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Toolkit: Approaches to Private Participation in Water Services Module 7 Developing Institutions to manage the relationship.

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Presentation on theme: "Toolkit: Approaches to Private Participation in Water Services Module 7 Developing Institutions to manage the relationship."— Presentation transcript:

1 Toolkit: Approaches to Private Participation in Water Services Module 7 Developing Institutions to manage the relationship.

2 Introduction: Navigating through this E-Learning Module E-learning design:

3 Elements of the Toolkit TOOLKIT 1 Considering Private Participation 2 Planning the Process 5 Standards, Tariffs, Subsidy, Financials 4 Setting Upstream Policy 3 Involving Stakeholders 6 Responsibilities & Risks 7 Developing Institutions 8 Designing Legal Instruments 9 Selecting an Operator Additional Material CD-ROM Appendix B Policy Simulation Model Appendix A Examples of PP Arrangements

4 General Outline of Toolkit TOOLKIT 1 Considering Private Participation 2 Planning the Process 4 Setting Upstream Policy 3 Involving Stakeholders 6 Responsibilities & Risks 7 Developing Institutions 8 Designing Legal Instruments 9 Selecting an Operator Additional Material CD-ROM Appendix B Policy Simulation Model Appendix A Examples of PP Arrangements Module 7 5 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements Module 7 Developing Institutions to manage the relationship Module 7 Developing Institutions to manage the relationship

5 Involve Customers Working relations Links with others Monitoring & enforcing Resolving Disputes Adjusting Tariffs Module 7 Developing Institutions Tariffs & Rules [Module 6] Institution Interprets & Applies the rules. [Module 7] THE 3 ATTRIBUTES of the Institution THE 3 TASKS of the Institution In this Module we look at the issues that Governments need to address in order to choose and develop Institutions that will interpret and apply the many rules to be applied and enforced in a private participation arrangement. Government needs to consider two main areas TASKS: The Institution may have to carry out three main task areas ATTRIBUTES: The Institution has to have three main attributes to be effective Additionally we look at types of Institutions. The Institution design could range from an Expert Panel (easy), to an Independent Regulator (more difficult) Plus! Types of Institution

6 Module 7 Tasks and Institutions 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs TASKS FOR INSTITUTIONSATTRIBUTES OF INSTITUTIONS ‘In this section we look at the Institutions and three main tasks needed to manage a Private Participation Arrangement……..’ Plus! The Various types of Institution

7 “Many kinds of Institutions can perform some or all of the tasks required in a Private Participation Arrangement. We start by looking at these. These include:” A government ministry, department, or other agency that is not legally distinct from the government. The operator and the contracting authority acting by common consent—perhaps through a bipartite committee or with a mediator or independent expert acting as an adviser The board of the publicly owned water utility (in the case of a management contract) or asset-holding company (in the case of a lease-affermage) An independent expert or experts selected by the two parties A contract monitoring unitA private firm with relevant expertise An independent regulator at the same tier of government as the contracting authority (a municipal regulator) or at a higher tier (a national regulator for a municipal concession) A local or international arbitrator or panel of arbitrators selected by the two parties (local or international) CustomersLocal or foreign court The operator Choice of Tasks & Institutions

8 “Many kinds of Institutions can perform some or all of the tasks required in a Private Participation Arrangement. We start by looking at these. These include:” A government ministry, department, or other agency that is not legally distinct from the government. The operator and the contracting authority acting by common consent—perhaps through a bipartite committee or with a mediator or independent expert acting as an adviser The board of the publicly owned water utility (in the case of a management contract) or asset-holding company (in the case of a lease-affermage) An independent expert or experts selected by the two parties A contract monitoring unitA private firm with relevant expertise An independent regulator at the same tier of government as the contracting authority (a municipal regulator) or at a higher tier (a national regulator for a municipal concession) A local or international arbitrator or panel of arbitrators selected by the two parties (local or international) CustomersLocal or foreign court The operator Choice of Tasks & Institutions Examples: Main types of Institutions; Main Tasks to be carried out

9 “Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:” Choice of Institutions Criteria for choosing Institutions: Each task is different, but there are general characteristics the Institutions should share: Information being available to the Institution Capability to carry out the task Incentives for the Institution to make good choices Legitimacy of the Institution – the moral and legal right to make a decision Typical strengths and weaknesses of Institutions: These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions. The following three main sections discuss how these strengths and weaknesses affect the Institution’s abilty to carry out some of the main tasks of managing arrangement.

