Private Sector Participation

Private Sector Participation
Recent Findings and Assessments

Experiences of GTZ MEN-REM
January 2004
PSP – Recent Findings and Assessments; Experiences of GTZ MEN-REM 2
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Private Sector Participation

Recent Findings and Assessments
Experiences of GTZ MEN-REM
A report commissioned by GTZ MEN-REM
Author:
Dieter Rothenberger
Centre for Innovation Research in the Utility Sector (CIRUS)
Eidgenössische Anstalt für Wasserversorgung, Abwasserreinigung und Gewässerschutz
(EAWAG)
Seestr. 79
6047 Kastanienbaum
Switzerland
dieter.rothenberger@eawag.ch
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Table of Contents
1 Executive Summary........................................................................................................... 6
1.1 Project objective and remarks .................................................................................. 6

1.2 Theoretical analysis and recent general findings ..................................................... 7
1.3 Results from the MEN-REM survey.......................................................................... 8
1.4 Consequences for the network and GT Z ............................................................... 10
2 Introduction ...................................................................................................................... 11
2.1 General background ............................................................................................... 11
2.2 The project .............................................................................................................. 11
2.3 Outline of the discussion paper .............................................................................. 12
3 New Institutional Economics viewpoints ......................................................................... 13

3.1 Transaction costs .................................................................................................... 13
3.2 Determinants of transaction costs .......................................................................... 13
3.3 Summary................................................................................................................. 15
4 Recent general findings ................................................................................................... 18
4.1 Introduction ............................................................................................................. 18

4.2 Asymmetric information and opportunistic behaviour ............................................ 19
4.3 Renegotiations and cancellations ........................................................................... 20
4.4 Performance with and without PSP........................................................................ 22
4.5 Conclusions............................................................................................................. 24
5 The Project....................................................................................................................... 25
5.1 Working group......................................................................................................... 25

5.2 Methodology............................................................................................................ 25
5.3 Participating projects............................................................................................... 27
5.4 Results from the survey .......................................................................................... 30
5.4.1 Information regarding Pre-PSP situation............................................................ 30

5.4.2 Origin of the PSP process and decision-making about PSP ............................. 31
5.4.3 Project definition and tendering .......................................................................... 32
5.4.4 Selection and negotiation process...................................................................... 33
5.4.5 Contractual issues – content and regulatory framework.................................... 35
5.4.6 Contractual issues – regulatory mechanisms .................................................... 36
5.4.7 Potential for external influence ........................................................................... 37
5.4.8 Results ................................................................................................................ 38

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5.4.9 Transaction Costs ............................................................................................... 39
5.4.10 Role of GTZ..................................................................................................... 43
5.4.11 Lessons learned and conclusions .................................................................. 43
6 Conclusions ..................................................................................................................... 46
6.1 Project Objective..................................................................................................... 46

6.2 Main Findings .......................................................................................................... 46
6.3 Consequences for the Network and GTZ............................................................... 48
7 References....................................................................................................................... 49
8 Annex - Questionnaire ..................................................................................................... 52
List of Figures
Figure 1: Investments in Water and Sanitation Projects with PSP components;.................. 18
Figure 2: Cancellation ratios in infrastructure projects with PSP (1990-2001)...................... 21
Figure 3: Ranking of weaknesses .......................................................................................... 30
Figure 4: Duration of project preparation phase..................................................................... 33

Figure 5: Participation in tender process................................................................................ 34
Figure 6: Ranking of influence possibilities according to individual projects ......................... 38
Figure 7: Ranking of influence possibilities - average............................................................ 38
Figure 8: Total staff inputs according to the project stages ................................................... 40
List of Tables
Table 1: Summary of contractual options for PSP ................................................................. 16
Table 2: Summary of contractual options for PSP analysed from NIE viewpoints ................ 17
Table 3: Comparison of Performance Indicators of Projects with and without PSP. ............ 23
Table 4: The Project Working Group ...................................................................................... 26
Table 5: Reform approaches in the countries of the participating projects ........................... 28
Table 6: Key data of the participating projects ....................................................................... 29
Table 7: Staff inputs according to project stages as indicator for transaction costs.............. 42
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List of Abbreviations
CIRUS: Centre for Innovation Research in the Utility Sector
EAWAG: Eidgenössische Anstalt für Wasserversorgung, Abwasserreinigung und

Gewässerschutz (Swiss Federal Institute for Environmental Science and
Technology)
EBRD: European Bank for Reconstruction and Development
GTZ: Deutsche Gesellschaft für Technische Zusammenarbeit GmbH (German

Agency for Technical Cooperation)
KfW: Kreditanstalt für Wiederaufbau (German Bank for Reconstruction and

Development)
M.: Million
MEN-REM: Mediterranean Environmental Network
NIE: New Institutional Economics
NGO: Non Governmental Organisation
OED: Operations Evaluation Department of the World Bank
ONEA: Office National de l’Eau et l’Assainissement (Burkina Faso)
Plc: Public Limited Company
PSP: Private Sector Participation
TAC: Transaction Costs
UFW: Unaccounted for Water

WATSAN: Water and sanitation
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1 Executive Summary
1.1 Project objective and remarks
In October 2002 the Middle East and Northern Africa network for water, wastewater and
solid waste (MEN-REM) 1 of the Deutsche Gesellschaft für Technische Zusammenarbeit
(GTZ; German Agency for Technical Cooperation) decided to systematically collect and
structure the experiences with PSP existing within the network. The objective of this project
was to support the improvement of the GTZ knowledge management process and thus the
future arrangements and concepts of PSP processes. The focus of the study was more on
the process and less on the results, since most of the projects in the region with GTZ
participation were supposed to be more recent. In general it is rather difficult to assess the
sustainability of impacts at the beginning of a PSP project, since flaws in the set-up are
often seen after many years, but then with often serious consequences, as, for example, in
the cases of Manila, Atlanta and Buenos Aires.
The questionnaire which was used to collect the information was differentiated was
differentiated into various phases:
• Pre-PSP situation, origin of the project and decision making

• project definition, tendering, selection and negotiation
• contractual issues, regulation and renegotiation
• results, transaction costs and role of GTZ
Although, during the 2002 MEN-REM network meeting great interest was aroused by the
idea of a project with these objectives, and although eight projects financed the study, the
real experiences with PSP in the region seem to be quite limited. Out of the eight projects,
four had no direct involvement in and/or access to information about national PSP projects.
Nevertheless, the study delivered interesting results which were discussed at the 2003
MEN-REM network meeting in Marrakech. The working group on PSP and regulation will
use these results to further explore the possibilities and collect the experiences with
commercialisation and Micro Scale PSP for the 2004 MEN-REM network meeting in Jordan.
The study was made possible due to the financial contributions and the provision of
information by various projects in the region supported by GTZ. In addition, MEN-REM and
the Swiss Federal Institute of Environmental Science and Technology (EAWAG) contributed
financially to this study. The study was prepared and conducted by Dieter Rothenberger
(Economic Researcher at the Centre for Innovation Research in the Utility Sector, EAWAG,
Switzerland) in close co-operation with Marina Meuss (GTZ Projectadvisor, Jordan). The
discussion paper was written by Dieter Rothenberger and commented on by the
participating projects.
1
For more information about the network see www.gtz.de/network/men-rem.
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1.2 Theoretical analysis and recent general findings
PSP is often perceived as a way to tap new financial sources for the rehabilitation and
expansion of plants or networks, or for improving operational efficiency, since conventional
economics analysis states that production efficiency is lower in the public sector than with
private enterprises. However, experience gained in recent PSP projects all over the world,
shows that this argument is too generalised to guarantee high quality water services in the
long term. Conventional analysis tends to neglect the costs and benefits of the institutional
setting, i.e. the regulatory framework or the allocation of responsibilities.
Especially in the water and sanitation sector with its long term investment plans, institutional
frameworks are of major importance for high quality and high reliability service provision.
When opting for a PSP contract the decision should be based on full cost considerations,
i.e. including additional costs for searching for the right transaction partner, elaborating and
agreeing on the contract terms, monitoring performance and intervening in case of
contractual failure. These so-called “transaction costs” can make up a considerable share of
the overall costs of the introduction of a new institutional setting. In the health sector,
evidence suggests that savings from contracting-out are often more than offset by
transaction costs. Similar experiences have been made in the UK with the “Compulsory
Competitive Tendering” procedures for services formerly provided by local authorities.
The choice of the PSP-option has a clear impact on the level of transaction costs: Basically,
the more specific the required investments, the longer the duration, the more
comprehensive and the lower the competition for contract, the higher the transaction costs.
As can be seen from many examples, high transaction costs e.g. for renegotiations of long-
term and complex contracts, are a major problem. A study analysing the renegotiation of
concession contracts in Latin America, found that more than 70% of the 89 water and
sewerage concessions in Argentina, Brazil, Chile, Colombia and Mexico which were signed
between 1989 and 2000 were renegotiated. Asymmetric allocation of information between
the private and the public partner about crucial indicators relevant for the performance
evaluation, the lack of an appropriate regulatory framework, strategic bidding of the
operator, and opportunistic behaviour of the governments are some of the reasons for the
renegotiations. It also became obvious that long-term contracts with major private capital
investments are much more prone to renegotiations than short-term contracts. The authors
of the study raise their concern about the validity of the concession contract model, and the
general flaw in concession models can also be seen in the increasing reluctance of
international private operators to invest their own money in water and sewerage projects in
developing countries
Thus, it seems that short-term and easily defined contracts with lower risk, but also lower
potential for efficiency improvements, are the best way forward in PSP, as a first step to
improving the performance of inefficient public service providers. This means that
commercialisation processes combined with decentralisation and outsourcing activities like
in micro scale PSP, service contracts or management contracts are becoming more
appropriate than long-term lease or concession contracts.
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1.3 Results from the MEN-REM survey
Out of the eight participating projects, we were able to collect information about PSP
processes in five water and sanitation projects and one solid waste management project.
The water and sanitation projects are:
• Intended lease contract in Sana’a (Technical Secretariat, Yemen); cancelled.
• Management contract in Amman (Jordan); running
• Service contract (Burkina Faso); running
• Management contracts in Zambia; running
• Management contract Northern Governorates (Jordan); tender phase
The solid waste project is
• Joint venture and management contract in Aswan (Egypt); running
Many recommendations were given by experts in the six projects. Some of them were rather
project-specific, but most of them are relevant also in a wider and general PSP context.
The following keywords are used to structure the recommendations:
• Participation and transparency
• Defining and allocating tasks
• Intellectual and factual leadership
• Phasing in.
Participation and transparency
• The early stages were identified as the most crucial ones and the ones most prone
to be shaped according to some special interest. These were stages where
international donors and their consultants were dominating the process. Thus,
ownership of the process, especially of the local decision-makers and employees,
but also on national level, was very limited, which lead to frictions later on.
• In some projects the local level was not very well involved during the whole process,
especially during the project definition and conceptualisation stages. Frustration is
often the consequence of rushing into a contract or feeling pressurized to sign a
contract, which might lead to hostile attitudes towards the private partner.
• Beside politicians and the public, early involvement/ establishment of the regulator
(and its participation in all the steps) was seen as important.
• Most of the projects remarked that the information collection in the preparation phase
should be improved, and also that the way in which data transparency should be
achieved after the private operator has taken over should be stipulated in the
contract.
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Defining and allocating tasks
• A clear definition and allocation of tasks is crucial for a successful process and
adjusts the expectations to a realistic level, leading to an improved co-operation.
• Capacity building is important for the staff of the utilities, but also on the regulatory
and political level. The necessity of improving local competence before the PSP
process starts and of providing capacity building in parallel to the PSP process was
seen as one important measure for improving results.
Intellectual and factual leadership
• The dominance of external bodies like the World Bank, and also the preparation of
blue-print, not tailor-made feasibility studies by international operators and
consultants was seen as counterproductive. The question as to whether PSP is
appropriate, and, if so, what type of arrangement is appropriate is a rather complex
one, and a lack of objectivity could result in inappropriate solutions which might lead
to frequent quarrels or renegotiations.
• A possible solution is that a comprehensive external audit should be conducted by

international consultants together with a strong local committee (consisting, for
example, of staff from the present operator, the ministries, but also customer
representatives and relevant NGOs). The criteria against which the current situation
and perceived needs for reform are assessed must be clear and transparent. Ideally
they should have been agreed upon by all major stakeholder groups.
Phasing in
• All contracts (except of the one in Yemen for which there were no bidders) were
already closer to the shallow end of the PSP spectrum. Nevertheless, almost all
projects stressed that it would be important to have a stepwise phasing-in process,
starting with decentralisation and commercialisation first and awarding only short-
term and clearly-focussed contracts. This approach has been chosen in Jordan as
preparatory steps for the management contract in the Northern Governorates, and
has improved efficiency and motivation considerably.
• This approach also helps to improve local knowledge and thus create more equal
partners and greater information symmetry for a future PSP contract. In addition, it
helps to show how the public operator works in a more flexible framework (e.g. with
new staffing policies and career opportunities) and also to foster competition for the
tasks and contracts. Last but not least, this might induce the involvement of local
private service companies and thus promote local development.
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1.4 Consequences for the network and GTZ
Faced with criticism about concession contracts, and with the frequent failure to establish
appropriate regulatory bodies, the whole PSP process is under critical review. It seems that
there are three major consequences:
• Increasing realisation of the importance of a well-designed and timely establishment

