Performance-Based Contracts for Non-Revenue Water reduction in Vietnam
Like many public water distribution networks in the world, water utilities in Vietnam are confronted with limited funding, yet high demand for modernising infrastructure. Aging public water infrastructure that has often not been upgraded for 50 years weighs heavily on water utilities, contributing substantially to poor performance and water losses, also referred to as Non-Revenue Water (NRW). NRW is the water that has been inserted in the water network, but which did not create any revenue for the water provider. Water losses due to NRW in Hanoi and Ho Chi Minh Cities were estimated to be 44% and 40% of the total water produced, respectively (SWAN, 2011). There may be various reasons for these losses, such as pipe leakage, metering inaccuracies, or illegal connections. For a country with a rapid urbanisation rate and an increasing demand on water services, reducing NRW is a prime strategy in achieving water security.
Conventionally, a water utility offers a tenure contract that includes several practices or tasks to eventually decrease the losses in the water network. These traditional input-based contracts (TIBC) are based on pre-defined tasks. Previous experience with TIBC brought non-satisfactory results in overcoming water losses (Janssens and Carron, 2018). Normally, utilities design tasks for contractors to achieve the required improvement. However, this implies little flexibility in changing the work plan by the contractors during the implementation phase. The full responsibility for design of contract and also the outcomes remains with the water utility. Accordingly, the available incentives tend to be inefficient and don’t allow much room for innovation and optimization of processes. Those traditional contracts were found to impose a slow implementation process, leading to low water savings. Poor outcomes of traditional contracts motivated the design of another methodology of contracting: Performance-Based Contracts (PBC).
Previous case studies found that a properly designed Performance-Based Contracts (PBC) can achieve better results than a normal traditional input-based contract. The advantages of the ‘performance’ element in the contracts come from aligning incentives with output objectives, in addition to more flexibility for the contractor in design and implementation of measures (PPIAF, 2016). Furthermore, the availability of incentives stimulates the contractor to focus on achieving the greatest impact on the utility’s performance. These aspects offer a space for innovation and creative solutions in contrast to the traditional contracts. Another advantage of PBCs is that the contractor is responsible for improving the performance of the utilities within a certain time frame. This contracting methodology allocates the responsibility for any unforeseen time risk on both the utility and contractor. Overall, PBCs provide a win-win situation to all parties.
Upscale of PBC for Non-Revenue Water reduction in Vietnam
In Vietnam, the first PBC was implemented in Ho Chi Minh City in 2008 as an initiative from World Bank. During its six years’ time span, this PBC project was able to save 122 MLD of water, ameliorated the supplying reliability, connected more customers to the network, and saved more than US$100 million of capital expenditures by reforming and restoring the water network. Comparing this project with a similar, traditional contract based project which was executed in a neighboring district of Ho Chi Minh City at the same time period, it was found that the PBC was implemented faster, saved more water, and reduced the operating costs per unit of water. Applying the PBC concept on a larger scale in Vietnam can promote the investments in the infrastructure sector side by side with the private and public sectors and encourage effective public water resources management.
Even though the ‘performance’ element in contracts offers distinct advantages, it also brings challenges. At the beginning, the quality of available data needs to be reliable and reflect the current baseline of the available assets and current performance. This is a major problem often faced. Secondly, the availability of competent contractors is an essential component. Therefore, the selection criteria for the contractors need careful definition. Currently, there are many international contractors operating globally and specialized in executing those PBCs. On the other hand, the domestic expertise in Vietnam, but also many other countries, is still not sufficient to compete in this market for tenure contracts. Limited awareness and expertise on national level motivates capacity development as an essential component for introducing PBC for NRW reduction to both water utilities and potential contractors. Any international contractor needs to team up with local companies for implementation works on the ground. Capacity development with such local companies makes the formation of winning teams easier for the leading contractor, but also allows for more informed competition of companies entering this market.
Supporting capacity development, the World Bank and the International Water Association (IWA) have established a global partnership to help countries reduce and improve the management of their Non-Revenue Water (NRW) through Performance-Based Contracts (PBC). A training workshop for potential contractors for upcoming PBC tenures in Vietnam is currently in preparation for spring 2020. For more information please contact firstname.lastname@example.org.
Araral, E., Wang, Y., 2013. Water demand management: Review of literature and comparison in South-East Asia. Int. J. Water Resour. Dev. https://doi.org/10.1080/07900627.2013.826413
Janssens, J.G., Carron, D., 2018. Performance-Based Contracts (PBC) for Improving Utilities Efficiency, Performance-Based Contracts (PBC) for Improving Utilities Efficiency. https://doi.org/10.2166/9781780405964
PPIAF, 2016. Using Performance-Based Contracts to reduce Non-Revenue Water.
SWAN, 2011. Stated NRW (Non-Revenue Water) Rates in Urban Networks 1–4.