10 “Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:” Choice of Institutions Criteria for choosing Institutions: Each task is different, but there are general characteristics the Institutions should share: Information being available to the Institution Capability to carry out the task Incentives for the Institution to make good choices Legitimacy of the Institution – the moral and legal right to make a decision Typical strengths and weaknesses of Institutions: These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions. The following three main sections discuss how these strengths and weaknesses affect the Institution’s ability to carry out some of the main tasks of managing arrangement. More detail on this slide Institutions; Strengths & Weaknesses

11 Tasks 1. Monitoring & Enforcing Performance TASKS and INSTITUTIONS 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs 1. Monitoring & Enforcing Performance Examples of need for monitoring: Is the Operator meeting coverage targets? Is he providing required quality, quantity and pressure of water? Is he meeting wastewater and customer service standards? Is the Operator maintaining the Utility’s assets as agreed? Is the Operator providing the required information? Some Institutions for monitoring Operator performance: A Ministry A Utility Asset holding company A Contract Monitoring Unit An Independent Regulator Other monitoring issues: The contracting authority needs to be monitored on compliance – usually by the operator Customers need to be involved, but need a ministry or other organization to take their concerns to. Institutions may impose fines against non-compliance, others may have to take court action, or dispute resolution “An Institution is needed to monitor whether the Operator is fulfilling its obligations under the Arrangement:” A Ministry can monitor the Operator under any arrangement. Lack of independence is not a problem – but lack of resources often is a problem. Management Contract: The utility can monitor operator performance. Affermage –Lease: An asset holding company can monitor. A special Contract Monitoring Unit can be created if existing agencies do not have the skills. An Independent Regulator is likely to have the appropriate skills to monitor and enforce performance.

12 Tasks 2. Resolving Disputes TASKS and INSTITUTIONS 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs 2. Resolving Disputes “Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!”

13 Tasks 2. Resolving Disputes TASKS and INSTITUTIONS 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs 2. Resolving Disputes “Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!” Resolving Disputes More Expert Insight Resolving Disputes

14 2. Resolving Disputes: Types of Dispute Resolution (1): “Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement” The various stages and options for dispute resolution include: Negotiation Mediation Independent expert opinion Independent expert decision

15 2. Resolving Disputes: Types of Dispute Resolution (1): “Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement” The various stages and options for dispute resolution include: Negotiation Mediation Independent expert opinion Independent expert decision Renegotiation: Senegal Example More Expert Insight: Types of Dispute Resolution (1) Checklist: Designing Expert Panels

16 Types of Dispute Resolution (2): Arbitration & Courts “Arbitration is often chosen, before involving the final sanction of court proceedings” ARBITRATION Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. Advantages include selection of judges suitable to the parties and to suit the technical commercial issues, and there is a more flexible approach COURTS Court settlements are generally conclusive and directly enforceable. When things are not going well with arbitration, a court case may be the only, ultimate, solution for dispute resolution ARBITRATION OR COURTS? Court settlements are normally conclusive and directly enforceable. However, generally arbitration is included in Private Participation Arrangements because the advantages of Arbitration outweigh the advantages of Courts. If private finance is involved, International Lenders may insist on arbitration

17 Types of Dispute Resolution (2): Arbitration & Courts “Arbitration is often chosen, before involving the final sanction of court proceedings” ARBITRATION Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. Advantages include selection of judges suitable to the parties and to suit the technical commercial issues, and there is a more flexible approach COURTS Court settlements are generally conclusive and directly enforceable. When things are not going well with arbitration, a court case may be the only, ultimate, solution for dispute resolution ARBITRATION OR COURTS? Court settlements are normally conclusive and directly enforceable. However, generally arbitration is included in Private Participation Arrangements because the advantages of Arbitration outweigh the advantages of Courts. If private finance is involved, International Lenders may insist on arbitration Arbitration Expert Insights Courts: Expert Insights Arbitration: Examples of issues & Contract provisions

18 Tasks 3. Adjusting Tariffs TASKS and INSTITUTIONS 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs “Implementation of Tariffs, review and Tariff resets has a major impact on utility revenue and the Operator’s income. These issues cannot be controlled in advance and have a high risk to the parties to the Arrangement ”

19 3. Adjusting Tariffs: The Two Approaches (1) “There are two traditional approaches to the design of Tariff Adjusting Institutions Bi-Partite Negotiation Regulatory Agencies” BIPARTITE APPROACH Under a Bi-Partite arrangement the Contracting Authority and the Operator jointly agree on Tariff changes If they cannot agree, then the contract outlines dispute-resolution procedures to be used. Tariff resets are treated like disputes. Bipartite negotiations associated with affermage-lease and concessions, A relatively straightforward use of the approach is feasible in most countries but requires adaptation to deal with the heightened political and regulatory risk Examples: France & former French Colonies, such as Côte d’Ivoire, Morocco, Senegal and Gabon Bi-Partite Negotiation

