The service contract, well known to some municipalities through the contracting-out of non-essential services, is established with a service provider to deliver an agreed service, within well-defined specifications, for a fixed period of time. Often concerning some form of technical service, the service contract may also be a supply contract, a civil works contract or a technical assistance contract, such as that being considered in Lesotho (see Box 8.4). It may involve sub- contracting or contracting a part of a municipal service.
In relation to water and sanitation, a municipality typically uses service contracts for:
• operation and maintenance of standpipes and kiosks;
• meter reading, billing and collection;
• sewer cleaning;
• pumping station operation;
• sanitation vehicles maintenance and repair; and
• tariff collection.
Service contracts are commonly found in cities without sewerage, when the upkeep of a fleet of special-purpose vehicles for septic tank cleaning is contracted on a fixed term to local entrepreneurs.
The service contract may be the key instrument used in municipal solid waste management after the operations are unbundled, enabling the municipality to let areas or parts of the service to small- and medium-sized enterprises. In relation to solid waste management, a service contract is often a preferred method of contracting an operator for collection services in middle-income areas.7 Other potential uses include:
• collection of municipal waste;
• facility repairs, maintenance; and
• waste collection and maintenance and repair of transfer vehicles.
The service contract is not ambitious: it is often short in duration (1-3 years), and control is still firmly lodged with the municipality. Duration must be sufficient to allow contractors to fully write-off the cost of any equipment purchased (such as collection vehicles). Conversely, the duration will determine the level of investment (e.g., in collection vehicles) and therefore the standard of service provided.
The municipality retains ownership and control of all capital assets and property, and must finance fixed assets and working capital. The municipality establishes the performance criteria, evaluates the bids, selects and supervises the contractor and monitors the work to be carried out to ensure the contractor meets the performance specification. For the contracting of solid waste collection services (that do not always raise revenue), the municipality must ensure that it has sufficient revenue to pay the contractor. This must be calculated to include depreciation, interest on borrowing, salaries, consumables, insurance and profit.
Under the service contract, the contractor is normally responsible for managing personnel and services. To ensure the service contract results in greater efficiency, it should be awarded through competitive bidding, and this can be compared against the public sector costs through a benchmarking process. The selected contractor is obligated to carry out the service to the specification established in the agreement, and agrees to a fee for the service on a lump sum, unit cost or other basis. Unlike more complex forms of private sector participation (PSP), to the contractor, the municipality is still the client and the source of payments. The commercial risk for the private operator is that the municipality may default on payments.