technical assistance for stakeholders to analyze the

consequences of the proposals (ie tariffs, charges, connections, service levels) on the poor. Local government, donors, charities, etc may be con-sulted for funding.

• The independent TA provider should communicate its assessment of the planning and procurement phases to the public on an ongoing basis by providing public testimony, publishing reports and fact sheets, and hold-ing public meetings.

• The independent TA provider should ensure that he is responding to the requests of the community by holding meetings to gauge needs and concerns.

• Such meetings should be funded by the public partner or other local gov-ernment or charitable entity.

Responsible/lead: Local government Possible actors: Technical assistance provider, Stakeholder Committee, local government, donors, charitable entities


III_17 [comm] Publish financial results of the bidding process Draw attention to: • Any deviations from the original plans • Situations in which tenders differ significantly from estimates

Responsible/lead: Regulator Possible actors: Regulator, local governments, bidders, NGOs

Transparency

Implementation Guidelines for PSP in Sustainable WSS Phase IV: Operation & Monitoring


PHASE IV: OPERATION & MONITORING

Figure 7: Link between Operation and Monitoring

Tasks and challenges during the Operation Phase The success of a PSP project depends to a very large extent on whether the private and public part-ners comply with the terms of the contract. Main tasks:

- Service delivery/operation: Production of potable water (water intake and treatment); distri-bution of potable water to customers; recollection of sewage; treatment and final deposit of sewage; metering and billing.

- Maintenance: Assets and facilities; grid and other infrastructure; repairing burst pipes; reduc-ing leakages.

- Construction: Source development; treatment plants; pumping stations; storage facilities; network extension and connection of new customers.

- Monitoring/regulation: Enforcing the terms of the contract between the public and private partner; monitoring operator’s performance; interpreting key contract terms.

Main challenges:

- Flexibility in response to changing frameworks and conditions (eg state of assets not as ex-pected, changes in demand)

- Adequate parameters for monitoring; meeting the SMART criteria - Specific: do they measure what we think they ought to measure? Measurable: Provides the indicator measurable data? Attainable: The identified indicator may be measurable, but is it attainable? Relevant: Do ac-tors and stakeholders see the indicator as being relevant to the project? Timely: Can the in-formation be collected in a timely manner and at regular intervals (time, effort, resources?).

Water abstraction and treatment

Water distribution and billing

Wastewater collection

Wastewater treatment

Discharge of treated wastewater

Disposal of sludge

Routine operation

Intake

Treatment plant

Network expansion

Network expansion

Treatment plant

Construction work

Main-tenance

Custo-mer

service

Compliance with legislation and

contract by

Public partner Private partner

Monitoring

Effective measurement

SMART- criteria

Feedback

Continuous improvement

Implementation Guidelines for PSP in Sustainable WSS Phase IV: Operation & Monitoring (Main Process)


Guideline notes for the Main Process of the Operation & Monitoring Phase


IV_01 Appoint a qualified contract manager Once the public partner starts delegating service delivery to the private op-erator, the skills and competencies it will need to manage the contract will be quite different from those required in the past when it provided all of the ser-vices itself. • Designate an individual who will:

⇒ Have primary responsibility for managing the contract ⇒ Ensure that the public partner complies with its contractual obligations ⇒ Act as the primary liaison with his or her private counterpart

• Criteria for selecting the contract manager to represent the public entity include: ⇒ No vested interest in returning the facility to public operation ⇒ Familiarity with facility operations ⇒ Detailed understanding of the contract terms and conditions ⇒ Experience in contract monitoring ⇒ Expertise in negotiation ⇒ Strong communication and interpersonal skills

• The contract manager’s skills could be enhanced through: ⇒ Formal training ⇒ Executive coaching ⇒ Exposure visits to communities that have experience with PSP

Responsible/lead: Local government Possible actors: Local government, trainers


IV_02 Fulfill the terms of the contract • Detailed “service development plans” are to be developed by the private

operator in accordance with the stipulations of the contract: ⇒ A service development plan for the whole contract period must be presented

to the regulator no later than about a year after the contract start date. ⇒ An updated service development plan must be presented annually.

• An Annual Report must be presented each year ⇒ These documents must be accessible for all stakeholders, including custom-

ers.