20 3. Adjusting Tariffs: The Two Approaches (1) “There are two traditional approaches to the design of Tariff Adjusting Institutions Bi-Partite Negotiation Regulatory Agencies” BIPARTITE APPROACH Under a Bi-Partite arrangement the Contracting Authority and the Operator jointly agree on Tariff changes If they cannot agree, then the contract outlines dispute-resolution procedures to be used. Tariff resets are treated like disputes. Bipartite negotiations associated with affermage-lease and concessions, A relatively straightforward use of the approach is feasible in most countries but requires adaptation to deal with the heightened political and regulatory risk Examples: France & former French Colonies, such as Côte d’Ivoire, Morocco, Senegal and Gabon Bi-Partite Negotiation Expert Insight Tariff Institutions: Improving the Bi-Partite Approach

21 3. Adjusting Tariffs: The Two Approaches (2) “There are two traditional approaches to the design of Tariff Adjusting Institutions Bi-Partite Negotiation Regulatory Agencies” REGULATORY AGENCIES The Regulatory Approach involves a third party agency – the Regulator: Traditionally associated with private ownership and the absence of a contract between parties Simple transplant of regulatory approach likely to be too great for Operators because of the regulatory risks of investing in water services in the absence of a contract Attraction is that Regulatory Agencies can be insulated from political pressures influencing tariffs Decision making typically transparent, involving customers Exemption from civil service salary limits and access to budget resources can give regulatory agencies more expertise than most ministries Examples:Originally in the United States, and now standard in the United Kingdom, it is also used in former British colonies, and in countries affected by American practice, such as Caribbean countries Regulatory Agencies

22 3. Adjusting Tariffs: The Two Approaches (2) “There are two traditional approaches to the design of Tariff Adjusting Institutions Bi-Partite Negotiation Regulatory Agencies” REGULATORY AGENCIES The Regulatory Approach involves a third party agency – the Regulator: Traditionally associated with private ownership and the absence of a contract between parties Simple transplant of regulatory approach likely to be too great for Operators because of the regulatory risks of investing in water services in the absence of a contract Attraction is that Regulatory Agencies can be insulated from political pressures influencing tariffs Decision making typically transparent, involving customers Exemption from civil service salary limits and access to budget resources can give regulatory agencies more expertise than most ministries Regulatory Agencies Regulatory Agencies; Expert Insights Regulatory Agencies: Design of Decision Making Process Regulatory Agencies: Improve Independence & Capacity

23 Module 7 Attributes of Institutions 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship TASKS FOR INSTITUTIONSATTRIBUTES OF INSTITUTIONS

24 Attributes: 1.Involving Customers 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 1. Involving Customers ‘It makes sense to involve customers in managing the arrangement’

25 Attributes: 1.Involving Customers 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 1. Involving Customers ‘It makes sense to involve customers in managing the arrangement’ Tariff Adjustment: 3 Ways of Public Involvement Involving Customers Expert Insight Involving Customers

26 Attributes: 2. Maintaining good working relations 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 2. Maintaining good working relations Maintaining good working relations The Operator and the Contracting Authority have a continuing relationship over the life of the contract. It is helpful to have a permanent Forum to manage the relationship between the parties to facilitate: Working through issues as they arise Agreement on interpretation of specific terms and conditions Agreement and resolution of implementation issues It is important to distinguish between maintaining good relations, and enforcing performance. Involving the Operator in the monitoring of performance and making decisions on performance can create a conflict of interest and reduce enforcement effectiveness. Example: Trinidad & Tobago Management Contract had the Operator’s representatives on the committee monitoring performance, and the Government had little confidence in the results. ‘It is important to distinguish between maintaining good relations, and enforcing performance’

27 Attributes: 3.Links between Institutions 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 3. Links between Institutions to manage the Relationship Links between Institutions to manage the relationship Some aspects of the choice of Institutions for managing the relationship depend on the type of arrangement selected. Particularly on allocation of: Responsibilities Net Revenues: The following examples show differences between Management Contracts and Concessions. ‘Some aspects of the choice of Institutions for managing the relationship depend on the type of arrangement selected’

28 Links: Institutions in a Management Contract Private operator Customers Public utility Regulator Payments Management Tariffs Services MANAGEMENT CONTRACTS Under a Management Contract the Contracting Authority bears most of the Risk related to : Tariff Levels Collection Service Delivery Tariff Setting and Tariff re-setting is the role of the Public Utility and the Customer- Tariff decision maker. The Regulator may therefore have two distinct roles: Monitoring the contract with the Private Operator Regulating the public tariff process

29 Links: Institutions in a Concession Contract Regulator Customers Private operator Project Company Shareholders Lenders Management Tariffs Services EquityFinance CONCESSION CONTRACTS In the case of a Concession or a Divestiture, all the major Responsibilities involved in delivering water services are taken by the Operator The Regulator: One option is for the Regulator to combine: Monitoring and enforcement of the Private Operator’s Performance. Management of Tariff resets

30 Reviewing Module 7 ‘The Module has looked at the whole range of issues in Arrangement design, concerning “Developing Institutions to Manage the PP relationship”………….’ Involve Customers Working relations Links with others Monitoring & enforcing Resolving Disputes Adjusting Tariffs Tariffs & Rules [Module 6] Institution Interprets & Applies the rules. [Module 7] THE 3 ATTRIBUTES of the Institution THE 3 TASKS of the Institution Plus! Types of Institution

