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Module 17: Negotiating and Contracting
17.3. What should the contract cover?
Who is involved?
... A management team
... A PPP taskforce
... The private sector
Pre-bidding phase
Prior to the PPP bidding process, the municipality must consider
the type of PPP that is most appropriate to the local situation;
it must also consider the needs of the poor [Tool 2]. The type of PPP
chosen must reflect the objectives of the municipality
(government). For instance, is the principle objective:
– Expansion of (network) capacity?
– Expansion of distribution networks?
– Addressing of unaccounted for water (in the case of water provision)?
or
– Tackling of inefficiency?
The risks involved must also be taken into account during
the pre-bidding phase. For instance, lease contracts may
be more attractive to the private sector in high risk areas compared to concessions.
Procurement phase 
At the procurement stage of drawing up the contract with
the private sector, the municipality needs to consider
how the contract can incorporate the needs of the poor. Specific provisions
covering services for low-income people must be included in the contract
with the private operator so that the private partner is contractually
obliged to address the needs of the poor. Examples of specific provisions
include:
– type of supply and level of service;
– financial conditions, such as cost of upgrading;
– tariffs (for example, a low flat rate);
– payment arrangements (for example, spreading of costs for low-income
customers); and
– definition of areas with limited resources and the level of service
to be provided to those areas.
In some cases, it is worthwhile for the municipality to engage
external experts to assist in preparation of the contract
documentation, as often the public sector does not possess the necessary
skills.
Given that the private sector may be reluctant to extend
services to low-income areas, informal incentives such as
the following could also be incorporated into the contract:
– cost-sharing arrangements;
– pricing arrangements;
– links to performance standards; and
– insurance arrangements.
Experience with PPP contracts has shown that there is a need
to give sufficient attention to the clarity of the contract
and the way in which different institutional responsibilities are laid down.
Some of these responsibilities include:
– contracting built structures;
– investment;
– operation and maintenance;
– monitoring and regulation;
– commercial exploitation;
– marketing and sales;
– payment collection; and
– customer service.
Even though PPP contracts should aim for clarity and comprehensiveness
in order to reduce the likelihood of there having to be renegotiations,
they also need to leave sufficient room for the private partner
to devise efficient and innovative solutions to any unforeseen problems that
may arise.
Operation phase
Two major contractual issues might occur during the operation
phase:
– there may be circumstances under which the private sector is
failing to adhere to the conditions set out in the contract;
and
– circumstances may have changed since the original contract was
agreed, necessitating a renegotiation to be organised.
In some circumstances the private sector may not be able
to meet the agreed targets due to no fault of its own. Indeed,
the problem may be rooted in the original service provision by the public
sector. The necessary steps need to be laid out in the contract should
this situation occur, in order to address the problem before it leads
to an erosion of public confidence.
For contracts lasting many years (for example, 25 years)
it is difficult to predict how circumstances may change.
Provisions therefore need to be made in order to address the need for
contract renegotiation [Tool 18]. These provisions could also cover sub-contracting.
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