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Toolkit: Approaches to Private Participation in Water Services

This module explores the considerations and choices involved in designing legal instruments for private participation (PP) arrangements in water services. It covers choosing legal instruments, working with special codes, and ensuring compliance with obligations.

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Toolkit: Approaches to Private Participation in Water Services

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  1. Toolkit: Approaches to Private Participation in Water Services Module 8 Designing Legal Instruments for the Arrangement.

  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 8 General Outline of Toolkit 1 ConsideringPrivate Participation 2 Planning the Process 9 Selecting an Operator Module 8 Designing Legal Instruments for the Arrangement 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 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements 6 Responsibilities & Risks Additional Material CD-ROM

  5. Risk Allocation [Module 6] Tariffs & Service Standards[Module 5] Designing Institutions[Module 7] KEY ELEMENTS OF ARRANGEMENT DESIGN ARE COVERED IN PREVIOUS MODULES THIS MODULE: Designing the Legal Instruments Effective documents and arrangements to embody the elements of the Arrangement [Module 8] Ensuring Compliance With Obligations Choosing Legal Instruments Working With Special Codes Module 8Designing Legal Instruments • In this Module we look at the issues that Governments need to address in order to choose and develop Legal Instruments that will embody the Arrangement Criteria already arrived at in the Design Process. • We need to consider three main areas: • Choosing legal instruments: to provide a clear and effective legal basis • Working with special codes: that may cover issues relevant to the PP Arrangement • Ensuring that people comply with their obligations: provide workable mechanisms for enforcement

  6. Risk Allocation [Module 6] Tariffs & Service Standards[Module 5] Designing Institutions[Module 7] KEY ELEMENTS OF ARRANGEMENT DESIGN ARE COVERED IN PREVIOUS MODULES THIS MODULE: Designing the Legal Instruments Effective documents and arrangements to embody the elements of the Arrangement [Module 8] More Design Issues Ensuring Compliance With Obligations Choosing Legal Instruments Working With Special Codes Module 8Designing Legal Instruments • In this Module we look at the issues that Governments need to address in order to choose and develop Legal Instruments that will embody the Arrangement Criteria already arrived at in the Design Process. • We need to consider three main areas: • Choosing legal instruments: to provide a clear and effective legal basis • Working with special codes: that may cover issues relevant to the PP Arrangement • Ensuring that people comply with their obligations: provide workable mechanisms for enforcement

  7. Choosing Legal Instruments ‘In this section we look at the range of possible legal instruments and ways to use them in designing a PP Arrangement……..’ CHOOSING LEGAL INSTRUMENTS COMPLIANCE WITH OBLIGATIONS WORKING WITH CODES CHOOSING LEGAL INSTRUMENTS Module 8Designing Legal Instruments

  8. CHOOSING LEGAL INSTRUMENTS • Choosing Legal Instruments ‘There are four main reasons to be considered for choosing Legal Instruments for the PP Arrangement ……..’ • But which legal instrument to choose? • The choice of instrument depends on the legal system and the purpose the instrument has to serve. • Several instruments can be used in a single arrangement: Example: Manila used a Statute spelled out in executive orders and given legal effect in a Concession Contract. • Statutes are usually required where a new agency with special powers is created. • Contracts alone may be enough, in countries where contract law is well established • Contracts + Statutes may be necessary where governments may not honor contracts, to provide greater certainty • Regulation + Licenses have been used in some mature markets, with no specific contracts, but with Operators monitored and controlled by Regulators Regulation plus Licenses: Examples: USA and England & Wales use Regulators with powers, rather than Contracts, to control Private Participation. Although this seems to increase Government flexibility, in fact there are strong rules to constrain the power of the regulator and political authorities The Regulatory bodies are designed to be independent from Political bodies, with an Appeal Procedure. If Contract Law is well established, Contracts can safely cover such issues as Tariff rules, Service Standards, Commercial Arrangements and Dispute Resolution 1. Provide Legal Basis 2. Make Tariff rules legally effective 3. Make commercial aspects legally binding 4. Provide clear & effective Dispute resolution

  9. Flexibility of Instruments CHOOSING LEGAL INSTRUMENTS • Choosing Legal Instruments ‘There are four main reasons to be considered for choosing Legal Instruments for the PP Arrangement ……..’ 1. Provide Legal Basis 2. Make Tariff rules legally effective 3. Make commercial aspects legally binding 4. Provide clear & effective Dispute resolution

  10. Advantages & Disadvantages of Instruments (1a) Definitions: Legal Instruments ‘In this section we look at the range of possible legal instruments and ways to use them in designing a PP Arrangement……..’