31 More Information: Module 7

32 Supporting Material The Toolkit Financial Model Toolkit Case Study material Toolkit Website: For comments or further details contact Cledan Mandri Perrott at

33 Toolkit: Module 7 End of Module

34 Toolkit: Module 7 Return to Start

35 Toolkit: Module 7 DO NOT MOVE or ERASE THE FOLLOWING SLIDES

36 MinistryUtility or asset- holding- company board Contract monitoring unit Independent regulator Operator and contracting authority together [Other options not shown] Monitoring operator’s performance Enforcing operator’s performance Monitoring contracting authority’s performance Enforcing contracting authority’s performance Resolving disputes Adjusting tariffs Adjusting service standards Maintaining good relations Choice of Tasks & Institutions: Examples In Senegal, for example, the contracting authority and operator, Sénégalaise des Eaux, jointly decide on adjustments to the tariff, following rules set out in the Affermage contract. In United Kingdom, a national independent regulator, Ofwat, can fine the operator for failing to meet its obligations. In Trinidad and Tobago, for example, the board of the Water and Sanitation Authority had ultimate responsibility for monitoring the management contractor’s performance. INSTITUTION: TASK: This Table illustrates some of these main types of Institutions and some of the Tasks that have to be carried out. The blank spaces or cells are to be assigned to the various institutions. We now give three specific examples from case studies to illustrate some of the considerations. This Table illustrates some of these main types of Institutions and some of the Tasks that have to be carried out. The blank spaces or cells are to be assigned to the various institutions. We now give three specific examples from case studies to illustrate some of the considerations. Institutions Tasks This Table illustrates some of these main types of Institutions and some of the Tasks that have to be carried out. The blank spaces or cells are to be assigned to the various institutions. We now give three specific examples from case studies to illustrate some of the considerations. This Table illustrates some of these main types of Institutions and some of the Tasks that have to be carried out. The blank spaces or cells are to be assigned to the various institutions. We now give three specific examples from case studies to illustrate some of the considerations.

37 “Although responsibility for some tasks can be simply allocated, for many tasks the choices among institutions can be difficult:” Choice of Institutions (Insight) Criteria for choosing Institutions: Each task is different, but there are general characteristics the Institutions should share: Information being available to the Institution Capability to carry out the task Incentives for the Institution to make good choices Legitimacy of the Institution – the moral and legal right to make a decision Typical strengths and weaknesses of Institutions: These may vary by country, but there are typical patterns of strengths and weaknesses. No Institution is perfect in respect to all the tasks, so Governments must choose between institutions with strengths in some areas and weaknesses in other – or create new Institutions. The following three main sections discuss how these strengths and weaknesses affect the Institution’s abilty to carry out some of the main tasks of managing the Arrangement. Information  The Institutions must have access to information to perform Example: For a tariff reset, information on the Operator’s costs Information  The Institutions must have access to information to perform Example: For a tariff reset, information on the Operator’s costs Capability  The Institutions must be able to access skills needed to do the job Example: For a tariff reset, skills needed in financial, economic and engineering areas to be able to estimate efficient costs Capability  The Institutions must be able to access skills needed to do the job Example: For a tariff reset, skills needed in financial, economic and engineering areas to be able to estimate efficient costs Incentives  The Institutions need incentives to comply with rules governing their choices, and to exercise discretion in the interests of the Customers and the Operator Incentives  The Institutions need incentives to comply with rules governing their choices, and to exercise discretion in the interests of the Customers and the Operator Legitimacy  Especially with contentious or politically sensitive tasks, the Institution needs to be considered legitimate by the affected parties Example: If Customers consider the institution adjusting tariffs to be legitimate they will accept increases. If they do not consider it legitimate they may not pay for services. If the operator considers the regulatory Institutions to be legitimate, his risks are perceived lower, and he will be more willing to agree to penalties or other sanctions against his performance Legitimacy  Especially with contentious or politically sensitive tasks, the Institution needs to be considered legitimate by the affected parties Example: If Customers consider the institution adjusting tariffs to be legitimate they will accept increases. If they do not consider it legitimate they may not pay for services. If the operator considers the regulatory Institutions to be legitimate, his risks are perceived lower, and he will be more willing to agree to penalties or other sanctions against his performance Back to Module

