The lease contract aims to provide an arrangement through which a municipality (or utility) can lease infrastructure and facilities to a private firm, which then operates and maintains the service for a fixed period of time. There is no transfer of ownership of existing assets and the municipality is responsible for the capital investment required to upgrade existing assets or extend infrastructure to new areas. As such, the lessee is under no obligation to invest in new or major rectification of infrastructure. The only obligation on the lessee is for the operation and maintenance of the leased assets. This includes anticipated replacement and repair works, the standards and extent of which are specified in the contract. Obviously, distinguishing operation and maintenance expenses from capital investments is critical to the successful allocation and fulfilment of these responsibilities.
In exchange for the exclusive right to use the assets (infrastructure, facilities, vehicles etc.) to deliver services, the operator typically pays rent to the municipality and generates revenue by collecting fees from users for the services delivered. It profits from the lease if the user fees are higher than the rental payments and the other costs incurred in providing the service. The fact that the private operator bears the commercial risk of non-payment is often cited as the factor that distinguishes leases from management contracts. Improving service delivery and fee collection can take time. As a result, lease contracts are generally longer term, with a duration that falls between the management contract and the concession in the region of 8-15 years.
'Affermage', a term which originated in France and was brought into the market by the large French water operators, is similar to a lease, in that the operator bears the cost of running the business (or service network) and typically bears the commercial risk by having the responsibility for revenue collection. However, this is not always the case and municipalities should be aware that there are many situations where an operator is expected to provide investment but is not given the responsibility for the customer interface. While it can be argued that the two are inextricably linked, in practice municipalities often choose to separate them, much to the detriment of the arrangement. The important issue is not the name given to the contract but the implications of such decision-making. The experience in South Africa is that small municipalities have been reluctant to hand over the customer management function, and this has had significant impact on the operator's efficiency.
Box 8.7 Issues Concerning Delivery to the Poor • Are performance standards designed to ensure better-quality service for the poor? The very poor? Women? • Is service expansion included in the arrangement? • Has the arrangement included for alternative service delivery mechanisms? • Has it included for alternative payment mechanisms for the poor? • Does the arrangement allow the concessionaire to explore alternative technologies such as condominial systems? • Does the arrangement promote temporary or intermediate arrangements to improve the services for the poor early in the contract? • Are labour-based approaches explicitly defined in the contract for both operation and maintenance and new construction works? • Has the arrangement addressed the problems of payment for connection costs (or emergency recurrent costs) through financial support services? • What provision has been made for the adoption of participatory processes? • How are the activities and the programme of the concessionaire being integrated with other municipal service activities? • What provision is made in the contract to integrate and link physical activities with other poverty reduction responses? What tasks must be undertaken by municipalities to facilitate action in poor areas (e.g., land title)? • What provision is made for hygiene promotion in relation to water use and solid waste activities? • How are demand-led processes being incorporated into the activities? How does the contract make provision for the time and flexibility needed for community capacity building? • How does the design of inputs in poor areas respond to the different needs of women and men? • How have women and other marginalised groups been included in the process? • How does the proposed tariff affect the poor? The very poor? Women? • What are the indirect implications of the tariff and subsidy structure? • What improvements will be made through the capital investment programme? Do they benefit the poor? Can they be targeted more closely towards benefit for the poor? • Does the arrangement stipulate investment in poor areas? How is this selected and prioritised? • What is the source of investment funds? Is cheaper capital available? Is this gain passed on in the tariff? • What service options are available to poor households? Has the arrangement closed down or opened up options for them to adopt in their livelihood strategies? • What incentives does the private operator have to deliver services to the poor? What are the disincentives? What are the programming incentives to ensure the poor are not left until last? • What provision is made for the re-employment of municipal workers? • What are the terms and conditions of their employment in the private sector? • Is there an exclusivity clause restricting the role of informal service providers (ISPs)? What provision is made for those currently involved in service provision? What compensation will existing service providers receive if their assets are expropriated? • How does the arrangement incorporate or build on these assets? What supporting tasks are needed from the municipality (e.g., promotion of registration and licenses)? • What provision is made in the contract for improving awareness of service systems and institutions? • What provision is made for community capacity building? Who will be responsible for working with communities? What provision is made for a skilled interface to be established with poor communities? • What is the role of the NGOs in working with communities? How are they to be contracted? How will they be established as equal partners? • How will efficiency gains be made (e.g., addressing leakages and illegal connections)? What provision is made to address impacts on the poor households affected by these changes? Are performance targets framed to ensure they do not provide incentives for the operator to reduce access to services by the poor? • Is the tender evaluation weighted in favour of those operators that bring more immediate benefit to the poor (through tariff levels, coverage targets, proposed partners)? • What provision is made for transfer of skills and technology? • How does the management of risk impact upon the poor? |