AN INNOVATIVE SCHEME FOR DELEGATED MANAGEMENT
IN EMERGING COUNTRIES

Bernard SAUNIER, Ph.D
Chairman of SAFEGE and LYSA

An apt title for the package LYSA is currently putting together in Columbia - among other countries - could be "An Innovative Scheme for Delegated Management in Emerging Countries". A venture of this kind could be transposed to many countries, since it is well suited to cities where water tariffs are relatively low.

I. The issues to be addressed

Although the international funding institutions finance a certain number of infrastructure projects, their vocation is by no means a charitable one. Their aim is to recover their loans. For this reason, having long practised a policy of technical assistance, the funding agencies are increasingly turning to delegated management which is both a durable option and provides greater reliability in terms of debt recovery and the success of the projects financed.

Against this background, Lysa and Safege have been looking at new forms of delegated management which are practicable in emerging countries, since they demand only moderate increases in the price of water over the first five years of their implementation. The existing options all have their drawbacks. With the concession system, capital expenditure is made by the operator, which entails considerable risk and may even lead to failure to implement the project, owing to the need for massive increases in water rates. Conversely, the affermage (lease) and management contracts do not carry any significant financial risk but allow the operator no control over the implementation of new works - and a delegated management system in an emerging country where the operator has no control over the works implemented is a sure recipe for failure.

It is therefore necessary to give the operator control over the financial, human and technical aspects of the various projects and at the same time relieve him of a large part of the financial burden. It is with this objective that this scheme was elaborated.

II. Objectives and Context of the Proposed Scheme

The objectives of the innovative scheme are as follows:

Durability.

Public-private partnership and transparency.

Inclusion of a (5-year) period of adjustment.

Control over investments without the attendant financial burden during the period of adjustment and without the need for a counter-guarantee from the operating company and shareholder.

Control over human resources and operation costs.

Provision of a first-rate service.

Control over public guarantees to make these irreversible in the face of possible political pressures in the future.

Minimisation of pre-start up investments.

Nevertheless, a scheme of this kind can only be successful when adopted within the appropriate legal framework. In Columbia, delegated management is compatible with the legal context. Moreover, the prevailing legislation requires the municipal authorities to devote 20% of their budget to public services, 80% of which is allocated to water and sanitation. Water and sanitation thus absorb 16% of local authority revenues - a fact which has clearly facilitated the implementation of the scheme.

III Nature of the Scheme

1. Legal aspects

Firstly, the project involves creating a firm governed by local law. Ownership of the firm will be shared between the municipality or a public enterprise owned by the municipality, one or more local private partners and a global operator. The controlling interest will be held by the latter.

The firm thus created will have the beneficial ownership of the facilities for a period of 15 to 20 years for which it will pay a fee to the municipality. It will also enter into a management contract with the Operator to whom it will pay a fixed fee throughout the beneficial ownership period. In return the Operator will provide the principal Managers.

Finally, the operator provides the necessary engineering services, materials and equipment. A works fund is set up administrated by the firm and financed by the municipality, State, etc.

2. Human Aspects

The aim is to maintain only the quality staff of the existing municipal enterprise. This will inevitably mean a certain number of job losses. It is therefore important to set up a staff compensation fund.

3. Economic aspects

The contribution of the global operator as well as the engineering services and equipment are financed through a long-term loan. 85% of the loan could feasibly be from French sources (export buyer's credit). The remaining 15% could be provided by a local commercial bank. Another possibility is to take out a loan on the local market at the going market rate.

The works fund has an immediate source of finance, namely - in the case of Columbia - the 16% contribution from the municipal budget. This will, if necessary, be supplemented by contributions from various national and multilateral institutions.

The package is ultimately quite simple. The presence of a first-class local bank will suffice to secure the backing of the COFACE (France's export credit guarantee department) and other local banks. The first-class local bank will in turn require financial guarantees which will be provided through the creation of a Trust. The Trust contract will be irrevocable until all repayments have been made. The escrow account system may also be used.

IV Conclusion

Our package makes it possible to:

Provide a ready source of funding for upgrading existing facilities without a substantial increase in the cost of water.

Farm out the financial risks associated with the works while maintaining control over planning of the works and their implementation.

Ensure a long-term presence in the emerging countries while minimising the level of financial commitment.

Upgrade the water company to a standard of operation approaching international standards, using local skills and the resources of the operator.