38 Institutions; Strengths & Weaknesses INSTITUTION Typical strengthsTypical weaknesses OperatorKnows the business well—has much relevant information. Has many relevant skills. May lacks independence and won’t have the right incentives for some tasks as a result of being one of the main parties to the agreement. MinistryKnows aspects of the business well. Already functioning. Will have legitimacy in some countries. May lack independence. May not have all the expertise required for some tasks, such as applying tariff-adjustment rules. Independent regulator Can be independent of the operator and somewhat insulated from political pressure on the contracting authority. May have more legitimacy with customers than other more independent bodies such as international arbitration panels. May not be effectively independent from the government in practice. May not be trusted by the operator or the contracting authority. Joint decision- making (bipartite committee) Represents the interests of the operator and the contracting authority. Incorporates expert knowledge of the business and has many relevant skills. Has incentives to take into account the interests of both the operator and the contracting authority. May fail to reach an agreement if both parties hold out, for a better deal. May not operate transparently. May not directly involve customers in decision making. An independent expert Is independent and likely to have technical expertise.May lack legitimacy in the eyes of customers. Arbitral panelIs independent and can have expertise in resolving disputes.May lack legitimacy in the eyes of customers. CourtsAlready exist. Generally independent of the operator and the contracting authority. Often have legitimacy. Typically reactive, rather than active, limiting their role. Lack expertise for certain tasks. May be slow or corrupt. May lack legitimacy. Back to Module

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40 Tasks 2. Resolving Disputes TASKS and INSTITUTIONS 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs 2. Resolving Disputes “Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!” Need for good Dispute Resolution methods (having these characteristics): Access to Information Capability Incentives Appropriate Speed Appropriate Cost Effectiveness Some Institutions that can be used to resolve disputes: Negotiation: Operator & Contracting Authority Negotiation: with help of a Mediator Negotiation: informed by Independent Expert Decision: by Independent experts Decision: domestic or international arbitration Decision: by courts Back to Module

41 Resolving Disputes (Insights) TASKS and INSTITUTIONS 1. Monitoring & Enforcing Performance 2. Resolving Disputes 3. Adjusting Tariffs 2. Resolving Disputes “Disputes arise even when arrangements are well designed, laws and contracts clearly drafted, and there are good working relationships!” Need for good Dispute Resolution methods (having these characteristics): Access to Information Capability Incentives Appropriate Speed Appropriate Cost Effectiveness Some Institutions that can be used to resolve disputes: Negotiation: Operator & Contracting Authority Negotiation: with help of a Mediator Negotiation: informed by Independent Expert Decision: by Independent experts Decision: domestic or international arbitration Decision: by courts Information accessible, to allow good decisions Decision makers need the necessary skills Incentives needed to ensure a decision that is impartial and good The process needs to resolve the dispute effectively, but taking account of size and complexity The cost is a factor of the size and complexity The decision made under dispute resolution has to be enforceable An appropriate Institution for negotiation  The appropriate institution and method of dispute resolution will vary according to size, scope and nature of dispute Example: Negotiation or use of independent experts may work for a small dispute, but international arbitration may be more appropriate and cost effective for large disputes. Providing a range of options and a suitable dispute escalation procedure may be the way of dealing with a range of issues, of varying complexity and importance An appropriate Institution for negotiation  The appropriate institution and method of dispute resolution will vary according to size, scope and nature of dispute Example: Negotiation or use of independent experts may work for a small dispute, but international arbitration may be more appropriate and cost effective for large disputes. Providing a range of options and a suitable dispute escalation procedure may be the way of dealing with a range of issues, of varying complexity and importance Back to Module

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43 Insight : Types of Dispute Resolution (1) “Various options and stages of dispute resolution procedures, can be considered at various process stages according to complexity and size of the arrangement” The various stages and options for dispute resolution include: Negotiation Mediation Independent expert opinion Independent expert decision The starting point for dispute resolution is negotiation between parties. It can be speedy, low cost, preserve relationships, be flexible, and with control by parties [Example: Box 7.1 Senegal Affermage-Lease]. If this fails, other forms of dispute resolution to be considered Mediation is negotiation with the help of a third party. The mediator helps to facilitate, without expressing a view. Mediation has advantages of conventional negotiation, but can help parties to move away from entrenched positions, and reach solutions more easily Independent expert opinion may be used when decision depends partly on technical questions. Decisions may not be binding An independent expert or panel can be asked to provide a binding solution. A well chosen panel will have the skills to find an effective solution Back to Module

44 Renegotiating Back to Module

45 Check List: Designing Expert Panels ‘……..and the process of Designing Expert Panels is detailed in this Checklist” Back to Module

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47 Arbitration: Insights “Arbitration is often chosen, before involving the final sanction of court proceedings” ARBITRATION Binding settlements of major disputes involve court decisions or arbitration. Courts do not always work so well, so Arbitration is often included instead. This has several advantages: The parties can choose their tribunal, and both parties can be reassured that the judges will give a fair and just decision. They can appoint people wit the skills to understand the dispute and reach an effective decision Arbitration can be more flexible, including use of ‘documents-only’and no oral hearings Final decision can be made more quickly as right of appeal may be waived Continuity of personnel can be assured through the case ( in courts there is no guarnatee of the same judge throughout) Arbitration is generally informal Back to Module

