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Julian ThorntonAlan Wyatt
December 2015
They include some clauses for:• Performance bonds• Guarantees• Liquidated damages• Fines for non-performance• Bonuses for good performance
However, with today’s PBCs, the private sector makes a larger investment and takes a larger risk, and is paid to reach or exceed specific targets
Increased water utility revenues from reduced commercial losses
Decreased operating costs from reduced physical losses
Loans to the water utility: WB, IDB, ADB, etc Infrastructure grants to the water utility
(Guayaquil, Salta) Commercial loans to the contractor Equity investments in the contractor:
Private, IFC, IIC, etc. (Manila Water, AEGEA)
At the extreme: No financing is needed for 100% performance based projects – payment made solely on results (Brazil, USA)
More Typical: Mix of Fixed Fee and Performance Payment (70% Fixed Basis 30% Performance Basis
Advance Payment with Adjustments
PBCs can achieve more rapid reduction than in-house programs – at least in many cases
More rapid reduction MAY lead to higher cost of NRW reduction
Financial analysis can determine if the more rapid reduction is worth the higher cost. The initial level of NRW and the financial value of water are key considerations
If the PBC does not build local capacity, NRW will rise after the PBC.
More work is needed to fully assess these tradeoffs
Expensive is defined as that which is a high cost and not worth the money
Depending upon the context of the PBC It may need a high cost to attract the private sector to a
risky situation It may need a high cost to deal with a high rate of rise It may need high cost to achieve rapid reduction It may need a high cost to change-out faulty
infrastructure to ensure longer term sustainability But it may not be expensive!
Principle : Risks should be allocated to those best able to manage them
Allocate to the party best able to influence the risk (e.g., constructions costs – completion risk).Allocate to the party that can best anticipate or respond to the risk factor - influence impact or sensitivity of risk factor on project valueAllocate to the party best able to absorb the risk
Risk
1. Inflation2. Currency devaluation3. Incomplete or incorrect
baseline data during bid4. Non performance by
utility of assigned tasks5. Government change
mentality change6. Inflexibility by utility to
change plan if PDCA dictates
7. Utility does not have capacity to measure
8. Payments are delayed
Mitigation
1. Adjustment clause2. Currency insurance3. Opportunity to negotiate
baseline and target after detailed verification
4. Clause allowing contractor to intervene
5. Fair value payout clause6. Agree to agree clause7. Third party specialist to
measure performance8. Bank has fund for delayed
payment
Risk
1. Utility does not have the capacity to manage the contractor
2. Contractor does not perform
3. Contractor performs but after the project NRW returns to high levels
Mitigation
1. Contract out the management with a capacity building phase
2. Increased performance portion
3. Maintenance phase & Capacity building – if impossible long term PPP
If the market is not mature If data is not available If politics are not stable If the value is not recognized locally If the environment is tough If there are no guarantee’s from a third
party There could be a no show – this is costly
and embarrassing!
Full Definition of CONTEXT (Miriam Webster) the parts of a discourse that surround a word or passage
and can throw light on its meaning the interrelated conditions in which something exists or
occurs : environment, setting A contract without local context – it is just text! Like many NRW contracts in the past they may
not have been sustainable as the context was not fully understood
In some cases the contract clauses were cut and pasted from other contracts with different context
Current Annual Loss VolumeBureaucracy &
Unions
Financial
Social & Political
Technical
PEOPLE
PEOPLE
PEOPLE
PEOPLE
METHODS
INDICATORS, TARGETS AND
RESULTS
BEST OPPORTUNITIES
CORPORATE AND SECTORAL
ACTION PLANS
INTEGRATION AND
INTERACTION OF PROGRAMS
MAINTENANCE AND OPERATION OF
INFRASTRUCTURE
MANAGEMENT MODEL
PROJECTS
FINANCIAL RESOURCE
IMPLEMENTATION
PEOPLE
DEVELOPMENT AND OPERATIONAL CONTROL
PEOPLE
No use having the best technologies and methodologies if no commitment from the team
Motivation, awareness, capacity building, training, communication and dissemination
Source…Paulo Cherem COPASA, Brasil
PEOPLE PEOPLE PEOPLE PEOPLE PEOPLE PEOPLE
METHODS BEST OPPORTUNITIES
DIAGNOSTICS AND CORPORATE AND
SECTORAL ACTION PLANS
INTEGRATION AND
INTERACTION OF PROGRAMS
MANAGEMENT MODEL
INDICATORS, TARGETS AND
RESULTS
MAINTENANCE AND OPERATION OF
INFRASTRUCTURE
FINANCIAL RESOURCE
IMPLEMENTATION
DEVELOPMENT AND OPERATIONAL
CONTROL
MOTIVATIONCAPACITYBUILDING
EVALUATION OF RESULTS
PROJECTS AND WORKS
Commitment of people
Motivation, awareness, capacity building, training, communication and dissemination
At all stake-holder levels – leads to sustainable success
Source…Paulo Cherem COPASA, Brasil
PBC’s need clear goals built on sound data PBC’s need clear minimum scope and simple
payment calculations PBC’s can be attractive where an enabling
environment can be developed PBC’s work well where trust is built between the
contractor and recipient PBC’s can be appropriate to accelerate NRW
programs for a quicker fix and a higher NPV PBC’s develop buy in from the private sector which
can grow local markets and build local capacity But they are not necessarily for everyone and
should be used where appropriate