of a regulatory system, well in advance of the implementation of a comprehensive
PSP approach, in order to facilitate progress in the sector.
• A new emphasis on supporting the decentralisation of responsibilities and budgets

and also the commercialisation of operators in order to create absorption capacity on
the public side and to facilitate the acceptance of more business-like processes in
the utilities. Another important need is to raise the awareness of the customers so
that they expect a quality service, and are prepared to pay for it.
• There is a need to support new, phasing-in approaches with a clear schedule and
clear objectives in regions where political and economic stability might be a barrier
for rapid involvement of private investors in long-term projects.
All these consequences could provide attractive opportunities for GTZ, since all of them are
core business activities of technical co-operation of GTZ, which has major strengths
• …in supporting sector reform processes to improve the legal and institutional
framework of the partner countries
• …in establishing regulatory bodies
• …in building awareness concerning the advantages, but also the challenges and
limits of PSP
• …and in performing preparatory work like data collection and structuring or support
for contract design and monitoring.
And since the MENA region shows on the one hand a tremendous need for improvement of
water management, and on the other hand reluctance by private companies to invest, these
phasing-in approaches might also be the way forward in the MENA region – and thus for the
GTZ water projects in the regions.
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2 Introduction
2.1 General background
Access to sufficient and safe drinking water and sanitation is a key issue of sustainable
development. In 2000 the General Assembly of the United Nations established the
Millennium Development Goals, which express the need to halve the proportion of people
without access to safe drinking water by 2015 (UN 2000). This goal was confirmed and
extended by the Johannesburg Declaration on Sustainable Development which also
incorporated the access to basic sanitation (UN 2002).
One approach to support these objectives might be Private Sector Participation (PSP) in the
provision of water and sanitation. PSP is often perceived as a way to tap new financial
sources for the rehabilitation and expansion of plants or networks, or for improving
operational efficiency, since conventional economics analysis states that production
efficiency is lower in the public sector than with private enterprises (Boyco et al. 1996: 309).
This seems to hold true especially for local government providers in permanent monopolies,
when compared to large, internationally experienced private operators which are awarded
contracts in competitive bidding processes. Efficiency improvements are often perceived as
particularly required in developing countries, where many public utility systems are on the
brink of collapse for various reasons, such as permanent lack of funds, political interventions
and multi-objective strategies of the decision makers.
2.2 The project

In October 2002 the Middle East and Northern Africa network for water, wastewater and
solid waste (MEN-REM) 2 of the Deutsche Gesellschaft für Technische Zusammenarbeit
(GTZ; German Agency for Technical Cooperation) decided to systematically collect and
structure the experiences with PSP existing within the network. The objectives were the
improvement of the knowledge management process and thus the future arrangements and
concepts of PSP processes. To achieve this, MEN-REM commissioned this study which
focuses on the PSP process. This focus, and not the analysis concerning the outcomes,
was chosen since most of the projects in the region with GTZ participation were supposed to
be more recent. In general it is rather difficult to assess the sustainability of impacts at the
beginning of a PSP project, since flaws in the set-up are often seen only after many years,
but then with serious consequences, as, for example, in the cases of Manila, Atlanta and
Buenos Aires.
2
For more information about the network see www.gtz.de/network/men-rem.
______________________________________________________________________________________________________________________________________________________________________________________________________
The questionnaire which was used to collect the information was differentiated into various
phases:
• Pre-PSP situation, origin of the project and decision making
• project definition, tendering, selection and negotiation
• contractual issues, regulation and renegotiation
• results, transaction costs and role of GTZ
The study was made possible due to the financial contributions and the provision of
information by various projects in the region supported by GTZ. In addition, MEN-REM and
the Swiss Federal Institute of Environmental Science and Technology (EAWAG) contributed
financially to this study.
The study was prepared and conducted by Dieter Rothenberger (Economics Researcher at
the Centre for Innovation Research in the Utility Sector, EAWAG, Switzerland) in close co-
operation with Marina Meuss (GTZ Projectadvisor, Jordan). The discussion paper was
written by Dieter Rothenberger and commented on by the participating projects.
2.3 Outline of the discussion paper
This paper contains the results of this study, but starts to describe the broader picture of
PSP. First, a non-conventional economics approach, the New Institutional Economics (NIE),
which is linked to the questions about the process of PSP and the institutions required
posed in this study, is being introduced. After this, some recent general findings about PSP
in the water sector are outlined, and chapter five presents the study approach and the
results. Chapter six then concludes with recommendations, while chapter seven contains
the references and chapter eight the appendix with the questionnaire.
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3 New Institutional Economics viewpoints
3.1 Transaction costs
When opting for a PSP contract the decision should be based on full cost considerations,
including additional costs for co-ordinating the task. This leads to one of the key concepts
for analysing organisational strategies to minimise overall cost, which is the transaction
costs approach. Transaction costs are costs incurred in searching for the right transaction
partner, developing and agreeing on the contract terms, monitoring performance and
intervening in case of contractual failure. These costs can make up a considerable share of
the overall costs of the introduction of a new institutional framework. In the health sector, for
example, contracting out usually reduces production costs, but evidence suggests that these
savings are often more than offset by transaction costs (Vining and Globerman 1999: 79).
Similar experiences have been made in the UK with the introduction of so-called
“Compulsory Competitive Tendering” procedures for services formerly provided by local
authorities: “Even if tender prices are lower, the costs of monitoring the contract usually
outweigh the savings” (Wilson 1999: 38). Hodge states that for service contracts, which are
relatively easy to define and monitor, the transaction costs are between 2 and 10% of the
contract volume.
Where do these transaction costs come from? The two contractual parties are confronted in
the market place with substantial information asymmetries; this fact is highly important for
the so-called Principal-Agent setting, in which the public side (the principal) allocates the
task of providing a service – such as a water supply or solid waste collection - to the private
side (the agent) against monetary compensation. Since many efforts under such
agreements are non-observable, the agent generally possesses better information about the
efforts and the results (e.g. sales, profits) than the principal. Hence, there is ample scope for
the agent to pursue his own objectives and not (only) the objectives of the principal. With
this background, opportunistic behaviour - which means the maximisation of personal gains
at the expense of the transaction partner, e.g. by post-agreement shirking or pre-agreement
hiding of information - is an attractive strategy for the agent. In order to prevent opportunistic
behaviour, the principal is keen on defining certain monitoring mechanisms, incentives or
penalties in the contract, and these might induce considerable transaction costs.
3.2 Determinants of transaction costs
Transaction costs are directly linked to the existence of information asymmetries: the more
serious the effects of asymmetric information and the greater the potential for opportunistic
behaviour, the more important are safeguards to protect both sides from losses. The needs
to write more complete agreements on which the transaction is based, and to monitor these
agreements more closely induce higher transaction costs. The importance of these needs
depend on the specific investment required to fulfil the tasks, the uncertainty about the
context in which the task has to be completed, the complexity of the overall setting and the
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contestability (see e.g. Vining and Globerman 1999; Ashton 1998; Williamson 1990). The
following sections briefly explore these factors, all of which directly influence the level of
transaction costs.
Asset specificity and lock-in
In many transactions the partners have to invest in transaction-specific assets. Assets are
specific if they are not deployable for alternative uses without major reduction in value
(Ashton 1998: 357, Williamson 1991: 281). If they cannot be used for other purposes these
assets may create lock-in situations, i.e. they will be perceived as exit barriers for the
investors. It is important to note that a high degree of asset specificity may not be confined
to physical assets, but may also apply to investments in human resources, like transaction-
specific knowledge or the reputation of a company within an environment broader than the
project itself.
A potential lock-in situation due to asset specificity increases the vulnerability of the investor
to opportunistic behaviour by the other party. After the contract has been signed and the
corresponding investments have been made, the power balance between the contracting
parties switches, and the competitive market structure of the pre-contract situation is
suddenly transformed into a bilateral monopoly. The player with a lower degree of specificity
in his investment may try to renegotiate the agreement and thus obtain additional benefits
not foreseen in the original contract. Since both actors know about their asset specificity,
they will try to protect themselves by arranging a more detailed (and thus more expensive)
contract which prevents opportunistic behaviour and prescribes detailed arbitration
procedures. This strategy implies that transaction costs tend to rise with increasing asset
specificity (Dorward 2001: 61).
Uncertainty and task complexity
A contract can never incorporate all the uncertainties in terms of “if...then” conditions, hence
information about future circumstances and the outcomes of a specific transaction is
accompanied by differing, but high, degrees of uncertainty. Therefore, the agreement or
contract on which the transaction is based is necessarily incomplete. As a consequence,
renegotiations become more likely and transaction costs may increase in order to prevent
opportunistic behaviour. An additional criterion, which is to a certain extent related to
uncertainty, is task complexity. Tasks with low complexity require relatively little additional
cost to negotiate and to monitor the contractual arrangements. Complex tasks on the other
hand involve relatively high uncertainty and may be a source of considerable information
asymmetry. This results in high transaction costs, since the definition, negotiations,
implementation and monitoring of a contract require more care and time.
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Contestability
A market is contestable if firms are immediately available to provide a service. This means
that there are no (or very low) market entry barriers and that there is sufficient competition to
prevent collusion. Contestability can be reduced if the task is relatively complex and a
change of contract partners would affect not only the very specific task, but also other
aspects such as basic societal services in the transition period. Low levels of contestability
lead to a high potential for opportunism at contract stage.
3.3 Summary
In general, WATSAN system operators can be departments of public authorities, public

companies or private companies, in charge for the comprehensive operation, maintenance
and financing of the system. The operation of the system is a classical example for a
Principal-Agent setting. Hence, when deciding about the appropriate organisational form for
the provision of WATSAN services, transaction costs should be taken into account.
Table 1 gives a brief summary of various PSP contracts in “conventional” form, while Table
2 summarises the aspects related to transaction costs.
The choice of contract for PSP has a clear impact on transaction costs: the more specific
the required investments, the longer the duration and the more comprehensive the task, the
higher the additional costs. Thus many authors argue that, in situations where high
specificity, complexity and uncertainty are combined with low contestability, outsourcing
under long-term contracts is often less satisfactory than in-house (public sector) provision
(Lane 2000: 133), perhaps with short-term outsourcing or service contracts in the case of
WATSAN services. On the other hand, long-term concession contracts are normally used to
attract private investment and to reap major operational improvements. As a consequence,
there is a clear trade-off between minimisation of transaction costs and the mobilisation of
private capital to achieve the production efficiency gains envisaged with lease or concession
contracts. The next section provides some findings which support the importance of
transaction cost thinking, but gives also some generally interesting results of PSP
processes.
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Contract Type General characteristics Possible Results Responsibility (Risk) Reward (Remuneration)
Service contract the private partner is engaged to provide can help to overcome Private operator with very limited Fixed fee
a clearly defined service for the public particular problems of the responsibility
sector; rather short-term option public service provider
Duration: 0.5 – 3 years.
Management Contract The tasks of the private partner include Can increase production Private partner has no Fixed management fee
direct support for core activities like efficiency and overall entrepreneurial risks (in terms of (sometimes with some
operation and maintenance of the system. performance of the existing collection rates etc.) Consumers incentive payment).
system remain customers of public entity
Duration: 3-10 years.
Lease Contract (or The task of the private partner is the full Like for the management Private partner has payment via water fees for
Affermage) operation and maintenance of the system. contracts, but also improved entrepreneurial risks; public operation; add on for
investment planning and partner has investment risk; tariff investment goes to public
Duration: 8-20 years
finance management setting procedure crucial issue partner
Concession contract The task of the private partner is the full Like for the lease contract, Private partner has full refinancing via water fees.
operation, maintenance and investment. but capital investments entrepreneurial risk and
should facilitate expansion investment risk; tariff setting
Duration: 15-30 years
and rehabilitation of the procedure is a crucial issue
system.
Table 1: Summary of contractual options for PSP