48 Courts: Insights “Court actions may be used because Arbitration is not directly enforceable” COURTS Courts have some advantages over Arbitration, as well: Consolidation of cases Availability of courts Less expense Transparency Courts: Allow consolidation of cases when disputes arise over the same subject in more than one contract.. Arbitration: Consolidation can only occur if the contracts include relevant clauses Courts: May be more readily available to deal with cases, and can impose sanction within time limits. Arbitration: The chosen Arbitrators may have limited availability, and may take a long time to become available Courts: Can be less expensive than arbitration. Arbitration: Arbitrators fees and case accommodation has to be paid. International arbitration institutions often charge fees based on the value of the sums claimed Courts: Proceedings are more transparent than Arbitration, which increases legitimacy of this approach. Back to Module

49 Arbitration provisions Arbitration Issue: Arbitration drafting provision: Permissibility of international arbitration. One of the first issues to be clarified is whether local law allows disputes over contracts with government authorities to use international arbitration. Sometimes disputes between a locally incorporated operator and a local government lack the international element required to allow the use of foreign rules. In this case, an international arbitration clause can be included in an agreement between the local government and a foreign parent of the operator. Deciding which disputes are subject to arbitration. In some arrangements only a few kinds of dispute are covered by the arbitration clause, while other types of dispute are covered by different procedures. Because disputes do not always fall neatly into one category, it helps to include a mechanism for quickly deciding which category disputes fall into. Enforceability.Arbitration awards are reciprocally enforceable if both the country that is the seat of arbitration and the country in which the award is to be enforced have ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Number of arbitrators and decision making rule. In a three-person panel, for example, the rule might require a decision to have the support of two arbitrators. Rules for appointing arbitrators.In a three-person panel the operator and contracting authority typically each select one arbitrator. The third can be appointed jointly by the two or, if they do not agree, by a third party. Nationality of arbitrators.Arbitrators can be locals or (if local law permits) foreigners. When the operator is foreign owned, it is a good idea to preclude arbitrators who are citizens of the host country or the country of the operator. Institutional or ad hoc arbitration. Parties must choose between institutional and ad hoc arbitration. Institutional arbitration is supervised by an arbitration institute, which appoints the arbitrators, decides on challenges to arbitrators, and reviews the award before it is released, among other things. One example is the International Chamber of Commerce. Institutional arbitrations can be more expensive and somewhat bureaucratic, but in international arbitrations they have some advantages, especially for challenges to arbitrators. By contrast, ad hoc arbitration is not supervised by an arbitration institution. After selecting the arbitrator, the appointing body has no further input into the proceedings, unless an arbitrator must be replaced. The seat of arbitration.Even when arbitration involves international rules or the rules of an international institution, it is important to seek local advice on the laws governing arbitration proceedings. The choice of seat may be affected by local rules, for example in regard to nationality restrictions of arbitrators or counsels, the role of the local courts regarding interim measures, or provisions for challenging or appealing an award. Joinder and consolidation of disputes arising under connected contracts. The arbitration clause in the relevant contracts should generally provide for the appointment of the same arbitrator in connected disputes Criteria.The criteria by which the arbitrator is to reach a decision should be set out in the contract. Rights of appeal.The contract should include procedures for appealing a decision, including whether any exclusions should apply. Language of the arbitration.The contract should specify in which language arbitration should be conducted. This Table illustrates some of the main types of Arbitration Issues, and some examples of possible Arbitration Contract Provisions Back to Module

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51 3. Adjusting Tariffs: Bipartite Approach (1) -Insights The various options include: Agreement between Contracting Authority and the Operator Third Party Help Arbitration Final Offer Arbitration The two parties must agree any tariff option, and are the only parties involved (no customers or Government involved). The decisions and information remain confidential. Contracting Authority must strongly represent public interest. Drawbacks: Parties may be unable to agree, may stray from contract provisions, compromising wider objectives, such as customer interests. Independent experts or mediators may help negotiation. Even though the experts’ view may not be binding, it may help the decision. If one party moves away from the recommendation, they must justify why negotiation Example: Gabon –uses independent expert every five years to study progress A third party can be appointed to make a decision. The arbitrator’s authority often derives from the ocntract, with the process and certain arbitration powers usually governed by local arbitration law Under Final Offer Arbitration, each company proposes a settlement and the arbitrator is obliged to select one without amendment. This tends to reduce unreasonably one-sided arguments. Example: Santaigo Chile – used to reduce tariff disputes between Operator and Government Regulatory Agencies” Bi-Partite Negotiation Back to Module

