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Purpose and Context: The employer is introducing the private sector into the water and wastewater sector

through a four year incentive management contract. If this is successful then the employer would look to move to a more extensive contract. The operator collects revenues on behalf of the authority. The operator is paid a fixed fee and an incentive fee, based on performance.

Whilst there is reference to new customers in the service standards, there is no specific mechanism or requirement for connecting neighborhoods. Circumstances where this contract may be appropriate: This form of contract is useful as an initial management contract, as part of a process for introducing private sector involvement, where the government is willing to maintain the risk of cost of operation of the assets and. It has some limited incentives for improvement of standards and efficiency.

Main Features: The operator is (i) to operate and maintain the water and wastewater facilities in order to preserve and improve service standards, (ii) to invoice customers and collect revenues and take meter readings, and (iii) preparation of the Annual Operating Investment Fund Plan and (iv) to cooperate with the authorities in the implementation of the capital investment program (appendix 2, art. 2).

The contract is for 4 years, with the possibility of extending for a further 12 months.

The draft agreement does not state that the operator will have an exclusive right to provide the services in the designated service area.

The operator is paid a base fee plus the Incentive Compensation (GC 6). It is paid in the currency of the bid price.

The operator can recommend merit payments but this is subject to employer approval. there should be clear provisions specifying provision to low income areas. firing or demotion. It is therefore not clear that the operator will have real authority over the staff. article 2 that except as stated elsewhere in the contract the Operator is to perform the same level operations and maintenance of the Facilities as were performed by the Employer in the Service Area in the Base Year. under the Staffing Policy Index. However. Possible additional provisions that it might be appropriate to include: It is not clear whether the employer is hoping to meet the needs of low income areas ± where this is the desire. how this is to be achieved. the Operator is not liable for consequential and indirect loss (other than specified under [liquidated damages]). The operator is liable for performance of the services and for loss suffered by the employer as a result of default by the operator. The risk for the operator is to be able to achieve and maintain the Service Standards. Aggregate liability is limited to the total Management Fixed Fee (other than in relation to criminal negligence or wilful misconduct). whether through traditional service delivery or through standpipes etc. the operator is to reach or achieve certain standards.In the service standards and incentive compensation mechanism. The operator does not take on the risk of the cost of operation and maintenance or of financing improvements. their salaries shall be determined by the employer and the operator shall not be responsible for determining rates of pay/ benefits/ hiring.5 the operator is liable for acts of the Operations Staff under the supervisions of the operator.3(1)) and not transferred to the operator. and there is no possibility in the contract for adjustment of standards in the event that the asset condition or capacity is not capable of meeting these standards or if the data on which these performance standards have been prepared is found to be inaccurate (this is mitigated by the statement in the Service appendix. Specified staff of authority is to be seconded to the Operator under the Staffing Policy Index (GC 5. and . This will be a concern for the operator as under GC 3. It is also not clear whether the Operator will be required to meet the performance standards in the event that the employer fails to make the various operating and other investments.

1(f)). rather than their employer. It would also be helpful if the operator could make recommendations for disciplinary measures. and in limited areas base year data is established in the first weeks of the contract (appendix 2. even where these are not binding on the employer. The operator is taking on the risk of the asset condition and performance of the system. not just a material failure to the Operator. Whilst performance is based initially on the performance of the employer in the year prior to contract commencement. However. Secondment rather than transfer of staff is often the most practical approach to short-term management contracts and may sometimes be the only method available in law. This may be mitigated by the operator being able to recommend merit payments but the employer does not need to follow it. The employer has the right to suspend payments in the event of failed performance by the operator (GC 2. art 2). there is no clear mechanism for the performance standards being . If such a provision is to be included there should be materiality included. The operator will not be compensated for loss of profits in such a circumstance and this will be resisted by a bidder as they will be anxious to ensure that the employer does not terminate the contract for no good cause. A better mechanism might be to impose liquidated damages for certain breaches/ non-performance. It might be helpful to include a clause allowing the Employer to suspend services in the event of an emergency. The employer is entitled to terminate for convenience (GC 2. This is a harsh and unusual provision as the employer is entitled to suspend performance for any failure.create an incentive structure to encourage the operator to reach these poor areas in the life of the contract. the employer should furnish evidence of the failure and the suspension should be only in relation to a portion of the payments.8.7). difficulties may arise in ensuring that staff feels that they report to the operator.

8.6) ± as the operator is operating a whole system. Provisions that may not be advisable to replicate/ may need further thought: The employer has the right to suspend payments in the event of failed performance by the operator (GC 2. If such a provision is to be included there should be materiality included.it is not clear why this clause has been included ± in a civil law jurisdiction there is likely to be a similar concept incorporate into law ± is this supposed to supplement/ reflect/ supersede it? In a common law jurisdiction there is no such understood concept ± other than doctrines preventing a party from benefiting from fraud/ negligent misrepresentation ± a court in a common law jurisdiction/ arbitral panel may have difficulties in interpreting such a provision. Settlement of Disputes (GC 8) ± consideration should be given as to whether expert determination should be sought before resorting to arbitration. The drafting could be adjusted to take this into account. not just a material failure to the Operator. This is a harsh and unusual provision as the employer is entitled to suspend performance for any failure. Fairness and good faith (GC 7) .amended or indeed for variation of the contract in the event that performance standards prove to be unrealistic. The employer is entitled to terminate for convenience (GC 2. A better mechanism might be to impose liquidated damages for certain breaches/ non-performance. The operator will not be compensated for loss of profits in such a circumstance and this will be resisted by a bidder as . Force Majeure (GC 2. rather than an individual asset.7).1(f)). the operator may be prevented from operating part of the following an event of Force Majeure. the employer should furnish evidence of the failure and the suspension should be only in relation to a portion of the payments. Parties should also consider whether it is appropriate to have one or three arbitrators.

