African prospects for performance-based non-revenue water contracts

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Performance-based contracts offer the potential to help African water utilities tackle non-revenue water. Jessica Ertel, Roland Liemberger and Ignacio Peña review prospects, and highlight one of the latest projects, at a utility in Kenya.

Non-revenue water (NRW) presents a considerable challenge to the financial viability of African water utilities. Recent studies suggest NRW in sub-Saharan Africa of around 14Mm3/d. This is approximately 64 litres a day for each person supplied – an amount far higher than the water readily available for individuals in many parts of the continent. The cost of these losses in Africa has been estimated at a shocking $1.4bn per year.

Despite these compelling statistics, the challenge of NRW continues to plague utilities throughout the continent. This is because they often lack the proper incentives, management and technical expertise to implement an effective NRW programme. One option for addressing this gap is the use of incentive frameworks that encourage the private sector to deliver results.

Many water utility managers argue that NRW management is an integral part of strong utility management and, so, should not be outsourced. This is a valid point. Nonetheless, there are ample case studies of utilities that have struggled for years to reduce NRW, but have found success by tapping into private sector expertise and financing through performance-based contracts (PBCs).

Several early-stage World Bank-funded projects, plus the latest example of the Murang’a South Water and Sanitation Company in Kenya, indicate the potential for PBC projects across Africa.

The performance-based approach

In the past 20 years, there has been an increase in utilities adopting contracts with a performance-related payment component. Under a PBC, a private firm is contracted to implement an NRW-reduction programme, and contract payments are linked to achievements. Contract models and the level of performance-based payments can vary widely from one utility to another.

Contracts funded by the utility as public sector financing will be the cheapest option. However, the example of Murang’a South Water and Sanitation Company (explored below) demonstrates that utilities can request co-financing from the private sector if they are unable to fund the NRW reduction project alone. In some cases, guarantees given by donor agencies – such as the World Bank – could improve project bankability by covering payment or political risks when the financial position of utilities is weak.

Although PBCs are a relatively new concept for the water sector in developing countries, they are increasingly being implemented in other sectors – notably energy and roads maintenance – as a way to improve efficiency and accountability of contracts with private providers. With the proper balance of government oversight and private sector initiative, PBCs can provide an enabling environment with the right incentives to reduce NRW, resulting in immediate operational and financial benefits for the utility.

If designed well, PBCs have the potential to bring rapid improvements for public water utilities in Africa by increasing cash flows and water availability to serve a growing population.

Murang’a South Water and Sanitation Company (MUSWASCO)

Murang’a County is around 50km north-east of the Kenyan capital, Nairobi, and MUSWASCO is one of its five utilities, serving 26,000 households. Coverage, of around 65% of the area’s 460,000 population, has increased from 30% since 2010 with support from the output-based aid programme of the World Bank Group.

Despite the progress in expanding coverage, MUSWASCO has struggled with high levels of NRW – close to 60% – for many years, significantly impacting financial performance. Alongside this, demand for water in the region is high, but the low connection rate and intermittent water supply forces customers to additionally buy water of low quality at a higher price from private boreholes.

MUSWASCO customers have expressed a preference for purchasing water solely from the utility. This demand, plus anticipated population growth in the region, underscores the urgent need to increase connections and manage a continuous water supply.

This reflects the picture nationally. Kenya’s Water Services Regulatory Body (WASREB) has indicated that 42% of the water put into the distribution network is not accounted for, on average. Many urban areas throughout the country do not have 24/7 supply, leaving the population reliant on expensive water offered by vendors.

According to Mary Nyaga, MUSWASCO’s managing director – speaking in an IWA webinar this year – the Kenyan government has encouraged utilities to seek financing from different sources. With this in mind, the utility signed a PBC NRW contract in January, with work scheduled to start not long after. “Internally, because of a number of issues, we were not able to handle the NRW,” says Nyaga. “So we decided to try the PBC to see if it will work for us – and I believe that it will.”

