The management contract moves beyond the delegation of discrete service functions to the delegation of a range of delivery, operation and maintenance functions. The municipality retains ownership of assets and - like the service contract - is responsible for capital expenditures, working capital and the commercial risk associated with collecting service fees from users. Within the municipality, the engineering or health department normally monitors the management contractor to ensure that performance standards and other obligations are met. The contract emphasises outputs and a programme for achieving targets.
In the management form of contract, a private operator manages the operations without committing substantial investment capital (beyond that necessary to win and perform the contract) or accepting the bulk of the commercial risks (unless its compensation is linked to the collection of user fees). In practice, management contracts vary substantially: from short-term contracts where the contractor manages specific tasks; to longer-term contracts where the contractor is responsible for all aspects of delivering the service, and has an obligation to introduce technical and management skills and to bring specific improvements to the service delivery process. Where the contract links compensation with improved system performance, it starts to resemble some of the more complex contract types described below.
The duration of the management contract is usually in the range of 3-8 years. The aim is to ensure that there is sufficient time for the operator to implement changes and be held accountable for results. Where the contract requires particular reform or efficiency gains, for instance, it is critical that the municipality does not micro-manage the process. The contractor must be given autonomy to implement commercial reforms. The contract must also contain effective incentives for good performance, including penalties for failure to meet agreed performance goals and/or bonuses for a job well done. Payment may therefore be based on an agreed fee plus a performance-based incentive (see discussion in Chapter 7).
Examples of the use of management contracts include:
• management of water and wastewater treatment plants and/or pumping stations;
• operation and management of distribution networks;
• training to operate and manage water and sanitation services;
• regional water supply management;
• waste collection; and
• solid waste treatment/disposal plant operation.
The process of transformation in Johannesburg (described in Box 4.4) included, inter alia, radical transformation of the city's infrastructure and services. The programme of reform to the utilities included a fundamental shift for the water and sanitation sector, the power sector and waste management. These three services accounted for approximately 9000 staff and approximately 50% of the annual operating budget. As they represent three basic urban services in need of significant capital expenditure and ongoing maintenance from dwindling resources, it was proposed that a fundamental change in approach should try to draw on new technologies, sophisticated customer management and revenue, and complex management skills. The Igoli 2000 strategy thus proposed that each sector should be corporatised into an independent utility. These utilities are to operate under the terms of the Companies Act and should be professionally managed, while dividends, regulation and policy direction are kept under political control through the council. The creation of utilities addressed five key issues: • access to capital; • separation of regulator and operator; • removing inefficiencies caused by the bureaucracy; • attracting managerial and technical skills; and • employment of existing workers on acceptable terms and conditions. In the case of water and sanitation, it was necessary to consider how the utility would operate - once it became an independent entity - in order to achieve the objectives set down by the Igoli Plan. Various forms of contracts were matched against the agreed city objectives and the constraints of the operating context. The key challenges of the water and sanitation sector are to extend universal but individualised access to the 20% who do not have it and reduce unaccounted-for water (costing R176 million (US$25 million)) to more acceptable levels. The aim is to maintain the existing infrastructure, extend bulk infrastructure, improve the billing and revenue system, introduce a lifeline service, create more community delivery system partnerships, create interactive user forums and improve management systems in all respects. A number of opportunities also guided the decision. By ringfencing and corporatising a new council-owned utility there was still a good potential for achieving efficiencies and improvements as a result of: • greater autonomy from council; • wider commercial and management freedoms; • improved governance and greater accountability; and • freedom to borrow funds commercially. The option for establishing a concession contract was considered along with a full range of contracts, but given the strong ideological opposition to privatisation from the unions, the council judged that a concession contract would be highly contentious. Despite some of the benefits that would be brought to the city, the long-term concession option was not considered viable due to the local political context. A decision was made to procure the services of a management contractor to help operate the utility and transfer skills to the local management over five years. The pre-existing water and sanitation services of the council employed a number of good technical specialists and managers. However, it employed very few staff with commercial and financial expertise. The purpose of the five-year management contract was to bring in experienced staff with the skills that were missing, and to accelerate the utility's progress to financial sustainability (i.e., give it a bump-start). It would also give the new utility exposure to world-class business systems, management etc. The criteria thus included technical and management ability, shared commitment to council objectives, skill transfer experience, maximum utilisation of South African managers, commitment and ability to correct historical imbalances, economic empowerment, price and willingness to take on risks. The objective of procuring a management contract was to ensure the quickest and most efficient achievement of the objectives and the transfer of skills and systems to the utility. The management contractor was chosen by competitive tender in early 2001 (see Box 9.1).
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