Making the country workMaking the country workMaking the country work

LEARNING ACADEMY19 JULY 2002:

LEARNING ACADEMY19 JULY 2002:

INTRODUCTION1. Jhb Story

2. Spectrum of Possibility

3. Pre-PPP Structuring

4. PPP Process

5. Regulation

6. Conclusion

FINANCIALFINANCIAL INSTITUTIONALINSTITUTIONAL• Arrears - 2.1bn - 1bn bad debt• No cash in “funds”• Long term debt + call bonds 98/99 721m ; 75 on CB 99/2000 696m• Despite cuts in OP/CAP 291m deficit last 2yrs current s/fall - 257m (partly un-funded)• Next year CAP - 84m net OP - 7072m• Wastage fraud housing/water non essential bad management

• No distinction between commercial and other• 5 admins - duplication & un co-ordinated• Fragmentation - COS, divided by 5; split businesses; staff vs line functions• Gap between policy/decisions and implementation• Not performance linked• Bureaucratic procedures slow, wastage, low initiative• Weak man. info systems & management skills

• Running down infra• Reduced services• Backlog growing• Low morale/productivity 2bn - 1bn value• Bad/Under utilisation of money / people / assets

CEO

Elec HRCSPlanning & Urb

SACEDFinancePublic safetyTransportTech Serv

GenDistrFleetPolicyRegions

Bulk WaterDisposal wwLabsRds & S/watFleet

AirportPlanningMBS

Art & CultureMarketLibMuseumsSport & RecParksZooHealthEco Dev

Bud & accRev

ClustersAssetsProcure

SecurityTrafficEM SerLogistics

LRODTrainPolicy

ClustersStaffing

ITCommLegalValuation

PlanningLUMHousingInner city

Plan Com DevTech Serv CS Fin HR

Water distWaste waterWaste ManRds & S/water

HealthLibrarySport & RecArt & CultureSoc Serv

ITCommLegalValuationPropertyFleetAdmin

HousingEnvLEDProj Fac.Planning

Bud & AccAssetsProcureRevenue

ClusterEO X 6Staffing

Trans & DevStaffingPersonalODLR

ClusterEO X 6

CEO

THE SPECTRUM OFPOSSIBILITY: JHB CITY

GOVTDEPTAdmin

Bureaucratic

GOVT BUS UNTIntegrated cost

CentreEMS, MPD

CONTRACT OUT

Billing, MaintenanceMeter reading

CORPORATISATIONElec, Refuse, Zoo,

CT, FPM, Mbus,JDA, JRA, Parks

CORP/MANGMTCONTRACT

WaterPropcom

CONCESSIONNone: Jhb

Other Cities:Dolphin Coast&

Nelspruit

JOINT VENTURE

Kelvin PowerGeneration

LONG TERM LEASE

Jhb Stadium

FULL SALERand Airport

Metro Gas

Board

MD

2900 367m

Waste Management

Prog A - Utilities

Board

MD

2500 1.9bnWater & Sanitation

Management Contract

Electricity Utility

Board

MD

2800 1.7bn

Power Generation - JV

Prog B - Agencies2264 400m

Roads andstormwaterAdv Board

MDContractor

1100 294mParks and Cemeteries

MDContractor

Metro gas Rand airport

Stadiums

Prog C - Privatise 1 %

Prog D - Corporatise 7%

- Zoo- Civic- Bus Co- Property & Projects- Fresh Produce Market

Unicity Metro Council

CEO

Comm Serv Planning & Dev

Corp Ser Finance MPS

Comm HealthWelfareArts & cultureMuseumslibrariesSport and rec

“Clients”Spatial PlannLum-systemHousingM T Planning

IT/infoCommLegalHRSecurityFleetAdminFacility M\Ment

TrafficBy-lawsCrime prev.

11 RegionalDirectors - ContractorsComm HealthWelfareLibrariesSport & rec CS & FinHRAdmin supportPlanning InfoBldg ControlHousing

Exco

Prog E - 40 %Str Plan Unit

Short TermFinancial Plan

Steering ComiGoli 2010

ExecutiveExecutive

MayorMayor

Contract Contract M \ M \ MentMent

EmergEmerg Ser Ser

NEED FOR SEPARATIONOF ROLES IN GOVT.

