'Bundling' refers to the aggregation of components or functions to create a larger scope of work. For instance, a municipality may approach its neighbours to ascertain if there are significant benefits in them presenting their problems as a part of a consolidated package. This might include arrangements where municipalities group together to attract the private sector, to introduce economies of scale not possible in smaller municipalities, or to share high transaction costs.
In Nepal, in order to make a landfill proposal viable, Biratnagar Sub-municipal Corporation have proposed that in the future they work with two neighbouring cities to establish a joint operation. The Kathmandu water and sanitation affermage contract has been developed for three municipalities in the Kathmandu Valley, all under the jurisdiction of the national level of government.4 In Mozambique, the Maputo contract is actually for seven cities in the country.
'Bundling' may also refer to the packaging of different cross-service sectors. For instance, electricity and water functions might be covered by the same partnership arrangement.5 In Kavre, a rural area in Nepal, the district development committee initially proposed to pilot a PPP for the delivery of a wide range of local services including health, education, infrastructure and agricultural extension services. The bundled arrangement is illustrated by Box 8.1(e).
One question concerning private investors is how secure bundled arrangements are over time. If the mayor in one town is replaced, can that town pull out of a partnership - legally or practically? Does this suggest that higher levels of government (national or provincial) must be involved to attract private investors? On the other hand, does such an approach lead to a less competitive environment, with less possibility for benchmarking?
Box 8.2 A Joint Venture | ||
In 1995, following an international tender and a period of controversy, the municipality of Cartagena entered into an agreement with the Spanish water operator Aguas de Barcelona (AGBAR) to form and jointly own a new joint venture company - AGUACAR. It was the first PPP for the delivery of basic services to be created in Colombia. The initial share capital of AGUACAR was US$8.8 million, of which 50% was owned by the Municipality of Cartagena (this was provided in the form of goodwill, it was not provided in cash); approximately 46% by AGBAR, and 4% by private Colombian investors, of whom a majority are company employees. In order to carry out its contract obligations, AGUACAR must issue a minimum share capital of US$4000 million and obtain the necessary loan finance as required. AGUACAR has the responsibility of determining the consumer tariff, subject to the requirements of national legislation. In addition to its participation as a shareholder in AGUACAR, AGBAR also signed a separate, fee-based management contract with AGUACAR, as a private operator, for the day-to-day operations of the company. Thus AGUACAR has an independent affermage contract for the management of water and sanitation services in the city. The contract with AGBAR is for: • the operation and maintenance of the existing water and sanitation system, including billing and collection; and • a duration of 26 years. Under the terms of the affermage contract with AGBAR, AGUACAR is only responsible for the management of the system, while AGBAR is responsible for capital investment. The capital investment component of the water and sanitation works in Cartagena had been under discussion with the World Bank well before the signing of the agreement, and in 1998, without a contract, AGUACAR was entrusted with the management of a major water and sanitation investment programme, the Plan Maestro de Acueductoy Alcantarillado. This investment programme is financed mainly by loans from the World Bank (US$85 million) and the Inter-American Development Bank (US$24 million). Consequently, under this complex arrangement, the private sector partner will carry out the functions normally found in a concession contract, but with protection from the capital investment risks inherent in such an arrangement. As a result, AGBAR's remuneration comes in two forms: • the declared profits/dividends of its 46% share in AGUACAR; and • a management fee, which is calculated as a share of the gross income of AGUACAR. In the first four years of operation, this management fee was fixed as a percentage of gross income, and increased gradually from 2.94% to 4.25%. In 1999, AGUACAR declared profits of US$1.96 million. In the same year, AGBAR received a total of around US$2.1 million from its involvement in the Cartagena joint venture - US$900,000 from its dividend share and US$1.2 million from its management fee. The new and complex institutional arrangement for water and sanitation in the form of a joint venture, contracted out to a private partner also represented in the joint venture, poses two potential dangers to the sustainability of the PPP. First, the role of the municipality becomes blurred. This happens because, under the joint venture, the municipality is at both the service provider (as owner of the network assets) and service operator (as a major shareholder in AGUACAR). This overlap in the division of responsibilities blurs the lines of accountability and has a potentially damaging effect on the transparency of management decision-making. The lines of accountability are further complicated by the fact that the municipality has effectively relinquished its operational role to its private sector partner, through an affermage contract awarded to AGBAR. Second, under this complex arrangement the private operator benefits from the advantages of the traditional affermage arrangement in terms of exercising day-to-day control of the management of the system, but with a much reduced financial risk in terms of working capital outlay and consequent higher effective rate of profit. This latter happens because, unlike the affermage arrangement under which the private operator is paid exclusively from a share of the gross revenue, AGBAR is paid both in the form of a management fee based on a fixed percentage of gross revenue and in the form of a share of the profits from the joint venture. | ||
Source: Nickson, 2001a | ||
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