  11. (1b) The choice ofinstrument for purpose ‘The choice of the actual legal instrument will depend on the issue and purpose for which it is needed ……..’ Which Legal Instrument to use?

  12. Choosing Instruments Detailed Text Choosing Instruments 5 Examples (1b) The choice ofinstrument for purpose ‘The choice of the actual legal instrument will depend on the issue and purpose for which it is needed ……..’ Which Legal Instrument to use?

  13. (2) Working with Codes CHOOSING LEGAL INSTRUMENTS COMPLIANCE WITH OBLIGATIONS WORKING WITH CODES WORKING WITH CODES Module 8Designing Legal Instruments ‘” Many countries have Codes governing Private Participation Contracts………”

  14. WORKING WITH CODES (2) Working with Codes ‘…and we look at issues related to Administrative, Concession, and Regulatory Codes……..’ • Use of contracts: • It is normal to embody most aspects of an arrangement in a contract • Contract Law: • Provides flexibility to draft a legally binding document that fits particular circumstances and objective • Legal Codes Governing Private Participation • Many countries have Legal Codes governing Private Participation • These can have major influence on legal aspects of contract design • Main Sources of “background” law • Three main sources of ‘background’ law 1. Civil Law Administrative Jurisprudence There are three main sources of “background” Privatization law 2. Special Privatization or Concession Laws 3. Statutes creating Regulators

  15. WORKING WITH CODES 2.1 Civil Law Administrative Jurisprudence (2) Working with Codes 1. Civil Law Administrative Jurisprudence 2. Special Privatization or Concession Laws 3. Statutes creating Regulators

  16. “Many Standard approaches to Privatization are based on the Civil Law tradition” Civil Law Systems Common Law Systems There are two main types of legal systems, CIVIL LAW or COMMON LAW, and these influence the approach to PPP contracts. The systems vary by country Where used? • Often separate administrative law governs PP contracts • Standard PP contract approaches developed • The administrative rules can be repeated in the contract for clarity Private/Public Contracts? 2.1 Civil Law Administrative Jurisprudence • France, Spain, Continental Europe • United Kingdom, Former colonies, USA • No legal distinction between contracts involving public or private firms. • PP contracts governed by the same laws that govern business • Common law contracts flexible & most agreements can be put into an enforceable contract

  17. “Many Standard approaches to Privatization are based on the Civil Law tradition” Civil Law Systems Common Law Systems Where used? • Often separate administrative law governs PP contracts • Standard PP contract approaches developed • The administrative rules can be repeated in the contract for clarity Private/Public Contracts? Civil Law – PP Contracts 2.1 Civil Law Administrative Jurisprudence • France, Spain, Continental Europe • United Kingdom, Former colonies, USA • No legal distinction between contracts involving public or private firms. • PP contracts governed by the same laws that govern business • Common law contracts flexible & most agreements can be put into an enforceable contract

  18. WORKING WITH CODES 2.2 Privatization & Concession Laws (2) Working with Codes “Some countries set out PP principles in infrastructure in special statutes” 1. Civil Law Administrative Jurisprudence 2. Special Privatization or Concession Laws 3. Statutes creating Regulators

  19. Central & SE Europe: • Bulgaria • Croatia • Hungary • Romania • Slovenia • Turkey • Latin America • Brazil • Chile • Colombia • Peru • Asia • Philippines • Thailand • Vietnam 2.2 Privatization & Concession Laws ‘Some countries set out PP principles in infrastructure in special statutes”

  20. 2.2 Privatization & Concession Laws ‘…special concession laws and statutes have particular advantages” • Privatization or Concession Laws: • These can provide a clear framework for an arrangement • Well designed laws address: • Which agencies can initiate PP Arrangements. • The process to be followed to ensure transparency and competitive procurement • They demonstrate Government’s openness to introduce PP Arrangements • Contract design needs to be consistent with special statutes. • It may be possible to contract out of some special provisions of the statutes – providing the changes become more favorable to the party the provisions are meant to protect. • Latin America • Brazil • Chile • Colombia • Peru • Asia • Philippines • Thailand • Vietnam

