The Asian Development Bank is drafting an innovative contract framework to support sustainable and secure water systems for people in the Asia and Pacific region. Stephane Bessadi, Stephane Giraud and Vincent Leloup explain how it is intended to future-proof standards of delivery.
Despite global efforts to ensure safe water supplies and equitable access, water security remains a persistent challenge.
In Asia and the Pacific, around two billion people are considered water insecure – a situation that is exacerbated by increasing customer demand, depleting water resources affected by climate change and disaster events, old and dilapidated infrastructure, and lack of resources and financial management.
To help improve the situation, the Asian Development Bank’s (ADB) lending in the water sector has steadily increased over the years, with an average of more than $2.3 billion per year in investments from 2011–2022. The total water sector portfolio for the same period was around $27.7 billion, directly supporting the water security and resilience of around 665 million people in Asia and the Pacific.
Despite this level of water sector investment, there remains a significant requirement to improve the performance and sustainability of water operations in the region, with particular regards to the low quality of operations and maintenance (O&M) following the construction phase, which is slowing the sector’s progress.
This highlights the need to integrate O&M into project objectives and activities, ensure greater policy dialogue with the government for improved practices, and increase budget allocations for O&M.
ADB has traditionally delivered infrastructure investments through civil works contracts for the construction of physical infrastructure. In recent years, however, works contracts have been amended to include O&M services. Increasingly, ADB has adopted more innovative contract modalities, including basing design-build-operate contracts on the International Federation of Consulting Engineers (FIDIC) Gold Book.
In 2021, the World Bank developed a ‘Water – Performance Based Leakage Reduction Contract’, focused on reducing non-revenue water (NRW) by creating District Metered Areas. But this still leaves gaps where efficiencies can be lost.
To address the problems identified in O&M, ADB is drafting an innovative procurement and contract solution under a new Standard Bidding Document. The Collaborative O&M (COM) contract aims to combine the desire for performance-based O&M contracting with the realities of existing infrastructure in the water sector. It is intended to be of limited duration (up to five years) and will pave the way for future large-scale rehabilitation and upgrading works with a more impactful long-term investment plan. COM adopts an innovative, collaborative approach to water and wastewater infrastructure and contains strong, built-in controls on the quality of O&M, with robust key performance indicators (KPIs) selected by ADB clients.
Using tested practices and based on the FIDIC Green Book, 2021 Edition, conditions of contract modified by built-in provisions in the Particular Conditions, the COM contract template was developed by a team of eminent water and wastewater specialists and renowned FIDIC experts. Currently, the COM contract template is being tested and implemented in a project in Fiji, and is planned to be rolled out in India, Vietnam, Timor- Leste, Georgia, and Kyrgyzstan.
The main features of the COM contract
To classify water and wastewater infrastructure, ADB has drawn up a simple project classification that separates greenfield and brownfield infrastructures. ‘Greenfield projects’ are new facilities or infrastructure. ‘Brownfield projects’ are those where part or all of the facilities are existing facilities to be rehabilitated.
For brownfield projects, common inefficiencies include deteriorated assets, outdated or inefficient electrical and mechanical systems, high NRW levels, lack of automation, and inefficient wastewater treatment regimes. Better O&M capacity helps identify and solve these inefficiencies by implementing quick-win measures that help save revenue, enabling future investments despite financial constraints.
The water sector has faced many contract failures, and the traditional confrontational/adversarial approach between contractors and employers/governments slow the development of public-private partnerships. Unrealistic risk allocation and performance requirements provide typical examples of where traditional contracting can fail to deliver expected outcomes. The COM contract combines services and works with a collaborative approach.
During the ‘Works Preparation Phase’ (Phase 1), the contractor must perform a diagnostic of the existing infrastructure and outline its O&M under the standard of reasonable skill and care, potentially undertaking some minor works – ‘quick-wins’ – to repair simple defects, and prepare an Investment Plan designed to meet the employer’s short-, medium-, and long-term performance objectives for its infrastructure.
“The Asian Development Bank’s (ADB) lending in the water sector has steadily increased over the years, with an average of $2.3 billion per year in investments from 2011-2022”
At the end of Phase 1, the employer and the contractor will endeavour to agree on a priority investment plan (PIP), the short-term portion of the Investment Plan, including measures of the highest benefit vs. cost ratio. The employer will disclose in the contract the budget they have for the PIP in the form of a provisional sum, helping to avoid any misunderstandings.
The parties should also endeavour to agree on the performance guarantees, performance bonuses, and damages that will apply during the second phase of the contract, which is the ‘Works Implementation Phase’ (Phase 2), where the contractor will implement the PIP as agreed.