Responsible/lead: Private operator Possible actors: Private operator, regulator, local government

Results orientation

IV_03 Implement the tariff system • The private operator implements the tariff system as defined in the tariff

policy (GL note II_07 and II_09 above). • If the private operator wishes to adjust tariffs, it must submit its proposals

together with financial performance data to the regulator. This data will normally include: ⇒ Operation and maintenance expenditures ⇒ Investment performance ⇒ Interest rate information

• The tariff structure must be formally approved by the regulator. • Inform the consumers about their rights and obligations. • Answer the claims and/or queries of any CSO relating to the tariff sys-

tem.



Responsible/lead: Private operator Possible actors: Private operator, regulator, Tariff Commission

IV_04 Implement customer-friendly payment systems • Use payment systems that have been tailored to the local situation

as defined during preparation and planning (see GL note II_10 above). • If the payment systems are not covered under the contract, they must be

discussed and agreed at the beginning of the Operation Phase with the Stakeholder Committee (see GL note I_22 above).

Responsible/lead: Private operator Possible actors: Customers, Stakeholder Committee


IV_05 Continuously improve customer service and service awareness • Local customer service offices

⇒ Set up local customer service offices for processing transactions. Where illit-eracy is widespread and postal and phone services are unreliable, people tend to prefer personal contact.

⇒ The offices act as a centre for customers to present their complaints. ⇒ They provide a channel for information exchange.

• Given that many utility staff will have an engineering background or – if they come from abroad – may not be familiar with the local situation, they may need training in: ⇒ Customer care, especially where low-cost connections are a departure from

traditional practice ⇒ Participatory methods designed to overcome resistance to change (especially

in engineering functions) ⇒ Safety training: Updates, and access to refresher courses

Responsible/lead: Private operator Possible actors: Private operator, staff

Customer orientation Shared incentives

IV_06 Take advantage of local entities Employing residents and sub-contractors helps to build a local economy and involve local people in building and operating the water service facilities, thereby creating a sense of “local ownership”; it helps to reduce a commu-nity’s dependence on imported skills and labor (see also GL note III_04 above). • Consider all possible local sub-contractors:

⇒ Local formal private sector: Small and medium-sized enterprises (SMEs) may be contracted to perform specific tasks (eg metering, billing, repair).

⇒ Local informal private sector: These entities will often be able to perform a va-riety of tasks.

⇒ NGOs or civil society groups • Sub-contracting may be an interesting alternative for both parties to in-

vestigate: ⇒ It may allow operational tasks to be carried out in a cost-effective manner. ⇒ Close ties with local community may facilitate good revenue collection rates. ⇒ It may enhance communications with consumers. ⇒ Sub-contractors can carry out a range of tasks (eg meter reading) which may

be difficult for a utility company to do where they have not yet won the trust of consumers. In extreme cases (eg insecurity and civil unrest) local entities will likely be the only actors that can operate with any degree of safety.

• Sub-contractors may need capacity building if they have little commercial experience.

• Sub-contractors may need to change their mandate if existing arrange-ments exclude them from “commercial” activities.

Poverty responsive-ness Shared incentives Proactive risk man-agement



• Whenever you enter into a relationship with local entities: ⇒ Define binding rules ⇒ Note that the concession contractor remains responsible towards the local

government

Responsible/lead: Private operator Possible actors: CBOs, NGOs, informal private sector, private operator

IV_07 Introduce agreed systems for routine measurement

• The regulator must be supplied with performance reports on a quarterly, half yearly or annual basis (See GL note IV_11 below).

• The private operator should employ companies to conduct an independ-ent technical audit, an independent account audit, and an external audit and to assume responsibility for certifying all information sent to the regulator.

• Monitor the quality of industrial waste input into sewer systems and, in the event of non-compliance with agreed standards (environmental law etc), report this to the authority in charge of applying sanctions.

Responsible/lead: Private operator Possible actors: Private operator, regulator

Accountability

IV_08 Introduce a performance incentive program for staff A bonus scheme could be linked to the following: • Achieving high drinking water quality • Consistently reaching agreed sewage effluent standards • Achieving certain customer service standards • Achieving certain collection efficiency levels • Any labor incentive scheme should be reviewed regularly to ensure that

it is delivering the intended benefits.

