Contractual Issues of Non-Revenue Water Contracts David Ehrhardt, Nils Janson, and Traci Kuratomi 6 November 2013

Table of Contents Potential of NRW Reduction Contracts  Non-Revenue Water in the Caribbean and Latin America is High  NRW Reduction Contracts can Significantly Reduce NRW Design of NRW Reduction Contracts  Essence of a NRW Reduction Contract  How to Solve the Information Gap  Multi-Phase NRW Reduction Contract  Capital Cost: Who Pays? How is it Managed?  Incentive Design Options  The Problem in Selecting the Contractor  Alternate Approaches to Selecting the Contractor 1

2 Non-Revenue Water in the Caribbean and Latin America is High

3 NRW Reduction Contracts can Significantly Reduce NRW NW Parishes, Jamaica ( )  NRW: 71% → 57%  Billed consumption: 41,400 → 54,100 m3 per day Dublin, Ireland ( )  Physical losses: 175,000 → 125,000 m3 per day Bangkok, Thailand ( )  Physical losses: ↓ 165,000 m3 per day Stony Hill, Jamaica ( )  NRW: 75% (2010) → 39% (2012) Ho Chi Minh City, Vietnam ( )  NRW: 72% (2010) → 45% (2011)  Average pressure: 2 m → 8 m (in Zone 1) State of Selangor, Malaysia ( )  NRW: ↓ 117,000 m3 per day (2009) Manila, Philippines ( )  NRW: 63% (2009) → 42% (2011) (in East Zone)

4 Essence of a NRW Reduction Contract Utility Contractor Payment for assistance Reduce non- revenue water Utility’s Objective for a Non-Revenue Water Reduction Contract: Get the largest reduction in non-revenue water for the lowest cost Government Oversight NRW Contract Information Gap Don’t know:  Starting levels of NRW  Where losses are happening  Cost to reduce losses Contract hard to specify

5 How to Solve the Information Gap ApproachDescriptionProblems with ApproachExamples of Approach Two contracts  Contract 1: Establish Baseline, Design the Works  Contract 2: Implement  Cannot gather all information  No single point of accountability  Can’t adapt as information emerges NRW Contract for Ho Chi Minh City Single, multi- phase contract  Phase 1: Establish Baseline, Design the Works  Phase 2: Implement  Phase 3: Sustain Improvements Targets may need to be adjustedNRW Contract for New Providence NRW Contract for State of Selangor

6 Multi-Phase NRW Reduction Contract Establish a Baseline Adjust if Necessary Implement Train and Handover Install Computer Systems Install Meters Establish DMAs Detect and Repair Leaks Replace Mains and Service Connections Customer Surveys Meter Accuracy Sampling Sample DMAs Process must be specified in contract Needs to be incentivized in contract Volume $ Pressure Continuity

7 Capital Cost: Who Pays? How is it Managed? ContractorUtility Utility Reimburses Contractor on Unit Rates Team of professionals who manage it Operating Costs Capital Works Costs of a NRW Reduction Program Who pays? Leak detection and repairs SCADA communication costs = Contractor pays all: Max risk, max incentive = Reimbursement contract = Program Management: Risk limited, incentive limited = Hybrid Risk New Providence Dublin

Incentive Design Options 8 Reduction in volume of NRW (Mg/year) Cost (US $million) 80 Option 1: Cost Savings 1700 Option 2: Results Achievement Outperformance Minimum Performance 70

The Problem in Selecting the Contractor 9 Objective: Get Best Value for Money Conventional Procurement (Quality and Cost-Based ) “Winner’s Curse” Low Information Prequalification

Alternate Approaches to Selecting the Contractor 10 OptionProsCons Lowest Fixed Fee Winner: Bid with lowest fixed fees  Lowest cost of program management  Contractor makes losses → Low motivation  Price competitive element is a small portion of total cost Lowest Unit Rates Winner: Bid with the lowest reimbursement for construction  Uses competition to minimize costs through initial procurement  Selects who does the works the cheapest, not who will select the right works to do Share of Fee at Risk Winner: Puts the greatest percentage of fixed fee at risk  Most confident in success will win  Still subject to winner’s curse Quality-Based Fixed Budget  Set budget  Set per unit payment for performance  Requires works to be bid out Winner: Highest technical score on track record, staff, and approach  Get best quality in design and management of program  Provides strong incentives to manager  Uses competition to minimize the cost of works  Program management contract may not interest some bidders  Depends on the subsequent procurement of works