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External External Delivery MechanismsDelivery Mechanisms

Joint Response Team - DWAF, SALGA, NT Joint Response Team - DWAF, SALGA, NT and dplgand dplg

What are the different options?

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Purpose of this presentationPurpose of this presentation

The purpose of this presentation is to:

Provide a broad overview of different external delivery mechanisms

Illustrate how different external arrangements can address service delivery challenges and needs

Highlight when the different external mechanisms are appropriate

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What is meant by External?

External means any mechanism that is outside of the municipality

It therefore requires a written agreement between the municipality and the external mechanism

WSA

Municipality

WSPService delivery

agreement

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Service delivery agreements (SDAs) and Mechanisms (WSPs)

WSA

Municipality

WSPThere are different

types of service provider mechanisms

depending on the needs and challenges

that the service provider needs to

address

WSPService delivery

agreement

There are different types of contracts (agreements) that a municipality can enter into

with its service provider, which will regulate the

relationship of the WSA and the WSP

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Service Delivery Mechanisms

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What are the different types of external service delivery mechanisms?

The Municipal Systems Act defines an external service delivery mechanism as:

WSA

WSP

1. Municipal Entity 2. Another municipality3. Organ of state (including a

traditional authority) 4. CBO5. NGO6. Any other institution or entity

legally competent to operate a business activity

An external service delivery mechanism is OUTSIDE the municipality

Municipality

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1. What is a Municipal Entity?1. What is a Municipal Entity? It is an entity over which a municipality has majority

control, and can take any one of the following forms:

a. Private Company established in terms of the Companies Act

b. Service Utility established by by-lawc. Multi- Jurisdictional Service Utility (MJSU)

established by agreement between municipalities The Act no longer allows S21 companies and Trusts as

municipal entities Although a municipality has partial or full ownership of a

municipal entity, it is an external mechanism because it is independently governed and managed

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Municipal entities are HIGHLY regulated!

They are regulated in terms of incorporation, for example, it is a requirement to show that the existence of the entity is necessary and feasible

The functioning of municipal entities is also regulated in terms of the MFMA in respect of

Financial governance

Financial accountability

Reports and reportable matters

Regulation of Municipal Regulation of Municipal EntitiesEntities

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1a. Municipal Entity: 1a. Municipal Entity: Private Company Private Company

A municipality may:

establish or participate in establishing, or acquire or hold an interest in a private company

either acquire or hold full ownership, or acquire or hold a lesser interest

acquire or hold a lesser interest only if all the other interests are held by another municipality or municipalities or national or provincial organ/s of state

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1b. What is a Service Utility?

Service utilities are:

established by a by-law

juristic persons (separate legal entities)

under the sole control of the establishing municipality

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1c. What is a Multi Jurisdictional 1c. What is a Multi Jurisdictional Service Utility (MJSU)? Service Utility (MJSU)?

It is a joint venture established by a written agreement between two or more municipalities

Minister of dplg may request establishment in consultation with Minister of DWAF

The Systems Act states what must be provided for in agreement

Controlled by a governing body which is a juristic person (independent legal entity)

Accountable to municipalities

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Advantages of a Municipal Advantages of a Municipal EntityEntity

A municipal entity:

can operate more independently than an administrative structure or trading unit within the municipality

can function on business principles

allows for greater flexibility, for example adjusting to the changes and demands of the customer base

provides for water services to be ring fenced (company can be structured such that income from water services is reinvested in water services as opposed to other municipal services)

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When is a Municipal Entity When is a Municipal Entity appropriate?appropriate?

When a single provider is the optimal service delivery mechanism across more than one municipality

When there is a need to share operational risk with an investor

When a regional option is the optimal option When there is a need for change management When there is a merging of different structures or

services provision arrangements (e.g. powers and functions, redemarcation, DWAF transfers )

Examples of municipal entities include Joburg Water and uThukela Water Services (Pty) Ltd.

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2. Another Municipality: The 2. Another Municipality: The options?options?

Another municipality can include any of the following: An LM within the DMs area of jurisdiction

(where the DM is the WSA) A DM where the LM is authorised A Metro A neighbouring DM or LM Any other municipality

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LMs can be used in both internal and external arrangements

There are two ways to use LMs:

You can use them to provide support services (for example billing, customer care, legal services) to a decentralised internal mechanism through a support services agreement

You can appoint them as an external mechanism in terms of a service delivery agreement (SDA)

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Capacity issues when appointing Capacity issues when appointing ‘another municipality’‘another municipality’

If the WSA decides (following a s78 process) to appoint another municipality to be the WSP, the WSA must satisfy itself that it has the capacity to enter into such SDA, for example capacity to manage and regulate the SDA

The municipality selected by the WSA to be the WSP must also do a feasibility study (s 80(3) of the Systems Act).

