7.2  National guidelines for contracting with the private sector

There are various forms of instruments and/or arrangements to manage private sector investment in the water sector, including contracts, licensing, regulation or deed arrangements to name a few. The following discussion focuses on contractual arrangements because they are typically used in the water sector and offer the advantage of being flexible can be changed by consent and if well developed provide a degree of certainty for all parties (PPIAF & WB 2006 p.152).

When seeking private sector involvement a well structured contract is vital for ensuring an efficient, effective and safe water and wastewater service. In Australia private sector involvement, particularly through third party access type arrangements, is relatively new in the water services area. It is expected that there would be a general lack of experience and knowledge in the development of contracts to manage this or other forms of private sector involvement in the water industry, particularly amongst some of the smaller operators in regional and isolated areas. 

There are other factors may make it worthwhile considering the development of contractual guidelines for managing private sector involvement. For example, the longevity of contracts, sometimes over 20 years (and potentially up to 50 years in the Services Sydney case), creates significant risks for both parties. These risks are particularly apparent in the water sector with factors, such as the impact of climate change affecting the capacity of the supplier to meet its water and sewerage service obligations. The costs incurred in the future maintenance or replacement of infrastructure is also a long-term risk for both parties that need to be factored into contractual arrangements. 

From an infrastructure management perspective, contractors need to recognise the design parameters of the infrastructure to ensure that new entrants do not exceed its capacity and put the system, the health of humans or the environment at risk. Commitments to meet other objectives, such as environmental flows, are also essential requirements that need to be addressed in contracts. 

Contractual arrangements should provide the conditions to motivate new entrants to maintain and update infrastructure and improve management practices to create efficiencies. To a degree this depends on profit margins which can be closely related to tariff structures and the rules for adjusting tariffs, which are an essential part of contracts in the water industry. The capacity for new entrants to invest in research and to introduce innovations to address issues, such as water availability, depends to some degree on contracts clearly articulating the costs and rewards inherent in managing the water and sewerage system (Balance and Taylor 2005 P 8).