Structuring Private-Sector Participation (PSP) Contracts .

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Water and Sanitation Program: TOOLKITStructuring Private-Sector Participation (PSP) Contracts for Small Scale Water ProjectsCreating sustainable services through domesticprivate sector participationStructuring Private-SectorParticipation (PSP)Contracts for Small ScaleWater ProjectsVictoria Rigby DelmonMay 2014

AcknowledgementsThis report was developed by a team led by Victoria Rigby Delmon, Senior Counsel, World Bank.The team wishes to thank the Water and Sanitation Program (WSP) and the World Bank PPP inInfrastructure Resource Center (PPPIRC), who provided funding for this toolkit. The team alsothanks Jemima Sy, Iain Menzies, Sara Sigrist, Alexandra Nunez and Alexander Bakalian of theWorld Bank, and our panel of peer reviewers including Jane Jamieson and Patricia Sulser of IFC,Osward Chanda and Thomas Roberts of African Development Bank, Carlos Aquilar, SrinivasPodipreddy, Imad Saleh Sudipto Sarkar of the World Bank who have all provided valuableinput on the study. Finally, the team thanks all of our WSP and WBG colleagues who providedfeedback on a draft review of the contracts featured in this Toolkit.DisclaimerThis paper is a product of the staff of the World Bank. The findings, interpretations, andconclusions expressed in this paper do not necessarily reflect the views of the Executive Directorsof The World Bank or the governments they represent. The World Bank does not guarantee theaccuracy of the data included in this work. The boundaries, colors, denominations, and otherinformation shown on any map in this work do not imply any judgment on the part of The WorldBank concerning the legal status of any territory or the endorsement or acceptance of suchboundaries.The material in this publication is copyrighted. Copying and/or transmitting portions or all ofthis work without permission may be a violation of applicable law. The International Bank forReconstruction and Development/ The World Bank encourages dissemination of its work andwill normally grant permission to reproduce portions of the work promptly. For permission tophotocopy or reprint any part of this work, please send a request with complete information tothe Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone978-750-8400, fax 978-750-4470, http://www.copyright.com/.All other queries on rights and licenses, including subsidiary rights, should be addressed to:Address:The Office of the Publisher,The World Bank,1818 H Street NW,Washington, DC 20433, USAFax: 202-522-2422E-mail: pubrights@worldbank.orgAll pictures are taken from the World Bank Secure Photo Library: ain?menuPK 430504&pageNo 1&startIndex 1&topic Water Supply &theSitePK 265652&piPK 147347&pagePK 140696 2014 International Bank for Reconstruction and Development/The World Bank

Creating sustainable services through domesticprivate sector participationStructuring Private-SectorParticipation (PSP)Contracts for Small ScaleWater ProjectsVictoria Rigby DelmonMay 2014

iiCreating sustainable services through domestic private sector participation

ContentsAbbreviations and Acronyms. ivIntroduction.1I.II.Issues to Consider Prior to Drafting.31.1 Process for developing a PSP.31.2 Due diligence.31.3 Form of Contract.71.4 Clustering of Projects.121.5 Procurement of the Operator - Competitive Bidding.131.6. Clarity of Contractual Provisions and Implied Terms.171.7. Contract Management.18Key Contractual Provision.192.1 Contracting Parties.192.2 Term – Duration of Contract.212.3 Conditions Precedent.232.4 Rights Granted to the Operator.242.5 Functions and Obligations of the Operator.262.6 Capital Investment Obligations of Operator.282.7 Functions and Obligations of the Authority.302.8 Performance Penalties and Bonuses.332.9 Revenues, Tariffs and Cost Recovery.342.10 Monitoring of Contracts, Tariff Review and Regulation of Operators.362.11 Accounts and Reporting.382.12 Operators Obligation in Respect to Customers.392.13 Dispute Resolution.402.14 Liability, Insurance and Idemnification.432.15 Expiry and Early Termination.45Annexes1: Comparison Table of Small Scale Contracts Reviewed.472: Sample Term Sheet – DBO.503: Sample BOT/ Concession Agreement for Constructing & Operating the Whole Small Scale Scheme . 544: Sample Wording for Management and Updating of Capital Investment Plan by Operator.785: Sample Term Sheet – Operation and Maintenance Agreement.806: Template of Information Memorandum.83Figures1: Percentage of privately managed small scale schemes in a sample of African counties.12: Structure of the Toolkit.23: Typical PPP Process (adapted extract from PPP Reference Guide). 44: A sound PSP project structure can maximize benefits while minimizing risks.85: The share of private sector responsibility in small scale supply PSP contracts fall along a spectrum.106: High-level process flow for common competitive bidding options.14www.wsp.orgiii

Structuring Private-Sector Participation (PSP) Contracts for Small Scale Water ProjectsTables1: Typical characteristics of contracts reviewed.112: Procurement Process Options.153: Contracting Party Per Country Reviewed.204: Type and duration of contracts reviewed.225: Schedule of Service Improvement Targets.286: Schedule of Service Improvement Targets.347: Contracts with an alternative dispute resolution mechanism.41Checklists1: Legal Due Diligence.52: Key provisions of an RFP.173: Monitoring and Management Mechanisms Checklist.184: Function and Obligations of the Operator Clause.275: Repair, Rehabilitation and Expansion Checklist.31Boxes1: Common Law vs. Civil Law.82: Sample Request for Proposals Language.133: Sample Contracting Language.204: Sample Contracting Language.235: Sample Contracting Language.246: Sample Contracting Language.257: Sample Contracting Language.288: Sample Contracting Language.319: Sample Contracting Language.3210: Sample Contracting Language.3311: Sample Contracting Language.3612: Sample Contracting Language.3913: Sample Contracting Language.4214: Sample Dispute Resolution Clause from Kenya Operating Agreement.4213: Sample Contracting Language.44ivCreating sustainable services through domestic private sector participation