Responsible/lead: Private operator Possible actors: Private operator, staff

Shared incentives

IV_09 Provide information on project progress Both the public and private partners need to be actively involved in supplying the public with relevant information – and in coordinating this information ef-fectively, as described in GL note IV_29 below. • The private partner assumes responsibility for communicating with the

public on the status of implementation and construction, and provides this information via monthly bills, public meetings, and educational mate-rials.

• Contractors provide details of their progress to stakeholders and update potential customers on any changes in connection dates if programs change.

Responsible/lead: Private operator Possible actors: Local government, private operator, contractors

Transparency

Guideline notes for the Regulation Process of the Operation & Monitoring Phase

IV_10 Grant water licenses • Water licenses for raw water abstraction and wastewater should be

granted: ⇒ Based on the resource management standards (see GL note II_18 above) ⇒ According to the project’s progress ⇒ Check whether additional water abstraction can be avoided (eg by fixing leak-

Resource conserva-tion

Implementation Guidelines for PSP in Sustainable WSS Phase IV: Operation & Monitoring (Regulation Process)


ages) • Charge for the licenses according to the tariff policy.

Responsible/lead: Local government Possible actors: Private operator, regulator, local government

IV_11 Start monitoring the operations from the beginning

• System performance must be monitored using indicators chosen early in the process and must be reported to the regulator and then to the public: ⇒ Number of customers being served (water supply and sanitation) ⇒ Quality of goods and service provided ⇒ Customer satisfaction ⇒ Schedule of project progress ⇒ Cost control/economic performance (water supply, waste water treatment,

source protection) ⇒ Rates of water abstraction from sources and any over-abstraction that might

occur (abstraction rate compared to source capacity and/or authorized ab-straction volumes specifically reserved for drinking water as opposed to other uses such as irrigation or energy production by local government)

⇒ Source quality (contamination through mining, industry, agriculture) ⇒ Unaccounted for water: Technical (losses during treatment and distribution);

commercial; compare with loss targets of the service development plan ⇒ Any service interruptions, planned and unplanned ⇒ The quality of treated water being put into supply and any failure to meet

standards ⇒ The quality of sewage effluent discharged into watercourses and any failure

to meet standards ⇒ Safety

• Define how and when the performance information should be reported to the regulator (if this is not already laid down in the contract).

• Make use of incentives to foster performance • Where necessary, levy fines or penalties on the basis of the regulatory

monitoring. Fines and penalties may be imposed for: ⇒ Over-abstracting from water sources ⇒ Interruption of water production ⇒ Failing to meet drinking water or sewage effluent standards ⇒ Polluting water resources ⇒ Failing to communicate planned interruptions ⇒ Not paying charges (penalty could be disconnection from the system) ⇒ Unauthorized discharge of industrial waste into sewers ⇒ Failing to meet industrial waste consent standards ⇒ Unauthorized connections to systems

• Gather stakeholders’ opinions when assessing the seriousness of “mis-demeanors” and before taking any punitive action or referring a case for such action.

• Fines should be calculated according to the: ⇒ Area affected ⇒ Severity of breach ⇒ Duration/time needed for repair ⇒ Time that elapsed before service was repaired/replaced ⇒ Number of breaches

Responsible/lead: Regulator Possible actors: Private operator, regulator

Accountability Shared incentives Results orientation Resource conserva-tion



IV_12 Manage price reviews effectively • Tariffs are adjusted regularly as laid down in the tariff policy (GL notes

II_07 and II_09 above) and in the contract, based on the review of the operator’s information (GL note IV_03 above), and in consultation with the Tariff Commission (GL note IV_22 below). ⇒ Tariff components (water consumption charge, sewerage charge, right to a

water connection, water meter, sewerage connection) ⇒ Tariff payments (one payment for all, separate payments) ⇒ Tariff structure: Fixed payment irrespective of consumption (unmeasured)

and/or consumption-linked payment (measured), subsidized tariffs ⇒ Payment frequency (monthly, bi-monthly) ⇒ Measures to be taken in the event of non-payment ⇒ Allocation of work carried out by consumers (digging, installation, etc)

• Appointing a tariff expert panel of independent experts to resolve dis-putes related to tariff adjustments is often a cost-effective and flexible so-lution: ⇒ The tariff expert panel makes a recommendation ⇒ Rules for appointing this panel should be written into the contract ⇒ If the parties still cannot agree following the recommendation issued by the

panel, the dispute may be referred to international arbitration.