  21. Examples: Special Statutes 2.2 Privatization & Concession Laws ‘…special concession laws and statutes have particular advantages” • Privatization or Concession Laws: • These can provide a clear framework for an arrangement • Well designed laws address: • Which agencies can initiate PP Arrangements. • The process to be followed to ensure transparency and competitive procurement • They demonstrate Government’s openness to introduce PP Arrangements • Contract design needs to be consistent with special statutes. • It may be possible to contract out of some special provisions of the statutes – providing the changes become more favorable to the party the provisions are meant to protect. • Latin America • Brazil • Chile • Colombia • Peru • Asia • Philippines • Thailand • Vietnam

  22. WORKING WITH CODES 2.3 Regulatory Statutes (2) Working with Codes “Some countries have established Utility Regulatory Bodies under statute, with power over Service Standards and Tariff, ” Regulatory Control & Contract Design: In this case Management Contracts may be possible, but potential Operators may not be willing to enter into Concessions or Affermage-Leases without some changes • Utility Regulatory Bodies: • Established under Statute in some countries, they have power over Service Standards & Tariffs • This may cause conflict between the proposed Arrangement and the Regulator’s powers • Example: Laws giving Regulator ability to set Tariff may override any contract provisions between Government and contractor for Tariff Setting • Major difficulties may arise if the Regulator has ability to override the Contract, yet does not have a reputation for competence and neutrality 1. Civil Law Administrative Jurisprudence 2. Special Privatization or Concession Laws 3. Statutes creating Regulators

  23. WORKING WITH CODES 2.3 Regulatory Statutes (2) Working with Codes “Some countries have established Utility Regulatory Bodies under statute, with power over Service Standards and Tariff, ” • Utility Regulatory Bodies: • Established under Statute in some countries, they have power over Service Standards & Tariffs • This may cause conflict between the proposed Arrangement and the Regulator’s powers • Example: Laws giving Regulator ability to set Tariff may override any contract provisions between Government and contractor for Tariff Setting • Major difficulties may arise if the Regulator has ability to override the Contract, yet does not have a reputation for competence and neutrality 1. Civil Law Administrative Jurisprudence Regulatory Risk: Potential Remedies 2. Special Privatization or Concession Laws 3. Statutes creating Regulators

  24. (3) Ensuring people comply with Obligations ‘ So far we have shown ways of giving legal standing to the Arrangement. However it can be more difficult to ensure that people comply with their obligations……..’ CHOOSING LEGAL INSTRUMENTS COMPLIANCE WITH OBLIGATIONS WORKING WITH CODES COMPLIANCE WITH OBLIGATIONS Module 8Designing Legal Instruments