The project is being implemented in a district metered area (DMA) where the utility achieves 24/7 supply. Nyaga anticipates that the three-year project will help bring technology transfer. “There will also be capacity transfer – the skills will be transferred from the investor to our staff,” she adds.

PBC potential for African utilities

To try to improve the provision of sustainable water supply services through better NRW management and private sector support, the World Bank Group initiated a global programme to promote the use of performance-based contracts for NRW. This programme’s portfolio includes several PBCs for NRW initiatives in their early stages of development or under way across Africa. Specifically, the World Bank is working with Dar es Salaam Water and Sewerage Corporation in Tanzania, Addis Ababa Water and Sewerage Authority in Ethiopia, eThekwini Municipality Water and Sanitation in South Africa, and Société des Eaux de Guinée in Guinea.

Each PBC project is tailored to suit specific technical, contractual and institutional contexts of the countries in which they are based – critical to ensuring a successful PBC. These projects follow a similar three-phase framework, however, which entails the establishment of DMAs, NRW-reduction initiatives, and a maintenance phase in which knowledge, skills and equipment are transferred to the utility. The establishment of new DMAs and NRW-reduction activities ensures a baseline and benchmarking information for future NRW-reduction efforts. Utility and contractor teams will benefit from a drastic reduction of NRW levels in the system, and will be equipped with the knowledge and expertise to replicate these efforts in other areas. The greater capacity among utilities and local contractors to support this work will help project expansion and increase the possibility of securing additional funding sources.

Despite their varied contexts, these projects share several early-stage challenges that are worth noting in the evaluation of PBC potential for other African countries. First, water systems in developing countries are often plagued by intermittent supply. The PBC programmes are designed to minimise the effect of this, ensuring continuous supply in project areas, but utilities can still expect difficulties in starting phases. Second, data is limited and of low quality. This complicates the process of setting up and implementing successful projects, and requires innovative approaches. Third, utilities are working with limited budgets. This reinforces the importance of delivering successful pilot projects that can attract new finance streams and increase scale-up in other areas. The lack of experienced PBC contractors in these regions signals a need for capacity building and speaks to the importance of ensuring efficiency gains are sustainable. It is crucial that international specialist contractors engage local firms as partners, to build expertise in the region.

For all of these utilities, performance contracting is a new and innovative approach. Unsuccessful NRW-reduction programmes have encouraged utilities to evaluate new approaches. The relatively recent emergence of PBCs for addressing water loss involves growing pains in the project-design and procurement stages. There are also concerns about how to sustain performance after a PBC, which highlights the importance of a capacity-building component to these programmes. Nevertheless, examples such as MUSWASCO and other early-stage World Bank projects have the potential to set a regional precedent.

“This is a new concept in the Kenyan market,” says Nyaga. In MUSWASCO’s case, the learning process has included the need to work through details such as agreeing the minimum amount of work in which a project partner will invest. But Nyaga can see the benefits to be gained from the PBC option. We needed big wins – something that will not cost a lot of money, but will give big returns,” she says.

The authors

Jessica Ertel prepared this article while project consultant, Water & Sanitation Services Programme, IWA.

Roland Liemberger is non-revenue water management adviser at Miya.

Ignacio Pena is a water loss consultant.

More information

Quantifying the global non-revenue water problem. Liemberger, Roland, and Alan Wyatt, Water Supply 19.3 (2019), 831-837. The challenge of reducing non-revenue water (NRW) in developing countries. How the private sector can help: a look at performance-based service contracting. Bill Kingdom, Roland Liemberger, Philippe Marin, 2006, IBRD/World Bank.

IWA webinar: Addressing water loss with performance-based contracts, vimeo.com/322739352/ca8cb9f473.

For more on IWA’s Water and Sanitation Services activity, see: https://iwa-network.org/programs/water-and-sanitation-services/