Breaking down barriers in the PBC market
IWA Supports Capacity Development in Emerging PBC Markets
To support the growth of sustainable utilities, the International Water Association and the World Bank Group are promoting performance-based contracts (PBCs) as a mechanism to mobilize private sector finance and enable effective interventions in non-revenue water (NRW) management. PBCs are innovatively designed to maximize a contractor’s incentive to achieve results by making payment contingent on outcomes. Private sector management of water resources can be contentious, but sensitively designed, context-specific partnerships have the potential to harness private sector expertise and bring rapid improvements for a water utility.
The IWA and World Bank recognize that a number of factors leave contractors hesitant to engage in a PBC. Their reluctance is reasonable: crafting ambitious yet realistic objectives, defining the appropriate level of risk and measuring performance are not easy tasks. Furthermore, baseline data may not always be reliable, creating the potential for disagreements between the utility and contractor.
Bridging this gap in the PBC market involves more than promoting successful case studies. With a global reach and ability to connect relevant topics with expertise in the water sector, IWA is well positioned to build the capacity of private sector actors and promote good market practices. To fulfill this objective, IWA convened three pilot engagement opportunities in Kenya, Palestine and South Africa, drawing the participation of over 100 different companies from the consulting, utility, technical supplier and municipal or governmental sectors.
Two of these events were technical training workshops targeted at local and regional contractors in countries supporting active PBC tenders. The structure of these trainings was informed by knowledge gathered from market surveys on the structure and risk associated with existing performance-based contracts opportunities, as well as the preferences of private firms interested in this contract mechanism. The topics were varied but specific, including non-revenue water monitoring and management, PBC design considerations and guidelines for the preparation of tender documents and financial proposals.
Photo: Carlos Mustoni, Director of Water Loss and Pressure Management Pty Ltd, discusses the impact of PBC design in Nairobi, Kenya.
In April 2018, the first of these trainings was carried out in Nairobi, Kenya with a total attendance of 31 companies. The training enhanced the efforts of local contractors currently designing project methodologies for PBCs. Several participants remained engaged following the event and expressed interest in consulting the training documents and presentations. The technical training succeeded in raising awareness about PBCs and was an important first step in expanding the pool of local suppliers in the region.
A few months later, the second technical training gathered 24 local companies together in Ramallah, Palestine. Several participating firms confirmed current or anticipated involvement in non-revenue water management or PBC projects, signaling another budding yet nascent market. Many obstacles hinder PBC market growth in this region, including financial constraints, contractor performance risk and inexperience with tendering processes. Local firms cite a lack of government reliability as a barrier to working on non-revenue water projects. The training was successful in addressing some of these constraints, as confirmed by post-training evaluations that highlighted improvements in the tender and contracting expertise of participants ( see Figure 1).
“The training introduced us to some advantages and disadvantages of performance-based contracts for the private sector. The private sector has to take some of the performance risk of achieving targeted NRW levels. We have to incorporate the topics from this training to make sure risks are well addressed in our proposals” commented Khaled Nassereldin, Executive Manager of SES Consulting. Participants expressed strong interest in additional training opportunities to encourage firms eager to bid on PBC tenders and build on this progress. “We are willing to pursue a performance-based contract for NRW project, but we have to ensure that these contracts have the needed terms that will protect our rights. The legal framework has to be a solid one and the data on water losses should be reliable and hopefully verified by a third party” adds Nassereldin. The technical training shed light on these critical considerations and equipped contractors with the tools to mitigate risk and prevent poor contract design.
IWA convened a third event to compliment the technical training opportunities. As part of the 2018 Water Loss Conference and Exhibition in Cape Town, this “market-place event” aimed to build a critical mass of practitioners in countries where good practices for NRW management and performance-based NRW contracts are still nascent. It provided a platform to feature four upcoming PBC bid opportunities and allowed prospective bidders to consult with granting authorities about potential projects in their regions. Furthermore, local and international contractors could evaluate possibilities for partnerships. The event drew more than 40 participants from local, regional and international consulting firms, as well as representatives from municipalities and relevant government agencies.
A well designed performance-based contract holds great potential to address the issue of non-revenue water. Recognizing the diverse settings of developing countries and the criteria needed to carry out a successful PBC, it should come as no surprise that these contractual agreements must be highly customized. Therefore, capacity development at a local level is critical. IWA’s market-place and technical training events were important steps in building this capacity, sensitizing key stakeholders and brokering partnerships around specific PBC for non-revenue water opportunities. In light of this progress, continued efforts are needed to build trust and expertise. Hesitation to adopt PBCs can be equally present on the utility side. Utilities sacrifice a significant amount of responsibility by outsourcing to consultants and fear a lack of performance or missed targets.
Moving forward, IWA works to support the growth of knowledge sharing platforms for water utilities by identifying and promoting innovative pilot projects, international frameworks, and favorable regulation and policy to overcome existing barriers. This platform is open for comments and discussion: if you would like to share your thoughts or experiences on reaching sustainable reductions of non-revenue water through performance-based contracts, please contact IWA’s Water and Sanitation Services team.
About the initiative: The World Bank Group (WB) and the International Water Association (IWA), in collaboration with the Public-Private Infrastructure Advisory Facility (PPIAF), established a global partnership in 2016 to help countries improve management of non-revenue water. The program aims to capture good practices, raise awareness on the issue of NRW, simplify and streamline the preparation of performance-based contracts and support their implementation in developing countries. The insights from these trainings are informing a new wave of NRW performance-based contracts being developed by the World Bank Group and partners. Lessons, tools and resources are also available through a new portal on “PBCs for NRW” in the PPP Knowledge Lab and IWA’s PBC initiative page.
Stay tuned for upcoming webinars and additional activities planned for this initiative in early 2019.