ASi" kUCTURE FlOR DEVELOPMENT

short-mn gain and skimp on routine maintenance.
Most of these problems can be avoided. Expli4t
maintenance requirements can be written into con-
tracts, and compliance can be monitored. Private
dent incentives to maintain and expand the facilities
in their charge. A private supplier that does not
own the production facilities or is uncertain of contract
renewal may depreciate assets rapidly for
Box 3.3 Tailoring concessions to sectoms and government objectives
The method of awarding concessions or the right to op- depreciate considerably. But because trucks can be sold
erate is extremely important in determining the incen- more easily than assets underlying roads and power
tives to private sponsors. When the returns to the spon- plants, the contract period may be as short as several
sor. are unrelated, or only wealdy related, to the months.
performance of the operation, the benefits of private= Ar. interesting variation is used in telecomnmunica-.
sponsorship are forgone.
tions, although it could be applicable also for indepen-
The goal is to ensure an attractive financial return dent power projects. The focus is not on the length of the
for investors while safeguarding public interests. One concession period, which can be indefinite, but on the
key element of negotiation is the price the investor period of the exclusive concession. In Mexico and Arpays
for the right to operate the service-or the extent gentina, the newty privatized companies have been
of capital or operating subsidy that the govenmuent granted exclusive licenses for six to ten years, during
may provide. Other negotiating points are the price which they have certain investment obligations. After
that will be charged for services, the concession period, the exclusive period, the government is free to allow
and the rights and obligations at the end of the contract new entrants.
period;
The method of chlarging for the right to provide ser-
This is a complex brew, with each element depend- vice can take different fonns. In theory, it is most efficient
ing on another. There is always a danger that the terms to award a concession to the bidder who offers the
of a concession will allow investors to secure too high a largest lump sum up fronL Having paid a large initial
rate of retur, or will fail to provide sufficient incentives fee, the operator will be motivated to operate the fadlity
for proper.maintenance of the assets and provision.of in themostefficientmanner. For large projects, however,
services.
where project costs and revenues are uncertain, revenue-
To simplify matters, certain nonns and conventions sharing or profit-siaring arrangements can spread the
have been adopted. The length of concession periods is risk (as in the Guangzhou-Shenzen highway in China).
typically related to the life of the underlying asset For Where the govermment sees itself mainly as a guardian
example, thirty-year concessions are common for toll of consumer interest it may choose to receive no fee but
roads, and fifteen years is common for power generation to awsard the contract on the basis of the lowest price
pxrects (although for hydroeectricprojects, tiirty years charged to the consumer (which can later create probis
more likely). Contracts for solid-waste disposal are in lems with quality of service and requires spedfication of
the range of four years, a period in which garbage trucks mnirmum service standards).
Box 3.4 Success of a lease contrat-Guiinea'swater supply
When the Republic of Guinea's water supply sector was To make sure the necessary tariff increases wvould be
restructured in 1989, it was one of the least developed in affordable, the Guinean lease contract included an inno-
West Africa At that time a new autonomous water au- vative cost-sharing arrangemenL Under the agreement
thority,SONEG, took over ownership of the urban water nroega.ed by the government, the two sector entities,
supply infrastructure and assumed responsibility for and the external financier (the World B3ank, the consector
planning and investmenL SEEG, 49 perent gov- sumner tariff was to be adjusted gradually from the first
ermnent-owned and 51 percent owned by a foreign con- to the tenth year of the contract During this period the
sortium, was created to operate and maintain the sys- World Bank agreed to assume a declining share of the
ter's facilities.
foreign exchange expenditures of operation, and the cen-
Under* the ten-year lease contract signed with tral government covered a declining share of the debt
SONEG, SEEG operates and maintains the system at its sennce. By the tenth year tariffs were expected to cover
own commerdal risk. Its remuneration is based on user the full cost of water. Tariff imcreases have to date excharges
actually collected and fees for new connections. ceeded the planned schedule, rising from 50.12 per cubic
SEEG also benefits from improvements it achieves in the meter in 1989 to about 0.75 in 1993. Despite higher tarcollechon
ratio, from reduced operating costs, and from iffs, the collection ratio for private customers has inreductions
in unaccounted-for water. Since SONEG has creased dramatically-frrn less than 20 percent to more
ulftimate responsibility. for capital financing, it has strong than 75 percent in 1993-and technical efficiency and
incentives to seek adequate tariffs and to make prudent service coverage have improved.
investments based on realistic demand forecasts.
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