The Principle of Clarity and Predictability
The partnership framework (and the contract that results) must be as clear as possible to create a stable context for the activities related to the partnership. A lack of clarity discourages investors, and even if they do enter an agreement with a municipality, the lack of clarity leaves the whole arrangement vulnerable to inadequate performance, legal and technical disputes, and uncertainty. It also makes it more difficult to accurately monitor and evaluate the partnership, and thus to take action if service providers do not perform to the standards expected. Chapter 8 has provided a list of what the contract should cover (see Box 8.3). Ensuring contractual clarity and completeness helps a municipality create an effective working environment.
On the other hand, partnerships are vulnerable when there is uncertainty. Predictability can be developed through the actions of key actors and the regulatory arrangements. For example, investors want to know that a change in political leadership would not jeopardise the municipality's commitment to the partnership. The clearer and firmer the rules about tariff-setting, determination of levels of service, and decision-making processes in general, the more attractive a partnership becomes to private and community partners. Inevitably, arrangements need to evolve to suit changing capacities and circumstances, and a certain level of flexibility is mostly required to keep the partnership attuned to the demands of this environment. But it is essential that clarity and predictability are re-established following review and revision. Arbitrary decision-making and unexpected changes in policy and regulatory stances discourage parties outside the municipality to engage in a partnership, and undermine the efforts of those within the partnership.
Box 9.7 Managing Risk through Partnership Contracts | | Typical arrangement | Political risk | The municipality takes on this risk in the local environment and therefore has a key role in working with other levels of government, community groups and all stakeholders to ensure the highest possible level of stability. It is often difficult to provide a clear projection at the outset, especially in the case of long-term contracts. | Design risk | Typically this risk is transferred to the private operator. It means the risk linked to design of goods and services, and the operator could be penalised if the required standards are not met. The municipality should ensure that the standards are very clearly specified. | Construction risk | There should be clear specifications and time schedules for construction, agreed between the municipality and the private contractor. The latter then assumes the risk of meeting those criteria, and the contract should provide for appropriate penalties if these criteria are not met. It must also be clear who carries the risk of cost over-runs (probably the private partner). The municipality should put in place effective monitoring mechanisms to ensure compliance with agreed-upon standards. | Operating and maintenance risk | The private party is normally made responsible for all operating risks, and is expected to manage all operating costs, including staff costs. For this reason it is important to clearly distinguish between capital and maintenance expenditures and to indicate who will be responsible for which aspects. Any restrictive conditions or incentives should be clearly defined up-front, in order to allow the contractor to incorporate them in preparing a cost estimate at the bidding and contracting stages. The municipality should put in place effective monitoring mechanisms to ensure compliance with agreed-upon standards. | Demand risk | Contractually, the private operator is mostly expected to identify the demand for the service and users' willingness to pay. The operator's risk assessment will affect the pricing projected in its bid. The municipality should attempt to provide bidders with as much information as possible to facilitate accurate projections and pricing. | Tariff risk | Risk is normally managed through an agreed formula and procedure outline that sets the framework for future increases. It is important not to grant the private operator free reign to adjust tariffs, but it would also probably find the risk unacceptably high if government wants to retain this power for itself. It is in all parties' interests to ensure a fair and mutually acceptable formula and procedure. | Tariff collection risk | Ideally, this risk should be placed on the private partner as it relates directly to demand and operational risk, and the operator has the incentives to achieve targets. | Credit risk | The private party should carry its own credit risk, but the municipality should ensure that clarity exists as to what will happen if the private party becomes incapable to deliver the services, especially through insolvency. Contracts must ensure uninterrupted service. | Source : , 2000; World Bank, 1997c |
|