Responsible/lead: Private operator Possible actors: Private operator, regulator, panel of tariff experts

Customer orientation Socially responsible financing

IV_13 Survey the effectiveness of subsidies • Public and private partners must comply with all terms of the contract

documents (financial and others) designed to benefit the poor and any other applicable laws and regulations, including any modifications to monitoring requirements made by the regulator.

• Investigate who ultimately ends up receiving the subsidies and compare this with the initial data/assumption. ⇒ Conduct household surveys ⇒ Make use of CBOs and NGOs

• Propose possible improvements.

Responsible/lead: Regulator Possible actors: Private operator, regulator, Stakeholder Committee, Poverty Advisory Group, NGOs


IV_14 Introduce a system for continual performance improvement • The system should include all items regularly covered by periodical cus-

tomer satisfaction surveys: ⇒ Visual appearance of drinking water ⇒ Taste of drinking water ⇒ Interruptions to supply of drinking water ⇒ Response time to customer complaints ⇒ Low pressure at drinking water taps ⇒ Flooding from sewers ⇒ Blockages in sewers ⇒ Smells from sewers ⇒ Inadequate communal facilities (fountains or latrines)

• Introduce a benchmarking system: Systematically compare performance not only against targets but also against that of other utilities.

Responsible/lead: Regulator Possible actors: Private operator, regulator

Customer orientation Results orientation

[Checklist] WORLDBANK BENCH-MARKING NETWORK: WWW.IB-NET.ORG



IV_15 Improve water use efficiency • Demand investments in technology to reduce leakages and water-saving

systems before expanding existing water resources or developing new ones.

• Incentives should be put in to encourage people to meet or exceed con-servation targets; equally, disincentives should be applied for failure to meet targets.

Responsible/lead: Regulator Possible actors: Regulator, private operator

Resource conserva-tion

IV_16 Define procedures for customer complaints • Complaints should be addressed to the private operator. • If the private operator does not respond to a claim satisfactorily, the cus-

tomer must have other options for presenting his/her case. These options may include: ⇒ The regulator: Domestic consumers must be able to have easy access to the

regulator to lodge complaints. ⇒ A Customer Dispute Mediation Board: Again, this must be easily accessible

to poor and illiterate customers. (Such a board must be established by the government and be anchored in the regulatory framework.)

⇒ The courts

Responsible/lead: Regulator Possible actors: Regulator, private operator, Customer Dispute Mediation Board

Results orientation Power-balanced partnership

IV_17 Establish direct contacts with customers Regulators need to seek ways of gathering the opinions and experience of domestic consumers, especially the poor. They should therefore:

⇒ Participate in Stakeholder Committee meetings and other community meet-ings and focus groups.

⇒ Conduct regular customer surveys

Responsible/lead: Regulator Possible actors: Regulator, Stakeholder Committee

Poverty responsive-ness Transparency

IV_18 Publish outcome of regulation process • Inform stakeholders using the established communication systems (see

GL note I_27 above), about: ⇒ All failures to meet standards and about any fines or penalties imposed, as

well as positive outcomes of the regulation procedures. ⇒ All licenses and consents that have been issued by the regulator and their

terms. In some circumstances commercial confidentiality may legitimately prevent full disclosure of details on trade waste consents.

⇒ Regular (annual) reports on compliance with regulatory standards and achievements of customer satisfaction.

• Coordinate information activities of the public and private partner (see GL note IV_29 below)

Responsible/lead: Regulator Possible actors: Regulator

Transparency, ac-countability

Guideline notes for the Support Processes of the Operation Phase

IV_19 [stake] Set up a Community Liaison Group within utility management This group will assume responsibility for forging relationships with key people and institutions within target communities as well as cooperating with the Stakeholder Committee (see GL note I_22 above).

Accountability

Implementation Guidelines for PSP in Sustainable WSS Phase IV: Operation & Monitoring (Support Processes)


• A start-up team should be established within the private water utility and assigned the role of promoting and facilitating the process through which the Stakeholder Committee negotiates a system of cooperation and communication between stakeholders and the utility.

• Appoint a Community Liaison Officer (must speak local language, possi-bly resident).

• Include professionals (eg sociologists) in the Community Liaison Group.

