Toolkit: Approaches to Private Participation in Water Services

1. Toolkit: Approaches to Private Participation in Water Services Module 7 Developing Institutions to manage the relationship.

2. Introduction: Navigating through this E-Learning Module E-learning design: davidstiggers@comcast.net

3. Elements of the Toolkit 1 ConsideringPrivate Participation 2 Planning the Process 9 Selecting an Operator TOOLKIT Appendix A Examples of PP Arrangements 8 Designing Legal Instruments 3 Involving Stakeholders Appendix B Policy Simulation Model 4 Setting Upstream Policy 7 Developing Institutions 5 Standards, Tariffs, Subsidy, Financials 6 Responsibilities & Risks Additional Material CD-ROM

4. Module 7 General Outline of Toolkit 1 ConsideringPrivate Participation 2 Planning the Process 9 Selecting an Operator TOOLKIT Appendix A Examples of PP Arrangements 8 Designing Legal Instruments 3 Involving Stakeholders Appendix B Policy Simulation Model Module 7 Developing Institutions to manage the relationship 4 Setting Upstream Policy 7 Developing Institutions 5 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements 6 Responsibilities & Risks Additional Material CD-ROM

5. Tariffs & Rules[Module 6] Institution Interprets & Applies the rules. [Module 7] Involve Customers Working relations Plus! Types of Institution Monitoring & enforcing Links with others Resolving Disputes THE 3 TASKS of the Institution THE 3 ATTRIBUTES of the Institution Adjusting Tariffs Module 7Developing Institutions • In this Module we look at the issues that Governments need to address in order to choose and develop Institutions that will interpret and apply the many rules to be applied and enforced in a private participation arrangement. • Government needs to consider two main areas • TASKS: The Institution may have to carry out three main task areas • ATTRIBUTES: The Institution has to have three main attributes to be effective • Additionally we look at types of Institutions. The Institution design could range from an Expert Panel (easy), to an Independent Regulator (more difficult)

6. TASKS FOR INSTITUTIONS ATTRIBUTES OF INSTITUTIONS Plus! The Various types of Institution Module 7Tasks and Institutions ‘In this section we look at the Institutions and three main tasks needed to manage a Private Participation Arrangement……..’ 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs

7. Choice of Tasks & Institutions “Many kinds of Institutions can perform some or all of the tasks required in a Private Participation Arrangement. We start by looking at these. These include:”

8. Examples: Main types of Institutions;Main Tasks to be carried out Choice of Tasks & Institutions “Many kinds of Institutions can perform some or all of the tasks required in a Private Participation Arrangement. We start by looking at these. These include:”

9. Choice of Institutions “Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:” • Criteria for choosing Institutions: • Each task is different, but there are general characteristics the Institutions should share: • Information being available to the Institution • Capability to carry out the task • Incentives for the Institution to make good choices • Legitimacy of the Institution – the moral and legal right to make a decision • Typical strengths and weaknesses of Institutions: • These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions. The following three main sections discuss how these strengths and weaknesses affect the Institution’s abilty to carry out some of the main tasks of managing arrangement.

10. Institutions;Strengths & Weaknesses More detail on this slide Choice of Institutions “Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:” • Criteria for choosing Institutions: • Each task is different, but there are general characteristics the Institutions should share: • Information being available to the Institution • Capability to carry out the task • Incentives for the Institution to make good choices • Legitimacy of the Institution – the moral and legal right to make a decision • Typical strengths and weaknesses of Institutions: • These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions. The following three main sections discuss how these strengths and weaknesses affect the Institution’s ability to carry out some of the main tasks of managing arrangement.

11. TASKS and INSTITUTIONS Tasks1.Monitoring & Enforcing Performance “An Institution is needed to monitor whether the Operator is fulfilling its obligations under the Arrangement:” • Examples of need for monitoring: • Is the Operator meeting coverage targets? Is he providing required quality, quantity and pressure of water? Is he meeting wastewater and customer service standards? • Is the Operator maintaining the Utility’s assets as agreed? • Is the Operator providing the required information? • Some Institutions for monitoring Operator performance: • A Ministry • A Utility Asset holding company • A Contract Monitoring Unit • An Independent Regulator • Other monitoring issues: • The contracting authority needs to be monitored on compliance – usually by the operator • Customers need to be involved, but need a ministry or other organization to take their concerns to. • Institutions may impose fines against non-compliance, others may have to take court action, or dispute resolution A Ministry can monitor the Operator under any arrangement. Lack of independence is not a problem – but lack of resources often is a problem. Management Contract: The utility can monitor operator performance. Affermage –Lease: An asset holding company can monitor. A special Contract Monitoring Unit can be created if existing agencies do not have the skills. An Independent Regulator is likely to have the appropriate skills to monitor and enforce performance. 1. Monitoring & Enforcing Performance 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs

12. TASKS and INSTITUTIONS Tasks2.Resolving Disputes “Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!” 1. Monitoring & Enforcing Performance 2. Resolving Disputes 2. Resolving Disputes 3. Adjusting Tariffs

13. TASKS and INSTITUTIONS Resolving Disputes Resolving Disputes More Expert Insight Tasks2.Resolving Disputes “Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!” 1. Monitoring & Enforcing Performance 2. Resolving Disputes 2. Resolving Disputes 3. Adjusting Tariffs

14. 2.Resolving Disputes:Types of Dispute Resolution (1): “Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement” • The various stages and options for dispute resolution include: • Negotiation • Mediation • Independent expert opinion • Independent expert decision

15. Renegotiation: Senegal Example Checklist: Designing Expert Panels More Expert Insight: Types of Dispute Resolution (1) 2.Resolving Disputes:Types of Dispute Resolution (1): “Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement” • The various stages and options for dispute resolution include: • Negotiation • Mediation • Independent expert opinion • Independent expert decision

16. Types of Dispute Resolution (2):Arbitration & Courts “Arbitration is often chosen, before involving the final sanction of court proceedings” ARBITRATION Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. Advantages include selection of judges suitable to the parties and to suit the technical commercial issues, and there is a more flexible approach COURTS Court settlements are generally conclusive and directly enforceable. When things are not going well with arbitration, a court case may be the only, ultimate, solution for dispute resolution ARBITRATION OR COURTS? Court settlements are normally conclusive and directly enforceable. However, generally arbitration is included in Private Participation Arrangements because the advantages of Arbitration outweigh the advantages of Courts. If private finance is involved, International Lenders may insist on arbitration

17. Arbitration: Examples of issues & Contract provisions Arbitration Expert Insights Courts: Expert Insights Types of Dispute Resolution (2):Arbitration & Courts “Arbitration is often chosen, before involving the final sanction of court proceedings” ARBITRATION Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. Advantages include selection of judges suitable to the parties and to suit the technical commercial issues, and there is a more flexible approach COURTS Court settlements are generally conclusive and directly enforceable. When things are not going well with arbitration, a court case may be the only, ultimate, solution for dispute resolution ARBITRATION OR COURTS? Court settlements are normally conclusive and directly enforceable. However, generally arbitration is included in Private Participation Arrangements because the advantages of Arbitration outweigh the advantages of Courts. If private finance is involved, International Lenders may insist on arbitration

18. TASKS and INSTITUTIONS Tasks3.Adjusting Tariffs “Implementation of Tariffs, review and Tariff resets has a major impact on utility revenue and the Operator’s income. These issues cannot be controlled in advance and have a high risk to the parties to the Arrangement ” 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs 3. Adjusting Tariffs

19. 3.Adjusting Tariffs:The Two Approaches (1) • “There are two traditional approaches to the design of Tariff Adjusting Institutions • Bi-Partite Negotiation • Regulatory Agencies” • Bi-Partite Negotiation • BIPARTITE APPROACH • Under a Bi-Partite arrangement the Contracting Authority and the Operator jointly agree on Tariff changes • If they cannot agree, then the contract outlines dispute-resolution procedures to be used. • Tariff resets are treated like disputes. • Bipartite negotiations associated with affermage-lease and concessions, • A relatively straightforward use of the approach is feasible in most countries but requires adaptation to deal with the heightened political and regulatory risk • Examples: France & former French Colonies, such as Côte d’Ivoire, Morocco, Senegal and Gabon

20. Tariff Institutions: Improving the Bi-Partite Approach Bi-Partite Negotiation Expert Insight 3.Adjusting Tariffs:The Two Approaches (1) • “There are two traditional approaches to the design of Tariff Adjusting Institutions • Bi-Partite Negotiation • Regulatory Agencies” • Bi-Partite Negotiation • BIPARTITE APPROACH • Under a Bi-Partite arrangement the Contracting Authority and the Operator jointly agree on Tariff changes • If they cannot agree, then the contract outlines dispute-resolution procedures to be used. • Tariff resets are treated like disputes. • Bipartite negotiations associated with affermage-lease and concessions, • A relatively straightforward use of the approach is feasible in most countries but requires adaptation to deal with the heightened political and regulatory risk • Examples: France & former French Colonies, such as Côte d’Ivoire, Morocco, Senegal and Gabon

21. 3.Adjusting Tariffs:The Two Approaches (2) • “There are two traditional approaches to the design of Tariff Adjusting Institutions • Bi-Partite Negotiation • Regulatory Agencies” • Regulatory Agencies • REGULATORY AGENCIES • The Regulatory Approach involves a third party agency – the Regulator: • Traditionally associated with private ownership and the absence of a contract between parties • Simple transplant of regulatory approach likely to be too great for Operators because of the regulatory risks of investing in water services in the absence of a contract • Attraction is that Regulatory Agencies can be insulated from political pressures influencing tariffs • Decision making typically transparent, involving customers • Exemption from civil service salary limits and access to budget resources can give regulatory agencies more expertise than most ministries • Examples: Originally in the United States, and now standard in the United Kingdom, it is also used in former British colonies, and in countries affected by American practice, such as Caribbean countries

