Like the service contract, the management contract is relatively easy to put in place and its short duration does not create the same level of concern as a long-term investment contract with the private sector. As a result, management contracts are sometimes seen as an attractive option when investment-linked long-term private sector participation is not appropriate (as seen in Johannesburg, illustrated in Box 8.5), or when private firms see the current risks as being too high. The management contract can address efficiency objectives, although not the structural problems associated with under- investment.
The contract might also be adopted where it is clear that the skills of the private sector would help establish a stronger information base about the infrastructure, the organisation and the market before further private sector participation options are considered. While this may have some benefits, this stepping stone approach also brings with it problems, and the municipality must weigh these against each other. If management contracts are seen as a precursor to longer contracts, the winning tender for a management contract secures a privileged position in the future tender for a longer- term contract. This can stifle the competitive process and give an advantage to one operator that may not be the best organisation for the tasks required in the later stage.
The lack of any input into or control over tariffs means that significant reform still lies in the hands of the municipality and the incentives associated with improved cost recovery are not in place. (Evidence suggests there is often a weak tariff discipline operating alongside an efficient management contractor.) As the management contract generally focuses on improved management, it does not facilitate a strategy for improving service coverage. Consequently, poor settlements that are currently unconnected to water supply and sewerage networks are unlikely to benefit from improved performance (unless the municipality or another agent funds a capital works programme). However, a management contractor may be better placed to rethink the organisational structure of the water and sanitation network and service than a municipality. In cities with limited network coverage, this could result in the potential of a strategic approach to delivery, including the role of independent providers and NGOs and potentially larger-scale private firms.
Management contracts to date rarely provide incentives to improve delivery to the poor. Municipalities explicitly concerned with service delivery in poor areas must ensure that the contract clearly defines the responsibilities of the private sector in relation to poor households and low-income areas. One of the lessons of management contracts that encourage efficiency improvements but do not spell out any improvements for low-income areas is that the contractor will make efficiency improvements wherever possible to meet performance targets, without regard to the impact on the poor. If, for example, a primary inefficiency is unaccounted-for water and the management contractor identifies illegal connections as a key problem, then the contractor may remove these connections without concern or discussion as to alternatives for poor householders. If a primary inefficiency is revenue collection, management contractors will tenaciously pursue the inefficiencies of meter reading, billing and collection, but this improvement might not be associated with wider tariff reforms and could distort the tariff system further, as there may be implicit subsidies built into these inefficiencies. The performance target may be met, but at the expense of poor households' continued access to water for domestic and productive use. The implementation of the management contract in the situation described thus delivers adverse impacts on the poor.
It is therefore necessary to create management contracts that include efficiency improvements with targeted pro-poor actions, and it is necessary to ensure that the operator is obliged to implement these through contract provisions. Defining performance standards to ensure that efficiency is not gained at the expense of the poor is essential to the pro- poor management contract. This might include, for example, efforts to ensure that the poor have access to other affordable water sources when illegal connections are removed, or that options other than pre-paid meters are offered to facilitate improved payment rates.
When the partnership in Stutterheim was established, a primary goal of the council was to streamline municipal functions. The council aimed to redirect conventional forms of management to address the resource deficiencies of the council. To this end, they envisaged partnerships with actors outside the government and coordination with other municipal bodies. Among other issues, they sought to tackle the problems of small municipalities that cannot sustain sufficient technical capacity to run a properly skilled water and sanitation service. As the engineering department was going through a difficult stage (beset by uncertainty in contracting practices), service was deteriorating, and a partnership arrangement with the private sector for water and sanitation services solved particular and strategic problems. The objective of private sector participation was to buy-in the technical skills needed to improve the efficiency, management and delivery of water and sanitation services to the population of Stutterheim. However, the objective at that time did not include capital investment, and the pre-democratic council was only concerned with bulk supply to low-income areas. Decisions were set within the context of political change in South Africa. In 1992, the council agreed to pursue private sector involvement in a range of municipal functions. In order to initiate the process the council agreed to test the market and advertised nationally for expressions of interest for the management of water and sanitation services in the town. In the early 1990s there was little direction for PPPs in South Africa; nor was there any significant assistance available internationally, and the process of preparation, tender and evaluation process was carried out with the methodology used for the construction of civil works. The council was dominated by business acumen; the councillors were willing and able to identify gaps in council skills and were agreeable to the appointment of (and fees for) consultants to fill these gaps and manage the formulation of a contract. The proposal for the affermage contract was presented by WSSA in its tender. An investigation into alternative contract types was not pursued. The contract was considered appropriate because it met the council's key technical, managerial and efficiency objectives and did not include a significant investment component. (In some respects this decision has proven prudent: the Stutterheim Transitional Local Council has been very successful in obtaining reconstruction and development funds.) Despite its interest in private sector involvement in the delivery process, the council in power in the early 1990s was too cautious to enter into a 20- or 30-year commitment. In that context, there was little concern for the mechanics of public consultation or the explicit involvement of stakeholders in the decision to enter into a partnership arrangement. The council had a mandate to manage the town and was not concerned with building a consultative approach or obtaining explicit approval for a decision on delegating management. The decisions made over the contract during its formulation were not specifically linked to poverty reduction initiatives in the adjacent areas, where the poorer communities lived. Effective town management was, however, a key issue, and the council envisaged a key role for the private sector in attaining this end. The partnership arrangement in place in Stutterheim today is an affermage contract for 10 years. It contracts-out responsibility for providing management, operation and maintenance to the private sector. Unlike the management form of contract in the nearby town of Fort Beaufort in the Eastern Cape, the private operator must provide working capital, but capital investments remain the responsibility of the authority. Unlike the other nearby town of Queenstown, the Stutterheim contract does not provide for any capital investment. The scope of the contract in Stutterheim includes the management, operation and maintenance of the water and sewerage system, replacement of pipework due to normal wear and tear, and record keeping. It also includes for customer management services as a future option. In addition, WSSA has an obligation for some rehabilitation works on the existing system: to replace a fixed amount of pipework annually, to replace all meters that are older than seven years by the fifth year of its contract, and to replace any malfunctioning electromechanical equipment. Thus, maintenance, replacement and ongoing repair are the responsibility of the operator, while upgrading and expansion are those of the council. Eight years later, the actors and their roles and relationships have changed considerably. The council is oriented towards the achievement of social goals, and to some extent these goals are at odds with private sector involvement in service delivery. Perhaps the primary issue for the council is that the contract it inherited in 1995 does not meet its new objectives. The need for investment is significantly greater than it was under the previous regime. The desire to pass on additional risk to the private sector, the need to embrace the potential role of communities in demand-led decision-making and implementation, and the need to build institutional and community capacity, are all vital ingredients of a municipal service partnership designed to meet reconstruction and development objectives. The Stutterheim experience also illustrates the assertion made by the World Bank that the lease/affermage contract is politically demanding and complex to administrate.
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