Evolution of contract structures in water supply and sanitation

Abstract

Today, public-private partnerships (PPPs) in the water supply and sanitation sector, including the affermage, are increasingly hybrid, performance-based models. These include evolved, more sophisticated affermage models – such as what we refer to as the performance-based affermage (PBA). This model is based on an incentive-driven and more equitable distribution of the efficiency gains between the operator and the contracting authority (CA). The operator's expenses are reduced through efficiency improvements; the operator's fee reduces and the payment to the CA increases. The operational surplus increases and its eventual distribution depends on whether or not the operator meets its financial and technical contractual targets. Hence the PBA model may be more politically attractive to public authorities whose bargaining power to demand improved service delivery from the operator is strengthened. Key preconditions for the successful implementation of a PBA include: (i) an incentive mechanism based on an audited and validated baseline, and (ii) a capable CA, leading to a balance of power and mutual respect between partners. This output-based affermage (PBA) option is structured with appropriate investment obligations and allocation of risks between the operator and the CA. These are based on each entity's ability to manage risks – and both are rewarded on their performance and the respective levels of risk assumed.