Performance-Based Contracts for Non-Revenue Water Management

Context

The financial viability and operational performance of water utilities is heavily affected by excessive levels of non-revenue water (NRW). NRW refers to the difference between the amount of water that enters the distribution system and the amount of water billed to consumers. Public water utilities in developing countries are keen to reduce NRW levels, but face many constraints and few incentives for efficiency. Weak governance frameworks, prices that do not reflect the costs of delivery and a lack of technical expertise to carry out an effective NRW program explain some of the complexities behind this challenge.

Given these obstacles, an increasing number of utilities are addressing NRW management through public-private partnership (PPP) contracts known as Performance-Based Contracts (PBCs). PBCs are a form of results-based financing, where payment to the contractor is linked to performance. The contracting party assumes substantial risk, but has the flexibility and discretion to determine how outcomes will be achieved. This mutually beneficial relationship allows utilities to access the technical expertise and equipment they lack, while minimizing the risk of not achieving NRW targets. Furthermore, utilities retain control of their operations and assets, making NRW PBCs slightly different from traditional forms of private sector participation. PBCs require certain criteria and utility conditions to be effective. They may not be an appropriate mechanism for all situations and must be carefully implemented and managed according to local circumstances. That said, a well-designed PBC can be 68% more effective in reducing NRW than initiatives undertaken by utilities alone.

The Initiative

The World Bank (WB) and the International Water Association (IWA), in collaboration with the Public-Private Infrastructure Advisory Facility (PPIAF), established a global partnership in 2016 to help countries improve management of NRW through PBCs. The program aims to raise awareness on the issue of NRW, capture good practices, simplify and streamline the preparation of such contracts and support their implementation in developing countries. A central goal is to generate market interest in this innovative contract mechanism by fostering supportive environments for nascent or immature supplier markets. IWA is leading a number of activities to enhance the qualifications of prospective contractors and spread awareness about upcoming opportunities. Continued efforts will allow for a deeper understanding of both supply and demand-side constraints, enabling more effective cross-sector collaboration.

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