PPP International Best Practice and Regional Application

PPP International Best Practice and Regional ApplicationTegucigalpa, HondurasApril 23 - 25, 2008Sponsored by the Spanish Trust Fund

Setting Upstream PolicyDavid Stiggers & Sabino EscobedoGovernment Readiness for PPPSession 6.1

Session 6.1Private Sector View

PPPApproachDay 1: Session 1.1Overview of PPPDay 1:Session 1.2Challenges: Latin America

Day 1:Session 1.3ConsideringPrivate ParticipationDay 1:Session 2.1Planning the Process

Day 1:Session 2.3Involving Stakeholders

Day 1:Session 3Case Study:TransmissionDay 2:Session 5Case Studies:(1)Highways(2)Water & Sanitation(3) PortsDay 2 :Session 4.1Standards, Tariffs, Subsidy, FinancialsDay 2 :Session 4.2Selecting an Operator

Day 1:Session 2.2Regulation & Institutions

UpstreamPolicyReadinessofGovernmentCapacityBuildingFor PPPDay 2 Session 6Readiness of Government

Day 2- Session 6.1

Setting Upstream Policy

What will we look at?

Session 6.: Setting Upstream Policy

Identify the Reform Leader (Module 2)

SETTING UPSTREAM POLICY

In this Module we look at the issues that Governments need to address to set Policy upstream from the design of the Private Participation Arrangement

This involves three broad topics

These steps do not need to be considered in sequence, as the results are often examined simultaneously as the reform strategy develops

Introduce Private Participation

Session 6.: Setting Upstream Policy

Identify the Reform Leader



Allocate Responsibilities at different Government Levels ALLOCATE (In 3 Steps)Responsibilities to different levels of GovernmentDividing up the responsibilities for water services is a three step process,

Allocate Responsibilities at different Government Levels ALLOCATE (In 3 Steps)Responsibilities to different levels of GovernmentCREATE LEGAL INSTRUMENTSThese have to :Be clearAllocate appropriate responsibilitiesAllocate adequate powers to each level of Government

, then we need to set up the legal & institutional framework

Allocate Responsibilities: Step 1 Examining existing3 Steps - ALLOCATE Responsibilities to different levels of GovernmentThe first step is to identify current responsibilities of each level of Government, the legal and constitutional basis for these, and to identify any unclear areas

Allocate Responsibilities: Step 1 Examining existing3 Steps - ALLOCATE Responsibilities to different levels of Government

In many countries, responsibilities for services are spread between two or three levels of government. For Example

Federal states, like India, the constitution may assign roles to regional or state government, with some responsibility with central governmentLocal governments may be involved in reform at national levelEven in non-federal states the division of responsibility may not be clearExample: Jamaica water service provision is at national level, with small systems and standpipe payments at local level. However, legal and financial relationships between utility and local government is not clearly defined.

Systems can work well with distributed responsibilities, but introduction of private participation has to be done with care so as the change in roles does not cause conflict.

The first step is to identify current responsibilities of each level of Government, the legal and constitutional basis for these, and to identify any unclear areas

Examining Responsibilities: ConflictBrazil - unclear institutional structure led to legal questions on responsibility

Box 4.1 Controversies over water service responsibilities in Brazil

A controversy in Brazil arose over ownership of water and sanitation assets, leading to the failure of the proposed privatization of CEDAE, Rio States water company.

On one hand, the legal rights and authority to provide water services appeared to rest with municipalities, but on the other hand, state governments had owned the assets of the water companies providing services since the 1970s through concession contracts with the municipalities.

This unclear institutional structure led to legal questions over who holds responsibility for introducing private participation

Allocate Responsibilities Step 2 Choose Level Generally the tier of Government ( local, provincial or federal) responsible for service delivery should also be the Contracting Authority with the Private Operator

Allocate Responsibilities Step 2 Choose Level Generally the tier of Government ( local, provincial or federal) responsible for service delivery should also be the Contracting Authority with the Private Operator

Although the tier of government responsible for service delivery should generally be the Contracting Authority, many factors influence the choice of tier:

Need for collective choice mechanism: in order to set an equitable service level and tariff, best if control is at a local level, representing the area of service.