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Contract Type Information Asymmetry Asset specificity Uncertainty/ complexity Contestability Level of Transaction Costs
(TAC)
Service meaningless no investment, low short term, clearly defined very high (contracting out very low TAC; easy to
contract reputation effects contract; fixed pay-per-service, to locals or former handle
low complexity employees)
Management moderate importance low, rather unspecific short-medium term; fixed pay- moderate to high (greater moderate TAC;
Contract investment; medium per-service; medium complexity number of experienced renegotiations possible
reputation effects operators; no investment
required)
Lease high importance: private co-ordinated investment high; medium -long term; low (few companies with high TAC; often
Contract operators benefit from required; high reputation remuneration from customers’ sufficient experience) renegotiations; often
investment in expansion, but do effects payments; complex contract contracts too long (low
not have to invest investments); Lock-in
Concession very high importance: high investment from private very high; long term; very low (few companies very high TAC; very long
contract renegotiation on cost and sector, very high reputation remuneration from customers’ with sufficient experience contracts, often
investment require sufficient effects payments also for investment; and prepared to invest) renegotiations and
information very complex contract underinvestment; Lock-In
Table 2: Summary of contractual options for PSP analysed from NIE viewpoints
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4 Recent general findings
4.1 Introduction
PSP has been identified by international funding agencies as an important tool for
improving WATSAN service provision in developing countries. In this context the provision
of WATSAN services must deal with major difficulties: The technical and organisational
systems are often on the brink of collapse. PSPs must be evaluated against a background
of drastic underinvestment, un-trained labour forces, out-dated equipment etc. - all
contributing to high water losses, frequent service interruptions, financial losses, low
coverage ratios and so on. Often the decision whether to implement PSP or not is driven
by investment requirements, reflecting a prediction by the World Bank and other
international finance institutions that public and donor finance will not be sufficient to fund
all required investment (e.g. Briscoe 1999), especially considering the tremendously high
sums required to achieve the goals mentioned above 3.
Investments in projects with PSPs increased tremendously from 1990 to 2001, as Figure 1
indicates, but are still very low, when compared to the figures required according to WWC
2003. Clearly, if a PSP project is to contain private investments, long-term contracts will be
necessary to provide sufficient refinancing time for the private partner.
45
40
35
30
Billions USD
25 Cumulative
20 Annual
15
10
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Figure 1: Investments in Water and Sanitation Projects with PSP components;

Source: Izzaguirre (2002:2) and author’s calculations
3
The figures vary between 49 billion US$ and 10 billion US$ annually, depending on the service
levels achieved or the technology used. See e.g. Smets (2003 36), but also WWC 2003 and
Averous 2002.
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4.2 Asymmetric information and opportunistic behaviour
One of the most crucial issues in PSP settings is how to achieve more symmetric
allocation of information. Here a strong regulator with competence in defining information
requirements and processing obtained data can play a key role. Weak regulatory capacity
is seen - for example in Abidjan (Côte d’Ivoire) - as a major reason for dramatic
information asymmetries. In the Abidjan case it enabled the private operator to extract
excessive additional rents (Ménard and Clarke 2002: 256). Although not bearing any
investment and financial risk, the private operator could make decisions about investment
projects, and implement them, without tendering the construction tasks, while the public
agencies with which they were working lacked adequate information to assess the
appropriateness of the investment plans. Additionally, the lack of a clear division of roles
between various public agencies and the private provider increased the discretionary
power of the latter and thus the scope for opportunistic behaviour (Ménard and Clarke
2002: 257). However it is not only private operators that may seize discretionary power:
public authorities and regulators also tend to do so when they stand to benefit.
In a PSP process, in addition to a strong regulator, the tendering for the contracts is a
major source of information about costs and investment requirements in a competitive
process. However, the outcomes of tendering may be unreliable. As described above, the
transaction costs for collecting information and for writing complete contracts are often
very high. While shortcomings in contracts and lack of data provide ample scope for
renegotiations from the public side and may also put undue pressure on the private
operator, strategic bidding by the private companies limits the success of the tendering
process. This can allow private companies to submit bids with lower-than-appropriate
water prices, and renegotiate them soon after the contract is awarded, thereby weakening
the pressure for efficiency improvements, especially with an inexperienced government as
negotiation partner (Harris 2003: 9)
Another example of strategic bidding is the frequent failure of private operators to provide
the staff that is listed in their bids. They tackle the uncertainty of winning a competitive
tender by proposing the same key staff in more than one tender proposal at the same
time. It is inevitable, then, that if the enterprise wins more than one bid, either the key staff
proposed will not be part of the project at all or they will only be available for a short period
to be subsequently replaced by other, probably less experienced staff. Due to the special
situation of long-term-contracts this behaviour is reasonable from the perspective of the
private side. Nevertheless, the public partner often cannot successfully intervene and has
to accept the changes. Although contractual penalties like fines, forfeiture of bonds or
contract revocation may exist, governments are often very reluctant to enforce. On the
other side, international arbitration procedures to protect the private operator are also
common, but can be seen only “…as a last resort and are not very effective in resolving
ordinary disputes” (Shirley and Ménard 2002: 17).
______________________________________________________________________________________________________________________________________________________________________________________________________
4.3 Renegotiations and cancellations
As a consequence of the points mentioned in the previous paragraph, renegotiations are

very common in long-term contracts. A study analysing the renegotiation of concession
contracts in Latin America, found that more than 70% of the 89 water and sewerage
concessions in Argentina, Brazil, Chile, Colombia and Mexico which were signed between
1989 and 2000 were renegotiated (Guasch et al. 2002: 23), causing high transaction
costs. The study found that long-term projects with a high share of private investment are
particularly likely to be renegotiated, while short-term projects are more stable. In addition,
price caps and price adjustment formulas did not prevent renegotiation, but rather
increased it. One main lesson is that there is clear evidence concerning the very positive
impacts of regulators who are in place before the PSP process and the tendering starts.
Similar results come from a study by Henisz and Zelner (2003) concerning foreign
investors in the electricity sector. Basing their conclusions on more than 300 interviews
within private companies and public authorities, the authors show that institutions which
were in place for only a very short time and were not rooted in the whole legal and
economic system were doomed to fail due to lack of acceptance by the general public.
The outcome of a review of the World Bank’s evaluation department are even more
alarming against the background of these findings: only 37% of the World Bank water and
sanitation projects with a PSP component also have the establishment of a sector
regulation as an objective or as a component of the project (OED 2003: 14), while almost
two thirds of these projects simply rely on contract regulation, and are thus much more
likely to have a higher rate of renegotiations: ”...the contractual commitments, either on
performance targets or on tariffs, proved insufficient to withstand macro-economic and
political pressures.” (OED 2003: 13)
Another study (Estache and Quesada 2001) showed that renegotiations often have
adverse effects for poor customers. Companies sometimes tend to bid strategically in
tendering processes, i.e. they compete by proposing far too low a water tariff or with very
challenging targets for new connections. Often, very soon after the contract is signed, the
successful company starts to renegotiate. This type of opportunistic behaviour “...is often
related to poor initial efforts to assess the sources of demand fluctuations…” (Estache and
Quesada 2001: 2). Detailed information collection before the agreement is less important
for the partners which are confident of favourable outcomes from any renegotiations. Poor
customers tend to be the losers in the renegotiations game, because of reductions in the
numbers of new connections to be achieved (or at least some major postponements) and
increases in prices (Estache and Quesada 2001: 22).
Renegotiations are sometimes not the end of the story. The results of a World Bank
analysis show that 3.5% of all PSP projects in water and sewerage projects reaching
______________________________________________________________________________________________________________________________________________________________________________________________________
financial closure between 1990 and 2001 were cancelled (Harris et al. 2003: 4). 4 This
seems like a relatively small proportion. But it should be noted that projects which were
handed over from one private investor to the other were not included, as were the recent
developments in major concession projects like Buenos Aires, Maynilad Water (Manila)
and Atlanta. In addition, the survey also found that the average time before cancellation
was four and a half years (Harris et al. 2003: 3). Since more than a third of the water and
sewerage projects measured by investment volume reached financial closure between
1999 and 2001 (Izzaguirre 2002: 2, see Figure 1), a future increase of the overall
proportion of cancelled projects might thus be expected. 5
But even now, the cancelled projects (3.5% as mentioned) in fact account for more than
11% of the investment value of all PSP projects in water and sewerage – which indicates
that the correlation between investment required within a project and the “stability” of the
project. Indeed the WATSAN sector had the highest failure rate compared with energy,
telecoms and transport, see Figure 2. If the toll road projects in Mexico - which suffered
from a general failure in their conceptual set-up so that a very high proportion were
cancelled - are left out (indicated by Transport (a)), the WATSAN sector shows the worst
performance by far compared to other sectors.
12
10
8
Percentage
Numbers
6
Investments
4
0
Energy Telecom Transport Transport WATSAN
(a)
Figure 2: Cancellation ratios in infrastructure projects with PSP (1990-2001).
Source: Harris et al (2003:4) and own calculations. (a): Transport sector without Mexican Toll Road
Projects
4
Since projects in which the private partner terminated the contract by handing it over to a
competitor were not included, the numbers might be higher.
5
The cancellation of a major concession contract for half of the city of Manila, which had attracted
as much attention as the Buenos Aires concession, was announced in December 2002.
______________________________________________________________________________________________________________________________________________________________________________________________________
The reasons for the projects’ cancellations were similar to those stated above for the
renegotiations: price increases and losses due to lower-than-expected demand figures
and collection ratios. Also strategic bidding in terms of high concession fees, which the
operators failed to pay after the contractual agreements were signed, is an issue. This
might indicate unfulfilled expectations of successful renegotiations following strategic bids.
There might be two different sets of reasons behind the higher cancellation ratios in the
WATSAN sector: the first being due to specific features of the WATSAN sector, (e.g. the
health implications of inadequate water quality and quantity), PSP processes in the water
and sanitation sectors cause intense scrutiny and highly emotional debates. Thus, the set-
up of these change processes might be quite complex and prone to major disruptions.
Beside this, one should also take into account that the other sectors might have started
earlier with PSP and have reached a stage of more mature handling of the process.
Therefore, the PSP process in the WATSAN sector might just be experiencing some
teething problems, which could be solved with more experience and the development of
more appropriate mechanisms.
4.4 Performance with and without PSP
The Operations Evaluation Department of the World Bank conducted in 2002 and 2003 an
evaluation of the World Bank’s projects in the water and sanitation sector (OED 2003).
The World Bank’s overall objective in the water and sanitation sector is “Efficient,
sustainable services for all”. This objective encompasses three sub-objectives:
1. Having a cost-efficient supply without wasting resources, with the indicators:
• Percentage of unaccounted-for water

• Number of employees per thousand connected households.
2. Safeguarding a lasting service via generation of sufficient revenues to cover all

costs and considering the environmental impacts, using the following
indicators:
• working ratio (cash operating costs/ cash operating revenues), for the financial
sustainability
• proportion of wastewater that is treated, for the environmental sustainability
3. Expanding services to accommodate also the needs of the poor for safe water
supply and sanitation, using the following indicators:
• proportion of population connected to public water supplies

• proportion of population connected to public sewerage
• proportion of population with continuous service
• proportion of population with bacteriological safe water.
______________________________________________________________________________________________________________________________________________________________________________________________________
Part of the evaluation was also to analyse the outcomes of the recent paradigm of PSP in
the sector with regard to these factors. Since, until now, comparative analyses are rare,
this appears to be an interesting starting point, especially since the evaluation is done
against a sector strategy, and not against the contractual obligations. Of course, to assess
if a project has been successful per se, it is necessary to compare the expectations and
obligations (as stated in the contracts) with the outcome. But, to see if PSP might help to
better fulfil the general strategy of the development organisations, this kind of assessment
proves very useful. There are two shortcomings though: the data was collected via
questionnaires from the private operators, which might give some biased results, and the
database itself is small, with only eleven projects with PSP and 28 projects without PSP.
Yet, as mentioned above, this seems to be one of the first systematic cross-project
evaluations of the PSP approach.
Table 3 shows a comparative assessment of projects with and without PSP. The first
impression is that there are some significant and some minor improvements, with no big
difference concerning the PSP element. This is quite remarkable. Yet, a more thorough
analysis shows some interesting differences.
With PSP Without PSP

Performance Indicator before project after project before project after project
Service for all
Connection ratio water supply 66% 80% 70% 86%
Connection ratio sewerage 38% 48% 32% 41%
Households with permanent supply 68% 94% not available not available
Households with disinfected water 82% 97% not available not available
Efficiency
Unaccounted-for Water 53% 46% 40% 38%
Employees per 1000 household 8.2 4.2 7.6 4.4
connections
Sustainability
Working Ratio 0.77 0.7 0.71 0.66
Share of treated wastewater 7% 13% 9% 31%
Table 3: Comparison of Performance Indicators of Projects with and without PSP.