52 Tariff Institutions Improving the Bipartite approach Operational Issue: Options for improving operation of Bi-Partite tariff arrangements: Promoting continuity in decision-making. A weakness of conventional arbitration as an institution for adjusting tariffs is that arbitrations are each undertaken independently of previous processes and do not benefit from institutional memory or the certainty provided by a body of precedent. This problem can be addressed by establishing an ongoing arbitration-type institution incorporating mechanisms to preserve consistency among decisions. Example, in Sofia, Bulgaria, the concession established a dispute resolution board with three members: a chairperson (a lawyer trained in arbitration), a technical expert, and a financial expert (see Examples). This mechanism is adapted from the approach commonly used in construction contracts. The board provides a first-level mechanism for handling disputes. Members are appointed for fixed terms and are paid a small retainer. They undertake regular site visits to maintain familiarity with the arrangement. While the board is used mainly for dispute resolution in Sophia, a similar model could in principle be considered for tariff adjustments. Increasing transparency and consultation with customers. Under the traditional bipartite approach deals are made in private, and contracts are often confidential (in practice, if not in law). If disputes about tariff adjustment go to arbitration, the proceedings are likely to be private. Rules ensuring transparency and consultation can be adopted and could increase legitimacy. Example: During the recent Maynilad arbitration in Manila, Philippines customer groups sought to allow the public to listen to the proceedings, but failed. Increasing expertise.Steps can also be taken to ensure that the contracting authority has sufficient expertise. This may be harder when civil service rules apply and budgets are tight. But if customers or taxpayers have the resources to pay for an expert independent regulator, they probably have the resources to pay for an expert ministry. Back to Module

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54 3. Adjusting Tariffs: Regulatory Agencies - Insights The issues are: The source of the Institution’s legal powers The Institution’s structure Controls over the institutions decision making process – independence and accountability Independent regulator’s powers are usually established from statute. This may mandate appointment processes, funding and issues such as the decision making process Drawbacks: Statutory regulators bring increased risk to they operator, who loses control over outcomes. Independence and accountability are an important issue for the design of a regulator. The decision maker should not be unduly influenced by the various interests. Independence consist of three elements: An arms length relationship with customers, the operator and other private parties An arms length relationship with political parties Organizational autonomy such as separate funding, exemption from civil service salary rules “There are three key issues to be addressed when establishing a Regulatory Institution approach..” One danger is political interference. The regulator needs to be insulated from day to day control by politicians. The government helps sets the rules, and the regulator ensures they are applied fairly Back to Module

55 Regulatory Agencies Improving Independence & Capacity “Governments can take steps to increase the Regulator’s independence through robust appointment processes and providing adequate capacity..” Improving Regulatory Independence Governments can improve the regulator’s independence with: Robust appointment processes: Prescribing professional criteria for appointment Involving both the executive and the legislative branches of the government Appointing regulators for fixed terms and protecting them from arbitrary removal (while still providing for their removal in case of proven misconduct or incapacity) Setting terms that do not coincide with election cycles and staggering the terms of the members. Adequate capacity supported by: Exempting the agency from civil service salary rules that make it difficult to attract and retain qualified staff Providing the agency with a reliable source of funding, usually earmarked levies on regulated firms or customers. Design to improve Regulatory decisions: Governments can try to improve the quality of a regulator’s decisions by simultaneously constraining the regulator’s discretion and increasing its accountability. This can be done by careful design of constraints on the decision-making process [see separate ‘blue’ slide] Design to improve Regulatory decisions: Governments can try to improve the quality of a regulator’s decisions by simultaneously constraining the regulator’s discretion and increasing its accountability. This can be done by careful design of constraints on the decision-making process [see separate ‘blue’ slide] Too much Independence Too much independence from political oversight can become a problem if political leaders are more accountable than the regulator and less vulnerable to improper influence. Institutional arrangements for regulatory independence need to take into account the specifics of the country, its political and organizational culture, and its legal environment. Too much Independence Too much independence from political oversight can become a problem if political leaders are more accountable than the regulator and less vulnerable to improper influence. Institutional arrangements for regulatory independence need to take into account the specifics of the country, its political and organizational culture, and its legal environment. Political Independence no guarantee of good decisions Ensuring that the regulator is independent from political and other interference will not guarantee good decisions. A regulator might be highly independent, but still fail to make decisions that properly balance the interests of the operator, contracting authority, and customers. Ensuring that the regulator is accountable helps to encourage good performance and reduces the potential for improper influence. There are several processes and appeal mechanisms that can increase accountability and the quality of decisions. Political Independence no guarantee of good decisions Ensuring that the regulator is independent from political and other interference will not guarantee good decisions. A regulator might be highly independent, but still fail to make decisions that properly balance the interests of the operator, contracting authority, and customers. Ensuring that the regulator is accountable helps to encourage good performance and reduces the potential for improper influence. There are several processes and appeal mechanisms that can increase accountability and the quality of decisions. Back to Module

56 Regulatory Agencies Design of decision making processes “Issues to be addressed when establishing a Decision making..” Back to Module

