Toolkit: Approaches to Private Participation in Water Services Module 7 Developing Institutions to manage the relationship

Toolkit: Approaches to Private Participation in Water Services

Module 7

Developing Institutions to manage the relationship.

Introduction:

Navigating through this E-Learning Module This is one of 9 Toolkit e-learning Modules. Each Module is created in PowerPoint, and you advance through the Module by pressing the right arrow or ‘Enter’ button. Core Module: The Module takes you sequentially through four or five major issues, depending on the Module. The progress through the Module is shown by the colored area on a logo on the top right hand corner of each slide. Here is an example: Supplementary Content: The Core module covers all key issues. However, you can choose to access additional information. These supplementary slides can be accessed by passing the cursor over colored buttons. The button colors relate to issues of various levels of detail:

Navigation through the supplementary material is also by pressing the right arrow or ‘Enter’ button. At the end of each section you will return automatically to the core Module. However, there is an extra button (to pass over) on the top right hand of each supplementary page that gives you the option of a shortcut back to the core Module:

Basic Concept Detail

Expert insight

Supplementary Information / Case studies

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E-learning design: [email protected]

Elements of the Toolkit

TOOLKITTOOLKIT

1ConsideringPrivate Participation

2Planning the Process

5Standards, Tariffs, Subsidy, Financials

4Setting Upstream Policy

3Involving Stakeholders

6Responsibilities & Risks

7Developing Institutions

8Designing Legal Instruments

9Selecting an Operator

Additional MaterialCD-ROM

Appendix BPolicy Simulation

Model

Appendix AExamples of PP Arrangements

General Outline of Toolkit

TOOLKITTOOLKIT

1ConsideringPrivate Participation

2Planning the Process

4Setting Upstream Policy

3Involving Stakeholders

6Responsibilities & Risks

7Developing Institutions

8Designing Legal Instruments

9Selecting an Operator

Additional MaterialCD-ROM

Appendix BPolicy Simulation

Model

Appendix AExamples of PP Arrangements

Module 7

5Setting Service

Standards, Tariffs, Subsidies &

Financial Arrangements

Module 7

Developing Institutions to manage the relationship

Module 7

Developing Institutions to manage the relationship

Involve

Customers

Working

relations

Links

with others

Monitoring

& enforcing

Resolving

Disputes

Adjusting

Tariffs

Module 7Developing Institutions

Tariffs & Rules [Module 6]

Institution Interprets & Applies the rules.

[Module 7]

THE 3 ATTRIBUTESof the Institution

THE 3 TASKS of the Institution

In this Module we look at the issues that Governments need to address in order to choose and develop Institutions that will interpret and apply the many rules to be applied and enforced in a private participation arrangement.

Government needs to consider two main areas

TASKS: The Institution may have to carry out three main task areas

ATTRIBUTES: The Institution has to have three main attributes to be effective

Additionally we look at types of Institutions. The Institution design could range from an Expert Panel (easy), to an Independent Regulator (more difficult)

Plus!Types of Institution

Module 7Tasks and Institutions

1. Monitoring & Enforcing Performance

2. Resolving Disputes

3. Adjusting Tariffs

TASKS FOR INSTITUTIONS ATTRIBUTES OF INSTITUTIONS

‘In this section we look at the Institutions and three main tasks needed to manage a Private Participation Arrangement……..’

Plus!The Various types of Institution

“Many kinds of Institutions can perform some or all of the tasks required in a Private Participation Arrangement. We start by looking at these. These include:”

A government ministry, department, or other agency that is not legally distinct from the government.

The operator and the contracting authority acting by common consent—perhaps through a bipartite committee or with a mediator or independent expert acting as an adviser

The board of the publicly owned water utility (in the case of a management contract) or asset-holding company (in the case of a lease-affermage)

An independent expert or experts selected by the two parties

A contract monitoring unit A private firm with relevant expertise

An independent regulator at the same tier of government as the contracting authority (a municipal regulator) or at a higher tier (a national regulator for a municipal concession)

A local or international arbitrator or panel of arbitrators selected by the two parties (local or international)

Customers Local or foreign court

The operator

Choice of Tasks & Institutions

“Many kinds of Institutions can perform some or all of the tasks required in a Private Participation Arrangement. We start by looking at these. These include:”

A government ministry, department, or other agency that is not legally distinct from the government.