Source: OED (2003: 24)
There are four indicators relevant to the poverty focus – unfortunately, for two them there
were no data available in the Non-PSP-projects. The other two indicators show slightly
better improvement ratios for the projects without PSP, which could mean that the poverty
orientation might be slightly higher without PSP.
The efficiency indicators show that the projects with PSP have higher improvement ratios,
especially concerning the reduction of unaccounted-for water (UFW). Nevertheless, UFW
is still very high, even in the projects with PSP components the average is about 46%.
______________________________________________________________________________________________________________________________________________________________________________________________________
Concerning the sustainability indicators, the picture is somehow mixed: While the
improvements of the working ratio are slightly higher with PSP, the increase in the share of
treated wastewater is almost three times as high without PSP as with PSP.
Obviously, and as mentioned above, the incentive system and the structure of the contract
play a crucial role for the outcome of a PSP project. But the overall objectives in the sector
were the same, so they should also be mirrored in the PSP projects. It might be that,
during the preparation of the contracts, more emphasis was put on objectives which were
more in line with the objectives of the private partners (such as efficiency and cost
coverage), while others were seen as less important. Even so, it is interesting that those
projects in which the World Bank supported a thorough sector reform together with the
strengthening of (autonomous) public service providers proved as successful as those with
PSP.
4.5 Conclusions
Tendering long-term PSP contracts may seem attractive for indebted countries or
municipalities trying to attract private capital for major investments. However, as can be
seen from the example of Buenos Aires, opportunistic behaviour and transaction costs
due to information asymmetries, asset specificity and uncertainty can pose major
problems for the contracting partners. Post-agreement transaction costs in terms of
renegotiations could be at least partly avoided, since “…the difficulty is often related to
poor initial efforts to assess the sources of demand fluctuations…” (Estache and Quesada
2001: 2). Nevertheless, with long-term and complex contracts, renegotiations will stay a
major problem. Guasch et al (2002) state: “While some renegotiation is desirable,
appropriate and is to be expected, this high incidence appears to be beyond expected and
reasonable levels, and raises concerns about the validity of the [concession contract]
model. It might indicate poor design or excessive opportunistic behaviour by the new
operators, or by the government, in detriment of the efficiency and the overall welfare”
(Guasch et al 2002: 5). The general flaw in concession models can also be seen in the
increasing reluctance of international private operators to invest their own money in water
and sewerage projects in developing countries (WWC 2003: 32). After describing the
deep-rooted problems with ability to pay, the chief executive of SAUR International
concluded that, without major financial support in terms of subsidies and soft loans by
international donors, private operators will not be able to deliver services, especially to
poor areas in developing countries (Talbot 2002).
______________________________________________________________________________________________________________________________________________________________________________________________________
5 The Project
5.1 Working group
Various projects in the region supported by GTZ agreed to support the study both
financially and by providing information after the regional network meeting of MEN-REM in
October 2002. In addition, the MEN-REM water, wastewater and waste management
network of GTZ and the Swiss Federal Institute of Environmental Science and Technology
(EAWAG) contributed financially to this study.
Table 4 summarises the participating projects and lists the corresponding contact partners.
The study was prepared and conducted by Dieter Rothenberger (Centre for Innovation
Research in the Utility Sector, EAWAG, Switzerland) in close co-operation with Marina
Meuss (GTZ Projectadvisor, Jordan). The discussion paper was written by Dieter
Rothenberger (CIRUS/EAWAG) and commented on by the participating projects.
5.2 Methodology
The database for this section originates from a survey among the participating projects for
which a standardised questionnaire was used. The development of the questionnaire was
done in two steps: First the conceptual framework was established and sent to the
participants for comments. Then the final questionnaire, which was based on the
framework and the comments, was sent to the projects. For clarification, some additional
questions were sent to the respondents after the first assessment of the replies. The
responses were put, partially coded, in an evaluation file and then used for this document.
As an additional source of information direct interviews during the MEN-REM network

meeting 2003 in Marrakech were used to highlight specific questions.
______________________________________________________________________________________________________________________________________________________________________________________________________
Project No. Project Participants Email
99.2082.8-001.00 Water Program Algeria, Algeria Gomer, Dr. Dieter Dieter.Gomer@gtz.de
Holtkemper, Siegfried Siegfried_Holtkemper@yahoo.de
Sperling, Frank Puits@web.de
2002.2005.3-001.00 Operations Management Support (OMS) Project, Jordan Kachel, Udo Udo_Kachel@mwi.gov.jo
Khashman, Khaldon Khaldon_Khashman@ngwa.com.jo
Meuss, Marina Marina_Meuss@mwi.gov.jo
Sakarat, Jehad Lothar_Nolte@mwi.gov.jo
2002.2058.2-001.00 ONEA, Burkina Faso Leutiger, Dr. Ingo Gtz.onea@liptinfor.bf
2002.2508.6-001.00 Advisory Services to the Water Supply and Sanitation Sector, Yemen Wolf, Eberhard Ewolf.gtz@y.net.ye
Mayer, Hans Mayer.dorsch@y.net.ye
01.2207.7-001.00 Jerusalem Water Undertaking (JWU), Palestine Davies, Digby Digbydavies@aol.com
Mulhem, Nadim Nadim.mulhem@gtz.de
01.2293.7-001.00 National Programme for Privatization of Waste Management in Egypt Nels, Christian Christian.Nels@gtz.de
00.2096.6-001.00 Technical Secretariat for Water Supply and Sanitation Reform, Yemen Sahooly, Anwer Techsec@y.net.ye
Smets, Susanna Techsec1@y.net.ye
02.2014.5-001.00 Morocco, Water Project Juelich, Dr. Walter Walter.Juelich@gtz.de
99.2056.2-001.00 Morocco, Programme de Gestion et de protection de l’environment Pluschke, Peter Gtz-pgpe.rabat@menara.ma
Table 4: The Project Working Group

______________________________________________________________________________________________________________________________________________________________________________________________________
5.3 Participating projects
Out of the eight participating projects, four provided information about five different PSP
processes. In addition to these five cases, a project in Zambia delivered data and
information about the PSP process in Zambia. So we were able to collect information
about five water and sanitation projects and one solid waste management project. The
water and sanitation projects are:
• Intended lease contract in Sana’a (Technical Secretariat, Yemen); cancelled.
• Management contract in Amman (Jordan); running
• Service contracts (Burkina Faso); running
• Management Contracts in Zambia; running
• Management Contract Northern Governorates (Jordan); tender phase
The solid waste project is
• Joint Venture in Aswan (Egypt); running
There are various reasons why the other projects did not provide information about the
PSP process in their countries. The Advisory Services (not the Technical Secretariat) in
Yemen and the project supporting JWU in Palestine deal with upgrading and
commercialisation of public water utilities without any PSP. Thus, there is no direct
involvement in PSP processes, like e.g. the Management Contract in Gaza Strip. The
same holds true for the projects in Morocco – although there are various PSP processes
in the country (Tanger, Rabat, Casablanca), there is no GTZ expertise with these projects.
In Algeria, the project has just started to deal with minor reform issues , and PSP is still a
long way to go.
Table 6 shows the main general features of the participating projects. Obviously, the
analysis of the cases and the conclusions drawn are based more on comparative analysis
and not on statistical assessments.
______________________________________________________________________________________________________________________________________________________________________________________________________
Commercialisation Private Sector Participation
Project Outsourcing Public Service Contract Management Lease Contract Concession

Company Plc “Micro PSP” Contract Contract
Water Program Algeria, Algeria
Operations Management Support (OMS) Project,

Jordan
ONEA, Burkina Faso
Advisory Services to the Water Supply and

Sanitation Sector, Yemen
Jerusalem Water Undertaking (JWU), Palestine
National Programme for Privatization of Waste

Management in Egypt
Technical Secretariat for Water Supply and
Sanitation Reform, Yemen
Morocco, Water Project and Programme de
Gestion et de Protection de l’Environment
Water Sector Reform in Zambia
Table 5: Reform approaches in the countries of the participating projects
Key:
existing, part of the survey; existing, not part of the survey
is/ was planned, part of the survey , existing, but no GTZ involvement and not part of the survey
______________________________________________________________________________________________________________________________________________________________________________________________________
Indicators Egypt (Aswan, Yemen (Sana’a) Jordan (Amman) Burkina Faso Zambia Jordan (N.
Solid Waste) Governorates)
Organisational Public authority, autonomous local Local branch of Local branch of national Mostly run by ministry Local branch of national
form before reform within WSS corporation national public public authority (ONEA) department; some by public authority
Municipalities authority councils
Responsible for Municipalities Board of Directors/ Ministry; national Various ministries Ministry departments Ministry; national public
strategic issues Ministry public authority (water, finance, health, authority
commerce)
Responsible for Municipalities Management and governorates Management and Ministry departments; some Governorates
operation employees (controlled by employees of ONEA councils (controlled by national
national public public authority)
authority)
Employees total 280 940 1600 589 2000-2500 (whole country) 1746
Citizens supplied 300.000 No data available 2,2 Million 1.913.480 130.000 houses with No data available
connections; standposts?
percentage served 80% No data available 99% water No data available
Table 6: Key data of the participating projects

______________________________________________________________________________________________________________________________________________________________________________________________________
5.4 Results from the survey6
Before going into the details of the answers given in the questionnaire, it has to be stated
that the data base is obviously relatively limited. So drawing general conclusions is
somewhat difficult. Nevertheless we expect that tendencies can be found in the answers,
and it is important to highlight these tendencies, in order to facilitate learning effects for
other and future PSP projects supported by GTZ.
5.4.1 Information regarding Pre-PSP situation
Within the last ten years before the various PSP projects, the strategic decision-makers
changed between zero and seven times, while the changes on the operational side show
significantly lower numbers (between zero and three). This might indicate that even
though there is a relatively high fluctuation on the strategy (often the political) side, there
were relatively fewer changes on the operational side. Frequent changes in leadership
and direction are said to be a major problem of public utilities, but the changes observed in
the cases under consideration were less than what might have been expected .
Concerning the weaknesses of the Pre-PSP situation some clear points emerge: As
Figure 3 indicates, production efficiency seems to be the main weakness in most of the
situations before PSP was implemented, with only Burkina Faso having investment
planning as the major weakness. Technical competence has been perceived as the
second most important weakness, just before investment planning and customer
orientation. Capital finance problems are not seen as a major weakness. The average
unaccounted-for water was almost 40%, showing technical and administrative problems.
Weakness ranks (6: high)
6
Egypt (waste)
5
Yemen
4 Amman
3 Burkina Faso
Zambia
2
Northern Governorates
1
er
oth
ce
g
s
ce
an
nc
nin
ion
en
l fin
icie
lan
tat
t
pe
eff
ita
tp
ien
m
p
en
n
Ca
or
co
tio
tm
er
uc
al
m
es
nic
od
sto
Inv
ch
Pr
Cu
Te
Figure 3: Ranking of weaknesses
6
For many of the questions multiple answers were possible, especially for those asking for the
relevant actors in the various process stages.
______________________________________________________________________________________________________________________________________________________________________________________________________
5.4.2 Origin of the PSP process and decision-making about PSP
For most of the projects national governments (in five cases) and donors (four cases)
were the first to identify the necessity for a structural change. Local government was
mentioned only once, which is not surprising since for five of the six projects (in fact the
five water projects) the control and operation of the system was not decentralised.
Interestingly, while in Aswan the control and operation was in the hands of the
municipalities, the first mover towards PSP was the national government, due to an
incident of severe air pollution.
A detailed situation analysis (e.g. feasibility study) was conducted in three cases, while a
partial analysis had been done in two projects. One project was pursued without a
structured situation analysis.
The studies were all financed by donors and conducted by international consultants with -
in almost all cases - only minor or no involvement of local stakeholders. The consultants
were mainly selected (and paid) by the international donors, and they played a rather
important role in preparing the ground for the future options. A critical point which was
perceived in some of the projects is that these consultants often do not deliver tailor-made
solutions, but rather apply standard solutions favoured by the donors.
The results of all studies matched the perceptions of the respondents regarding the
identification of crucial weaknesses and the needs for change. All of the studies contained
recommendations for PSP, except for Zambia. The national and local persons in charge
seemed to agree with mixed feelings concerning the PSP recommendations, partly
because they feared a loss of control and power. But the conditionality concerning
availability of funds seems to have had the desired impact in convincing the governments
about the appropriateness of the proposed reform.
Accordingly, the international donors (mainly the World Bank) and often the national
governments supported the reform, except in the case of Burkina Faso, where only the
donor community - especially the World Bank - supported the reform. Since the donor
community made the introduction of PSP a precondition for further financing a big water
project, the government opted, after having waited for three years, for the mildest form of
PSP - the service contract. In the case of the management contract in the Northern
Governorates in Jordan - at the beginning there was also support for comprehensive PSP
at the local level, but this soon changed to support for commercialisation, with micro scale
PSP as a first step. The project has started with commercialisation and outsourcing
processes, to support the transition towards the second step of a management contract in
two ways: first, the data on which the tender documents can be based is improving, and
thus the uncertainty for the public as well as the private partner is reduced. And, the staff
can adapt to new processes of a more commercial provision of water and sanitation
services.
All projects were decided upon between 1997 and 2001, with one project each year
except in 2000 when there were two. The decisions were mainly taken at national level,
______________________________________________________________________________________________________________________________________________________________________________________________________
even in the case of the waste project in Egypt where the municipalities had been in charge
before. The main interests of the politicians were, as mentioned above, to secure
international financial resources (3-4 replies), and also to improve local know-how and
services to the customers.
Thus, it can be seen that the international donors, jointly with the consultants financed by
them, were in the driver’s seat, and that ownership of the change process seemed to be
quite limited at the beginning.
5.4.3 Project definition and tendering
As mentioned above, for most of the projects the preferred form of PSP was a
management contract with an international operator or a joint venture . However, in
Burkina Faso service contracts were implemented and in Yemen a lease contract was
intended.
While the World Bank had a major influence on choosing the type of PSP in five cases,
together with national governments (four), the local side was actively involved in only two
cases. Replies from three projects indicated that transparent criteria for the selection of
the PSP form were used, while in two cases there was some political compromise, and in
one case no transparency was established. Examples for these selection criteria were:
• Transfer of asset ownership
• Duration of contract
• Allocation of risks
• Need for capital investment.
The tender documents were mainly produced by international consultants (4 examples),

sometimes together with local and national partners from the country (in two cases) and
with GTZ support (once). In one case (Egypt) the regional/local levels produced the tender
documents themselves. Except in the case of Egypt, the production of the tender
documents was financed by donors, mainly the World Bank (four cases). The KfW
financed the tender documents for the project in the Northern Governorates.
The overall time between the decision for a PSP approach and the finalisation of the
tender documents was between one and more than three years, with an average of more
than two years. The time spent on the production of the tender documents might indicate
the complexity of the project and the difficulty to prepare properly for the process.
______________________________________________________________________________________________________________________________________________________________________________________________________
Production of tender documents