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58 Attributes: 1.Involving Customers 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 1. Involving Customers ‘It makes sense to involve customers in managing the arrangement’ Involving Customers Customers can be considered on two levels, and with the following issues covered in the arrangement:: INDIVIDUAL ISSUES: Customers should have a clear legal right of service to a specified standard at a specified price. The Operator to have a clear set of legal obligations to the customer, and the Customer to have a clear set of legal obligations to pay. Customers should have a way to hold the utility accountable. COLLECTIVE ISSUES: At a collective level customers are interested in price, coverage and quality of service. Involving customer in arrangement design has several benefits: Customers know the current problems Customers may know ways in which efficiency may be improved Involving customers increase the legitimacy of a decision Agreement and resolution of implementation issues It makes sense to review ways in which customers can be involved in decisions on tariffs and service level decisions, and to include workable mechanisms for customer input Back to Module

59 Tariffs: Involving Customers 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 1. Involving Customers ‘It makes sense to involve customers in managing the arrangement’ Involving Customers Customers can be considered on two levels, and with the following issues covered in the arrangement:: INDIVIDUAL ISSUES: Customers should have a clear legal right of service to a specified standard at a specified price. The Operator to have a clear set of legal obligations to the customer, and the Customer to have a clear set of legal obligations to pay. Customers should have a way to hold the utility accountable. It is helpful if the legal rights to service can be incorporated in the contract between Operator and the Customer, making the operator directly accountable for delivering the service at the tariff. This does not have to be a separate document for each customer. There should be a reciprocal set of obligations on the customer to pay for the services It is helpful if the legal rights to service can be incorporated in the contract between Operator and the Customer, making the operator directly accountable for delivering the service at the tariff. This does not have to be a separate document for each customer. There should be a reciprocal set of obligations on the customer to pay for the services One accountability mechanism is the use of court proceedings.. However this is costly and complex and not useful for most customers. More customer friendly measures can involve:  The utility required to make it easy to register complaints, and to respond within a defined period.  A body to assist customers if the complaint is not dealt with adequately, with powers to make the utility respond adequately At the same time, the customers need to recognize their own obligations, including payment for services, and this should be reflected in the legal arrangement One accountability mechanism is the use of court proceedings.. However this is costly and complex and not useful for most customers. More customer friendly measures can involve:  The utility required to make it easy to register complaints, and to respond within a defined period.  A body to assist customers if the complaint is not dealt with adequately, with powers to make the utility respond adequately At the same time, the customers need to recognize their own obligations, including payment for services, and this should be reflected in the legal arrangement Back to Module

60 1. Involving Customers 2. Maintaining good working relations 3. Links between Institutions to mange the Relationship ATTRIBUTES OF INSTITUTIONS 1. Involving Customers ‘It makes sense to involve customers in managing the arrangement’ Involving Customers Customers can be considered on two levels, and with the following issues covered in the arrangement: INDIVIDUAL ISSUES: Customers should have a clear legal right of service to a specified standard at a specified price. The Operator to have a clear set of legal obligations to the customer, and the Customer to have a clear set of legal obligations to pay. Customers should have a way to hold the utility accountable. COLLECTIVE ISSUES: At a collective level customers are interested in price, coverage and quality of service. Involving customer in arrangement design has several benefits: Customers know the current problems Customers may know ways in which efficiency may be improved Involving customers increases the legitimacy of a decision Agreement and resolution of implementation issues It makes sense to review ways in which customers can be involved in decisions on tariffs and service level decisions, and to include workable mechanisms for customer input Service Problems  Customers know what the service problems are and how much they would be willing to pay for improvement  Customer information should be captured at tariff or service review.  Unconnected potential customers also need to be brought into the process – their views may differ from connected customers Service Problems  Customers know what the service problems are and how much they would be willing to pay for improvement  Customer information should be captured at tariff or service review.  Unconnected potential customers also need to be brought into the process – their views may differ from connected customers Efficiency Customers know the service problems and how they could be improved, which may not be obvious to utility or regulator. Example: Customers may have a detailed knowledge of local conditions which can help to improve the situation Efficiency Customers know the service problems and how they could be improved, which may not be obvious to utility or regulator. Example: Customers may have a detailed knowledge of local conditions which can help to improve the situation Fairness of Decisions  If Customers have the chance to present their views and see that the decision making process has dealt fairly, they are likely to accept the resulting decision  Customers ar less likely to accept decisions made behind closed doors, without consultation, as they will not trust the process Fairness of Decisions  If Customers have the chance to present their views and see that the decision making process has dealt fairly, they are likely to accept the resulting decision  Customers ar less likely to accept decisions made behind closed doors, without consultation, as they will not trust the process Tariffs: Involving Customers Back to Module

61 Tariff Adjustment: Ways to Involve Customers Back to Module

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63 Choosing Instruments 5 Examples Choosing Instruments Detailed Text

64 Toolkit: Module 7 DO NOT MOVE or ERASE THE PREVIOUS SLIDES AFTER “END” OF MODULE


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