Responsible/lead: Private operator Possible actors: Private operator, Stakeholder Committee

IV_20 [stake] Continue regular communications with stakeholder groups

Make use of the established Stakeholder Committee (see GL notes I_20 and I_22 above) to keep the partnership alive. If necessary, hold meetings during construction, including site visits. • Public and private partners and regulator should engage in a regular dia-

logue (see also GL note IV_29 below) aimed at continuous performance improvement.

• Use the regular meetings as “early warning systems”: ⇒ Seek to understand in advance why customers might fail to make connec-

tions to systems, for example. ⇒ Use the meetings as a forum for investigating any other dissatisfactions

stakeholders might have with the facilities or the way they are being operated. ⇒ Investigate reasons for non-payment of charges.

Responsible/lead: Private operator Possible actors: Stakeholder Committee, private operator, local government

Power-balanced partnership Accountability

IV_21 [stake] Evaluate the adequacy of stakeholder cooperation If participatory approaches are followed as advised in these guidelines, moni-tor their effectiveness and adequacy. An independent group should be con-tracted to carry out an performance assessment of the relevant partners and to report to the regulator. • Measure stakeholder cooperation against agreed participation level (see

GL notes I_21, I_22 above)? • Has stakeholder cooperation contributed to more effective solutions or

has it slowed down or even hampered the process? • If necessary, propose, negotiate and introduce modifications to the

stakeholder cooperation structure and procedure.

Responsible/lead: Private operator Possible actors: Stakeholder Committee, Poverty Advisory Group, Tariff Commission, private operator, local government, regulator

Accountability

IV_22 [stake] Initiate public discussion on tariff changes Since tariffs are subject to change (see GL note IV_03 and IV_12 above), ongoing public discussion of the tariff structure with Stakeholder Committee and Tariff Commission is important. • Make operating statistics and reports relevant to financial and technical

arrangements in favor of the poor available to stakeholders in a form that is readily understandable to a layman.

• Make sure all stakeholders and partners have enough time to review and comment on any proposed changes to: ⇒ Tariffs ⇒ Other customer charges ⇒ Compensation of the private partners

• If no agreement can be reached on tariff adjustments (see GL note IV_12 above), the authority responsible for approving the tariff structure



has the last word.

Responsible/lead: Regulator Possible actors: Stakeholder Committee, Tariff Commission, private operator, regulator

IV_23 [stake] Consider a public performance assessment (PPA) system

A public performance assessment (PPA) can be used to create reliable public reports on service performance and build a base for discussion on improve-ments in the broader context of urban development. • Use it as a “partnership tool” not as an additional external audit • The assessment should include:

⇒ Data from the private service provider ⇒ Consumers’ perception of service from surveys ⇒ Public health data

• Cover by location: ⇒ Network (quality, interruptions, pressure, breakage, leakage) ⇒ Water quality (taste, smell, coliform/chlorine content) ⇒ Service response (percentage of complaints, speed of response, speed of

resolution, effectiveness of resolution) ⇒ Coverage

• Prepare the data by sector/district of the municipality. • Hire an independent project team to establish the PPA system and proc-

ess. • Alternatively, if this is agreed with the Stakeholder Committee (see GL

note II_01 above), the independent TA provider also provides monitoring of contract management during Operation Phase and reports to the community through town hall meetings and independent reports.

Responsible/lead: Regulator Possible actors: Regulator, local government, private operator, Stakeholder Committee, consultants

Accountability Transparency Results orientation

[Best practice] PPA PROJECT IN MANILA

IV_24 [stake] Discuss effectiveness of the regulation process Request that stakeholders offer their opinions through established channels (see GL note I_22 above) on issues like: • Inadequate documentation or possible failure to comply with the finan-

cial, institutional or technical arrangements in favor of the poor. • Modifications of monitoring requirements made by the regulator, al-

though the final decision will always remain with the regulator.


