Under the leases and affermage contracts, the private partner is generally responsible for operating and maintaining the utility but not for financing the investment. The lease/affermage model is chosen mainly when the public entity intends to combine public financing with private efficiency. Under this model, a greater commercial risk is passed on to the private partner compared to that of the management contract, with incentives to perform. However, this model is often applied in combination with other models such as build-rehabilitate-operate-transfer. In such a case, the contract period is generally much longer and the private partner is required to make a significant level of investment.
| How is lease different from affermage? The arrangements in an affermage and a lease are very similar. The difference is technical. Under a lease, the private partner retains revenue collected from customers/users of the facility and makes a specified lease fee payment to the public entity. Under an affermage, the private partner and the public entity share revenue from customers/users. Further, in the case of a lease, the rental payment to the public entity tends to be fixed irrespective of the level of tariff collection that is achieved and so the private partner takes a risk on bill collection and on receipts covering its operating costs. In the case of affermage, the private partner is assured of its fee (assuming that the receipts are sufficient to cover it) and it is the public entity that takes the risk on the rest of the receipts collected from customers covering its investment commitments. |