Different capacities at different levels of government: For example, provision of water services needs specialized technical and commercial skills that may be in short supply, and perhaps only available at national level.

Economies of scale: It may be more efficient to have a single service provider serving several towns and villages rather than a number of smaller providers.

Dilemma of regional production and transmission networks: These may cut across several local areas. It may be possible to separate regional transmission systems from local distribution systems.

Allocate Responsibilities Step 3 External issues Institutions and rules need to be set up to monitor performance, regulate contract obligations, set tariffs and regulation and compliance with relevant laws and codes (e.g. environmental , water resources etc.)ALLOCATE (In 3 Steps) Responsibilities to different levels of Government

Allocate Responsibilities Step 3a Monitoring/Tariffs Central Government can monitor contract performance and set tariffs. Difficulties may arise when Municipalities or states take on this responsibilityIn the case of municipalities or states there are three options for allocating responsibility for monitoring operator performance and adjusting tariff and quality controls:

Assign functions to the level of Government where services are provided: Example: municipal contract supervision units for municipal contracts******PUERTO VALLARTA Waste Water BOT: Problem (1) Tariff set too high by Federal (2) Municipal Govt gave a very high minimum revenue guarantee. Municipal Government made massive annual expenditures for capacities not even treated and Federal Government revoked the BOT.*********Establish a National Regulator:Even if services are provided at municipal level, a national regulator can be established with responsibility for monitoring performance and adjusting tariff and quality controls. ****Example: Mexico water and waste waterSpread functions among various levels of Government:The level to depend on who is best to perform particular functions.

Allocate Responsibilities Step 3b Regulators A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs. There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?

Different mechanisms and Regulators for different tasks. Some of the key tasks include:

Contract monitoring & tariff setting Example: municipal contract supervision units for municipal contracts

Environmental protection:It is possible for services to be provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls.

Resource management:The level to depend on who is best to perform particular functions.

Allocate Responsibilities Step 3b Regulators A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs. There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?

DetermineMarket Structure

Identify the Reform Leader



DetermineMarket Structure Market Structure refers to the number of service providers and their responsibilities. There are three main market structure models

Market Structure:Horizontal Horizontal structures relate to service areas and this section looks at decisions on selecting service areas

Horizontal Structure Interaction between providers at the same level on the value chainVertical Structure Interaction between providers at different levels on the value chainCross Sector StructureLimits on ownership or other affiliations between water utilities and companies in other sectorsHORIZONTAL STRUCTURE

Deciding on Service Areas

The options range from having a single provider responsible for the whole country, to allowing every town and village to have its own provider, and, in between, various groupings of rural and city areas.

Various issues are considered:

Environmental and Technical factorsImpact on Service EfficiencyAdministrative boundaries & collective choiceFinancial attractiveness and capacityTransaction Costs

Technical & Environmental coordination can either be by awarding all responsibility to a single entity, or by ensuring adequate contracts or rules related to coordinationHorizontal Structure: Environmental & Technical


Single Utility?

When areas are served by a single network (like Capital City and Villages C & D in the example) there may be an argument for a single utility covering this area


Common resource?

If areas compete for the same resource (for example abstracting from the same reservoir as Capital City and Provincial Center) it may make sense to have a single provider to resolve conflict

Empirical research shows economies of scale in water servicesHorizontal Structure: Service Efficiency

Economies of Scale?

As more customers are added to the service, generally the unit cost drops. This can be important in small towns and villages that lack the scale to employ specialist managers and staff

There are limits to this. Utilities that are too large become difficult to manage

Horizontal Structures:Manila MetropolitanManila - Bulk water transfers needed to make it work

Box 4.4 Splitting the metropolitan provider service area in Manila

The designers of the transaction in Manila referred to the experience of Paris, where the citys network was divided into two concessions, one on each side of the river Seine.

The zone supplied by the publicly owned Manila Water Sanitation Board was divided into two areas: the East service area has a smaller population but is comparatively richer than the West service area, which has a large share of the citys urban poor.

To balance the bids, a higher proportion of the debt repayment, calculated on a per capita basis, was assigned to the West zone. International operators had to bid for both zones but could win only one, in order to maximize the potential for comparative competition and reduce the chance of receiving bids only for the most attractive area.

