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Module 4 -17 Negotiation & Contracting

17.1 What is the process of negotiating?
17.2 What is the process of contracting?
17.3 What should the contract cover?
17.4 Who should conduct this stage?
17.5 What are the key issues to keep in mind?
Further Guidance

Key Questions:

Why carry out negotiating and contracting?
What does negotiating and contracting entail?
How does negotiating and contracting achieve poverty reduction objectives?

Related Tools:

4 Collecting Information
6 Defining Objectives

Implementation – Negotiation & Contracting

17.3 What should the contract cover?

Pre-bidding phase

Prior to the PPP bidding process, the municipality must consider the type of PPP that is most appropriate to the local situation; it must also consider the needs of the poor [Tool 2]. The type of PPP chosen must reflect the objectives of the municipality (government). For instance, is the principle objective:

  • Expansion of (network) capacity?
  • Expansion of distribution networks?
  • Addressing of unaccounted for water (in the case of water provision)? or
  • Tackling of inefficiency?

The risks involved must also be taken into account during the pre-bidding phase. For instance, lease contracts may be more attractive to the private sector in high risk areas compared to concessions.

Procurement phase

At the procurement stage of drawing up the contract with the private sector, the municipality needs to consider how the contract can incorporate the needs of the poor. Specific provisions covering services for low-income people must be included in the contract with the private operator so that the private partner is contractually obliged to address the needs of the poor. Examples of specific provisions include:

  • type of supply and level of service;
  • financial conditions, such as cost of upgrading;
  • tariffs (for example, a low flat rate);
  • payment arrangements (for example, spreading of costs for low-income customers); and
  • definition of areas with limited resources and the level of service to be provided to those areas.

In some cases, it is worthwhile for the municipality to engage external experts to assist in preparation of the contract documentation, as often the public sector does not possess the necessary skills.

Given that the private sector may be reluctant to extend services to low-income areas, informal incentives such as the following could also be incorporated into the contract:

  • cost-sharing arrangements;
  • pricing arrangements;
  • links to performance standards; and
  • insurance arrangements.

Experience with PPP contracts has shown that there is a need to give sufficient attention to the clarity of the contract and the way in which different institutional responsibilities are laid down. Some of these responsibilities include:

  • contracting built structures;
  • investment;
  • operation and maintenance;
  • monitoring and regulation;
  • commercial exploitation;
  • marketing and sales;
  • payment collection; and
  • customer service.

Even though PPP contracts should aim for clarity and comprehensiveness in order to reduce the likelihood of there having to be renegotiations, they also need to leave sufficient room for the private partner to devise efficient and innovative solutions to any unforeseen problems that may arise.

Operation phase

Two major contractual issues might occur during the operation phase:

  • there may be circumstances under which the private sector is failing to adhere to the conditions set out in the contract; and
  • circumstances may have changed since the original contract was agreed, necessitating a renegotiation to be organised.

In some circumstances the private sector may not be able to meet the agreed targets due to no fault of its own. Indeed, the problem may be rooted in the original service provision by the public sector. The necessary steps need to be laid out in the contract should this situation occur, in order to address the problem before it leads to an erosion of public confidence.

For contracts lasting many years (for example, 25 years) it is difficult to predict how circumstances may change. Provisions therefore need to be made in order to address the need for contract renegotiation [Tool 18]. These provisions could also cover sub-contract.



  S T A R T P A G E  
  Module 1 - Before PPPs  
  01-Starting Out  
  02-Strategic Planning  
  Module 2 - Preparation Stage  
  03-Planning & Organising  
  04-Collecting Information  
  Module 3 - PPP Development Stage  
  05-Identifying Constraints  
  06-Defining Objectives  
  07-Defing Parameters (Scope)  
  08-Establishing Principles  
  09-Identifying Partners  
  10-Establishing Partnership  
  11-Selecting Options  
  12-Financing (Investment)  
  13-Financing (Cost Recovery)  
  14-Preparing Business Plans  
  15-Regulating the PPP  
  Module 4 - Implementation  
  16-Tendering & Procurement  
  17-Negotiating & Contracting  
  18-Managing PPPs  
  19-Monitoring & Evaluation  
  20-Managing Conflict  
  21-Capacity Development  
  Contact Information