Implementation – Negotiation & Contracting
17.3 What should the contract cover?
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
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
- 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.
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
- 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
- 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;
- 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
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.
Two major contractual issues might occur during the operation
- there may be circumstances under which the private sector
is failing to adhere to the conditions set out in the contract;
- 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
provisions could also cover sub-contract.