Both the WSA and WSP must check compliance with section 33 of the MFMA if there are financial obligations beyond 3 years

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When is another municipality When is another municipality appropriate?appropriate?

When there is existing capacity within the municipality’s area of jurisdiction, for example where LMs who are not authorised have service provision capacity within the DM area, and it makes sense to decentralise

When a neighbouring municipality has capacity and is willing to provide the service

When there is a highly capacitated municipality that is able to achieve economies of scale without needing to share ownership, for example a Metro providing a service on behalf of an LM

When LMs in a district are authorised and they decide to centralise provision by appointing the DM to provide the services

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3. What is an Organ of State?3. What is an Organ of State? Any organ of state is any government entity

such as a government department, administration within any sphere of government of any other institution exercising a public power or performing a public function in terms of legislation

The most likely organ of state in terms of water services provision (i.e. to be a WSP) is a Water Board

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Process relevant to an Organ of Process relevant to an Organ of StateState

An organ of state is subject to the PFMA and must inform National Treasury in writing and obtain approval from the Minister of DWAF prior to accepting an appointment to become a WSP

It is a “public sector entity” and therefore competitive procurement is not compulsory for appointment

Both the MFMA and the PFMA oblige the parties to avoid fruitless and wasteful expenditure (for example, the agreement between two organs of state, the municipality and the Water Board must still regulate the flow of finances in a manner that is viable for both parties)

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The Municipal Systems Act does not define a community based organisation

DWAF is proposing the following definition in the new draft of the Water Services Act:

A not for profit organisation situated within a defined community that is mandated by that community to provide water services to that community on behalf of that community.

If the CBO is to be appointed by means of a service delivery agreement, competitive procurement is required in terms of the Systems Act, but may be exempt in terms of the new draft Water Services Act

A CBO must be legally competent to enter into a SDA in order to become a WSP

Community Based Organisations Community Based Organisations (CBOs)(CBOs)

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CBOs can be used in both internal CBOs can be used in both internal and external arrangementsand external arrangements

WSA’s may want to use a CBO to fulfil specific tasks and not to become a WSP - in such cases there is no transfer of risk and the WSA remains the WSP

CBOs can be used as a decentralised service delivery ‘agent’ or ‘contractor’ of the WSA if:

the WSA still remains the WSP, assisted by the CBO; the CBO operates as an agent and not as an external

mechanism.

If a CBO is to be appointed as a WSP they must be appointed through a competitive procurement process following a feasibility study

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WSA

DM

Where the CBO is fulfilling all the WSP functions it can be appointed as an external mechanism, namely the Water Services Provider (WSP)

CBOs as an external CBOs as an external arrangementarrangement

WSP

Service delivery

agreement

This option requires a feasibility study before

procurement

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Community Based Contractor (water services agent)

CBO as support to internal mechanism

WSAWSP

DM

Support Services Contract

Often CBOs do not have the capacity to fulfill all the WSP functions. However they can be contracted to fulfil some functions such as daily operations and minor repairs. In this arrangement they are merely a contractor to the municipality. The municipality remains the WSPThis is a normal support

contract arrangement and is not a full service delivery agreement, and therefore does not require a s78 process

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When is it appropriate to use CBOs When is it appropriate to use CBOs as WSPsas WSPs

It is appropriate to use a CBO as a WSP under the following conditions:

Where there is a community with structures able to make community management work

Where the infrastructure technology is such that the CBO can undertake all the WSP functions

Where the CBO has the necessary capacity or potential capacity to provide the services and is able to access whatever support it needs

CBOs are often the most appropriate mechanism in remote areas and rural areas.

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5. Non-governmental Organisations 5. Non-governmental Organisations

A non-governmental organisation (NGO) is a not for profit, service orientated, organisation which functions outside of both the government and business sector

Experience is showing that NGOs are interested in providing capacity and support to water service providers but generally do not want to take risk as the water service provider itself

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6. What comprises ‘any other 6. What comprises ‘any other institution’?institution’?

This is a very general and broad category enabling the WSA to conclude service delivery agreements (SDAs) with any parties if they meet the WSA’s requirements.

The only requirement is that they must be legally competent to operate a business activity

This category includes private sector providers

It also includes consortia of parties who may organise themselves to meet the specific output needs of the WSA

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Contracting with the private sector is generally known as a public private partnership (PPP)

A PPP is a commercial transaction where the private party: performs a municipal function assumes substantial financial, technical and

operational risk, and receives a benefit for doing so, by way of:

compensation from the municipality charges or fees collected by the private party

from users or customers of a service provided to them; or

a combination of such benefits

Private Sector

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Municipalities may enter into PPP agreements, but only if they can demonstrate that the agreement will -

provide value for money to the municipality

be affordable for the municipality

transfer appropriate technical, operational and financial risk to the private party