  25. (3) Ensuring people comply with Obligations ‘ So far we have shown ways of giving legal standing to the Arrangement. However it can be more difficult to ensure that people comply with their obligations……..’ COMPLIANCE WITH OBLIGATIONS (3) Ensuring people comply with Obligations • Compliance with legal obligations may not be easy to • establish in practice: • Operator gets into financial difficulties: • The Government may renegotiate the terms of the Contract rather than let the Contractor go bankrupt, fundamentally altering the intended risk allocation • A party defaults on its obligations: • Remedies (e.g. suing for damages in court) can be costly, time consuming and unpredictable • Enforcing Customer rights and obligations: • This includes the obligation to pay for services This section looks at 3 ways to manage such problems. 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  26. (3.1) Avoiding Renegotiation “Studies show 55% of Water Concessions in South America were renegotiated, some within 2 years of award” COMPLIANCE WITH OBLIGATIONS Operators may bid low, at tender stage, in order to win, with the intention of renegotiation later in order to increase profit. • Renegotiation? • In some cases the Operator or Contracting Authority may reasonably refuse to renegotiate • In other cases, circumstances may have changed so that renegotiation may benefit both parties, rather than terminating the contract • Authority – wants to maintain services • Operator – wants to benefit from past investment • The parties may want to renegotiate to reduce risk exposure, or to gain advantages • How to limit Renegotiation: • Good design • Minimum Equity requirement for investors • Use Performance Bonds • Use of Tripartite Agreements – Contracting Authority, Financiers and the Operator. 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  27. (3.1) Avoiding Renegotiation “Studies show 55% of Water Concessions in South America were renegotiated, some within 2 years of award” COMPLIANCE WITH OBLIGATIONS • Renegotiation? • In some cases the Operator or Contracting Authority may reasonably refuse to renegotiate • In other cases, circumstances may have changed so that renegotiation may benefit both parties, rather than terminating the contract • Authority – wants to maintain services • Operator – wants to benefit from past investment • The parties may want to renegotiate to reduce risk exposure, or to gain advantages • How to limit Renegotiation: • Good design • Minimum Equity requirement for investors • Use Performance Bonds • Use of Tripartite Agreements – Contracting Authority, Financiers and the Operator. 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  28. (3.1) Avoiding Renegotiation “Studies show 55% of Water Concessions in South America were renegotiated, some within 2 years of award” Renegotiation: Manila Example COMPLIANCE WITH OBLIGATIONS Limit Renegotiation: Design Issues • Renegotiation? • In some cases the Operator or Contracting Authority may reasonably refuse to renegotiate • In other cases, circumstances may have changed so that renegotiation may benefit both parties, rather than terminating the contract • Authority – wants to maintain services • Operator – wants to benefit from past investment • The parties may want to renegotiate to reduce risk exposure, or to gain advantages • How to limit Renegotiation: • Good design • Minimum Equity requirement for investors • Use Performance Bonds • Use of Tripartite Agreements – Contracting Authority, Financiers and the Operator. 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  29. (3.2) Making Enforcement easier ‘ If there are breaches of obligations, settling through court cases can be costly” COMPLIANCE WITH OBLIGATIONS • Several techniques can be used to make enforcement easier: • Set-off Rights • Escrow Accounts • Third Party Guarantees • Partial Risk Guarantees • Involvement of International Agencies • Penalties • Co-naming on insurance 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  30. (3.2) Making Enforcement easier ‘ If there are breaches of obligations, settling through court cases can be costly” COMPLIANCE WITH OBLIGATIONS Enforcement: Detailed Comment • Several techniques can be used to make enforcement easier: • Set-off Rights • Escrow Accounts • Third Party Guarantees • Partial Risk Guarantees • Involvement of International Agencies • Penalties • Co-naming on insurance 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  31. (3.3) Enforcing Customer Rights and Obligations ‘ Ensuring customers, including Government agencies, pay for services is a major challenge……..’ Disconnect Sue in Courts Seize Assets COMPLIANCE WITH OBLIGATIONS (3) Ensuring people comply with Obligations There are three main ways of dealing with non- paying customers: • Disconnection is the most effective power • Disconnection rights and methods are generally set out in law, as they affect customers basic rights. • Often only Government has the right to disconnect • Affermage/Leases and Concessions often need delegated authority to the Operator for disconnection 1. Avoiding Renegotiation • This depends on the efficiency of the legal system and the ability to enforce judgment • In many countries this is not practical 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations • Seizing customer assets for non-payment

  32. (3.3) Enforcing Customer Rights and Obligations ‘ Ensuring customers, including Government agencies, pay for services is a major challenge……..’ Disconnect Sue in Courts Seize Assets COMPLIANCE WITH OBLIGATIONS Enforcement: Collecting from Government Agencies (3) Ensuring people comply with Obligations There are three main ways of dealing with non- paying customers: 1. Avoiding Renegotiation 2. Making Enforcement Easier 3. Enforcing Customer Rights and Obligations

  33. KEY ELEMENTS OF THE PP ARRANGEMENT HAVING BEEN DESIGNED… THIS MODULE: Designing the Legal Instruments Design of effective Documents and Arrangements to embody the elements of the Arrangement, looking at 3 key areas: Civil Admin Law. Privatization or Concession Regulatory Statutes Legal basis Avoid Renegotiation. Tariff & Service Easier Enforcement Ensuring Compliance With Obligations Choosing Legal Instruments Working With Special Codes Enforce Customer Rights Dispute Resolution Commercial Reviewing Module 8 ‘The Module has looked at the whole range of issues in Arrangement design, concerning “Designing Legal Instruments for the PP Arrangement”………….’

  34. Checklist 1: Module 8 ‘ The due diligence issues for general background law are detailed in this Checklist……..”

  35. Checklist 2: Module 8 ‘……..and the key issues for Designing Legal Instruments, to embody the PP arrangement, are detailed in this Checklist’

  36. More Information: Module 8

  37. 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

  38. Toolkit: Module 8 End of Module

  39. Toolkit: Module 8 Return to Start

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