It was not feasible to completely separate the two zones from a technical standpoint. So, the concessionaires have to transfer bulk water across the zones. The determination of the prices for this transferred water was left to agreement between the two concessionaires, which generated controversy and led to arbitration.

Horizontal Structures:Buenos Aires - MetropolitanBuenos Aires - A single Metropolitan service provider proved practical

Box 4.5 Single Metropolitan Service Provider in Buenos Aires, Argentina

In Buenos Aires, a single water concession was let for the entire metropolitan area, which covers the city of Buenos Aires and 17 other municipalities.

Blanket coverage targets were defined for the whole concession, with no principles for deciding which areas should benefit first.

The tripartite regulatory body for Buenos Aires concession was set up with representatives from the federal, provincial, and municipal governmentsbut the municipal representatives came only from Buenos Aires municipality and not from smaller municipalities also covered by the concessionaire.

After much haggling, the municipalities obtained the right to have a say in the prioritization of coverage targets and in the monitoring of the concessionaires performance.

Horizontal Structures:Small Towns - Franchising

Box 4.6 Franchising and other professional support models for small towns

Small towns and villages could benefit from private sector expertise, capital, and incentives, but the international operators that compete for private participation contracts for large cities or entire countries are not usually interested in contracts for small towns. Local private firms may be interested but may lack the expertise, track-record, or management systems that governments want in a private operator.

A franchising model based on models used on other sectors, such as fast food, could be a way to address this problem. In a franchising model the supporting entity (the franchisor) provides comprehensive and long-term support without taking an equity position in the company it is supporting (the franchisee). For independent franchisees, franchising is a way of being in a business for oneself but not by oneself. In return for support, a franchisee pays the franchisor - typically an initial upfront fee and an ongoing franchise fee that is at least partly performance based. A water and sanitation franchise would have two distinct contracts: a primary contract between the asset holder and the operator and a secondary contract between the operator and the franchisor. It remains to be seen whether franchising might work in water services.

Another option is cooperatively provided management support services for small water operators. For example, in Mali, a quasi-government institution, the Cell for Advice and Support to Small Water Providers, provides professional support to rural water service providers, including regular financial audits and on-call technical support services. Rural water service providers finance this entity through a small levy on the proceeds of water sales. This professional support mechanism has substantially improved the quality of services provided and sharply reduced tariffs. The government is currently looking into the possibility of introducing private participation into the Cell to further increase efficiency and the number of rural centers served.

Sources: Roche and others 2001.

Horizontal Structures:Ghana - NationalGhana - a proposal to split into two utilities created resistance

Box 4.3 Difficulties splitting a national utility in Ghana

The central government of Ghana proposed splitting the national utility between two service areas: one centered on the capital Accra and another on the second biggest town in the country, Kumasi.

In order to make both areas comparable, attractive and unattractive, towns (in cost-recovery terms) were grouped in each contract package.

Not much analysis was done of how to split the utility along technical, financial, and labor lines.

The privatization process received vocal resistance from opposition groups and has not yet been implemented.

Although there were many reasons for the resistance, fears from the proposal to split the national utility ultimately contributed to the ultimate failure of the transaction.

Market Structure:Vertical Vertical structure relates to the provision of water services from Source to Tap and beyond. There is the possibility of unbundling these water service components

Horizontal Structure Interaction between providers at the same level on the value chainVertical Structure Interaction between providers at different levels on the value chainCross Sector StructureLimits on ownership or other affiliations between utilities and companies in other sectors

Vertical Market Structure:The Value ChainExample: Water Services components can be shown as items on a Value ChainUnbundling

Unbundling is the where items on the value chain are given to separate service providers.