AUTHORITY(Govt)

Sets Policy

REGULATORImplements policy

& monitorsefficiency

OPERATOR(Provides Services)

COMMUNITY/OTHER

Authority Regulator

Operator

Current Situation

New ApproachGlobalRoleplayers definedAccountability existsServices becomeefficient

Blurred accountabilityGame Ranger & Poacher in one

Services provided can never be efficient

PRIVATE SECTOR PARTICIPATION IN URBAN WATER & SANITATION SERVICES5/6 DECEMBER 2001:

Peoples CentresPeoples Centres

Zoo Civic Zoo Civic Bus Co. Bus Co. Property Property Fres h PMFres h PM

Executive Executive MayorMayor

Counc il

Contrac tsFinance

CorporateCommunity

CEOCEO

The PeopleThe PeopleGood governance

Sus tainable s ervicesSoc ial & Economic Deve lopment

Healthy and Safe EnvironmentPartic ipatory and Inc luc ivity

EMSEMS

PlaningPlaning

MPSMPS

Heritage Heritage ServicesServices

Regions X 11Regions X 11

HealthSoc ial

ServicesHous ing Librarie s

Sport &Recreation

Was teWas te

WaterWater

Electric ityElectric ity

RoadsRoads

ParksParks

PRE PPP STRUCTURINGEnabling Legislation

InformationData gathering

Ensure legislation allows for PPP. Remove uncertaintyEmpower local authorities. Contain enabling framework

Develop program for communication with : CustomersEmployees,Unions, State and National Government.Other relevant stakeholders eg. business Understanddynamics prior to choosing option. 80% of Work

Communication

Obtain data : Carry out feasibility: Finance, Humanresource, operations, fixed assets, environment, etc

Finance determine funding availability. Allocate funds. Highercosts may be incurred in short term.

PRE PPP STRUCTURINGIdentify Functional areaFor PSP

Establish InstitutionalMechanism:PSP Steering Committee

Water and Sanitation, Electricity,Solid Waste , etc

Ensure that there is strong leadership & skill todrive process. Separate from normal adminfunctions. Give Full accountability to apptd person.Appt Project leaders dedicated solely to PSP.Political & Functional system to be integrated. Ifavailable strategically select politically able person tolead PSP. Allocate financial resources to PSPprogram. Local and international. Advisors shouldbe apptd/available. Appt. labour relations advisor.Develop time frame & performance measures.Incentivise team. Regulatory system to be a project

LEARNING ACADEMY19 JULY 2002:

PRE PPP STRUCTURING• Determine and understand PPP’s.

• Assess govt’s performance in service delivery eg. Refuse ,water etc.

• Identify core function and areas of poor performance

• Govt and Management highlight the problems to all stakeholdersespecially employees and unions.

• Indicate the need to implement PPP options.

• Develop a programme and time frame to investigate and submitoptions. Information should be as detailed as possible.

• Establish a specialist team viz. Economist, financial specialist,institutional and legal specialist, labour relations

• Allow stakeholders to be given an opportunity to provide possibleselections/options for delivery.

• Report back and agree on preferred optionPPP’s

Data Required for Ring-Fencing

Human Resources

Financial Statements

Fixed Assets

ManagementReportingSystems

Decision-making

TotalInventory

Bottom LineCost of Staff

Support Services

Cost of support

Operations Business requirementsBusiness requirements

PRIVATE SECTOR PARTICIPATION IN URBAN WATER & SANITATION SERVICES5/6 DECEMBER 2001:

PSP PROCESS : JOHANNESBURG WATER

Conduct due diligence

study

Select PreferredBidder

Request forQualification

Request forProposals

Negotiations

Bidders Conference

FinaliseContract

Establish InfoCentre

Evaluate Bids

Take time : getReliable data

Put in specific Criteria

Info must beThe same for all

Put in contractFor mark up

And second best Have financial&Tech envelopes

Structure well

Match team With bidder

Keep legal teamsmall

M. FeePerf. FeeUpside Fee

Why Why FFormorm a a Separate Entity Separate Entity ??

❒ Accountability

❒ Reduce political bureaucracy

❒ Attract / retain good staff

❒ Investment

❒ Transformation

PRIVATE SECTOR PARTICIPATION IN URBAN WATER & SANITATION SERVICES5/6 DECEMBER 2001:

Water and Sanitation

PAST

Fragmented : 5 water, 5 sanitationand Sep Rev, HR, ITand Fleet

42% UFW : Capex Constr18% Technical losses24% Commercial losses

Non-payment : Sep of rolesnot commercial

Backlogs : Capexno invest plan

Customer Care : Bureaucracyno incentives

Comm delivery : inflexibleCapacity

PRESENT

SERVICEDELIVERY AGRMT

COUNCIL

BY-LAWEnables……

BOARD

Man. Contract

• 5 Years• Share upside

• functions and obligations

• standards• tariff process• KPI’s• Funding of socialobligations steppedtariff/subsidy

