Toolkit: Approaches to Private Participation in Water Services Module 2 Planning the process of introducing Private Participation

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

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

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 2 5 Setting Service Standards, Tariffs, Subsidies & Financial Arrangements Module 2 Planning the process of introducing Private Participation

1. Developing the Policy 2. Designing the Arrangement 3. Selecting the Operator 4. Managing the Arrangements Coordinating Advice Implement Transaction Choosing Strategy Setting Standards & Tariffs Risk Analysis & Design Managing Module 2 - What will we learn? Management Contract for Jordan Valley Authority, Irrigation Water Supply, may be the first of its kind. What are the four stages of preparation and implementation of a Private Participation arrangement? What ANALYTIC and ADVISORY work is required to design and implement an Arrangement? ‘We will look at the main issues related to planning a PP arrangement……..’

1. Developing the Policy 2. Designing the Arrangement 3. Selecting the Operator 4. Managing the Arrangements Coordinating Advice Implement Transaction Choosing Strategy Setting Standards & Tariffs Risk Analysis & Design Managing Module 2 - What will we learn? Management Contract for Jordan Valley Authority, Irrigation Water Supply, may be the first of its kind. What are the four stages of preparation and implementation of a Private Participation arrangement? What ANALYTIC and ADVISORY work is required to design and implement an Arrangement? ‘We will look at the main issues related to planning a PP arrangement……..’ Plus! Some ideas on Stakeholder consultation Plus! Institutions to manage the process Plus! Transaction Advisers

Preparing and Implementing an Arrangement ‘Preparation and Implementation of an Arrangement usually involves 4 overlapping stages……..’ PROCESS TO PREPARE & IMPLEMENT A PP ARRANGEMENT PROCESS TO PREPARE & IMPLEMENT A PP ARRANGEMENT 1. Developing the Policy 2. Designing the Arrangement 3. Selecting the Operator 4. Managing the Arrangement Objectives : The Objectives of introducing Private Participation are; To develop the best arrangement for local needs and circumstances To find a suitable firm for the arrangement and obtain the best possible offer from that firm We investigate the process of achieving this through the four stages in these next sections... Objectives : The Objectives of introducing Private Participation are; To develop the best arrangement for local needs and circumstances To find a suitable firm for the arrangement and obtain the best possible offer from that firm We investigate the process of achieving this through the four stages in these next sections... A successful arrangement?: The quality of the Process will determine the success of the arrangement. Generally the better the preparation, making best use of resources and using good advice, the greater the chance of success. However, there is a tradeoff between the amount of improvements in the arrangement and the potential time and cost involved. An in depth analysis suitable for a large city may be too expensive for a short term arrangement in a small town. A good process can produce results without unnecessary costs and delays A successful arrangement?: The quality of the Process will determine the success of the arrangement. Generally the better the preparation, making best use of resources and using good advice, the greater the chance of success. However, there is a tradeoff between the amount of improvements in the arrangement and the potential time and cost involved. An in depth analysis suitable for a large city may be too expensive for a short term arrangement in a small town. A good process can produce results without unnecessary costs and delays

Preparing and Implementing an Arrangement ‘Preparation and Implementation of an Arrangement usually involves 4 overlapping stages……..’ PROCESS TO PREPARE & IMPLEMENT A PP ARRANGEMENT PROCESS TO PREPARE & IMPLEMENT A PP ARRANGEMENT 1. Developing the Policy 2. Designing the Arrangement 3. Selecting the Operator 4. Managing the Arrangement The 4 Step Process: Details and links to materials in other Toolkit Modules

2. Designing the Arrangement 3. Selecting the Operator 4. Managing the Arrangement 1. Developing Policy 1. Developing the Policy Objectives are set. A Reform Leader is identified, and ground rules for the development of the sector are identified [More details in Module 4]

Module 6 Developing Objectives “Having decided on private participation (Module 1), what are the reforms intended to achieve? ” Some of the issues:  How important is it to expand to new customers rather than improve existing service, or keep low tariff?  Are we looking for private sector financing or will it remain with public sector?  Are the reforms water sector specific or part of large picture (such as decentralization)? Examples: La Paz – El Alto concession: Desire to extend coverage to unserved poor households Manila Concession:Largest reduction in tariffs “Clearly setting out and agreeing reform objectives allows a solid basis for the Arrangement design process ” Examples: Senegal Affermage Contract: Contract continued centralized supply situation Sofia Concession: Municipal contract, based on national decentralization of water services. Examples: Manila & La Paz concession: Brought significant finance Trinidad Management Contract: Initial emphasis was on bringing management efficiencies, while Government provided finance.