The operator and the contracting authority acting by common consent—perhaps through a bipartite committee or with a mediator or independent expert acting as an adviser

The board of the publicly owned water utility (in the case of a management contract) or asset-holding company (in the case of a lease-affermage)

An independent expert or experts selected by the two parties

A contract monitoring unit A private firm with relevant expertise

An independent regulator at the same tier of government as the contracting authority (a municipal regulator) or at a higher tier (a national regulator for a municipal concession)

A local or international arbitrator or panel of arbitrators selected by the two parties (local or international)

Customers Local or foreign court

The operator

Choice of Tasks & Institutions

Examples: Main types of Institutions;Main Tasks to be carried out

“Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:”

Choice of Institutions

Criteria for choosing Institutions:

Each task is different, but there are general characteristics the Institutions should share:

Information being available to the InstitutionCapability to carry out the taskIncentives for the Institution to make good choicesLegitimacy of the Institution – the moral and legal right to make a decision

Typical strengths and weaknesses of Institutions:

These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions.

The following three main sections discuss how these strengths and weaknesses affect the Institution’s abilty to carry out some of the main tasks of managing arrangement.

The following three main sections discuss how these strengths and weaknesses affect the Institution’s abilty to carry out some of the main tasks of managing arrangement.

“Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:”

Choice of Institutions

Criteria for choosing Institutions:

Each task is different, but there are general characteristics the Institutions should share:

Information being available to the InstitutionCapability to carry out the taskIncentives for the Institution to make good choicesLegitimacy of the Institution – the moral and legal right to make a decision

Typical strengths and weaknesses of Institutions:

These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions.

The following three main sections discuss how these strengths and weaknesses affect the Institution’s ability to carry out some of the main tasks of managing arrangement.

The following three main sections discuss how these strengths and weaknesses affect the Institution’s ability to carry out some of the main tasks of managing arrangement.

More detail on this slide

Institutions;Strengths & Weaknesses

Tasks1. Monitoring & Enforcing Performance

TASKS and INSTITUTIONS





Examples of need for monitoring:

Is the Operator meeting coverage targets? Is he providing required quality, quantity and pressure of water? Is he meeting wastewater and customer service standards?Is the Operator maintaining the Utility’s assets as agreed?Is the Operator providing the required information?

Some Institutions for monitoring Operator performance:

A MinistryA Utility Asset holding companyA Contract Monitoring UnitAn Independent Regulator

Other monitoring issues:

The contracting authority needs to be monitored on compliance – usually by the operatorCustomers need to be involved, but need a ministry or other organization to take their concerns to.Institutions may impose fines against non-compliance, others may have to take court action, or dispute resolution

“An Institution is needed to monitor whether the Operator is fulfilling its obligations under the Arrangement:”

A Ministry can monitor the Operator under any

arrangement. Lack of independence is not a problem – but lack of resources often is a

problem.

Management Contract: The utility can monitor operator performance.

Affermage –Lease:An asset holding company

can monitor.

A special Contract Monitoring Unit can be

created if existing agencies do not have the

skills.

An Independent Regulator is likely to have the appropriate skills to monitor and enforce

performance.

Tasks2. Resolving Disputes






“Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!”

Tasks2. Resolving Disputes






“Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!”

Resolving DisputesMore Expert Insight

Resolving Disputes

2. Resolving Disputes:Types of Dispute Resolution (1):

“Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement”

The various stages and options for dispute resolution include:

Negotiation

Mediation

Independent expert opinion

Independent expert decision

2. Resolving Disputes:Types of Dispute Resolution (1):

“Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement”

The various stages and options for dispute resolution include:

Negotiation

Mediation

Independent expert opinion

Independent expert decision

Renegotiation:Senegal Example

More Expert Insight:Types of Dispute Resolution (1)

Checklist:Designing Expert Panels

Types of Dispute Resolution (2):Arbitration & Courts

“Arbitration is often chosen, before involving the final sanction of court proceedings”

ARBITRATION

Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. Advantages include selection of judges suitable to the parties and to suit the technical commercial issues, and there is a more flexible approach

COURTS

Court settlements are generally conclusive and directly enforceable. When things are not going well with arbitration, a court case may be the only, ultimate, solution for dispute resolution

ARBITRATION OR COURTS?