More typical in the electricity sector, but still feasible in the water sector

The Value Chain: Unbundling ExampleExample: A proposal for improving Kenya Power & Light Company KPLCRuralCustomersUnbundling

KPLC is the Kenya national power and distribution company. Quoted on the Stock Exchange, with partial private shareholding. The Government (2006) considered increasing effectiveness and Private Sector involvement through:

Increasing Private Sector Stockholding Generation to be a separate business, unbundled from new separate private (a) Transmission and (b) Distribution companies Separating social (rural) from urban servicesTransmissionUrbanCustomers

When deciding whether to vertically separate services, consider several issues: Vertical Structure: Unbundling Issues

The current structure of the sectorHow to ensure quality of servicePlanning investmentWhere new investment or management is neededTaking advantage of scale and scopeManaging payment riskManaging scarce resources (e.g. water, fuel, hydroelectric)Promoting decentralized decision making

The issues and solutions will be specific to the particular case

Market Structure:Cross Sector It is possible for utility services to be provided jointly with other utility services (for example water with power or gas). The issue is whether they should be separated or combined

Horizontal Structure Interaction between providers at the same level on the value chainVertical Structure Interaction between providers at different levels on the value chainCross Sector StructureLimits on ownership or other affiliations between water utilities and companies in other sectors

Market Structure:Cross Sector - benefits Grouping services can offer benefits.

Possible benefits of grouping services together include:

Economies of scope

Reducing payment risk

Financial sustainability and cross subsidy

Market Structure:Cross Sector - Disadvantages Grouping services can also pose disadvantages

Possible disadvantages of grouping services together include:

Problems in cost allocation and tariff setting

Competitive distortions

Loss of management focus

Cross Sector:Gabon & Morocco These examples show how cross sector integrated schemes can work, for water and electricity, and also sanitation

Box 4.8 Joint water and electricity service provision in Gabon and Morocco

Gabon a concession contract was let for a vertically and horizontally integrated national utility, providing both water and electricity (but not sanitation).

When preparing the transaction, the government decided to keep water and electricity services together:

to maintain the coherence of the previous structure and

to permit continued cross-subsidies from electricity to water.

This contract design yielded several benefits, including cost reductions through the sharing of human, financial, and technical resources, the creation of a platform for more integrated investment planning, and coordination with key stakeholders (such as ministries and communities).

Morocco, has chosen to keep water and electricity (and in this case sanitation) together in concessions in Casablanca, Rabat, Tangiers, and Tetouan with apparently good results.

Establish Competition Rules

Identify the Reform Leader (Module 2)



Establish Competition Rules Market structure is likely to evolve based on the rules established for competition as defined at the time of the Transaction

Competition:For the Market Competition for the Market consists of re-bidding private sector contracts at regular intervalsCompetition via Capital MarketsCompetition in the Market

Competition for the Market

Competition:For the Market Competition for the Market consists of re-bidding private sector contracts at regular intervalsCompetition via Capital MarketsCompetition in the Market


Issues:Bidding and Rebidding is an efficient way of maintaining competitive pressure to provide high quality service at reasonable price: because the contractor risks losing the contract at the next bid stageTypically long term contracts (up to 50 years): necessary for the contract to mimic competition such as price controls, based on competitive comparisonsShould firms be encouraged to bid for several projects? Firms can bid for several contracts; increase demand, spread overhead cost and benefit from economies of scale If firms are allowed to expand without limits, it may develop into a monopoly, making difficult for new entrants at re-bid stage.

The issue of maintaining competition may limit the number of contracts an operator may be allowed to win, to prevent a monopoly.

Example: Metro Manila operators were not allowed to win both of the two Concessions for this major urban area

In most developing countries, however, it may be necessary to allow operator to develop their demand base to gain economies of scale.

Competition for the MarketExamples: Competition for the Market consists of bidding private sector contracts at regular intervals. A great many PPP projects are in this form.A few Market Competition Examples:Highways: Mexico - a large numbers of PPI projects, under a new regulatory and contract mechanism. The are BOOT projects, generally very long term over 20 years.Ports:Djibouti - Doraleh Container Terminal Development, financing, design , construction, management operation and maintenance of a container port. Concession, lasting 30 yearsPower: Bosnia Hydro Schemes: A multitude of small hydro power generation concessions. These are rebid every 5 years (profits of the new rebid are used to pay off the outstanding capital of the previous concessionaire)Water:Jordan Amman: Management contract for major water and waste water utility for the countrys capital for 5 years. The operator brought some operating capital. The MC period was further extended by negotiation. Finally Government then took decision to consider not to rebid as MC, but new bids as either lease or corporatization.