22. Regulatory Agencies; Expert Insights Regulatory Agencies: Improve Independence & Capacity Regulatory Agencies:Design of Decision Making Process 3.Adjusting Tariffs:The Two Approaches (2) • “There are two traditional approaches to the design of Tariff Adjusting Institutions • Bi-Partite Negotiation • Regulatory Agencies” • Regulatory Agencies • REGULATORY AGENCIES • The Regulatory Approach involves a third party agency – the Regulator: • Traditionally associated with private ownership and the absence of a contract between parties • Simple transplant of regulatory approach likely to be too great for Operators because of the regulatory risks of investing in water services in the absence of a contract • Attraction is that Regulatory Agencies can be insulated from political pressures influencing tariffs • Decision making typically transparent, involving customers • Exemption from civil service salary limits and access to budget resources can give regulatory agencies more expertise than most ministries

23. ATTRIBUTES OF INSTITUTIONS TASKS FOR INSTITUTIONS Module 7Attributes of Institutions 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship

24. ATTRIBUTES OF INSTITUTIONS Attributes:1.Involving Customers ‘It makes sense to involve customers in managing the arrangement’ 1. Involving Customers 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship

25. ATTRIBUTES OF INSTITUTIONS Involving Customers Involving Customers Expert Insight Tariff Adjustment: 3 Ways of Public Involvement Attributes:1.Involving Customers ‘It makes sense to involve customers in managing the arrangement’ 1. Involving Customers 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship

26. ATTRIBUTES OF INSTITUTIONS Attributes:2. Maintaining good working relations ‘It is important to distinguish between maintaining good relations, and enforcing performance’ • Maintaining good working relations • The Operator and the Contracting Authority have a continuing relationship over the life of the contract. • It is helpful to have a permanent Forum to manage the relationship between the parties to facilitate: • Working through issues as they arise • Agreement on interpretation of specific terms and conditions • Agreement and resolution of implementation issues • It is important to distinguish between maintaining good relations, and enforcing performance. • Involving the Operator in the monitoring of performance and making decisions on performance can create a conflict of interest and reduce enforcement effectiveness. • Example: Trinidad & Tobago Management Contract had the Operator’s representatives on the committee monitoring performance, and the Government had little confidence in the results. 1. Involving Customers 2. Maintaining good working relations 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship

27. ATTRIBUTES OF INSTITUTIONS • Links between Institutions to manage the relationship • Some aspects of the choice of Institutions for managing the relationship depend on the type of arrangement selected. Particularly on allocation of: • Responsibilities • Net Revenues: The following examples show differences between Management Contracts and Concessions. Attributes:3.Links between Institutions ‘Some aspects of the choice of Institutions for managing the relationship depend on the type of arrangement selected’ 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship 3. Links between Institutions to manage the Relationship

28. Private operator Payments Management Public utility Tariffs Services Regulator Customers Links:Institutions in a Management Contract • MANAGEMENT CONTRACTS • Under a Management Contract the Contracting Authority bears most of the Risk related to : • Tariff Levels • Collection • Service Delivery • Tariff Setting and Tariff re-setting is the role of the Public Utility and the Customer-Tariff decision maker. • The Regulator may therefore have two distinct roles: • Monitoring the contract with the Private Operator • Regulating the public tariff process

29. Private operator Regulator Lenders Shareholders Customers Finance Equity Management Project Company Tariffs Services Links:Institutions in a Concession Contract • CONCESSION CONTRACTS • In the case of a Concession or a Divestiture, all the major Responsibilities involved in delivering water services are taken by the Operator • The Regulator: One option is for the Regulator to combine: • Monitoring and enforcement of the Private Operator’s Performance. • Management of Tariff resets

30. Tariffs & Rules[Module 6] Institution Interprets & Applies the rules. [Module 7] Involve Customers Working relations Plus! Types of Institution Monitoring & enforcing Links with others Resolving Disputes THE 3 TASKS of the Institution THE 3 ATTRIBUTES of the Institution Adjusting Tariffs Reviewing Module 7 ‘The Module has looked at the whole range of issues in Arrangement design, concerning “Developing Institutions to Manage the PP relationship”………….’

31. More Information: Module 7

32. Supporting Material • The Toolkit Financial Model • Toolkit Case Study material • Toolkit Website: http://rru.worldbank.org/Toolkits/WaterSanitation/ • For comments or further details contact Cledan Mandri Perrott at cmandriperrott@worldbank.org

33. Toolkit: Module 7 End of Module

34. Toolkit: Module 7 Return to Start