In many operation and management arrangements a municipality pays the operator a fee comprising both a fixed and variable component. The operating fee may be calculated on a monthly basis, to cover the agreed fixed expenses of the operator plus a variable charge, e.g., for the volume of water supplied or sewage treated. This enables both parties to know, to some extent, that payment is directly related to the service provided - and some vary substantially due to seasonal variations. The nature and scope of the payment can be structured to provide a number of incentives for the operator to ensure the ongoing maintenance of the system. If the variable fee is based on the volume of water used at the meter, water leakage in the network is not paid for by the municipality but by the operator. Conversely, payment on the basis of sewage treated means that the municipality is responsible for greater payments in the wet season when volumes are higher. In Stutterheim, for instance, the variable fee is usually about one-third of the overall monthly fee.9
Box 7.14 Operating Profits as the Basis for Compensation Manila, The Philippines | Links to | ||||||||||||||||||||||
Prior to 1997, Manila's metropolitan waterworks and sewage system (MWSS) covered Manila and 14 adjoining cities and municipalities with a population of approximately 11 million people. When the privatisation of MWSS was conceptualised in 1994, it was supplying water to only two-thirds of its coverage population for an average of only 16 hours a day. Approximately 56% of the water it supplied was non-revenue water (or unaccounted-for water lost via leaks and theft). For sewerage, MWSS serviced only 8% of its coverage population. Since positive public opinion is critical for any decision to privatise a water utility, the government officials involved decided that - following the model of the Buenos Aires water concession - the privatisation had to result in lower water tariffs. Therefore, the two concessions (one each for the 'East' and 'West' zones of the MWSS service area) were to be awarded to the bidders offering the greatest reductions in the water tariffs existing at the time of the bids - i.e., including a 38% increase in the water tariffs five months before the bids were to be submitted. Both concessionaires were required to use the tariff structure formerly applied by MWSS, an increasing block system that distinguishes between residential, commercial and industrial customers. Since only private companies who believe they will make money on a contract will bid, the government took a number of steps to make the concession financially attractive. Most importantly, the concessionaires were allowed to keep the difference between the tariffs collected from users and the costs of running the system (both operating and capital costs). While the initial tariffs were set during the bidding process, procedures for regular and extraordinary tariff revisions were included (see below). The government also designed the water and sewerage expansion programmes so that the major capital expenditures started five years into the contract period. In addition, an automatic tariff adjustment was provided in the fifth year to cover funding for sewerage investments. Six-year income tax holidays were also granted to each of the concessionaires. Finally, in order to encourage capital investment towards the end of the concession period (when the concessionaires have less time to recoup substantial investments), the government agreed to pay the concessionaire the net present value of the remaining years' amortisation on such investments at the end of the contract period. All these measures helped the bidders propose large reductions in existing tariffs, while still enabling them to recoup their investments over time. The same tariff escalation procedure was applied for both concessions. Government officials considered various approaches, including tying tariff escalation to changes in the retail price index, the consumer price index, or a composite index (based on a formula designed to account for expected efficiency gains and the cost of investing in wastewater treatment sufficient to meet European standards). The inflation-tied system was ultimately adopted as it was easy to explain and logical. In addition to annual adjustments for inflation, concessionaires were also permitted to renegotiate the tariffs under exceptional circumstances. While government officials had hoped for a 10% reduction in tariffs, the bidders surprised organisers by proposing tariffs at much lower levels - ranging from 30% to over 70% reductions in existing tariffs. The final bids are given in the table below.
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Source: Dumol, 2000 | |||||||||||||||||||||||