Concessions provide the operators with an inherent incentive to provide service to as many customers as possible. Under the compensation scheme of a concession, the operator is allowed to keep most or all of tariff revenues at an agreed rate (or formula) for a unit of water. The operator thus is motivated to sell as much water as possible, potentially to LIGs as well as to others. However, the operator also has an incentive to keep operating costs as low as possible to maximize the profit margin. The operator will thus seek low-cost ways to provide service and may be reluctant to expand the network, particularly into areas that are geographically challenging or where the culture of payment is uncertain.
Related to the compensation issue is the scope of a concession. Under this contract type, the operator typically has the obligation to finance and operate not only the existing system, but also any expansion of the system. Relevant to LIGs, the operator would have to determine through cost-benefit analysis that expansion to unserved areas will generate a sufficient return on investment. If the government wants a concessionaire to prioritize expansion to low-income areas, this should be specified in the contract or an incentive should be provided. Box 17 highlights Peru's incentives for rural telephony expansion.