Provide benefit for the poor

Public private partnerships

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The process of embarking on and concluding a PPP agreement must comply with the regulations issued under section 120 of the Municipal Finance Management Act

Before a PPP is concluded, the municipality must conduct a Feasibility Study…

Requirements of PPPs

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The Feasibility Study (FS) must –

explain the strategic and operational benefits of the PPP for the municipality in terms of its strategic objectives

take into account all relevant information describe in specific terms -

the nature of the private party’s role in the PPP the extent to which this role can be performed

by a private party

PPPs and Feasibility Studies

Continued …

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describe in specific terms how the proposed agreement will –

provide value for money to the municipality

be affordable for the municipality

transfer appropriate technical, operational and financial risk to the private party

impact on the municipality’s revenue flows and its current and future budgets

The feasibility study must also motivate for the capacity of the municipality to effectively

monitor, manage and enforce the agreement

PPPs and Feasibility Studies

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When is it appropriate to use When is it appropriate to use the private sector?the private sector?

When the private sector party is able to bring the requirements to meet the service delivery challenges that the municipality faces

These may be skills, expertise, technology, innovation, training, and in some cases access to funding

When the municipality knows exactly what it wants to achieve through the partnership and it can set very clear key performance indicators

When the risks to be transferred can be managed by the private partner

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Service Delivery Agreements

(SDAs)

Service delivery agreement

Service delivery agreement

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What is a service delivery agreement?

A service delivery agreement is a contract between a WSA and a WSP which:

appoints and authorises the WSP to deliver water services to the whole or part of a local community

is a written document

sets out the roles, responsibilities, rights and obligations of each party so that the objectives of each party can be achieved

provides for the WSA to resume control of the service on termination of the agreement

must be signed by the municipal manager (accounting authority)

must be authorised by the full Council

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Purpose of a service delivery agreement?

Using an external arrangement is all about accessing skills, expertise and resources to address needs and challenges that cannot be addressed through an internal mechanism

The SDA must therefore be designed to respond to those specific needs and challenges

The purpose is to set out what each party must do in order to achieve the service delivery needs and objectives for the benefit of the community

The SDA is a negotiated instrument and it must be practical and realistic about what can be expected of each party

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Why must WSAs regulate service delivery?

Irrespective of the municipality’s choice of service delivery mechanism (i.e. who the WSP is) the WSA is ultimately responsible and accountable to the local community

The WSA must ensure that the consumers’ best interests are served

It must also ensure that the services provided are in accordance with national norms and standards as well as the municipality’s bylaws

The WSA must ensure that the services are efficient, affordable, economical, and sustainable

To this end it must put monitoring and other regulatory measures in place to ensure proper performance and delivery of services by the water services provider (whether it is an internal or external mechanism)

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Different types of SDA

There is a generic categorisation of contract types

The Municipal Systems Act refers to contracts as SDAs

The structure of a contract must be driven by needs and challenges and how risk and responsibilities are to be allocated between the parties

The key distinguishing features of different contracts:

Duration (short/medium/long term)

Transfer of risk (operational/technical/financial/legal)

Value of investment and expected rate of return

Complexity of implementation

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Generic types of SDAsSDA Term Typical Risks Transferred and Remuneration

Service Contract

Component of service - eg repair and maintenance, billing, collection. This may be a support and not an external mechanism

Short:

1-3 years

Limited service delivery risk transfer risk transfer

Fixed remuneration payable

Suitable for NGO/CBO contracts

Management Contract

WSP responsible for whole service – but no financial responsibility

Short – medium:

2-6 years

Responsible for all operational risk, but limited financial risk

Payment is fee-based plus incentive

BOT (Build operate Transfer)

WSP designs, builds, operates, maintains assets for service delivery. Municipality takes ownership at end of term

Medium to long:

5-10 years

Takes operational risk and commercial risk

Payment is fee-based plus incentive

Generally lender involvement

Concession

WSP manages, operates, repairs, maintains, extends, finances municipal assets and services – responsible for extending infrastructure and funding this

Long:

10-20 years

Takes operational, technical commercial and financial risk

Payment is tariff based and provider assumes collection risk and operational risk

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When does a support contract become an external service delivery

mechanism? This needs to be determined on a case by case basis

When the mechanism takes responsibility for the WSP function, for example: It is providing the full service on behalf of the

municipality , such as operations, maintenance, planning, customer care, contract management, revenue collection, staff management

It is taking a large portion of the risk and is measured on outputs, such as number of households served with a certain level and quality of service

It is responsible for managing delivery, rather than simply performing tasks

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External Option: Management Contract

WSA

Purpose: To appoint an operator to manage the operational aspects of water services provision function (external WSP)

