While municipal water utilities are subject to national rules and regulation, the governance of the water sector also relies on municipal authorities playing an active role. On the one hand, city authorities are needed to ensure proper supervision and enforcement of national rules – for example, through local monitoring, control and enforcement. On the other hand, city authorities should also play an important role as the owners of the municipal water utilities. This governance function can be supported by a well-defined public service contract (PSC) specifying the rights and obligations of the city and the water utility firm. Furthermore, in the case of extended private-sector involvement, the city should play an important role in procuring and supervising any private-service providers.
A well-defined PSC between the city and the water utility can help ensure clear and transparent governance of that utility when it is owned by a municipality – the utility should have been converted into a separate legal and commercial entity. Such contracts should clearly define the rights and obligations of both the water utility and the respective city authorities. It should also specify procedures and methodologies for business planning and approvals, for budget- and tariff-setting and for performance assessment and reporting. The aim is that a well-defined service contract will provide predictability and clear accountability for both the water utility and its municipal owner.
Resource implications and key requirements
Efforts and additional capacity may be needed to design and supervise a well-defined service contract between city authorities and the water operators. Drafting a PSC can sometimes benefit from contract templates or examples from other cities or international institutions. With some external support and technical assistance, a service contract can in many cases be concluded within six to nine months. For example, in Bucharest, the concession contract between the municipality and Vivendi Universal was signed in March 2000 and became effective in November 2000. But the effective application of the service contract requires more time as there may be a need for a change of mindset among the city authorities and the utility management.
Potential private-sector participation
Water and wastewater services can be provided through different forms of private-sector participation – from the outsourcing of non-core activities to management contracts or full-scale concession contracts.
Outsourcing contracts may cover a targeted area of activities, such as meter reading and bill collection. More comprehensive private-sector involvement can come in the form of a management contract under which a private contractor works alongside, or fully replaces, the existing utility management. The benefit of a management contract is that a private contractor brings in expertise and may also be less subject to politicised pressure once a contract, with clearly defined objectives and performance-based remuneration, has been signed. Even more comprehensive private-sector involvement could come in the form of a concession contract, often referred to as a PPP contract, which transfers funding, construction and operational obligations to the private contractor. It can also transfer the full operational and revenue collection risks to the private sector.
The preparation and monitoring of a concession contract require significant resources and administrative capacity within the respective city authorities. It also requires a robust legal framework. A full-scale concession contract for a water utility should thus only be recommended in cities that benefit from good information about current operations and infrastructure assets, and that further benefit from a well-developed legal framework and a strong administrative and procurement capacity.
City authorities can explore opportunities for inclusive procurement under all forms of partnership with the private sector. For instance, cities can encourage contractors to (i) offer work-based learning opportunities to young people; (ii) improve equal opportunity HR policies (including flexible work schedules when necessary); and (iii) enhance health and safety procedures (for example, by providing appropriate work outfits for female workers). For instance, projects have demonstrated that women can be more efficient than men as bill collectors in the utility sector, in contexts where women feel more comfortable opening the doors of their homes to other women. Moreover, mandatory gender audits can be introduced to assess the level of gender mainstreaming of contractors’ policies, practices, products and services. Cities can also help the private sector achieve inclusion targets through bridging together utilities and vocational educational institutions, developing campaigns to attract and retain female workers in the water sector, or providing consultation on gender additionality.
Implementation obstacles and possible solutions
The introduction of a public service contract implies a more formalised relationship between the city authority or administration and the water utility management. This requires a change of mindset and more transparent processes, which some stakeholders may find unnecessary.
The introduction of deeper private-sector participation, in the form of comprehensive management contracts or a full-scale concession contract, requires significant preparation and institutional capacity within the city administration. Therefore, for cities with limited experience of private sector contracting, it may be beneficial to pursue a step-by-step approach where smaller and less complex contracts are introduced first, followed gradually by deeper private-sector involvement. For instance, the Armenian water authority has introduced the private sector in a gradual manner over more than 10 years, by first introducing management contracts and then transferring revenue risks and later investment obligations to the private sector.
 P. Marin, M. Dambudzo and A. Andreasyan (2017), Review of Armenia’s Experience with Water Public-Private Partnerships, World Bank Group, Washington, D.C.