Produces 5yr + 1yrBusiness Plan

• Financial model• Capex plan• Delivery outputs• Perfomance targets• Dividends

Operator’sOperator’sremunerationremuneration

❒❒ Fixed fee (R25 million) - linkedFixed fee (R25 million) - linkedtotodeliverydelivery

❒❒ Incentive A (up to R20 million)Incentive A (up to R20 million)for:for:

➠➠ Human resourceHuman resourcedevelopmentdevelopment

➠➠ CapexCapex delivery delivery

➠➠ Sewer overflowsSewer overflows

➠➠ Customer serviceCustomer service

➠➠ Plant downtimePlant downtime

❒❒ Incentive B - % of improvedIncentive B - % of improvedoperatingoperatingmargin (“x” factor)margin (“x” factor)

❒Two envelopes❒Technical / Financial: 60/40❒75% hurdle on technical, withscore retained❒Financial “x” factors

➠Northumbrian Water JV =0.18%➠Vivendi-Rand Water JV =1.25%➠Thames Water JV = 5%

Bid StructureBid Structure

JOHANNESBURG WATER:JOHANNESBURG WATER:MANAGEMENT CONTRACTMANAGEMENT CONTRACT

RISK ASSESSMENT & MITIGATION• Design Risk : If desired standards of performance not met then

private party accepts the risk and pays the costs.

• Construction Risk : Performance specifications and time schedule. Private party must bear all costs.

• Operating Risk : Private party is responsible for all operatingcosts.

• Demand Risk : Private party must ensure that there is a demandfor the service. South African context requires caution.

• Tariff Risk : Contractually private party often has to accept thattariffs may not be adjusted automatically & balance costs/ revenues.

• Collection Risk : Responsibility of the private party. No guarantees from govt.

• Credit Risk : Private party takes full responsibility. But risk togovt when services get suspended due to insolvency.

LESSONS LEARNT

Due Diligence : This is most time consuming due to data reliability. Provide adequate time for process and debate. Understand the market

RFQ : Advertisements must be clear and should safeguard LG.Adjudication panel should be carefully selected. Keep ittechnical. Evaluation criteria should be determined upfront

RFP : Contract should be submitted as part of the RFP for markup.Ensure transparency throughout. Have two envelopes :Technical and financial

Pre PPP : Strong Political Will and Leadership is needed. Reliable and accurate data . Appt Skilled project managersCommunicate with all stakeholders. Put program in place to address Unions/employees

PRIVATE SECTOR PARTICIPATION IN URBAN WATER & SANITATION SERVICES5/6 DECEMBER 2001:

LESSONS LEARNTRFP Evaluation: Adjudicators should be carefully selected. Criteria

must be sent out with RFP. Be wary of point scoring & its limitations. Evaluation process should be audited.

Selection ofPreferred bidder : First and second bidders should be selected to use

as a negotiating tool. Check background of bidder.

Negotiation : Most critical phase. LG do NOT negotiate well. Neitherdo consultants. Issue of Risk and its allocation must becarefully determined. Ensure that contract mark up lead toonly a few important negotiation points. Only the lawyersget rich out of this process. Only have one legal advisor.

ContractMonitoring : Set up regulatory system in parallel with PSP process.

Identify what must be monitored . Know what must gointo contract.

PRIVATE SECTOR PARTICIPATION IN URBAN WATER & SANITATION SERVICES5/6 DECEMBER 2001:

LESSONS LEARNTCommunication : Make sure all stakeholders are informed.

Keep records of interaction –unions

Customers : Ensure that all customers are taken over byresponsible entity.

Risks : Make sure risks are properly defined andallocated eg. Revenue management. Inmanagement contract risks are with utility

Red Tape : Make sure bureaucracy is limited.

Time : Momentum must be maintained. Speed isessential but must not compromise quality

Separate Roles : Policy maker must be separated fromregulator and operator . Regulator &

• PPP’s are not a panacea for addressing government problems.

• Government must determine whether it is a delivery agent or aregulator/facilitator of services .This can be decided by assessingGovernment’s performance in service delivery.

• The above relates to how effective and efficiently are services beingdelivered, is the quality of the service provided acceptable to thecommunity, is the tariff structure affordable and acceptable , isfinance available , are skills available, is government able to deliverservices to the poor ?

• Is it a core function of government ?. Can the private sector do itbetter.

• If the answer is “no” to any one of the above then G must seekalternative delivery mechanisms.

• TREAT COMMUNITY AS IF THEY HAVE ACHOICE

• CONSTANTLY ASK R’U DOING THE BEST THATU CAN?

• IF IT IS THE RIGHT THING TO DO THENNOTHING CAN GO WRONG!!

• TAKE THE LEAP OF FAITH