Competition for the Market:Vietnam: Phu My 2-2 Power Project Competition for the Market consists of re-bidding private sector contracts at regular intervalsCompetition via Capital MarketsCompetition in the Market


The first international Competitively bid BOT power project in Vietnam

715MW gas-fired plant sourced through domestic gas

Total project cost about $480m including $80 million stand-by generation

IDA loan $75 million; Debt to equity ratio of 75:25

Sponsors formed a project company MECO: EDF International (56.25%) Sumitomo Corp (28.125%) Tokyo Electric Power Company International (15.625%)

Competition for the Market:Vietnam: Phu My 2-2 Power Project Competition for the Market consists of re-bidding private sector contracts at regular intervalsCompetition via Capital MarketsCompetition in the Market


BENEFITS:

Mobilized private investment for a country with untested legal / regulatory framework

Enhanced competition at entry and attracted strong bids

Shared risks with the private sector in infrastructure development (vs. all-risk pubic projects)

Increased Diversification of investment resources

Alleviated fiscal burden on budgetary resources

Competition:via Capital Markets Competition via Capital Markets occurs when Operators can purchase their competitors through buying shares on the Financial Markets, or through mergers


Competition via Capital MarketsCompetition in the Market




Issues:Threat of Purchase: maintains competitive pressure on Operators, and an incentive to maintain the companys financial healthWhen does this occur?: when companys shares can be bought and sold (often for service providers, more restricted for asset owning companies)Mergers & Acquisitions: Governments may want to restrict mergers and acquisition, as this would have similar issues to allowing a company to win multiple contracts, including difficulties of establishing competitive service benchmarksExample: Mergers have been prevented in the UK Electricity, Gas and Water Services market to ensure sufficient Operators remain for comparative competition

Competition:Capital Markets - UKEngland & Wales - Number of Competitors seen to influence effective competition

Box 4.9 Limits to capital market competition in England and Wales

In England and Wales, Ofwat, the economic regulator for water and sanitation services, has prevented mergers between regional water companies to maintain a minimum number of comparators for carrying out comparative competition.

Ofwat uses an econometric efficiency assessment, comparing different water service providers across a range of variables, to determine benchmarks for efficiency standards. For this analysis, it needs a minimum number of comparators.

However, a recent report challenged this approach by demonstrating the efficiency gains that could be achieved by mergers in the England and Wales water market (Indepent Consulting 2002).

Competition:In the Market Competition in the Market is when Operators are free to enter and offer services in a Market. More usual in consumer goods market; but has been used in Power Sector sometimes with disastrous results.



Competition:In the Market Competition in the Market is when Operators are free to enter and offer services in a Market. In the Pakistan Power Sector an unregulated market created excess generation Capacity



Exclusivity Issues: Often Exclusivity given to Operators, it limits competition, but may be needed to make the contract economic. Liked by Operators - Protects Operator from competition and some uncertainty of future demand.Prevents inefficient duplication of distribution networks. Helps preserve cross subsidies (since high paying customers cannot change providers) Customers may benefit from more liberal entry policies.May prevent small scale Alternative Providers from offering services

Example: Pakistan Power Sector The Pakistan Power Sector showed major problems with overexpansion of supply

Promotion of massive investment in IPP: Following success of 1292MW HUB private power project, 1994 Government Power policy set to attract PPP generation projectsOvercapacity: With hindsight, estimated capacity needs were probably around 2,000MW. However, under this market approach 34 Projects were initiated, resulting in around 20 IPPs with about 4,500 MW capacity reaching financial closure. This excess added to the later problemsTariff ceiling: In an attempt to speed the process to financial completion, competitive bids were not required, instead a tariff ceiling was set, at a reasonable level at the time. However, this lack of competition resulted in public perception (unfairly) that private power was too expensive.Market economy problems: a massive downturn in Pakistan economy resulted in rapidly increasing costs, particularly of foreign exchange components. IPP tariffs linked to the US $, and 45% rupee devaluation. For several reasons IPP power costs reached 50% of WAPDA operating costs. Revenues dropped with the economy, and poor WAPDA collection rates and crossubsidies Government attempted to renegotiate (lower IPP payments) at the same time as sorting out cases of corruption. This led to foreign investor doubts about the economy, which reduced foreign investments to a trickle and worsened the wider economic crisisWith the help of World Bank, Pakistan established an Orderly Framework for IPP negotiation and a procedure was gradually established that regularized the situation. On average tariffs were decreased by 10%, in return for extension of power purchase agreements from 20 to 30 years