Court settlements are normally conclusive and directly enforceable. However, generally arbitration is included in Private Participation Arrangements because the advantages of Arbitration outweigh the advantages of Courts. If private finance is involved, International Lenders may insist on arbitration

Types of Dispute Resolution (2):Arbitration & Courts

“Arbitration is often chosen, before involving the final sanction of court proceedings”

ARBITRATION

Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. Advantages include selection of judges suitable to the parties and to suit the technical commercial issues, and there is a more flexible approach

COURTS

Court settlements are generally conclusive and directly enforceable. When things are not going well with arbitration, a court case may be the only, ultimate, solution for dispute resolution

ARBITRATION OR COURTS?

Court settlements are normally conclusive and directly enforceable. However, generally arbitration is included in Private Participation Arrangements because the advantages of Arbitration outweigh the advantages of Courts. If private finance is involved, International Lenders may insist on arbitration

ArbitrationExpert Insights

Courts: Expert Insights

Arbitration:Examples of issues & Contract provisions

Tasks3. Adjusting Tariffs




3. Adjusting Tariffs3. Adjusting Tariffs

“Implementation of Tariffs, review and Tariff resets has a major impact on utility revenue and the Operator’s income. These issues cannot be controlled in advance

and have a high risk to the parties to the Arrangement ”

3. Adjusting Tariffs:The Two Approaches (1)

“There are two traditional approaches to the design of Tariff Adjusting Institutions

Bi-Partite Negotiation

Regulatory Agencies”

BIPARTITE APPROACH

Under a Bi-Partite arrangement the Contracting Authority and the Operator jointly agree on Tariff changes

If they cannot agree, then the contract outlines dispute-resolution procedures to be used.

Tariff resets are treated like disputes.

Bipartite negotiations associated with affermage-lease and concessions,

A relatively straightforward use of the approach is feasible in most countries but requires adaptation to deal with the heightened political and regulatory risk

Examples: France & former French Colonies, such as Côte d’Ivoire, Morocco, Senegal and Gabon






BIPARTITE APPROACH

Under a Bi-Partite arrangement the Contracting Authority and the Operator jointly agree on Tariff changes

If they cannot agree, then the contract outlines dispute-resolution procedures to be used.

Tariff resets are treated like disputes.

Bipartite negotiations associated with affermage-lease and concessions,

A relatively straightforward use of the approach is feasible in most countries but requires adaptation to deal with the heightened political and regulatory risk

Examples: France & former French Colonies, such as Côte d’Ivoire, Morocco, Senegal and Gabon

Bi-Partite Negotiation Bi-Partite NegotiationExpert Insight

Tariff Institutions:Improving the Bi-Partite Approach





REGULATORY AGENCIES

The Regulatory Approach involves a third party agency – the Regulator:

Traditionally associated with private ownership and the absence of a contract between parties

Simple transplant of regulatory approach likely to be too great for Operators because of the regulatory risks of investing in water services in the absence of a contract

Attraction is that Regulatory Agencies can be insulated from political pressures influencing tariffs

Decision making typically transparent, involving customers

Exemption from civil service salary limits and access to budget resources can give regulatory agencies more expertise than most ministries

Examples: Originally in the United States, and now standard in the United Kingdom, it is also used in former British colonies, and in countries affected by American practice, such as Caribbean countries

Regulatory Agencies





REGULATORY AGENCIES

The Regulatory Approach involves a third party agency – the Regulator:

Traditionally associated with private ownership and the absence of a contract between parties

Simple transplant of regulatory approach likely to be too great for Operators because of the regulatory risks of investing in water services in the absence of a contract

Attraction is that Regulatory Agencies can be insulated from political pressures influencing tariffs

Decision making typically transparent, involving customers

Exemption from civil service salary limits and access to budget resources can give regulatory agencies more expertise than most ministries

Regulatory Agencies Regulatory Agencies;Expert Insights

Regulatory Agencies:Design of Decision Making Process

Regulatory Agencies:Improve Independence & Capacity

Module 7Attributes of Institutions

1. Involving Customers

2. Maintaining good working relations

3. Links between Institutions to mange the Relationship

TASKS FOR INSTITUTIONS ATTRIBUTES OF INSTITUTIONS

Attributes:1.Involving Customers




ATTRIBUTES OF INSTITUTIONS


‘It makes sense to involve customers in managing the arrangement’

Attributes:1.Involving Customers






‘It makes sense to involve customers in managing the arrangement’

Tariff Adjustment:3 Ways of Public Involvement

Involving CustomersExpert Insight

Involving Customers

Attributes:2. Maintaining good working relations






Maintaining good working relations

The Operator and the Contracting Authority have a continuing relationship over the life of the contract.