Abbreviations and AcronymsAFDBAfrican Development BankIFIInternational Finance InstitutionPPPIRCWorld Bank PPP in Infrastructure Resource Center for Contracts, Laws and RegulationOperatorA private operator of a water schemePFIPrivate Finance InitiativePPPPublic Private PartnershipsPSPPrivate Sector ParticipationPSP ContractA contract relating to private sector participation in the water sectorReviewThe team’s review of over 20 PSP contracts, as described in the IntroductionRFPRequest for proposalsRFQRequest for prequalificationWBGWorld Bank GroupWSPWater and Sanitation Programwww.wsp.orgv

vi

IntroductionWhy use a Private-Sector Participation (PSP) contract?Water authorities in developing countries face the daunting challenge of meetingwater service delivery obligations to remote rural, peri-urban, and small towncommunities. Thus, even in countries with a decentralized water sector, therehas been an increasing trend in the last few years for local communities to enterinto arrangements with private operators for provision of small-scale water supplyservices. Today it is well recognized that these private operators may be betterplaced to provide water delivery services to remote communities because theyare located closer and are potentially more accountable to the users. Private localoperators may also have the possibility to attract additional sources of finance,such as commercial finance.Figure 1: Percentage of privately managed small scale schemes in asample of African countiesChapter SummaryThis chapter introduces thereader to PSP contracts andways to navigate through thetoolkit. Why use a Private-SectorParticipation (PSP)contract? What is this toolkit usedfor? How do I use this toolkit? Where do the examplesand key considerations inthis toolkit come from?Source: WSP 2013What is this toolkit used for?The purpose of this toolkit is to provide guidance to water authorities who intendto contract private operators and sector professionals assisting such authorities,on how to structure a contract and bidding documents for private sectorparticipation (“PSP contract”) in small scale water projects. The toolkit focuseson small scale water schemes typically serving a settlement with a populationfrom 1,000 to 10,000—with sufficient density to warrant a network solution,but which do not generate enough scale for integration in a centralized networkmanagement. The management and regulation of these schemes are typically leftwww.wsp.org1

Structuring Private-Sector Participation (PSP) Contracts for Small Scale Water Projectsto less well resourced local actors and institutions, requiringmore explicit and simplified guidance.The toolkit is part of a series of standard operating procedures(SOPs) that are being developed by WSP in respect of PSPin small water schemes. Other planned volumes will look atplanning and due diligence issues for PSPS in more detail,including development of a financial model, determiningwhether a project provides value for money, looking at thereadiness of the public sector to enter into PSP contracts.This toolkit is focused on PSP contracts for small scaleprojects. For a more general discussion of private sectorparticipation in the water sector go to the World BankToolkit “Approaches to Private Participation in WaterServices” er/Water Full.pdf.Licensing and regulation of existing informal privateoperators is not within the scope of this toolkit.How do I use this toolkit?This toolkit is structured around general issues to considerprior to drafting, key contractual provisions, and annexesthat provide supplemental information.IntroductionWhere do the examples and key considerationsin this toolkit come from?The toolkit was developed based on: A review of over 20 PSP contracts developed underprojects supported by the World Bank’s Water andSanitation Program and/or the World Bank Groupin Bangladesh, Benin, Burkina Faso, Kenya, India,Madagascar, Mali, Mozambique, Niger, Peru,Philippines, Rwanda, Uganda, Vietnam (see Annex1), and international practice in larger scale project.A number of the small scale contracts reviewed can befound on the World Bank PPP in Infrastructure ResoruceCenter for Contracts, Law and Regulation (PPPIRC) ers. Findings of a WSP survey that looked at PSP in ruralwater supply in several African countries and feedbackfrom practitioners in the field – tions/PPPs for smallpiped water schemes English.pdf. Reports on arrangements for PPPs in rural watersanitation supply in Benin and Senegal Report entitled “Professionalized Rural Service Areas –A Strategy for Improving Water Supplies” produced bythe WSP and AFDBFigure 2: Structure of the ToolkitContract PreparationA. General issues that project designers will need to considerbefore drafting a contractContract DraftingB. Key contractual provisions of a PSP contract, includingsample language and examplesAnnex 1: Comparison of key provisions in contracts reviewedAnnex 2: Term sheet for a DBO agreementAnnex 3: Sample BOT agreement for building and operating an entire schemeAnnex 4: Sample provision for management and updating of a Capital Investment PlanAnnex 5: Term sheet for an Operation and Management agreement2Creating sustainable services through domestic private sector participation

I.Issues to Consider Prior to Drafting the Bidding Documents1.1 Process for developing a PSPBefore embarking on a PSP or PPP project it is important for government andthe relevant contracting authority to examine the different options for proceedingwith the project, including traditional public service options, and look at theenabling environment for the project and the political economy of introducingthe private sector into the water sector, the capacity and appetite of the privatesector to be involved in the project, the maturity of the market for PSP, theappetite and capacity of the local financial market and the financial viabilityand value for money of the project. It will also be important to engage withstakeholders including the public to ensure that the objectives of the project arewell understood and to nurture social acceptance of the project. If these issues arenot taken seriously and managed then a project may fail before it is launched.A process map setting out key stages in developing and implementing a PPPproject is set out in Figure 3. As can be seen, there are a number of steps anddecisions that need to be taken before a tender fo

water service delivery obligations to remote rural, peri-urban, and small town communities. Thus, even in countries with a decentralized water sector, there has been an increasing trend in the last few years for local communities to enter into arrangements with private operators for provision of small-scale water supply services.

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