The cost of procuring private sector participation projects in the water and sanitation sector is significant, especially if it entails international service providers or financiers. It is therefore necessary to identify (as far as possible) and effectively manage the so-called transaction costs - those costs incurred through planning and preparation of the project until financial and contractual closure.14
On the municipality's side, there are costs associated with professional advisors and with the time of its own officials. For a typical international concession, the consultancy costs alone will be upwards of US$1 million, and can reach many times that figure. The types of advisory services needed in any contract are substantial and those in a larger initiative can be overwhelming. Among the major costs are those incurred for:
• feasibility studies (financial models and options, appropriate levels of services and service options and consumer profiles);
• hiring of legal advisors (many complex issues can only be dealt with by specialised legal advisors);
• consultants to assist with procurement and contracting procedures and to support the municipality in its liaison with the private and other stakeholders.
Box 6.22 illustrates the scope of advisory services utilised for the preparation of the Johannesburg management contract. This included, for instance, the engagement of 16 separate specialist consultancy firms to provide legal, financial, engineering, communications and human resource and IT expertise. Part of the transaction cost can be recovered through a success fee, payable by the successful bidder upon closure of the contract, and in some cases, municipalities manage to get assistance from external agencies.
On the bidder's side, the cost of putting together a bid for a concession or lease will be a similar amount. Even bids for management contracts, such as the one used in Johannesburg, can cost upwards of US$400,000, with some bidders spending considerably more. With so much at stake it is imperative that the procurement process should meet the highest international standards.15
Municipalities can attempt to contain these costs by:
• reducing the bureaucracy of the process by simplifying decision-making and granting negotiators authority and clear lines of accountability;
• bundling activities together so that costs are shared;
• simplifying specification by stating expected outputs (quality and performance standards);
• ensuring that invitations to tender do not require too much additional (detailed or extraneous) information. (This can be done by making sure that information requirements are well thought out beforehand, and by providing a format that makes it easy to compare the information received from different bidders);
• inducing awareness of cost management among municipal staff;
• expediting access for new suppliers to staff and premises; and
• ensuring that contracts are flexible to reduce time spent on discussing contract variations.
The sheer cost of establishing a PPP is thus a key concern for municipalities, and finding the funding to facilitate this process should be an early task for a designated team or individual within the municipality. Keeping transaction costs down is often a determining parameter affecting the final outcome and long-term benefit of the arrangement.