appointment of a Project Management Unit on the part of the Employer to be the day to day representative of the Employer (GC 5. provides for handover of assets and staff on termination (GC 2.they will be anxious to ensure that the employer does not terminate the contract for no good cause. with reduction of leakages. The operator is taking on the risk of the asset condition and performance of the system.8. there is no clear mechanism for the performance standards being amended or indeed for variation of the contract in the event that performance standards prove to be unrealistic. conflict of interest (GC 3.5). . Provisions of wider general use: The draft agreement contains provisions relating to exemption from tax of operator (GC 1. whether it has been applied: This contract proved to be successful. Whilst performance is based initially on the performance of the employer in the year prior to contract commencement. Experience Since Coming Into Force (including any amendments)/ if draft form. The Service Appendix and Incentive Compensation Appendix could serve as precedents. illegal connections and more accurate metering. and in limited areas base year data is established in the first weeks of the contract (appendix 2.7). the possibility of a transition period following the end of the contract (GC 2.4). art 2).3).9).

ensure effective treatment and disposal of sewage. LEGPS. It has some clear incentives for improvement of standards and efficiency. Circumstances where this contract may be appropriate: This form of contract is useful as an initial management contract.Type of Agreement: Management contract Region (if known): South America Year of Agreement/ Draft: 2002 Annotation by: Victoria Delmon. World Bank LEG VPU Purpose and Context: The host government is seeking (i) to improve and expand the existing system for drinking water to achieve 24 hour supply. as part of a process for introducing private sector involvement. improve water supplies to poor and hinterland communities and achieve financial self-sufficiency. improve drinking water quality. where a water system¶s performance is uncertain and the government is willing to maintain the risk of cost of operation of the assets and. expand customer base. Main Features: .

which is supported with incentive payments. The fixed costs are to cover personnel etc ± so the Operator does not bear the risk of the cost of operations such as power y Liability of the Operator is unclear as the Operator has a performance obligation of ³best endeavours´ to provide the services.2) and the Operator will not have a direct relationship with the customers. [this is unusual arrangement as the project manager may find itself with conflicts of interest] y The Operator is to provide personnel for management and also work with the Employer¶s own staff [exactly how this is achieved is unclear]. y The Operator submits each year a plan setting out external resources that will be required for the following year. y The Operator is to manage and maintain the water and sewage network for the country. The Operator is to provide the project manager who is to act as managing director of the Employer and be a member of the board of directors of the Employer the services are to be provided to the employer (clause 3. y There is no reference to exclusivity of the Operator ± however this is implied as the Operator provides the managing director of the Employer.y The contract is for 5 years. y This is a true performance-based management contract ± with little operational risk being transferred to the Operator but with performance incentives built into the contract.1. y The operator is paid a base fee (adjusted in line with official index for salaries) plus the Incentive Compensation (cl 6). The contract is however much more than a technical assistance arrangement for improving systems as the Operator has extensive duties to manage and maintain the systems and is subject to detailed performance obligations (set out in Schedule H). There is also a limitation of liability provision .

Possible additional provisions that it might be appropriate to include: A stated objective of the contract is to extend services to low income ands rural areas ± there is no detail of how this is to be achieved. there is no general principle allowing a contract to be avoided by reason of a party not acting in good faith (unless they are fraudulent or have made a misrepresentation prior to contract signature) and so the courts might find it hard to interpret the provision. in management contracts at least. Clause 8 introduces concepts of the parties acting in fairness and good faith. Secondment of staff to the operator is often the most practical approach to short-term management contracts and may sometimes be the only method available in law. y The operator does not take on the risk of the cost of operation and maintenance or of financing improvements. it is not clear how the parties would resolve a dispute in the event that the operator recommended a member of staff for discipline and the authority refused to take action. The benefit of such a provision is questionable because ± if the contract is located in a civil law system then there is likely to be a similar concept enshrined in law anyway and therefore reference here to it will not add anything (and may cause confusion as to whether the parties were trying to include an obligation different from that in law). This may be mitigated by the operator deciding salary levels and requiring the employer to act in disciplinary matters. although part of the performance standards is increased service delivery to the hinterlands. It is unclear how the operator will assert its authority on the utility employees and how discipline will be dealt with. that this will be practical. The clearest solution is to transfer employees to the operator. difficulties may still arise in ensuring that staff feel that they report to the operator. in common law. However.excluding liability for things which were not in the operator¶s control ± this provision is rather unusual and unclear. whether through traditional service delivery or through standpipes etc. however there are often legal/ union/ political restrictions on this and it is rare. It might be useful to include a more detailed plan of service delivery to poor areas. rather than their employer. The risk for the operator is to be able to achieve and maintain the Service Standards. However. This is a critical area as the operator will be dependent partly on performance of the staff to achieve the performance standards. service standards to be applied. billing arrangements in those areas etc. .