It is helpful to have a permanent Forum to manage the relationship between the parties to facilitate:Working through issues as they ariseAgreement on interpretation of specific terms and conditionsAgreement and resolution of implementation issues

It is important to distinguish between maintaining good relations, and enforcing performance.

Involving the Operator in the monitoring of performance and making decisions on performance can create a conflict of interest and reduce enforcement effectiveness.

Example: Trinidad & Tobago Management Contract had the Operator’s representatives on the committee monitoring performance, and the Government had little confidence in the results.

‘It is important to distinguish between maintaining good relations, and enforcing performance’

Attributes:3.Links between Institutions





3. Links between Institutions to manage the Relationship

Links between Institutions to manage the relationship

Some aspects of the choice of Institutions for managing the relationship depend on the type of arrangement selected. Particularly on allocation of:

Responsibilities

Net Revenues:

The following examples show differences between Management Contracts and Concessions.

‘Some aspects of the choice of Institutions for managing the relationship depend on the type of arrangement selected’

Links:Institutions in a Management Contract

Private operator

Customers

Public utility

Regulator

Payments

Management

TariffsServices

MANAGEMENT CONTRACTS

Under a Management Contract the Contracting Authority bears most of the Risk related to :

Tariff LevelsCollectionService Delivery

Tariff Setting and Tariff re-setting is the role of the Public Utility and the Customer-Tariff decision maker.

The Regulator may therefore have two distinct roles:

Monitoring the contract with the Private OperatorRegulating the public tariff process

Links:Institutions in a Concession Contract

Regulator

Customers

Private operator

Project Company

ShareholdersLenders

Management

Tariffs

Services

EquityFinance

CONCESSION CONTRACTS

In the case of a Concession or a Divestiture, all the major Responsibilities involved in delivering water services are taken by the Operator

The Regulator: One option is for the Regulator to combine:

• Monitoring and enforcement of the Private Operator’s Performance.

• Management of Tariff resets

Reviewing Module 7

‘The Module has looked at the whole range of issues in Arrangement design, concerning “Developing Institutions to Manage the PP relationship”………….’

Involve

Customers

Working

relations

Links

with others

Monitoring

& enforcing

Resolving

Disputes

Adjusting

Tariffs

Tariffs & Rules [Module 6]

Institution Interprets & Applies the rules.

[Module 7]

THE 3 ATTRIBUTESof the Institution

THE 3 TASKS of the Institution

Plus!Types of Institution

More Information: Module 7

More information on Developing Institutions to manage the relationship: The role of design of utility regulators: Asian Development Bank 2000, Klein and Hadjimichael 2003, Phillips 1993, Smith 1997a, 1997b, 1997c, and 1997d. Institutional arrangements: Crampes and Estache 1996, Gómez-Ibáňez 2003, Guasch and Spiller 1999, and PPIAF and World Bank Institute 2002. For a comparison of the two approaches: Gómez-Ibáňez 2003 and Shugart 1998 Source of a regulator’s authority: Artana and others 1999 . Decisionmaking process and accountability: Coelli and others 2003 and Helm 1994. Arbitration and court proceedings: Broches 1990, Nelson 1989, Paulsson 1996, and World Bank 2003. Contracting out regulatory functions: Bertolini 2004 and Bertolini and Trémolet 2004

Supporting Material

• The Toolkit Financial Model• Toolkit Case Study material• Toolkit Website:

http://rru.worldbank.org/Toolkits/WaterSanitation/• For comments or further details contact Cledan Mandri Perrott at

[email protected]

http://rru.worldbank.org/Toolkits/WaterSanitation/

mailto:[email protected]

Toolkit: Module 7

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Toolkit: Approaches to Private Participation in Water Services Module 7 Developing Institutions to manage the relationship