Time from the decision to tender until the finalisation of documents
40
duration (months)
30
20
10
0
Egypt (waste) Yemen Amman Burkina Faso Zambia Northern
Governorates
Figure 4: Duration of project preparation phase
The production of the tender documents took between three months (Egypt) and twenty
months (Northern Governorates) with an average of almost eleven months. Interestingly,
the tender documents production took only six months in Yemen (see Figure 4), well
below the average, although a more demanding form of PSP, a lease contract, was
intended in this case. While this might be surprising, the transaction cost indicator “input of
person-months” shows that during this short time period a relatively high number of staff
was working in this process, which led to the highest number of person-months of all the
projects (see 5.4.9)
Interestingly, in 50% of the cases the information provided in the tender documents was
perceived as insufficient. The projects which used more than 1.5 years for the preparation
of the tender documents (Amman and Northern Governorates) stated that the information
was sufficient. Maybe this indicates how difficult it can be to reach a point where sufficient
information is provided in the tender documents to allow for a satisfactory bidding process.
For the two projects in Jordan, the preparation of a sound database for the tender process
has been heavily supported by the OMS project – thus the GTZ activities were successful
in improving the information base for the contracts. But even in Amman the reliability of
data was a major point for discussion and led to a relatively low performance-based share
of the remuneration package. Nevertheless, the procedure of installing a project to
prepare a sound database before the PSP process and reduce the probability of
renegotiations soon after the contracts are signed seems to be promising.
5.4.4 Selection and negotiation process
Competition, and not only the introduction of the private sector, is seen by economists as
the major factor to improve efficiency. But, due to the natural monopoly characteristics of
water distribution and sewerage networks, it is difficult to introduce competition for the
single customer (competition in the market) in the water supply and sanitation sector.
______________________________________________________________________________________________________________________________________________________________________________________________________
Competition for the market, i.e. an auction or bidding process for the right to supply certain
areas with water or with services, is thought to overcome these shortcomings. To achieve
this aim, it is necessary that there is a competitive setting, i.e. that there are many
companies competing for the contracts. Normally the bidding process is separated in two
steps: a prequalification and the final bidding stage. In three of the projects, only five
bidders took part in the prequalification, in one project there were eight and in another
there were ten companies at the first stage. In the second round, in two cases only two
companies competed, in one case there were five and in the Northern Governorates the
tender process has not started yet, see Figure 5. Interestingly, the two projects in Jordan
which took very long to produce the tender documents, but which also stated that the
information provided in the tender documents was sufficient, were (or seem to be) able to
attract the highest number of companies in both qualification rounds, and ended up as the
only projects with a “competitive tendering” even in the second round. Although we are
aware that there might be many variables influencing the decision of companies to
participate in a tender process, this seems to be remarkable.
prequalfication final bidding

No. of companies participating
12
10
8
6
4
2
0
Governorates
Zambia
Burkina Faso
Yemen
Egypt (waste)
Amman
Northern
Figure 5: Participation in tender process7
The determination of the selection criteria plays a crucial role. In all cases the public
partner was involved in this process, although in two cases only with minor influence. The
World Bank was involved directly in three cases, and the international consultants in five
cases. Most of the projects had to adhere to the World Bank selection criteria, which focus
on experience with projects of comparable size and the regional experience of key staff
and company as the most important (technical) criteria, together with some financial
indicators. The importance of the regional expertise is obvious, since familiarity with social,
technical and cultural factors is key for the success of the project. Thus an approach that
focuses on this issue holds as an optimisation strategy for each of the projects if
7
The number of participants in the final bidding for the contract in the Northern Governorates,
Jordan, is an assumption, since the tender has not yet been issued.
______________________________________________________________________________________________________________________________________________________________________________________________________
considered in isolation. But if all projects focus on the same criteria, this may reinforce a
regional monopoly or oligopoly and raise market entry barriers for new companies, thus
reducing competition and contestability, both during the bidding process and also in case
of contract cancellation. Weak contestability - which can already be seen in the low
numbers of competing companies during the tender processes - reduces potential
efficiency improvements and increases the risk for opportunistic behaviour from the private
sector partner, as discussed in 3.2.
The main cause of conflict during the negotiations for the contracts were the setting of
performance targets (in three of five replies), while staffing, the reliability of the data
provided and the allocation of responsibilities were also mentioned as points of conflict.
5.4.5 Contractual issues – content and regulatory framework
The main tasks were defined in rather broad terms, like efficiency improvements, but in
general the focus was on reduction of unaccounted-for water and upgrading of
administrative processes (revenue collection, reduction of operating costs, reduction of
accounts receivable, energy savings, etc.). Concerning the possibility of achieving the
objectives, there was considerable scepticism in the replies. Only in one case a decisive
“yes” was given, whilst “no” and “to some extent” or “yes, if” were used three times.
For the tender process in the Northern Governorates there are clearly defined targets
(reliability of supply, response time to customer complaints, etc.) and performance
indicators like the improvement of the cash operating margin, which is also the basis for
the performance-based part of the remuneration.
The remuneration was, in five cases, based on a lump sum, with some kind of
performance-based payment in four cases. Only in Yemen the contractor was supposed to
collect the fees on its own behalf, which is standard procedure for lease contracts. In
Amman, the part of the performance-based payment is relatively low - at only eight
percent of the total remuneration this is almost a pure lump-sum payment. The
respondents stated that this was mainly due to the poor information on which the
performance target – unaccounted-for water – was based. Also the bonus payments in
Burkina Faso and Zambia seem to be relatively irrelevant.
The main task of the public side was defined as supervision of the private operator and
securing capital finance. This was seen as achievable, with some goodwill and the setting
up or strengthening of the regulatory capacities.
A regulator was set up in two projects, while two focused rather on contract regulation
(which is often seen as no substitute for a regulatory body, see 4.3). The setting-up of the
regulatory agency started, in the two cases, six to twelve months before the contract was
signed, and in Amman the price regulation via the Ministry of Water has not been active in
the first year after the contract was signed.
Capacity building for the regulator took place in five projects, while in one project there
was no capacity building. Recruitment of appropriate staff is often perceived as a problem
______________________________________________________________________________________________________________________________________________________________________________________________________
due to unattractive salaries. This seems not to hold for the projects participating in this
survey, since only one of four respondents agreed on this. Instead, a much greater
obstacle in finding staff was seen to be the lack of experience and competence in the
labour market.
As described in 3.2 and 3.3 asymmetric allocation of information is also a point often seen
as a problem within PSP contracts, since the operator has better information about the
performance and the cost than the regulator or the public partner. In Burkina Faso,
Zambia and Amman the respondents subscribed to this point, while this is expected to be
less of a problem in Egypt. In Amman the private contractor possessed better information
on the collection ratio, which is important since the improvement in the collection ratio
determines the premium being paid to the contractor. In Zambia the operator had better
knowledge about the cost structure, which might prove important for the future envisaged
set-up of leasing contracts. In both cases the asymmetry of information was seen as a
serious problem, with some efforts undertaken to improve the situation. Overall, in
Amman, Zambia and the Northern Governorates the regulatory competence was seen as
insufficient, in contrast to Egypt.
5.4.6 Contractual issues – regulatory mechanisms
Contracts in general, and particularly PSP contracts, suffer from uncertainty about future
changes in the main elements relevant to the contract. Since a contract can never
incorporate all the uncertainties in terms of “if...then” conditions, flexible adaptations might
be used to react to unexpected changes. All respondents quoted that there was some kind
of flexibility built into the contracts. This might range from defining clearly the indicators
which, if they differ quite strongly from the assumptions, might trigger new negotiations
(Amman), to requiring an automatic review and adjustment of the base year figures
according to the results of the first year and another review at midterm (Northern
Governorates), to monthly meetings with the board in charge of supervision of the private
partner (Burkina Faso). Of course, while flexible adaptations are very useful to reduce the
time and effort required for contract preparation, they also provide possibilities for one side
to change the contract in their favour without good reason, if the negotiation position or
power is unbalanced. This is also crucial for the next point - renegotiations. There is
sometimes no clear-cut differentiation between flexible adaptations and renegotiations,
especially since (periodical) renegotiations are often foreseen in the contract after some
time. Renegotiations are foreseen in five of the six cases (except for Burkina Faso), and in
the four projects where the private contractor had already started work they also take
place. The public side seems to be a good negotiator in these cases, but, as was pointed
out for Amman, this depends on sufficient training before the contract is awarded and on
the possibility to pay attractive salaries to the employees who oversee the contract. .
Extraordinary renegotiations, i.e. renegotiations which took place without being stipulated
in the contract, happened in three of the four cases, only in Burkina Faso (monthly
meeting arrangement) no extraordinary renegotiations took place. The reasons for the
renegotiations were pricing issues (two cases) and the underperformance of the private
______________________________________________________________________________________________________________________________________________________________________________________________________
partner (one case). In two of the three projects the public partner initiated the renegotiation
process.
Which parts of the contracts were seen as being most problematic? In all implemented
projects the fulfilment of performance indicators had provided most of problems, which is
not surprising since they determine the bonus for the private partner, and thus there is a
high incentive for the private partner to try and “fiddle” with the data or the targets. But this
has also to be seen against the background that the information base on which the targets
had been set was relatively poor, thus the behaviour of the companies might have some
just basis.
What kind of mechanisms are in place to ensure the performance of the private partner?
The weakest form, a pure bonus/ malus system, is applied in two cases (Burkina Faso and
Zambia) and shows no significant impact on the performance, since the amounts at stake
are too low, and since there is no real competition. The latter reason for a mechanism
being ineffective is not only relevant in the bonus/ malus system, but also to a certain
extent for the performance bonds, a mechanism often seen as relatively powerful. Still,
private companies might perceive the probability that the public partner asks for the
performance bonds as being relatively low, since the public side might consider the
frictions and repercussions this might have. Penalties for underperformance were also
used in two projects which have performance bonds in place (Amman and Aswan), since
they allow for a more fine-tuned intervention.
But not only are security mechanisms for the public partner important, the private partner
also needs to be protected against opportunistic behaviour by the public side. All projects
state that sufficient and appropriate mechanisms are in place. In Zambia there is a
legislative framework on which the contract is based, and there is the possibility for review
by the MWASCo Board. In addition to that, all projects except the waste project in Aswan
had an arbitration procedure put in place: in two cases there were national bodies to be
involved, in two cases international arbitration bodies, and in Burkina Faso a consultancy
in Paris acts as arbitrator.
5.4.7 Potential for external influence
Which of the PSP process stages was seen as the most problematic and prone to be
influenced by local or external partners? Figure 7 indicates that the project definition and
the set-up of a regulator were perceived as being most problematic in this regard. Also
negotiation and renegotiation are quite critical, while tendering and selection were seen as
less “vulnerable”. So, either the problems of influence while selecting the private partner
was not important, or the shaping of the project was already done in a way that the
selection and negotiation process needed no further influence. However, as expected from
theory and seen in other studies, the set-up of a regulator plays a crucial role and the re-
negotiation adds considerable uncertainty to the PSP process.
______________________________________________________________________________________________________________________________________________________________________________________________________
Prone to external influence (6: high)
5 Egypt (waste)
Yemen
4
Amman
Burkina Faso
3
Zambia
2 Northern Governorates
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Figure 6: Ranking of influence possibilities according to individual projects