Competition:Alternative Providers

ALTERNATIVE SMALL-SCALE PROVIDERS

Exclusivity may prevent small-scale service providers from offering services in areas unlikely to be connected (due to low income levels or the location). Thus small-scale Alternative Providers are often confined to illegal activity, or their activity is suppressed.

Alternative Providers can work with Operators to expand the connected areas, with the Operator providing bulk water supply, and the Alternative providers connecting and distributing to the customers

Competition from Alternative Providers is sometimes encouraged:

Example: Manila. The two main contracts allow for third party provision. As a result housing associations, community groups and industrialists are buying bulk water to distribute.

If alternative providers are allowed, issues Government should consider in determining whether the alternative providers will be able to compete and continue to provide services to poor customers :

Laws and regulations

Licensing

Should prices be controlled?

What is the economic tariff that should be set for bulk water supplies

Reviewing Session 6.1The Session has looked the main areas of upstream Policy that should be established before developing PP design

Identify the Reform Leader (Session 3)


Setting Upstream PolicyDavid Stiggers & Sabino EscobedoGovernment Readiness for PPPSession 6.1THANK YOU!

Session 6.1More Information ..and further background information is available

More information Setting upstream policy

Market structure and competition: Ballance and Taylor 2001, Ehrhardt 2003, Ehrhardt and Burdon 1999, Ehrhardt and Webb 1998, PPIAF and Water and sanitation Program 2001, and Solo 1998.

Service efficiency: Environmental Resources Management and others 2003 and Tynan 2003.

Flexible approaches to setting quality standards: Baker and Trmolet 2000, EconOne Research and others 2003.

Potential for cross-subsidization and government role: Trmolet and Neale 2002 and Trmolet and others 2002.

ContactsFor comments or further details contact:

Junglim [email protected] [email protected] Escobedo [email protected] Stiggers [email protected]

Setting Upstream PolicyDavid Stiggers & Sabino EscobedoGovernment Readiness for PPPSession 6.1THANK YOU!

Elements of the Public Private Partnership Approach (PPP): Over the next two days we will look at the overall approach for establishing Public Private Partnerships relating to international and regional experience:We will establish an overview of the approach taken in developing a PPP arrangement, discuss the key issues related tp providing services, the definition of basic principles and look at tools and options for planning and design of reforms needed to establish a successful PPP Arrangement

DAY 12 Considering private participation: A review of the key issues that governments can resolve in order to introduce private participation, including resolution of policy problems, effects of privatization, making privatization work, the various private participation models, and how the Toolkit approach works.3 Planning the process of introducing private participation: A four step process for developing policy, designing details of the arrangement, selecting the operator and managing the arrangements are reviewed. Key elements of the overall design such as stakeholder consultation, government institutions to manage the arrangement and key analytic and advisory work to support the arrangement are discussed.4 Involving Stakeholders in the design of the arrangement: Discussion on ways of identifying and involving stakeholders in the design of the arrangements and of distributing the benefits and costs of private participation so as to increase support and long term sustainability.

Day 25 Setting upstream policy:This considers some of the key reform choices for the sector upstream of the design of the private participation arrangement, such as the allocation of responsibilities among different tiers of government, definition of the market structure for the sector (including appropriate scale and scope) and establishing policies and rules governing competition.6 Setting service standards, tariffs, subsidies, and financial arrangements: A section reviewing the key issues related to setting targets relating to coverage and quality; the implications of those targets for the cost of service; options for supplementing tariff revenue with subsidies; and some implications for design of the arrangement and its financing.7 Allocating responsibilities and risks:Provides advice on the identification, assessment and allocation of risks and responsibilities among customers, the operator, and the government and how to design tariff-adjustment and other rules to achieve the desired allocation.8 Institutional Frameworks - Developing institutions to manage the relationship: The choice and design of institutionsincluding courts, arbitration panels, independent experts, and regulatory agenciesthat will interpret and apply the rules over the life of the arrangements. PPPs in the Transport Sector with some Case Studies

