Module 11: Selecting Options

11.5. What are the key issues?

Scale

Generally, the smaller the scope of the contract, the more likely it is to be financed through public sector funding. The larger the amount of investment required, and the longer the duration of the project, the greater is the potential involvement of the private sector. However, the private sector is only likely to be interested in these larger projects of long duration if there is a stable political climate and a well-established regulatory framework.

Establishing roles

The roles of the public and private organisations in ownership, investment, bill collection and operation are commonly prescribed by the type of the contractual arrangement. Although in practise arrangements are often hybrids of more than one contract type mentioned above, there are trends that can help municipalities understand the opportunities offered by different PPP options: (also presented on an overview: Table 11-2: Prerequisites of successful private participation)

Service contracts

Public
• Retains ownership and control of all capital assets and property, and must finance fixed assets and working capital.
• Establishes the performance criteria, evaluates the bids, selects and supervises the contractor and monitors the work to be carried out to ensure the contractor meets the performance specification.
• Ensures that it has sufficient revenue to pay the contractor.

Private
• Manages personnel and services.
• Carries out the service to the specification established in the agreement, and agrees to a fee for the service. Unlike more complex forms of PPP, the municipality is still the client of the contractor and the source of the contractor’s payments.

Management contracts

Public
• Retains ownership of assets.
• Responsible for capital expenditures, working capital and the commercial risk associated with collecting service fees from users.
• Monitors the management contractor to ensure that performance standards and other obligations are met.

Private
• Manages operations without committing substantial investment capital or accepting the bulk of the commercial risks.
• In short-term contracts, manages specific tasks.
• In longer-term contracts, responsible for all aspects of delivering the service, and has an obligation to introduce technical and management skills and to bring specific improvements to the service delivery process.

Lease contracts

Public
• Responsible for the capital investment required to upgrade existing assets or extend infrastructure to new areas.

Private
• Operation and maintenance of the leased assets. In exchange for the exclusive right to use the assets to deliver services, the operator typically pays rent to the municipality and generates revenue by collecting fees from users for the services delivered.
• Bears the commercial risk of non-payment; this is a fact that distinguishes leases from management contracts.

Build-Operate-Transfer contracts

Public
• Becomes both the customer and the regulator of the service.
• Purchase a minimum level of output over time, regardless of the demand from the ultimate consumers.

Private
• Provides the capital to build the new facilities.

Concessions

Public
• Establishes performance standards.
• Ensures that the concessionaire meets them.
• Is responsible for the regulation of price and quantity (quality).

Private
• Carries out any capital investments required to build, upgrade or expand the system and is responsible for financing those investments.
• Responsible for all capital and operational costs, including infrastructure, energy, raw materials and repairs. In return, the private operator collects the tariff from the system users directly.

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