Socially responsible financing Transparency

IV_25 [cap] Educate water users • Extension programs are carried out during the Operation Phase and

should be accompanied by information and education programs on the following topics delivered shortly before connections become available: ⇒ Basic hygiene ⇒ Water use efficiency

• It is often useful to ask prominent individuals in a community to nominate people to supervise the use of communal facilities and advise on: ⇒ Behavior ⇒ New technology ⇒ Economic incentives for conservation

Responsible/lead: Operator Possible actors: Local government, private operator, regulator, facilitators




IV_26 [cap] Train local contractors or local laborers

Carry out training sessions according to the tasks in hand and local needs. • Local laborers and local contractors will need training in hygiene prac-

tices to be adopted during construction and operation. This includes: ⇒ Personal hygiene ⇒ Keeping tools clean (including sterilization of specialized tools) ⇒ Ensuring that tools used on drinking water facilities are not used on sanitation

facilities • Local small-scale providers that continue to operate as part of the new

water services regime also need to be educated in hygiene matters (see above)

• Local laborers used to operate water supply and sanitation facilities need to be fully trained and ready to take over maintenance and operation roles should a foreign contractor leave the project.

Responsible/lead: Operator Possible actors: Customers, private operator, regulator

Results orientation Customer orientation

IV_27 [cap] Train communities Communities need training at various levels and on various issues: • Organize community education and training initiatives to enable commu-

nities to manage their own pipes and taps on the “last mile”: ⇒ Labor (eg plumbing, small business development) ⇒ Operation and maintenance (accounting, community management)

• The “legal literacy” of consumers tends to be low and they are often un-aware of their rights when they enter into contracts. ⇒ Community groups should be given training on legal rights, contractual obli-

gations, grievance procedures, etc. ⇒ Consumer groups will need training on how regulatory processes work, and

how they can interact with these processes. ⇒ Continue to build capacity of consumer groups. This will be especially impor-

tant in urban environments where populations are highly transient. Look for evidence that such groups are contributing to a stronger civil society (ie they are playing a positive role in urban development above and beyond the water sector).

• Any training activity can be used to: ⇒ Build awareness of the real cost of water supply and sanitation service deliv-

ery ⇒ Promote understanding of utility supplies as something that is of universal

benefit to communities ⇒ Reinforce awareness of the importance of hygiene and sanitation

Responsible/lead: Regulator Possible actors: Customers, private operator, regulator, facilitators, consultants

Poverty responsive-ness Power-balanced partnership

IV_28 [comm] Communicate tariff systems and consumer rights • Inform consumers and stakeholders clearly and transparently about the

tariff system and their rights and obligations in all processes within that system.

• Inform the public about the possibility of submitting complaints regarding failure to meet agreed performance targets to the operator’s complaints department, or, in the case of prolonged or severe non-compliance, to the competent regulatory authority’s consumer rights department.

• Explain the roles of the regulators and their power actively to all stake-holders.

Responsible/lead: Regulator




Possible actors: Customers, private operator, regulator, facilitators, consultants

IV_29 [comm] Maintain a continuous information flow

Citizens hold their local government responsible for providing them with safe drinking water supply and sanitation services. Local government can never relinquish this responsibility entirely. It is therefore important to ensure that the public is kept informed (see also GL note I_27 above): • The public partner should provide overall oversight for the Operation

Phase • In addition to fulfilling contractual information obligations (ie information

on planned and unplanned service interruptions), the private partner should keep stakeholders informed about the status of implementation and construction work and update potential customers on any anticipated changes in connection dates. ⇒ Proactive information policies on services, water quality, challenges, general

water issues, etc • It is the task of the regulator to inform stakeholders about the contractor’s

financial performance. This should include: ⇒ Performance against budget ⇒ Agreed additional work ⇒ Changes in rates for work

• Wherever possible, do not let difficulties or obstacles – whether techni-cal, financial or political – prevent you from communicating effectively. This might cause significant reputational damage and spark rumors about the projects viability.

Responsible/Lead: Local government, private operator Possible actors: Local government, private operator

Accountability Transparency Results orientation

[Best practice] SOFSKAVODJA RE-CEIVED 2003 PR PRICE FOR OUTSTANDING COMMUNICATION EFFORTS

Implementation Guidelines for PSP in Sustainable WSS Phase V: Termination


PHASE V: TERMINATION

Figure 8: Contract dispute scenarios, review and termination

Tasks and challenges during termination A contract may be terminated simply because the contract period has expired or because a given event causes it to be broken off prematurely. Termination rules covering both types of scenario must be defined in the contract. Main tasks:

- Transfer: Check condition of assets and facilities according to contract definitions - Ensure service continuity

Main challenges: - In the case of normal contract termination

o Continuity: Transfer to the new operator without service interruption o Fairness: Current private operator and local government should not lose funds

- In the case of premature termination o Continuity: Maintain service to consumers without interruption o Fairness: Fair and transparent conflict management and settlement

Expired

Contract

Termination

Dispute resolu-tion procedures

Dispute

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Planned review

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Public opera-

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Renegotiation

Implementation Guidelines for PSP in Sustainable WSS Phase V: Termination (Main Process)


Guideline notes for the Main Process of the Termination Phase


V_01 Hand-over after contract completion • Upon completion of contracts to build and operate water service facilities

for a limited period, the successing operator (whether public or private) assumes operational responsibility.