Module 6 Reform Leader “Early on, Government will need to choose who will champion and coordinate the overall process – a Reform Leader ” A Reform Leader is the Government entity chosen to champion and coordinate the overall process of designing and implementing the Arrangement:  Do they have the appropriate skills, capacity and responsibilities to be successful?  Which level of Government should it be ?  What do we do if the entities lack some of the needed requirements?

3. Selecting the Operator 4. Managing the Arrangement 1. Developing the Policy 2. Designing the Arrangement 2. Designing the Arrangement Work on: Service standards & Tariffs Risks Stakeholder views Defining tasks, liabilities and relationships & how to manage them. Establishing laws, contracts and implementing bodies

2. Designing the Arrangement “Once Objectives, vision and structure have been set, the details necessary to make it work need to be designed ” The various Toolkit modules cover the design elements in more detail:  Stakeholder Consultation and Communication are important – knowing what they want, and contribution to the reform to make it sustainable [Module 3]  The heart of the arrangement is the Level of Service to be provided and the Tariffs and any Subsidy that will have to be paid. This involves technical and financial work, and a large degree of consultation [Modules 3 and 5]  The choice of who will bear Risks and Costs of the chosen Arrangement has to be made (both private and public sector) and these decisions may influence the type of contract chosen. [Modules 3 and 5]  Institutions need to be developed to manage the development, and management of the Arrangement, as well as supervision and adjustment of Service Standards and Tariffs [Module 7]  Legal frameworks and contracts have to be drafted to ensure an effective legal arrangement to reflect all the design points and ensure stability of the long term Arrangement [Module 9]

3. Selecting the Operator 4. Managing the Arrangement 1. Developing the Policy 2. Designing the Arrangement Stakeholder Consultation & Analysis Stakeholders Stakeholder Consultation & Analysis ‘The success of any private participation process depends on the extent of support from stakeholders’

4. Managing the Arrangement 1. Developing the Policy 2. Designing the Arrangement 3. Selecting the Operator 3. Selecting the Operator Work on attracting potential operators. Selecting the operator with the best combination of: Skills Costs All to meet local needs and circumstances

3. Selecting the Operator ‘Selecting the Operator involves ensuring both that the opportunity is attractive to operators, and using the best process to choose which operator will be the best partner’ Operator consultation and selection are looked at in more detail in Module 9, including key issues:  Operator Consultation is important at the design stage – it increases the chance that Operators will want to be involved in the Arrangement. However care has to be taken to do this in a structured fashion and that no-one is given an unfair advantage.  Choosing a Private Partner – methods include:  Competitive tendering  Competitive negotiation  Direct negotiation  Other solutions may be needed if there is limited bidder interest.

1. Developing the Policy 3. Selecting the Operator 4. Managing the Arrangement 4. Managing the Arrangements 2. Designing the Arrangement The Rules and Institutions created at the design stage should keep the arrangement on track There is a need for special efforts to get the Management of the arrangement off to a good start There are likely to be tariff reviews and adjustments during the arrangement period, and at the end of the contract a need to decide on the next steps [More details in Modules 7 & 8] “No matter how well the Arrangement is designed, we need to note that it will take time and experience for all parties to understand each other and work together most effectively ”

1. Developing the Policy 3. Selecting the Operator 4. Managing the Arrangement 2. Designing the Arrangement Institutions to manage the process Setting up Institutions to Manage the Process ‘To manage the Process, the Government needs to: ● Establish the level of Government responsible for managing the Process ● Set up a streamlined and analytical management & reporting structure, with teeth!’ Institutions to Manage the Process