Day 3 Selecting the Operator: This is in two parts as we have a lot of interesting material to coverA review of the key issues to be addressed and steps involved in selecting an operator governments can use to select the operator. This includes detailed discussion on selection methods, selection criteria, managing the bidding process and some key bidding issues. Unsolicited Bids:Some of the key issues in resolving how to address unsolicited bids how to maximize advantages, whilst ensuring transparency and fairnessFour clicks3 clicks reveal3 clicks reveal3 clicks revealQuality Standards

It is normal to have more than one type of quality target for a utility, covering various service parameters. Typical examples are:Availability of Service Should water be available 24 hours a day seven days a week, or only at certain times?PressureAt what pressure should water be available?Water Quality Should the water be treated to strict guidelines ( e.g. WHO or EU) or is flexibility allowed for some none critical parametersEffluent TreatmentWhat percentage of wastewater should be treated, and to what standard?Customer Service TargetsWhat payment methods? How are complaints handled?

In addition to these output based Quality Standards, target levels for input based technical standards will often be specified for the Operator to follow (such as minimum depth and diameter of pipes).

Quality Standards



Quality Standards



KENYA POWER AND LIGHTING COMPANY 2006 Consultancy: The Government of Kenya has obtained financing for the Energy Sector Recovery Project fromthe World Bank, The European Investment Bank, the Agence France de Development and theNordic Development Fund, and intends to apply part of the proceeds for consultancy services fora study to hive-off the power transmission business for KPLC and create a new fullyGovernment owned national Transmission Company.BACKGROUNDKPLC is the sole commercial electricity transmission and distribution Company. It is a publiclimited liability company, which has been listed at the Nairobi Stock Exchange since 1954. Theshareholding of KPLC comprises public sector holding of 48% and private sector holding of52%. As part of the on-going energy sector reform programme, the Government of Kenya(GOK) has identified the Kenya Power and Lighting Company (KPLC) for possible privatizationthrough reduction of its shareholding in the Company. GOK has also decided to unbundle thetransmission and distribution functions into separate businesses and to separate social (rural)from commercial electrification. The Government plans to establish a transmission company,initially managed by KPLC, but with clear separation of assets, liabilities, incomes andexpenditures.

3 clicks revealNOTE REBID MAKES IT POSSIBLE TO:Change operator if not efficientChange contract model eg as information or control is better: MC 5 years , service and collection improved, now with better knowledge of the systems, goes to Lease for 10 15 yearsREPRISE OF IINITIAL SLIDE:Setting Level of Service is an iterative process First this involves technical analysis and costing of the level of service and any related investment.

The Government then has decide whether the cost of this level of service can be supported, what Tariff Levels need to be set for effective cost recovery and if any Subsidy has to be used to make an affordable service to the customer. We look at these elements, including types and use of subsidy

Estimating the Trade off between Level of Service and Tariff/Subsidy is best done with a financial model such as the one provided with the Toolkit:

If the cost of services proves too high then the process is iterated, amending the elements until a satisfactory balance between Level of Service and Tariff is found.

When the balance between Cost of Service and Tariff is satisfactory, then we can proceed with the design and Implementation of the chosen arrangement.

In the final sections we discussed Implication for design of PP Arrangements and looked at some guidance on Structuring Finance for the arrangement.Finally, this Checklist gives a useful reminder of the detailed issues to be considered in this process, towards arriving at Upstream .There are some supplementary materials that will help you understand this further.

The toolkit includes a spreadsheet based financial Policy Simulation model that will assist in balancing tariffs, subsidies and coverage targets as covered by Module 5 [ as well as integrating with some of the other key financial issues covered in other Modules]

There are 16 case studies, and some of these have been referred to in this module.

The full toolkit can be read or downloaded from the website, and questions or comments made to the task manager.

PPP International Best Practice and Regional Application

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