Prone to external influence (6: high)
4
Total Average
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Figure 7: Ranking of influence possibilities - average
5.4.8 Results
Although, as outlined above, we do not focus on the detailed results of the projects, we
obviously are at least interested if, as an overall assessment, the whole PSP project has
been successful so far. Interestingly, for one of the four projects the objectives had not
been achieved (Burkina Faso), in Amman some positive changes can be seen, but many
objectives were not reached, for various reasons. For Zambia and Egypt also some mixed
______________________________________________________________________________________________________________________________________________________________________________________________________
results were reported. The project in Yemen was perceived as being not successful, since
no company participated in the bidding process.
The reason for this rather negative record is not always the underperformance of the
private partner, although in two cases this has been identified as one of the reasons.
Instead, insufficient co-operation of the public side or low levels flexibility in the operational
processes due to the public structure of the partner are perceived as key factors
influencing the results negatively, esp. in Amman and Burkina Faso.
The private operator in the management or service contract has only a very limited
influence on many processes, which means that a close and trustful co-operation with the
public side is required. If the public side is not aware of the limitations of the particular
contractual options, or if they have been strongly directed towards the contract by donors,
lack of ownership of the change process results in counterproductive behaviour, as was
stated in Burkina Faso or Amman.
Lower than expected revenues were reported in two projects, which might indicate
insufficient fee collection, tariffs set too low or revenue projections based on insufficient
information about future water demand, willingness and ability to pay etc.
Closely linked with the performance record is performance monitoring. In all of the four
projects the respondents stated that there was a monitoring system in place, although in
one case the monitoring was being only partially carried out and there was no detailed
information available.
In Burkina Faso the monitoring systems consisted of 19 objectives and indicators, for
which data could be found in the ONEA database. During an annual review an
independent consultant compares the performance with the objectives and calculates the
bonus/malus for this year. In contrast, the monitoring procedure in Amman seems less
satisfactory, since the standards and the method of measurement used by the operator,
whose task it was to provide the data, were not transparent and traceable by the public
side. The monitoring system of the PSP in Aswan was based on selected residents who
were paid a small salary to check if the cleaning and collection were being done correctly
and on time.
5.4.9 Transaction Costs
Transaction costs, either in terms of real financial costs or in terms of effort to set up and
keep a contractual relationship, could differ widely depending on the contractual option.
Based on information from the cost accounts which exist in four cases, the volume for the
preparation of the contract varies between US$ 300.000 and US$ 2 M in Amman, the
average being almost US$ 900.000. To allow comparison - the contract volumes for the
private partner were: in Zambia US$ 5 M. for a four-year contract, in Egypt approximately
US$ 1.5-2 M. per year and in Amman US$ 8 M. plus an 8% performance incentive for a
four-year contract.
______________________________________________________________________________________________________________________________________________________________________________________________________
If looked at in more detail, the money spent for the preparation was lowest in Yemen –
although in Yemen it was intended to set up a lease contract. Regarding the figure in
Yemen one has to bear in mind that the PSP process came to a standstill in the bidding
phase, since no company participated. Using the other projects where a contract had been
awarded, the average cost for the whole preparation phase was more than US$ 1 M.
Evidently the costs for this were borne by international donors, with the World Bank being
financially involved in the preparation of four cases, KfW in one case and the GTZ in three
cases.
Beside these costs there are also costs for both the public and the private partner which
are not directly being paid by the international donors, but rather by taxes (for the public
partner) or by the general acquisition budget and eventually by the water customer (for the
private partner). These are the costs for the time spent to prepare the project, to set up a
contract, to negotiate the contract and so on. Staffing and other costs (like travel,
communication etc.) for these activities are often neglected when talking about project
costs and efficiency, but they might set up a market entry barrier for private operators if
there is a high risk of wasting this expenditure in the case of a non-successful bid. The
following graph summarises the data given by the various projects.
100
80
project definition/ Tender docs
person-months
tendering
60
selection
negotiation
40
set-up regulator
re-negotiation
20
0
Egypt (waste) Yemen Burkina Faso
Figure 8: Total staff inputs according to the project stages
As can be seen from Table 7 and Figure 8 the definition of the project and the tender
documents required quite high amounts of working time. Especially for the lease contract
in Yemen a large amount of time was consumed - 2.5 to almost 4 times as much as in the
cases of Burkina Faso and Aswan. This might indicate the higher complexity of the lease
contract compared to the management contract.
Although the overall preparation time (and the money spent) for the intended lease
contract in Yemen were surprisingly low (see 5.4.3), the figures here indicate that a huge
workforce was involved in all the preparation activities. The overall duration of the process
was only 20 months and thus relatively short, and 20% below the average for the other
projects. The total staff input of 90 person-months until the tender documents were
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produced implies that almost five people must have been working full-time for the project.
20% of this was done by external support staff, which accounts for the US$ 300’000
budget for the preparation of the contract. Another interesting feature is that the person-
months spent for tendering were also very high in Yemen, especially the time spent by the
public partner compared to the time devoted by the private partners. This might indicate
the difficulties of finding companies which were interested in the tender.
On the other hand, while in Aswan relatively little time was spent on the first stage in the
preparation of the tender documents, the tendering, selection and negotiation processes
consumed relatively high amounts of time, especially from the public partner. Whilst in
Burkina Faso the “public” time spent for these three stages was only 15% of the time
spent for the preparation, this ratio was two thirds in Aswan. So this might be an indication
that a quick preparation of the tender documents might end in more complex processes
later, especially concerning contract negotiation. In Burkina Faso, this stage required only
5% of the overall person-months required for the whole process until the contract was
awarded, in Aswan this was almost 20% .The time needed to establish the regulator is not
included, since this was not included for any other project. The regulatory issue also
seems to be a very time-consuming activity; almost 40% of all the person-months used to
get the project started in Aswan were used to set up the regulator. Nevertheless, since, as
shown by Guasch et al. (2002, see 4.3), the set-up of a regulator is crucial for the success
of a project, this time might be well invested with regard to the long-term benefit of the
project.
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Criterion definition/ tender tendering selection negotiation set up of regulator renegotiations

doc
estimation of person Burkina Faso: 30 Burkina Faso: 3 Burkina Faso: 1 Burkina Faso: 0.5 Burkina Faso: n.a. Burkina Faso: n.a.
months used by the public Yemen: 72 Yemen: 8 Yemen: n.a Yemen: n.a Yemen: n.a Yemen: n.a
partner
Aswan: 15 Aswan: 4 Aswan: 2 Aswan: 4 Aswan: 20 Aswan: n.a.
estimation of person Burkina Faso: n.a. Burkina Faso: 10 Burkina Faso: 1 Burkina Faso: 1 Burkina Faso: n.a. Burkina Faso: n.a.
months used by the private Yemen: n.a. Yemen: 3 Yemen: n.a Yemen: n.a Yemen: n.a Yemen: n.a
partner
Aswan: n.a. Aswan: 1 Aswan: n.a. Aswan: 4 Aswan: 1 Aswan: n.a.
estimation of person Burkina Faso: 10 Burkina Faso: 1 Burkina Faso: 0.1 Burkina Faso: 1 Burkina Faso: n.a. Burkina Faso: n.a.
months used by external Yemen: 18 Yemen: 2 Yemen: n.a Yemen: n.a Yemen: n.a Yemen: n.a
support (GTZ, World Bank,
Aswan: 10 Aswan: 2 Aswan: n.a. Aswan: n.a. Aswan: 8 Aswan: n.a.
private consultants)
Table 7: Staff inputs according to project stages as indicator for transaction costs
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_
5.4.10 Role of GTZ
In all projects GTZ was involved at very early stages, the preparation of the tender
documents being the latest entry point (Burkina Faso).
The co-operation with the public partner which was supported by GTZ staff was described as
rather neutral to slightly positive. Some distrust was due to general fears about PSP (Yemen,
Amman), an assumed conflict of interest during the selection phase (Burkina Faso) or the
feeling that the reform is forced from above (Amman).
The overall success of the GTZ inputs was seen as very positive, with only Yemen being a
failure since the wrong option was chosen, since it should have been obvious that a long-
term lease contract in Yemen might prove too risky for private companies. But, it has to be
stated that this decision was taken by local and national stakeholders jointly with staff from
the World Bank.
5.4.11 Lessons learned and conclusions
Many recommendations were given by the experts in the six projects. Some of them were
rather project-specific, but most of them are relevant also in a wider and general PSP
context.
The following keywords are used to structure the recommendations:
• Participation and transparency

• Defining and allocating tasks
• Intellectual and factual leadership
• Phasing in.
Participation and transparency
• In some projects the local level was not very well involved during the whole process,
especially during the project definition and conceptualisation stages. It was stressed
that the final decision should be taken by all major stakeholders, not only at ministry
level (Zambia). Frustration is often the consequence of rushing into a contract or
feeling pressurized to sign a contract. Even if it was in general the right decision,
pressure might lead to hostile attitudes towards the private partner (Burkina Faso).
• In Zambia better information for the public and the politicians about the
consequences of PSP was seen as crucial to a successful process, since the general
fears about PSP (redundancies, price increases, sale of crucial assets etc.) might
spread more easy if there is a lack of transparency (Yemen).
• Beside politicians and the public, early involvement/ establishment of the regulator
(and its participation in all the steps) was seen as important (Zambia).
• Most of the projects remarked that the information collection in the preparation phase
should be improved, and data publication procedures after the private operator has
taken over should be stipulated in the contract (e.g. Zambia: information about
assets, cost structure, customer base; or in Amman: collection ratio).
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_
• The early stages were identified as the most crucial ones and the ones most prone to
be shaped according to some special interest. Interestingly, these were stages where
international donors and their consultants were dominating the process. In general,
the fact that donors and their consultants were in the driver’s seat, especially during
the crucial early project stages, was criticised by the respondents. Most of the
countries surveyed agreed to the implementation of a PSP approach since this was
the precondition for future grants and loans. Thus, ownership of the process,
especially of the local decision-makers and employees, but also on national level,
was very limited. This lack of ownership lead to frictions later on, as in the case of
Burkina Faso and Amman.
Defining and allocating tasks
• A clear definition and allocation of tasks is crucial for a successful process.
• This could also help to clarify the roles of the public and private partner after the
contract and bring expectations to a realistic level (Burkina Faso), also depending on
the type of contract (Burkina Faso).
• One task which seems to be seldom stipulated in the contracts is the requirement to
provide adequate training for the staff. Thus, a clear training plan was seen as a
crucial part of a contract (Aswan). But capacity building is important also on the
regulatory and political level. The necessity of improving local competence before the
PSP process starts and of providing capacity building in parallel to the PSP process
was seen as one important measure for improving results (e.g. Yemen, Burkina
Faso).
Intellectual and factual leadership
• The dominance of external bodies like the World Bank, and also the preparation of
not tailor-made feasibility studies by international operators and consultants was seen
as counterproductive. The question as to whether PSP is appropriate, and, if so, what
type of arrangement is appropriate is a rather complex one, and a lack of objectivity
could result in inappropriate solutions which might lead to frequent quarrels or
renegotiations in the long term.
• A possible solution is that a comprehensive external audit should be conducted by

international consultants together with a strong local committee (consisting, for
example, of staff from the present operator, the ministries, but also customer
representatives and relevant NGOs). The criteria against which the current situation
and perceived needs for reform are assessed must be clear and transparent. Ideally
they should have been agreed upon by all major stakeholder groups with regard to
the service in question.
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_
Phasing in
• All contracts (except of the one in Yemen for which there were no bidders) were
already closer to the shallow end of the PSP spectrum. Nevertheless, almost all
projects stressed that it would be important to have a stepwise phasing-in process,
starting with decentralisation and commercialisation first and awarding only short-
term and clearly-focussed contracts. This approach has been chosen in Jordan as
preparatory steps for the management contract in the Northern Governorates, and
has improved efficiency and motivation considerably.
• This approach might help to improve local knowledge and thus create more equal
partners and greater information symmetry for a future PSP contract. In addition, it
helps to show how the public operator works in a more flexible framework (e.g. with
new staffing policies and career opportunities) and also to foster competition for the
tasks and contracts. Last but not least, this might induce the involvement of local
private service companies and thus promote local development.
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_
6 Conclusions
6.1 Project Objective
The objective of the project was to collect the experience of GTZ with PSP projects in the
Middle East and Northern African Region and by so doing to support the definition process
for a GTZ viewpoint on PSP. Although, during the 2002 MEN-REM network meeting great
interest was aroused by the idea of a project with these objectives, and although eight
projects financed the study, the real experiences with PSP in the region seem to be quite
limited. Out of the eight projects, four had no direct involvement in and/or access to
information about national PSP projects. Nevertheless, the study delivered some interesting
results which were presented and discussed at the 2003 MEN-REM network meeting in
Marrakech. The working group on PSP and regulation will use these results to further explore
the possibilities and collect the experiences with commercialisation and Micro Scale PSP for
the 2004 MEN-REM network meeting in Jordan.
6.2 Main Findings
It seems that short-term contracts with lower risk, but also lower potential for efficiency
improvements, are the best way forward in PSP, as a first step to improving the performance
of inefficient public service providers. This outlook is supported by various factors:
• The theoretical discussion described in section 2 emphasises the peculiar conditions

