There are a number of strengths of a lease arrangement, suited particularly to contexts where there is no need to access private channels for capital investment. A key strength can be that the lease - unlike the management contract - forces the municipality to commit to a cost recovery tariff structure. The combined responsibility for tariff collection and effective operation provides the operator with powerful incentives to ensure that revenue is improved (i.e., metering and billing is improved and tariffs are collected) and operating costs are minimised (i.e., unaccounted-for water is reduced and efficiencies introduced).
The lease provides no incentives, however, for a revision to the tariff regime or for the reform of municipal management practice. The World Bank views the primary weakness of the lease/affermage contract as the split responsibility noted above - the responsibilities for operation and maintenance are conferred on one party, while responsibility for investments lies with the municipality. Yet these are often difficult to distinguish.8 This leads to difficulties in coordinating investment decisions and operating needs, causing both the municipality and the lessee to blame each other for difficulties arising. Illustrations of the types of disputes arising are provided in Box 9.6.
Because the municipality retains responsibility for investment in capital works, budgetary constraints can lead to deterioration in the quality of the infrastructure, hindering the performance of the operator and, possibly, its ability to collect user fees. To guard against this situation, the lessee operator might seek a minimum revenue guarantee from the municipality. While such a guarantee reduces the incentives to perform efficiently, it exerts pressure on the authority to adopt adequate investment and tariff policies.