• Trial periods where local labor and contractors operate the facilities whilst being overseen by the contractors should be completed to identify any potential weaknesses.


Shared incentives

V_02 Follow defined arbitration procedures • The entities responsible for arbitration, according to severity of dispute,

must to be defined in the contract. These may include: ⇒ Regulators ⇒ Dispute Commission with legal, technical and financial expertise, appointed

by agreed rules (see GL note II_15 above) ⇒ Specialized arbitration organizations (eg the Environment Council) ⇒ Arbitrators appointed by professional bodies (eg professional accountancy or

engineering professional institutions) usually nominated in the contract docu-ments

• Measures to be taken in the event of inappropriate performance must be pre-determined in the contract. An arbitration and correction mechanism must be triggered when such performance deficits are detected.

• All parties should participate in mediation, binding arbitration, or other administrative conflict resolution procedures specified in the contract.

• The public partner and the private partner need to clearly lay out the na-ture of the dispute and release any information on the history of non-compliance by either party.

• Inform the public about the arbitration process through town hall meet-ings publications.

Responsible/lead: Regulator Possible actors: Local government, private operator

Accountability Proactive risk man-agement Transparency Results orientation

V_03 Conduct renegotiations equitably Long-term contracts are not written in stone. They require monitoring, nurtur-ing, adjustments, and sometimes renegotiation to keep them viable over the entire project life cycle. • Handle any proposed renegotiation in contract terms as if it were a plan-

ning proposal in phase 2 of this process. • MORE WILL FOLLOW…………

Responsible/lead: Local government Possible actors: Private partner, local government, regulator

Results orientation

V_04 Take precautions Take measures to secure continuous service in the event of unexpected con-tract termination: • Establish a fund financed by the public and private partner (details must

be laid down in the contract) • Appoint an administrator to ensure continuity of services to customers

before the private operator contract comes to an end. This administrator

Implementation Guidelines for PSP in Sustainable WSS Phase V: Termination (Main Process)


should be paid from tariff revenues.

Responsible/lead: Local government Possible actors: Private partner, local government, regulator

Guideline notes for the Regulation Process of the Termination Phase

V_05 Carry out a review of the project(s) Inspect the assets and services two years before contract termination to es-tablish whether they are in the condition stipulated in the contract, and whether the defined benefits, as well as the customer service criteria, are be-ing fulfilled. • Involve the Stakeholder Committee to establish whether the new water

services were meeting expectations. • Whenever it is agreed that the services being provided have been falling

short of the targets in the contract, establish whether this is the result of constructional or operational failures. ⇒ If construction failures are causing problems they should be remedied under

the terms of the original contract. ⇒ Where there are operational problems, targets should be set for improving

any aspect of the provision of water services that is failing to meet standards or customer expectations.

⇒ If the problems are not remedied, the regulator should impose penalties in line with the terms of the contract.

• If the failure is due to the contractor or operator, fines or penalties should be imposed. If failure is due to other factors such as population growth, further investment may be required. In these circumstances, the regula-tor should agree with the operating authority on an appropriate invest-ment program designed to overcome the problems.

• If failure to deliver benefits results from insufficient stakeholder coopera-tion, the regulator should require the operating authority to liaise with stakeholders to achieve the cooperation required for success.

• Where there are conflicting views on the causes of failure or on the achievement of quality or customer service standards, arbitration proce-dures may need to be introduced according the defined regulation pro-cedures (see GL-Note V_02 above).

Responsible/lead: Regulator Possible actors: Local government, private operator, regulator, Stakeholder Committee

Results orientation

V_06 Enable constructive renegotiation Handle any proposed renegotiated agreement as if it were a planning pro-posal in phase 2 of this process.