in the water, wastewater and solid waste sector arising from high asset specificity,
low contestability and the high complexity of the tasks. In this context short-term
contracts with lower risks are more likely to be successful than long-term contracts.
• One of the most crucial issues for the future development of the sector is the question
about generating finance to set up new infrastructure. Between 1993 and 2001
considerable attention was focused on the private sector as a source of finance for
major capital investments by means of long-term lease or concession contracts, but
even with the strong support of major players like the World Bank, this approach
seemed to prove only partially successful. The international companies are becoming
more and more reluctant to invest in developing countries, and “..the unrealistically
high expectations of clients and Bank staff must be tempered” (OED 2003). As in the
case of Yemen, if the option is not perceived as being appropriate concerning the
risk-reward-structure, the private sector abstains from any engagement.
• While the report of the Camdessus Panel on Financing Water Infrastructure opted for
a major role for the private sector in the future, the World Bank itself stated that an
expansion of the private sector’s role might be quite illusionary (World Bank 2003a).
And the Head of the Municipal Infrastructure Group of the European Bank for
Reconstruction and Development (EBRD) says: “...if the market moves away from
concession-type financing, we have to...see if we can support management or
operation and maintenance type approaches” (Reina 2003).
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_
This means that commercialisation processes combined with decentralisation and

outsourcing activities like in micro scale PSP, service contracts or management contracts are
becoming more appropriate than long-term lease or concession contracts. The experiences
of the GTZ MEN-REM network are thus quite valuable, since all approaches which have
been described by the participating projects are within this category.
Phased approaches, i.e. starting with short-term and clearly defined tasks and increasing the
responsibility of the private partner over time, may help to overcome the problems of long-
term contracts by generating information as the project progresses. This approach was
chosen for example in Mexico City (Johnstone and Wood 2001: 223; Haggarty et al 2002:
139).
Obviously production efficiency improvements may be lower with these small-scale or

phased contracts, since they cannot reap the full efficiency potential of more comprehensive
contracts (Harris 2003: 40) and often leave important and difficult decisions like prices,
investments, and staffing issues aside (Haggarty et al 2002: 184). Thus, short-term contracts
cannot be the end of the line, but rather the starting point for a clearly defined and scheduled
improvement process, which might end in long-term contracts even with private investments.
This phasing-in approach might offer the opportunity of learning processes for all sides, and
at the same time providing, albeit limited, success stories on which future progress might be
built.
With regard to these approaches, one of the most crucial findings of the project is the
necessity to create an autonomous institution at local or regional level to be in charge of the
water and sanitation system as the counterpart of the private operator holding the short-term
contract. If the counterpart of the private operator still has to function within a bureaucratic
framework, much of the efficiency potentials might be lost, as the cases in Burkina Faso and
Amman show. For a long-term concession contract this might be no problem, since the
private partner has control over all parts of the management and the system. But for these
rather small-scale projects a certain degree of flexibility and commercial thinking is required
also on the side of the public counterpart. Thus, the interest of many countries and
institutions to found publicly owned water utilities under private law (e.g. Public Water Plcs
like in the Netherlands or Germany), which can operate with a much higher level of flexibility,
might be very supportive for further steps towards PSP in the future. But, as the example of
Jerusalem Water Undertaking (JWU) indicates, these Public Water Plcs can also show
performance records which is comparable to a privately run water utility.
The advantages of a phasing-in approach can be shown with a comparison of the contract in
Amman and the intended contract in the Northern Governorates of Jordan. In Amman the
private partner had to deal with a public operator which was restricted by a very rigid and
bureaucratic framework. Many disagreements and considerable friction between the public
and the private side were the consequence.
These experiences were taken into account during the preparation of the contract for the
Northern Governorates. During the first steps towards commercialisation and outsourcing
(“Micro-Scale PSP”) a shift in mentality seems to have developed, leading to the view that
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_
commercialisation must take place to improve efficiency and service delivery. After three
years of preparation, including outsourcing projects, the database is improved, the efficiency
actually seems to improve, and the employees have a greater awareness about the
necessity of commercialisation. This seems to be a much better starting point for a
management contract.
6.3 Consequences for the Network and GTZ
Faced with criticism about concession contracts, and with the frequent failure to establish
appropriate regulatory bodies, the whole PSP process is under critical review. It seems that
there are three major consequences:
• Increasing realisation of the importance of a well-designed and timely establishment

of a regulatory system, well in advance of the implementation of a comprehensive
PSP approach, in order to facilitate progress in the sector.
• A new emphasis on supporting the decentralisation of responsibilities and budgets

and also the commercialisation of operators in order to create absorption capacity on
the public side and to facilitate the acceptance of more business-like processes in the
utilities. Another important need is to raise the awareness of the customers so that
they expect a quality service, and are prepared to pay for it.
• There is a need to support new, phasing-in approaches with a clear schedule and
clear objectives in regions where political and economic stability might be a barrier for
rapid involvement of private investors in long-term projects.
All these consequences could provide attractive opportunities for GTZ, since all of them are
core business activities of technical co-operation of GTZ, which has major strengths
• …in supporting sector reform processes to improve the legal and institutional
framework of the partner countries
• …in establishing regulatory bodies
• …in building awareness concerning the advantages, but also the challenges and
limits of PSP
• …and in performing preparatory work like data collection and structuring or support
for contract design and monitoring.
And since the MENA region shows on the one hand a tremendous need for improvement of
water management, and on the other hand reluctance by private companies to invest, these
phasing-in approaches might also be the way forward in the MENA region – and thus for the
GTZ water projects in the regions.
It is hoped that this discussion paper will be beneficial for all those of the network interested
in PSP by providing up-to-date knowledge about the issue and assisting preparations for
future challenges.
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
7 References
Alcázar, L., M.A. Abdala and M.M. Shirley (2002) ‘The Buenos Aires Water Concession’, in
M.M. Shirley (ed.), Thirsting for Efficiency – The Economics and Politics of Urban
Water System Reform (Oxford, UK: Elsevier): 65-102.
Ashton, T. (1998) ‘Contracting for Health Services in New Zealand: A Transaction Cost
Analysis’, Social Science & Medicine 46.3 (1998): 357-367.
Averous, L. (2002): Financing Water Infrastructure. (London: Lehman Brothers).
Boyco, M., A. Shleifer and R.W. Vishny (1996) ‘A Theory of Privatisation’, The Economic
Journal 106.1 (1996): 309-319.
Briscoe, J. (1999) ‘The Changing Face of Water Infrastructure Financing in Developing

Countries’, International Journal of Water Resources Development 15.3 (1999): 301-
308.
Conte Grand, Mariana (2000) ‘Regulation of Water Distribution in Argentina’, in: OECD (ed.):
Privatisation, Competition and Regulation. OECD Proceedings of the AGPs 12th
meeting 1998. (Paris: OECD)
Cosgrove, W.J. and F.R. Rijsberman (2000) World Water Vision – Making Water
Everybody’s Business (London: Earthscan).
Crampes, C. and A. Estache (1998) ‘Regulatory Trade-Offs in the Design of Concession

Contracts’, Utilities Policy 7.1 (1998): 1-13
Crocker, K.J. and S.E. Masten (1988) ‘Mitigating Contractual Hazards: Unilateral Options
and Contractual Length’, Rand Journal of Economics 19.3 (1988): 327-343.
Dorward A. (2001) ‘The Effects of Transaction Costs, Power and Risk on Contractual
Arrangement: A Conceptual Framework for Quantitative Analysis’, Journal of
Agricultural Economics 52.2 (2001): 59-73.
Estache, A. and L. Quesada (2001): Concession Contract Renegotiations: Some Efficiency

vs. Equity Dilemmas. Working Paper of the World Bank Institute (Washington: World
Bank Institute).
Finger, M. and J. Allouche (2001) Water privatisation – Trans-National Corporations and the
Re-regulation of the Water Industry (London and New York: Spon Press).
Guasch, J.L., J.J. Laffont and S. Straub (2002) Renegotiation of Concession Contracts in
Latin America. Research Paper, No. C02-22 of the USC Center for Law, Economics
and Organization (Los Angeles: University of South Carolina).
Haggarty, L., P. Brook and A.M. Zuluaga (2002) ‘Water Sector Contracts in Mexico City,
Mexico’, in: Thirsting for Efficiency – The Economics and Politics of Urban Water
System Reform (Oxford, UK: Elsevier): 139-187.
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
Harris, C. (2003) Private participation in Infrastructure in Developing Countries. Trends,

Impacts and Policy Lessons. World Bank Working Paper No. 5 (Washington: World
Bank)
Harris, C, J. Hodges, M. Schur and P. Shukla (2003): ‘Infrastructure Projects – A Review of

Cancelled Private Projects’, Public Policy for the Private Sector, Note No. 252 of the
Private Sector and Infrastructure Network of the World Bank Group (Washington:
World Bank).
Henisz, W.J. and B.A.Zelner (2003): Legitimacy, Interest Group Pressures and Change in
Emergent Institutions: The Case of Foreign Investors and Host Country Governments.
Paper presented at the Annual Conference of the International Society for New
Institutional Economic (ISNIE), (Budapest: ISNIE).
Izzaguirre, A.K. (2002) ‘Private Infrastructure – A Review of Projects with Private

Participation, 1990 - 2001’, Public Policy for the Private Sector, Note No. 250 of the
Private Sector and Infrastructure Network of the World Bank Group (Washington:
World Bank).
Johnstone, N. and L. Wood (2001): ‘Conclusions’, in: Johnstone, N and L. Wood (eds.):
Private Firms and Public water – Realising Social and Environmental Objectives in
Developing Countries (Cheltenham, UK: Edward Elgar)
Lane, J.E. (2000) New Public Management (London – New York: Routledge).
Ménard, C. and G.R.G. Clarke (2002) ‘Reforming Water Supply in Abidjan, Côte d’Ivoire: A
Mild Reform in a Turbulent Environment’, in M.M. Shirley (ed.), Thirsting for Efficiency –
The Economics and Politics of Urban Water System Reform (Oxford, UK: Elsevier):
231-272.
OED (Operations Evaluation Department) (2003): Efficient, Sustainable Service for All? An
OED Review of the World Banks Assistance to Water Supply and Sanitation
(Washington: World Bank).
Reina, P. (2003): ‘The Long Road to Reform’, in: Water 21 – Magazine of the International
Water Association. October (5/2003): 24-25.
Shirley, M.M. and C. Ménard (2002) ‘Cities awash: A Synthesis of the Country Cases’, in
M.M. Shirley (ed.), Thirsting for Efficiency – The Economics and Politics of Urban
Water System Reform (Oxford, UK: Elsevier): 1-41.
Smets, H. (2003): The Cost of Meeting the Johannesburg Targets for Drinking Water. A
review of various estimates and a discussion of the feasibility of burden sharing. (Paris:
Water Academy).
Talbot, J.F. (2002) Is the International Water and Sanitation Business Really a Business?
Presentation at the World Bank Water and Sanitation Lecture Series, 13th February
2002. Available at: http://www.worldbank.org/wbi/B-SPAN/docs/SAUR.pdf (retrieved
21.02.2003)
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
UN (United Nations) (2000) United Nations Millennium Declaration. Resolution adopted by

the General Assembly. (New York: United Nations Publications).
UN (United Nations) (2002) Report of the World Summit on Sustainable Development (New
York: United Nations Publications).
Vining, A. R. and S. Globermann (1999) ‘Contracting-Out Health Care Services: A

conceptual framework’, Health Policy 46.2 (1999): 77-96.
Williamson, O. E. (1989): ‘Transaction Cost Economics’, in: Schmalensee, R., Willig, R.

(eds.): Handbook of Industrial Organization, Vol. 1. (Amsterdam: North-Holland): 135 –
182.
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Märkte, Kooperationen (Tübingen: Mohr)
Williamson, O.E. (1991): ‘Comparative Economic Organization: The Analysis of Discrete

Structural Alternatives’, Administrative Science Quarterly 36.2 (1991): 269 – 296.
World Bank (1997) Selecting an Option for Private Sector Participation. Part 1 of the Toolkit
for Private Sector Participation in Water and Sanitation (Washington: World Bank).
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the Development Committee of the World Bank and the International Monetary Fund
(Washington: World Bank).
WWC (World Water Council) (2003): Financing Water For All. Report of the World Panel on
Financing Water Infrastructure (‘Camdessus -Report’; Geneva: World Water Council).
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
8 Annex - Questionnaire
Information regarding the Pre-PSP Situation
Organisational structures
1.1 Which organisational form existed before the PSP project was started?
1.2 Who was responsible for daily operation and maintenance?
1.3 Who was responsible for strategic issues (pricing, investment planning, approval and finance;
regulation)?
during the last ten pre-reform years: how often changed
1.4a o the politically/strategically responsible decision makers
1.4b o the operational management?
Human Ressources
1.5 How many people are employed in total: ________
1.5a of which technical staff: _____
1.5b of which accounting staff: _____
1.5c of which administrative staff: _____
1.6 Please state the most crucial training needs:
Required Investments
What is the total investment requirements (in US Dollar)
1.7a a) in the short term (next five years as of last pre-reform year):
1.7b b) in medium to long term
Crucial Weaknesses
1.8 please rank the most crucial weaknesses issues leading to reform Rank
a) investment planning
b) raising of capital finance
c) low production efficiency (overstaffing, over-consumption of staff, energy,

material)
d) lack of technical competence in operation
e) lack of customer orientation
f) others
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
Technical data
1.9a Total number of citizens
1.9b Numbers of Connections (Water/sewerage)
1.9c Connection ratio
Total amount of water
1.10a supplied ____ cbm
1.10b billed ____ cbm
1.10c Specific water demand
____ cbm
1.11a is there a sewer system
yes no
if yes:Total amount of wastewater
1.11b produced ____ cbm
1.11c treated ____ cbm
1.11d billed ____ cbm
Information regarding the PSP-Process
Origin and decision-making process
2.1 By whom was the necessity for reform raised for the first time?
a) National Government/ministries
b) Local responsibles
c) Donor community
d) others
2.2 Was a profound situation analysis (e.g. a feasibility study) conducted?

yes no
à if no: go to 2.9
2.3 who financed the analysis
2.4 who conducted the analysis (name of institution, if possible)
2.5a Which were the main results of the situation analysis?

