Under franchise contracts, the municipality grants a private firm an exclusive right to provide a specific type of service within a specific area. Often used in solid waste, the franchise is similar to the lease but instead of leasing facilities and infrastructure, the operator is only given the right to deliver a service. This is often confined to a specified zone and constitutes a zonal monopoly for a fixed period of time.
As with a lease, the operator pays the municipality for the franchise. The revenues for making such payments are generated by collecting the fees from customers in the specified zone or by selling materials (such as solid waste by- products) removed from the zone. The operator thus bears the commercial risk of non-payment. Government still retains overall responsibility and accountability to the public under the franchise contract. The municipality is responsible for setting performance standards, ensuring a competitive bidding process is established, letting the contracts and ensuring the performance of the firm through adequate monitoring of performance standards.
Although it does exist, the franchise arrangement is not common for primary collection in middle-high-income countries as it is too hard for an operator to collect solid waste fees and cover the costs to the municipality (In some variations, municipalities keen to facilitate collection services authorise an operator to undertake the collection with the understanding that they will not allow other firms to compete.) The franchise is sometimes the preferred method of privatising solid waste collection in low-income countries that have very constrained government revenues.9
In April 1997, the Provincial Government of Córdoba signed a 30-year concession contract with Aguas Cordobesas for the provision of water supply and sanitation services within the 24 square kilometre jurisdiction of the municipality of Córdoba. The contract came into force in May 1997. Aguas Cordobesas has a paid-up capital of US$30 million, and is owned by a consortium of Argentinian and foreign companies, in which the French utility multinational Suez-Lyonnaise des Eaux (now Ondeo) is the largest shareholder. In October 1998, Suez Lyonnaise des Eaux bought Sociedad Comercial del Plata's share in Aguas Cordobesas, thereby enabling it and its subsidiary, Aguas de Barcelona, to take a controlling interest in the company. In turn, Suez-Lyonnaise des Eaux is the technical operator of Aguas Cordobesas. The concession contract stipulated that Aguas Cordobesas would operate and maintain the 2766km pipe network in the municipality, and that water coverage of 97% would be reached by the end of the concession (2026). In addition, the company would pay royalties to the provincial government for water abstraction (US$0.019/m3) and for water transportation (US$0.077/m3) as well as reduce the average tariff by 8.2% at the start of the concession. The contract also required that Aguas Cordobesas undertake an investment programme of US$150 million in the first two years The total investment programme required in order to reach the coverage target has been estimated at around US$500 million. From 1997 to 1999, Aguas Cordobesas carried out investments worth US$84 million. A substantial part of this investment programme was financed by a US$40 million loan from the European Investment Bank (EIB). This was the first EIB loan to a private sector project in Argentina located outside Buenos Aires. The 10-year loan, inclusive of a three-year grace period, bears an EIB floating rate capped at LIBOR* plus 15 basic points. The loan represented 47% of the first five-year investment programme of Aguas Cordobesas. The overall performance of the concessionaire to date is generally perceived as satisfactory by citizens and the provincial government. In the two years to March 1999, the number of inhabitants covered by the network increased from 1,000,000 to 1,140,000. In 1999 Aguas Cordobesas distributed 140m3 of water. The number of connections rose from 208,526 in 1997 to 223,462 in 1999. By mid-2000 service coverage for water had reached 87%, compared with only 40% for sewerage. In addition, annual gross income in 1999 was US$65 million with net profit approximately 11% more than in 1998. Furthermore, Aguas Cordobesas had provided three direct benefits to consumers since the contract was signed in 1997: the 8% price reduction in average tariffs, an end to water cut-offs, and improved water quality leading to a sharp drop in sales of bottled water. There is a further indirect benefit in the form of the annual US$13 million royalty payment to the provincial government. Despite this favourable performance to date, two issues could have a potentially negative effect in the future. First, there is the question of policy towards supply cut-offs. To date Aguas Cordobesas has not cut supply to customers who have defaulted on their water bills. However, in February 2000, the company began legal proceedings in order to obtain debts totalling US$2 million from 2500 customers, equivalent to 1.1% of the total number of customers, who have refused to pay their bills ever since the company was awarded the concession in 1997. There is little evidence that these debts are linked to problems of ability to pay among low-income residents. Rather they are the consequence of a long-standing and widespread practice of non-payment of utility bills across the social spectrum. Second, there is the question of the sequencing of the investment programme. Under the terms of the contract, Aguas Cordobesas must achieve 97% coverage by 2026. The total investment required to meet this target has been estimated at between US$400 million and US$650 million. In contrast to the concession contract for Buenos Aires, the Córdoba contract does not specify five- yearly coverage targets within the framework of the total period of the overall concession. For this reason, there is the risk of 'backloading', whereby the concessionaire postpones major investment until the end of the concession period. In this eventuality, citizens of low-income neighbourhoods are likely to be the main stakeholders to suffer from delays in connection to the network.
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