Results orientation

[Further reading] WORLD BANK 2003: PRICE CAPS, EFFI-CIENCY PAYOFFS, AND INFRASTRUCTURE RENEGOTIATION IN LATIN AMERICA

V_07 Qualify the infractions leading to breach of contract The infraction can be reported by the regulator alone, or be the result of a formal complaint. An infraction may be minor or very serious. • The regulator qualifies the infractions in advance based on the relevant

contract clauses (see GL note III_06, III_07 above), eg: ⇒ Private operator does not provide an emergency service when water provi-

sion is interrupted for a long period of time. This is a serious infraction if a large area is affected.

⇒ Unanticipated interruption of water service. This may qualify as a serious in-fraction if service is interrupted for a long time.

⇒ The private operator does not report on scheduled service interruptions. This is a serious infraction if a large area is affected.

Implementation Guidelines for PSP in Sustainable WSS Phase V: Termination (Regulation Process)


⇒ The private operator does not fulfill its contractual obligations to report to the regulator or to inform customers.

⇒ The private operator does not meet customers expectations (two consecutive incorrect bills).

⇒ The private partner discharges treated water that fails to meet quality stan-dards.

⇒ The private partner supplies drinking water that does not meet quality stan-dards.

⇒ Modifying the tariff without gaining the permission of the regulator; misappro-priating goods or funds; misusing or retaining the regulation fee. All of these are serious infractions.

⇒ The private operator fails to fulfill the specific tasks outlined in the contract. ⇒ If the private operator commits three serious infractions in a defined period of

time, this counts as a breach of contract.


V_08 Keep full transparency

• Ensure that all aspects of a dispute are made public, and that the com-munity is consulted during renegotiations.

• When developing an exit strategy, the regulator needs to ensure trans-parency in all negotiations and in the final outcome and ensure that there is a smooth transition to another operator.

• Continue to produce annual reports which include details of: ⇒ Conformance with regulations ⇒ Achievement of customer service criteria ⇒ Fines and penalties imposed

Responsible/lead: Regulator Possible actors: Regulator

Transparency

V_09 Initiate new bidding process Decide whether to launch a new bidding process in cooperation with the cur-rent private operator. • The current private operator may participate in the bidding process for

the new PSP provided there has been no breach of contract. ⇒ If the current private operator is not selected in the bidding process but has

invested in the services, it should receive the value of these investments as defined in the accounts. If either the private operator or the local government refuses to accept this value, a technical auditor, previously accepted by both sides, should be called upon to decide. If the issue still cannot be resolved, both parties may settle the matter in a court.

• Handle new bidding process as in phases 1-3 of this process.

Responsible/lead: Regulator Possible actors: Local government, private operator

Results orientation

Guideline notes for the Support Processes of the Termination Phase

V_10 [stake] Keep the stakeholder network alive • Upon completion of a project and after satisfactory commissioning of all

installations, the stakeholder network can be reduced to stakeholder meetings concerning customer service and routine meetings with neighboring communities and countries which could be affected by the operation of the facilities.

• Keep stakeholders informed about all actions taken during this phase.

Responsible/lead: Local government

Power-balanced partnership Transparency

Implementation Guidelines for PSP in Sustainable WSS Phase V: Termination (Support Processes)


Possible actors: Private operator, local government, Stakeholder Committee

V_11 [stake] Involve stakeholders in exit strategy evaluation

• If the contract is being renegotiated or is in dispute, the public and all stakeholders should be kept informed about the nature of the contract dispute, and the history of contract management.

• Community residents should also be consulted to come to an effective exit strategy that will not disrupt service but will ensure a smooth transi-tion.


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Implementation Guidelines for PSP in Sustainable WSS Appendix II: Abbreviations


Abbreviations ADB Asian Development Bank CBO Community-based organization CSO Civil society organization HIPC Heavily indebted poor countries IBT Increasing block tariff IFC International Finance Corporation IFI International financial institutions IWRM Integrated water resource management NGO Non-governmental organization NWP Netherlands Water Partnership OBA Output-based aid (payment scheme) ODA Official development assistance PRSP Poverty Reduction Strategy Paper RFP Request for proposal PPA Public performance assessment PSP Private Sector Participation ROI Return on investment SLA Service level agreement TA Technical assisstance TI Transparency International UFW Unaccounted for water WSDF Water Sector Development Fund WSP Water and Sanitation Program (of the World Bank)

Documents

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