Do these match your perceptions of the main weaknesses?
2.5b
2.6 Were recommendations regarding PSP part of the analysis?

yes no
2.6a if yes: what kind of PSP was recommended?

__________________________________________________________________________________________________________________________________________________________________________________________________________
_
2.7a Did the local responsible agree on these recommendations?

yes no
2.7b If not, why not?
2.7c Did they prefer other PSP forms?

yes no
2.7d
If so, why?
2.8a Was there any kind of political support for the recommended reform?
yes no
2.8b If so, on
a) local
b) regional
c) national
d) international level (donors)?
2.9 When was the decision for the implementation of a PSP-project taken?
By whom?
2.10 Which were the main interests, objectives, incentives for the local decision-makers?
Project Definition and tendering
3.1 Which type of PSP form was chosen?
3.2 By whom?
a) Local government
b) national government
c) donor community
d) others
3.3 Were transparent criteria discussed and used to determine the type of the PSP project?
yes no
if yes: which ones?
3.4a If the chosen form was a concession or long-term -lease: was it possible for the private partner to
propose a phasing-in (e.g. start with service contract with option to switch to a concession or lease
contract)?
yes no
3.4b Which advantages and disadvantages would such a measure have had?
advantages:
a) better planning and decision base due to more reliable data collection
b) trust building between public and private partner
c) time to set up a regulator
d) others
disadvantages:
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
a) time lost
b) real problems not tackled
c) others
3.5a Who was responsible for producing the tender documents (name of institution)?
3.5b Who paid for it?
3.5c Who else was involved? How?
3.6a How long did it take between the decision for PSP and the finalisation the tender documents? How
long took only the preparation of the tender documents?
3.7a was the data/information provided in the tender documents sufficient for a clear tender and
negotiation process?
yes no
if no: what were the reasons for the insufficient data?

3.7b
a) lack of time
b) lack of knowledge
c) lack of attention by the consultant producing the tender documents
d) data not available
e) others
Selection process and negotiation process

4.1 How many companies took part in the pre-qualification?
How many were pre-qualified and submitted a bid?
4.2a Who was responsible to determine the pre-qualification and the final selection criteria?
Were these the same people which also formed the selection committee?
4.2b yes no
4.2c who else was involved in the selection process (formally and informally)?
4.3 Which were the main selection criteria (tariff, concession price, CVs of staff, etc)?
Could the selection committee agree on the winner easily, or were the major disagreements?
4.4a Were any major conflict points raised during the negotiation?
a) allocation of responsibilities
b) setting of performance targets and penalties
c) price setting procedure
d) reliability of data
e) others
f) none
Were parts of the proposal changed during the negotiation process? Which ones?
4.4b
yes no
4.5a Did the public authorities engage professional support for the negotiation?
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
yes no
4.5b if yes, which ones?
a) World bank staff b) gtz staff
c) other development organisation’s staff d) Private consulting companies
e) others f) none
4.5c Do you perceive any conflicts of interest of the supporting institutions? Which ones?
4.6 When was the contract awarded?
Contractual aspects – contents
5.1a Which were the main tasks of and objectives for the private partner? Please state in qualitative and
quantitative terms (where applicable)
Could these realistically be fulfilled and achieved?
5.1b yes no
5.2a Which were the main tasks of the public partner, the authorities and institutions?
Could these realistically be fulfilled?
5.2b
yes no
5.3 What kind of remuneration was agreed on?

a) lump sum
b) performance based payment (please specify below)
c) collection of fees
d) other
Contractual aspects – Regulatory institutions
6.1 Was a new regulatory body set-up?

yes no
6.2 When was the regulatory body set up?

a) existed already
b) ____ months before the PSP contract was signed
c) ____months after the PSP contract was signed
d) not until now
6.3a Was there a capacity building for regulators as part of the project?
yes no
6.3b if yes: How was it financed?
6.4 Is the level of salary an obs tacle to recruitment of appropriated staff?

yes no
6.5a Does the private operator possess better information on operational issues?
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
yes no
6.5b
If yes (1), which issues are these?
a) tariff setting
b) cost structure
c) collection ratio
d) others
6.5c
If yes (2): Does this induce severe problems in controlling the companies?
yes no
if yes (3): Are there any efforts to reduce these information asymmetries?
6.5d
yes no
6.5e Are these efforts successful?

yes no
6.6a Your overall assessment: Is there sufficient regulatory competence ?

yes no
6.6b if no, please state why
Contractual aspects – Regulatory Mechanisms
7.1a Are flexible adaptations to changes in the framework conditions possible?

yes no
7.1b if yes, how?
7.2a Are periodical renegotiations foreseen?

yes no
7.2b if yes: Do they take place?

yes no
7.2c if yes: Are the public partners able to perform well in this renegotiations
yes no
7.2d Have there also been extraordinary renegotiations?

yes no
7.2e if yes: 1) who initiated them:

a) private partner
b) local public partner
c) regulator
d) others
7.2f
if yes: 2) What were the reasons for the renegotiations?

__________________________________________________________________________________________________________________________________________________________________________________________________________
_
a) pricing issues
b) under-performance of private partner (please state below what type)
c) new regulations
d) crucial change in framework conditions
e) others
7.3 How many years after the contracts were signed did the first renegotiations occur?
a) regular renegotiations: _____years
b) extraordinary renegotiations: _____years
7.4 Which parts of the contract do you perceive as being the most prone to being ignored/ not fulfilled?
Which ones have provided most problems until now?
7.5 Which securities are in place against underperformance of the private operator?
7.6a Are these securities appropriate means to induce co-operative behaviour in re-negotiations?
yes no
If not, why?
7.6b a) lack of competition
b) no credible threat due to obvious difficulties in operating the system in a transition phase?
c) for the public side: Political pressure/ pressure by financial community?
d) others
7.7a Are any mechanisms in place to protect private operators against regulatory or political opportunistic
behaviour?
yes no
if yes: Have these proven successful?

7.7b
yes no
7.7c if no? why not?
7.8a Is there an arbitration procedure determined?

yes no
7.8b if yes: What kind?
Results
8.1a Have the main objectives been achieved?

yes no
8.1b If no, why?

a) lack of revenue
b) lower willingness/ ability to pay than predicted

c) unexpected cost increases
d) insufficient competence of operational staff

e) lack of co-operation of public partner
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
f) unpredictable changes in framework conditions
I. inflation
II. recession
III. political intervention or change of government
IV. additional regulatory requirements

comments:
8.2 Is there a monitoring procedure in place, which creates transparency in the comparison of objectives
and results?
yes no
If yes: How is the monitoring done? (What are the indicators, how is the monitoring process)
Transaction Costs (1)
8.1 Are there any cost accounts for the preparation/ implementation of the PSP project?
yes no
8.2a Have any external partners contributed financially to the preparation of the project and the support of
the public partner?
yes no
if yes, please state project volume in USD

8.2b
8.3 What is the amount for any additional costs for the preparation of the contract?
8.4 What is the number of staff employed by the regulator resp. which are working to safeguard an
appropriate regulation of the private partner (esp. contract supervision, determination of tariffs,
renegotiations, quality control etc.)?
_____ employees
8.5 How high are the overall costs of the regulator (in USD)?
8.6 Who pays for the cost of the regulator?

a) part of the water bill
b) private partner with no passing-on to the customers
c) public budget (i.e. tax financed etc.)
d) others
Please use the following table to estimate the values for the following aspects (according to the various steps of
the PSP process)
__________________________________________________________________________________________________________________________________________________________________________________________________________
_
Transaction Costs (2)
Criteria project definition/ tendering selection negotiation set up of regulator renegotiations

tender docs
Overall duration
Who was involved
estimation of person months

used by the public partner

used by the private partner

used by external support
(gtz, World Bank, private
consultants)
______________________________________________________________________________________________________________________________________________________________________________________________________
____
_
Concluding Judgements
9.1 What were the main strengths and weaknesses of the pre-PSP-system in technical, institutional,
economic, social terms?
Strengths:
Weaknesses:
9.2 Who was most able to influence the shaping of the project?
10.3 Which of the phases mentioned Rank: Rank: national Rank:

above were most prone to local or local influence international
external influence? influence influence
a) project definition/
preparation of tender
docs
b) tendering
c) selection
d) contract negotiation
e) set-up of regulator
f) contract renegotiation
10.4 How was the co-operation between local authorities and external consultants, which induced the
PSP process resp. supported the local authorities?
a) smooth, co-operative
b) determined by distrust
c) neutral
d) others
10.5 Overall, was the PSP process successful?

yes no
10.6 Which measures would you propose to improve PSP project performance and co-operation?
10.7 What are the main lessons learned from your point of view?

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Recent Findings and Assessments

Private Sector Participation

A report commissioned by GTZ MEN-REM

1.1 Project objective and remarks .................................................................................. 6

3 New Institutional Economics viewpoints ......................................................................... 13

4 Recent general findings ................................................................................................... 18

4.1 Introduction ............................................................................................................. 18

5.1 Working group......................................................................................................... 25

5.4.1 Information regarding Pre-PSP situation............................................................ 30

5.4.3 Project definition and tendering .......................................................................... 32

5.4.4 Selection and negotiation process...................................................................... 33

5.4.5 Contractual issues – content and regulatory framework.................................... 35

5.4.6 Contractual issues – regulatory mechanisms .................................................... 36

5.4.7 Potential for external influence ........................................................................... 37

5.4.8 Results ................................................................................................................ 38

5.4.9 Transaction Costs ............................................................................................... 39

5.4.10 Role of GTZ..................................................................................................... 43

5.4.11 Lessons learned and conclusions .................................................................. 43

6.1 Project Objective..................................................................................................... 46

8 Annex - Questionnaire ..................................................................................................... 52

Figure 2: Cancellation ratios in infrastructure projects with PSP (1990-2001)...................... 21

Figure 3: Ranking of weaknesses .......................................................................................... 30

Figure 4: Duration of project preparation phase..................................................................... 33

Figure 6: Ranking of influence possibilities according to individual projects ......................... 38

Figure 7: Ranking of influence possibilities - average............................................................ 38

Figure 8: Total staff inputs according to the project stages ................................................... 40

Table 4: The Project Working Group ...................................................................................... 26

Table 5: Reform approaches in the countries of the participating projects ........................... 28

Table 6: Key data of the participating projects ....................................................................... 29

CIRUS: Centre for Innovation Research in the Utility Sector

EAWAG: Eidgenössische Anstalt für Wasserversorgung, Abwasserreinigung und

EBRD: European Bank for Reconstruction and Development

GTZ: Deutsche Gesellschaft für Technische Zusammenarbeit GmbH (German

KfW: Kreditanstalt für Wiederaufbau (German Bank for Reconstruction and

MEN-REM: Mediterranean Environmental Network

NIE: New Institutional Economics

NGO: Non Governmental Organisation

OED: Operations Evaluation Department of the World Bank

ONEA: Office National de l’Eau et l’Assainissement (Burkina Faso)

Plc: Public Limited Company

PSP: Private Sector Participation

TAC: Transaction Costs

UFW: Unaccounted for Water

1.1 Project objective and remarks

• Pre-PSP situation, origin of the project and decision making

1.2 Theoretical analysis and recent general findings

1.3 Results from the MEN-REM survey

• Intended lease contract in Sana’a (Technical Secretariat, Yemen); cancelled.

• Management contract in Amman (Jordan); running

• Service contract (Burkina Faso); running

• Management contracts in Zambia; running

• Management contract Northern Governorates (Jordan); tender phase

The solid waste project is

• Joint venture and management contract in Aswan (Egypt); running

The following keywords are used to structure the recommendations:

• Participation and transparency

• Defining and allocating tasks

• Intellectual and factual leadership

Defining and allocating tasks

• A possible solution is that a comprehensive external audit should be conducted by

1.4 Consequences for the network and GTZ

• Increasing realisation of the importance of a well-designed and timely establishment