UTILITIES
Performance-based contracts An important part of a utility’s toolkit As cities continue to grow at rapid rates, water utilities are under increasing pressure to provide services. Performance-based contracts offer utilities the opportunity to harness the skills and resources of the private sector to improve performance. By Danielle Petterson
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apid rates of urbanisation in sub-Saharan Africa have meant that the percentage of the urban population receiving access to safe drinking water has been declining for decades. Added to this, many peri-urban and informal areas must contend with intermittent services or none at all, says David Ehrhardt, chief executive, Castalia. In many cases, utilities are not generating enough income to maintain infrastructure or raise finance for new infrastructure roll-out. Instead, they must rely on their national governments to
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provide them with grants – a challenge at a time when many governments have increasingly less money available. Poor revenue collection, coupled with increasing water losses, declining infrastructure and a lack of incentives for performance means that successful water utilities are usually the exception and not the rule. However, some African water utilities are performing well above average in providing good water service for the poor, even in rapidly growing cities with arid climates. Ehrhardt participated in a World Bank study that examined the utilities succeeding in providing water services and the methods they employed. Many of them have made use of performancebased contracts (PBCs) at some point in the past. “The use of PBCs has been a key tool in the toolkit of some of the best performing utilities in Africa,” he notes.
Performance-based contracts
PBCs allow public water utilities to contract the services of a private company to provide a specified level of service in the management of the utility. They include predetermined
performance targets that could be linked to several areas across the utility’s operations and reward the contractor financially for meeting those targets. Importantly, there are several types of PBCs, allowing for increasing risk transfer and private sector responsibility. These include service contracts, management contracts, lease contracts and concession contracts.
Service contracts
Service contracts typically focus on one component of a utility’s operations, such as revenue collection, metering management or non-revenue water reduction, and have no influence of the management of the utility. In Burkina Faso, for example, Ouagadougou’s utility brought in one of France’s international water operators to run their commercial function – billing, collections and metering – as part of the utility’s transformation to become one of the best performing utilities in Africa.
Management contracts
These contracts involve the government or board of a utility hiring an outside team to take over the management of the