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘In this second main section we look at the various Analytic and Advisory work elements required to design and implement a Private Participation Arrangement……..’ Designing and implementing the PP Arrangement requires economic, financial technical and legal expertize, and coordination of that expertize Detailed work is needed to refine the option and legal measures to support it, and preparation of complex documents, such as laws, bid & contract documents Governments lack the full range of expertize and will need Specialist Advisers The combination and effort of Advisers will vary for each case. The cost of advice needs to be balanced against the benefits Designing and implementing the PP Arrangement requires economic, financial technical and legal expertize, and coordination of that expertize Detailed work is needed to refine the option and legal measures to support it, and preparation of complex documents, such as laws, bid & contract documents Governments lack the full range of expertize and will need Specialist Advisers The combination and effort of Advisers will vary for each case. The cost of advice needs to be balanced against the benefits

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘1. CHOOSING A SECTOR STRATEGY Advice on sector strategy involves judgment on issues such as; Tradeoffs of decentralization/scale Responsibilities and relationships between institutions Advisors are typically led by Economists or others with Institutional Analysis or Water sector expertize. Lead advisors usually need input from: Social researchers (local conditions) Specialists on technical, financial and legal possibilities and constraints

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘2. SETTING SERVICE STANDARDS & TARIFFS’ Social researchers: Will determine level of services being received, services wanted and people’s willingness to pay. Economists typically will develop demand forecasts & Technical engineering consultants will determine methods and costs of providing the service, as well as asset condition and investment costs. Effective performance targets will be set, and demand forecasts and technical results will be used by the Financial Consultants to establish a financial model. The results will be used to establish a viable tariff and the potential need for subsidy.

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement 3. RISK ANALYSIS &DESIGN OF THE ARRANGEMENTS Risk Analysis: Ideally, involve all disciplines in the risk analysis. This may be led by the Financial specialists or the Transaction Adviser Design of Arrangements: Arrangements are designed in outline based on results of risk analysis. Legal specialists turn the outlines into a complete legally binding regime, with the aim of : ●Making the risk allocation legally effective ●Reducing future disputes

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘4.IMPLEMENTING THE TRANSACTION’ MARKETING THE TRANSACTION : begins after the arrangement is designed. Requires a Transaction Manager with good knowledge of potential private Operators [More details in Module 9] REQUEST FOR PROPOSALS: are put together by Technical, Financial and Economic specialists, who also prepare an Information Memorandum. Lawyers will ensure legal procedures are correct. Communications with Customers and workers is vital, and can involve Communications and HR specialists. [More details on Module 9] PREQUALIFICATION, BID ASSESSMENT & CONTRACT NEGOTIATION: generally require assessment and evaluation of contractors and their proposals by technical and financial specialists, with legal specialists to ensure all documentation makes the Arrangement legally effective and binding [More details in Module 9]

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘5. MANAGING THE ARRANGEMENT’ Once the Operator starts work, the Arrangement has to be managed, with three main tasks, and Institutions with the capacity to manage have to be set up: 1. Performance needs to be monitored to ensure standards met e.g. Regulator or Contract Monitoring Unit 2. Tariffs & standards may need to be adjusted e.g. Regulator 3. Disputes need to be resolved e.g. Arbitration Panel or Courts ADDITIONAL ADVISORY SUPPORT Additional advisory support may be needed to help manage the Arrangement, particularly early on when the institutions are being established: Technical specialists – monitoring service performance and assessing operating efficiency Financial specialists and economists – for Tariff Resets Lawyers - for enforcement and dispute resolution

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘6. COORDINATING ADVICE AND PACKAGING ADVISORY CONTRACTS’ Coordinating the Advisory Work is a difficult task, and needs effective integration of all disciplines. This depends on best selection of: Transaction Manager’s skills and experience, able to view overall the advisory and analytic work to establish the arrangement: Contract method used to select and hire the Transaction Advisor Transaction Manager’s skills and experience May be a strong and experienced Government member Or a Transaction Adviser hired for his skills and experience to manage all elements of design and implementation Contract method used Hire a single consortium with the requisite economic, technical, consultative, financial and legal skills, to be led by the Transaction Manager Or procure all the skills under separate contracts (but this requires Government personnel able to manage this)