Obligations of contractor:- Operate and maintain the water works (system)- Deliver water services to the customers- Manage the budget annually approved by Council- Achieve agreed upon key performance indicators (KPIs)- Manage staff but do not take transfer - May include extension of infrastructure / services but limited responsibility

for funding this - Municipality generally still responsible for collecting tariffs and for raising

capital Final Outcome: Staff managed and capacitated for a medium term

while service delivery continues and is improved

WSPManagement

Contract

NEED FOR TECHNICAL AND MANAGEMENT EXPERTISE

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External Option – PPP

WSA

Purpose: To access funding upfront to extend service delivery where government sources of funds are not available in the short term, but can be paid over a period of time

Features of the SDA: Longer term because the WSP needs to recoup its money invested

and earn a return WSP takes operational, technical and funding risk In addition to managing service delivery, the WSP must extend

service delivery The municipality must set proper tariffs, allocate equitable share for

free basic services, access grant funding such as MIG and support credit control and debt collection

Final outcome: Accelerated service delivery which is affordable

Concession

NEED FOR URGENT INVESTMENTWSP

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Key components of a SDAs The objective of the agreement

For example: improved service delivery for the local community

The scope of the appointment of the WSP by the WSA Duration (term) The area to be served (jurisdiction) Process for variation

General obligations of the WSA Setting policies and passing by-laws Approving budgets Tariff setting Approving or amending IDPs and WSDPs

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Key components of a SDAs

General obligations of the WSP

Depends on the mechanism chosen and the risk to be transferred to the WSP - but can include functions such as:

provide water services in accordance with the Constitution, Water Services Act, policies and by-laws of the WSA, and specific contractual terms

publish a customer charter

ensure consumer friendly billing

develop a business plan

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Key components of a SDA Funding service delivery

Budgets and business plan Setting tariffs, allocating equitable share and accessing MIG Credit control and debt collection

Asset operation, extension, management maintenance/ extension/ funding/ insurance

Mechanisms for monitoring and enforcing performance: Communication forum (co-ordinating committee) Key performance areas and Indicators Penalties Breach

Dispute Resolution: What happens if there is dispute (mediation/ arbitration/ legal action)

Termination: When can the contract be terminated and the consequences of termination

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Risks The appropriate allocation and mitigation of risk is critical

to the success of the agreement Risk allocation has costing implications. The more difficult

it is to manage a risk, or the more likely it is that the risk will happen, the higher the price will be

Risks need to identified at the feasibility stage, and will influence the value-for-money calculation

Risk allocation must be made clear in the bidding documents

Risk allocation will influence the competitiveness of bid prices

If fundamental risk allocation is shifted in bid negotiations, this may result in challenges from unsuccessful bidders

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Types of Risks Revenue Risk

The risk that customers to whom services are provided do not pay for services and the risk that suppliers will substantially increase prices

Operating Risk

The risk that the service provider cannot operate the provision of a service to the expected standard due to inadequate maintenance, industrial action, etc.

Demand / Affordability Risk

The risk that the demand for the services may be less than the projected demand. This may be affected by factors such as the increase in raw materials that influences the affordability of the service

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Types of Risks Non-performance Risk

The risk that one of the parties to the agreement will be unable to meet its contractual obligations

Political Risk

The risk of expropriation, nationalisation, war, exchange controls and the stability of the government

Legal / Policy Risk

The risk of substantial changes within the legal system, particularly with respect to labour, tax and environmental issues

Resource Risk

The risk that needed natural resources (such as water or electricity) is not of the required quantity or quality

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Types of Risks Unforeseen Circumstances Risk

This is the risk that unexpected and uncontrollable natural or human made conditions such as earthquakes, floods or war may occur that will negatively impact on the services

Residual Value Risk

The risk that assets are returned to the municipality on completion of an agreement in a condition less than expected due to inadequate maintenance during the period of the agreement

Regulatory Risk

The risk that service standards may require additional funding or that setting of tariffs and profit margins may be limited

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Monitoring and Regulation The municipality is ultimately responsible for service delivery The success of every contract depends on the ability and

capacity of the municipality to effectively monitor and regulate the performance of its service provider in accordance with the provisions of the service delivery agreement

The municipality can use different means to ensure proper monitoring of a service delivery agreement, for example: It may appoint consultants to review the performance of the

service provider at regular intervals It can identify a project officer to monitor performance It can allocate internal resources to undertake the task

Whatever means is used it is critical that those fulfilling the monitoring and regulatory function have sufficient capacity, experience and expertise

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Contract Management Plan

The Municipal Finance Management Act requires the Municipality to Prepare for contract management so that both parties are

able to meet their respective obligations to achieve the contract objectives

Identify a project officer with appropriate skills and expertise

A Contract Management Plan should encompass issues such as: Partnership management (systems and procedures to

manage accountability and relationship) Performance management (systems and achievements to

achieve the output specifications) Variation management (systems and procedures to enable

changes to be made)

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Thank You!