Module 07: Defining Parameters (scope)

7.4 What are the key issues?

Some of the issues faced by the government while it is considering the PPP parameters require special attention:

Service sector organisation

Whether the service sector is a monopoly or allows competition defines the parameters that need to be set up.
Some sectors are considered natural monopolies, for instance water and wastewater treatment. Therefore, governments rarely seek large-scale competition within these sectors (although they may seek competition for the sector). However, in such cases regulation is required to ensure that the monopoly service provider does not abuse its power by charging prices that are too high or by providing a low-quality service. Regulation is especially important in the water sector because demand for water is inelastic.

In areas in which competition can be introduced, a consumer-oriented service and culture may be established by the normal process of market competition. In those sectors where competition cannot be introduced, the creation of private monopolies will result in profit-maximising behaviour leading to an anti-consumer service and culture. In such monopoly sectors, clearly set parameters can help protect consumers.

Performance requirements

The PPP should establish clear performance requirements and incorporate them into the contract, requesting the operators of the service to publish key performance indicators regularly.

The following list is indicative of the kinds of indicators which service providers could be required to report on regularly:

– technical efficiency losses;
– quality indicators;
– reliability of service;
– consumer satisfaction, measured by the number and nature of complaints and through surveys of consumers;
– complaint response/resolution times;
– repair response/completion times; and
– access to service (i.e. percentage of the population covered).

However, formal indicators should not disregard the fact that some people are covered by the service, but are not able to use it because they cannot afford to pay for it. Thus, there is also a need to have a comparative assessment of service use indicators.

Levels of service

One of the most common expectations that governments have of a PPP is innovation in how service delivery is organised and carried out. PPPs are frequently called upon to improve the quality and level of services.

The level of service should be defined narrowly, specifically and with forethought. For instance, it could be defined through a measure of the number and rate of unresolved service requests and complaints. Or through an indicator of reliability measured by the functioning time – the number of days in a month or year when the service is functioning.

Incremental service options

In some cases a desire for greater choice or geography with respect to service options can be partially satisfied through incremental changes to the current service structure. For instance, a minimally acceptable level of service, in terms of reliability, for example, could be negotiated with the community with the plan to slowly enhance the service level thought the course of the project.

Defining outcomes and outputs

The preferred approach for regulating quality of service is for the regulator to specify and monitor performance outputs rather than inputs (for example, to specify an indicator of drinking water quality rather than the treatment methodologies and equipment to be used to achieve the desired water quality).
Regulating outputs promotes innovation and efficiency improvements – but only if the service provider also has an incentive to reduce costs. As a result, this approach goes hand-in-hand with other regulatory mechanisms, such as the price-cap approach to tariffs (which motivates cost savings). Specifying and monitoring a limited number of outputs helps to minimise regulation and avoid costly and bureaucratic regulatory practices and interference in day-to-day operations.

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