Analytic & Advisory Work Required ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement ‘6. COORDINATING ADVICE AND PACKAGING ADVISORY CONTRACTS’ - More about choosing Transaction Advisers Transaction Advisers: Attributes & Issues Transaction Advisers

Reviewing Module 2 ‘The Module has looked at some options for planning the process of introducing Private Participation…….” ANALYTIC & ADVISORY WORK REQUIRED ANALYTIC & ADVISORY WORK REQUIRED Coordinating Advice & packaging Advisory Contracts Implementing the Transaction Choosing Sector Strategy Setting Standards Tariffs & Subsidies Risk Analysis & Design of Arrangements Managing the Arrangement PROCESS TO PREPARE & IMPLEMENT A PP ARRANGEMENT PROCESS TO PREPARE & IMPLEMENT A PP ARRANGEMENT 1. Developing the Policy 2. Designing the Arrangement 3. Selecting the Operator 4. Managing the Arrangement Stakeholder consultation Institutions to manage the process “……………. and some of the Advisory & Analytic Advisory Work required.” Transaction Advisers

Checklist: Module 2 ‘……..and some of the key issues are detailed in this Checklist” More information The process of introducing private participation The process generally: World Bank 1997b. Hiring advisors for private participation in infrastructure projects: PPIAF and World Bank Ensuring the process takes account of the interests of the poor: PPIAF and WSP 2002d.

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

Toolkit: Module 2 End of Module

Toolkit: Module 2 Return to Start

Four Stages: Establishing the PP Process Back to Module 1. Developing the Policy 2. Designing the Arrangement “The whole Toolkit covers subjects related to this module, with links as shown here” 3. Selecting the Operator [9] 4. Managing the Arrangement

Stakeholder Consultation & Analysis ‘The success of any private participation process depends on the extent of support from stakeholders’ Module 3 gives further details, but key issues involve: Identifying key stakeholders and their interests in the design and outcomes of the process Developing effective ways of dealing with the stakeholders Identifying, at an early stage, issues that are likely to be politically sensitive, or require political decision or action (particularly regarding distribution of stakeholder benefits) Back to Module

Setting up Institutions to manage the Process ‘To manage the Process, the Government needs to: ● Establish the level of Government responsible for managing the Process ● Set up a streamlined and analytical management & reporting structure, with teeth!’ Module 7 gives further details, but key issues involve: Deciding which level of Government is Responsible Who leads?  Central Government acting as leader  Local Government as leader or  Local Government leads, with interaction from other levels of Government ? Which tier of Government?  Who has legal responsibility for water services?  Who has capacity for service provision and assuming leadership?  Who has necessary financial involvement? Setting up a Transaction Management structure needs Project Team to have suitable skills Effective delegated powers Reporting to and responsible to an effective political decision making group The composition of the Project Team may need to change with time (e.g. during negotiations with the successful bidder) Back to Module

Transaction Advisors ‘What are the attributes of Transaction Advisers, ……………………?’ Attributes of a Transaction Adviser Must have an understanding of the different disciplines and how they interact Strong communications skills – ability to offer informed choices (e.g. with Government and other stakeholders) Knowledge and understanding of potential operators and financiers, their objectives and constraints) Strong planning and management skills – ability to keep a complex, commercially and socially sensitive process moving forward. ‘…………. and what are the issues if we employ more than one Transaction Advisor?’ Employing more than one advisor: Coordination questions – some advisors may be good at one thing (say, policy) yet not good at others ( say, managing transactions) - One approach has been to employ one set of advisors to set policy, with a separate Transaction Manager to implement the arrangement. A disadvantage is that work done at an early stage by one advisor may be lost in the transition to the new advisor. Back to Module

Toolkit: Module 2 DO NOT MOVE or ERASE THE PREVIOUS SLIDES AFTER “END” OF MODULE