Unlike traditional contracting, there is no recourse to a third party in the case of the parties failing to agree. COM provides sufficient incentive mechanisms for the parties’ interests and objectives to be aligned, and for them to act in good faith to agree a reasonable PIP, taking due regard to all relevant circumstances.
The contractor benefits from incentive mechanisms such as performance bonuses (in circumstances where O&M performance is better than guaranteed), as well as a split of savings to the PIP budget. The employer remains in full control of the delivery of the PIP, with the insertion of a specific ‘exit provision’ allowing the employer to interrupt the negotiations at any time should the contractor attempt to exploit its advantage, without having to pay the contractor any loss of profit and keeping the full power to approach another contractor for implementing the PIP and any other portion of the Investment Plan.
The COM contract is recommended to cover a period of up to five years and the contractor is required to price O&M services during two main phases.
During the Works Preparation Phase (Phase 1), which is typically implemented over one year or so, the contractor will implement:
- Diagnostic assessment of the infrastructure;
- O&M services based on the O&M plan and performance requirements defined for this phase, and monitored through KPIs;
- Capacity-building of the employer’s personnel by the contractor and knowledge management;
- ‘Quick win’ measures, being works identified as having the potential to be quickly implemented with a high benefit-cost ratio and, therefore, a high, and quickly gained, value for money for the employer;
- Draft a version of the Investment Plan.
During the Works Implementation Phase (Phase 2), which is typically implemented over two to four years, the contractor will implement:
- O&M services with adjusted performance guarantees, bonuses, and damages (defined and agreed during the PIP agreement process);
- Works defined in the PIP;
- Capacity-building of the employer’s personnel by the contractor and knowledge management.
Provisions to ensure service levels are met
By reflecting the quality of service delivered to end users either in brownfield or greenfield conditions, the new COM contract template addresses the need for specific contractual provisions to be defined, including performance guarantees, performance-based payments, and quality assurance requirements to promote O&M in water contracts.
The COM contract template introduces sustainability enablers through the monitoring of KPIs, to ensure sustainable and smart services for final users, financial sustainability for the employer and the contractor, and sustainable new/refurbished infrastructure.
The COM contract supports global ambitions to reduce the water sector’s CO2 emissions. Contractual performance requirements reflected in performance guarantees include energy consumption and the reduction of water loss, which favours the O&M of complex systems such as advanced wastewater treatment plants and water reuse systems.
Technology and smart systems
COM is designed to enable the facilities of an entire system to be operated under the contract. It is simple and flexible, so it can adapt to a large range of contexts in Asia and the Pacific, and support the introduction of up-to-date technologies and practices, such as smart systems monitoring, leakage reduction, wastewater advanced treatment and reuse, and nature-based solutions.
COM will help bridge the gap between the current status and performance of existing infrastructure and the targeted future performance of rehabilitated infrastructure for all ADB implementing agencies. It enables strong quality control and will ensure infrastructure has a longer lifespan. COM makes investments more secure for clients and development banks, whose current focus is moving towards more advanced water services, such as water reuse, nature-based solutions, or carbon net-zero systems.
It is acknowledged that capacity is key to operating advanced water services, with focus needing to be placed on operations, along with infrastructure and relevant institutions. These three focus areas are made more formidable by smart systems, building a solid base to help ensure reliable water supplies and equitable access. •
Asian Development Bank (ADB). 2020. Asian Water Development Outlook 2020: Advancing Water Security across Asia and the Pacific. Manila.
ADB. 2021. Water and Other Urban Infrastructure Services Sector: Lessons from Project Evaluations. Manila.
ADB. 2022. Integrated Water Management: Sector-wide Evaluation of ADB’s Water Policy and Program (2011–2021). Manila.
ADB. 2021. User Guide for Design–Build–Operate Contracts for Water and Wastewater Greenfield Infrastructure Projects. Manila.
Stephane Bessadi. 2020. ‘Innovative Approach for a Resilient Water
Infrastructure in Asia and The Pacific,’ Chemical Industry Digest.
ADB. 2021. Screening Tool for Energy Evaluation of Projects: A Reference Guide for Assessing Water Supply and Wastewater Treatment Systems. Manila.
S. Bessadi. 2019. ‘Get Smart to Avoid a Global Water Crisis,’ Asian Development Blog.
The authors: Stephane Bessadi, senior procurement specialist for Indian Resident Mission at the ADB; Stephane Giraud, on the FIDIC President’s list of Adjudicators; and Vincent Leloup, Chairman of the FIDIC Contracts Committee.