WATER GLOBAL PRACTICE OPERATIONAL MANUAL The Use of Performance-Based Contracts for Nonrevenue Water Reduction Output of the Global Program on Developing Good PBC ­Practices for Managing NRW SEPTEMBER 2018 Bill Kingdom, Jemima Sy, and Gerhardus Soppe About the Water Global Practice Launched in 2014, the World Bank Group's Water Global Practice brings together financing, knowledge, and implementation in one platform. By combining the Bank's global knowledge with country investments, this model generates more firepower for transformational solutions to help countries grow sustainably. Please visit us at www.worldbank.org/water or follow us on Twitter at @WorldBankWater. The Use of Performance-Based Contracts for ­ Nonrevenue Water Reduction Output of the Global Program on Developing Good PBC Practices for Managing NRW SEPTEMBER 2018 Bill Kingdom, Jemima Sy, and Gerhardus Soppe © 2018 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The find- ings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dis- semination of its knowledge, this work may be reproduced, in whole or in part, for noncom- mercial purposes as long as full attribution to this work is given. Please cite the work as follows: Kingdom, Bill, Jemima Sy, and Gerhardus Soppe. 2018. “The Use of Performance-Based Contracts for Nonrevenue Water Reduction: Output of the Global Program on Developing Good PBC Practices for Managing NRW.” Washington, D.C., World Bank. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org Cover design: Jean Franz, Franz & Company, Inc. ii The Use of Performance-Based Contracts for Nonrevenue Water Reduction Contents Chapter 1  Introduction 1 1.1 Audience 1 1.2 How to Use the Manual 1 1.3 Organization of the Manual 1 Chapter 2  Overview of NRW-PBCs 3 2.1 What is an NRW-PBC 3 2.2 Benefits of NRW Reduction 3 2.3 Benefits of Using a PBC to Achieve NRW Reduction 3 2.4 Examples of Successful NRW-PBCs 4 2.5 Overview of Contract Types 4 2.6 Considerations for Contract Design 6 Chapter 3  Process Overview 7 Chapter 4  Screening Phase 11 Chapter 5  Initial Assessment Phase 13 5.1 Compile Data 13 5.2 Confirm if NRW Reduction is Needed 13 5.3 Decide Whether Field Assessment is Needed 14 5.4 Confirm Whether a PBC Is Suitable for Reducing NRW 15 5.5 Develop the NRW-PBC Project Concept 16 5.6 Key Decisions and Principal Criteria 17 Chapter 6  Field Assessment Phase (Optional) 19 Chapter 7  NRW Reduction Strategy Phase 21 7.1 Develop Indicative Strategy for NRW Reduction 21 7.2 Assess Economic and Financial Viability 23 7.3 Consult Stakeholders 23 7.4 Key Decisions and Principal Criteria 24 Chapter 8  PBC Design Phase 25 8.1 Finalize NRW-PBC Project Concept 25 8.2 Develop Indicative Contract Design 25 8.3 Conduct Market Sounding 26 The Use of Performance-Based Contracts for Nonrevenue Water Reduction iii 8.4 Assess Feasibility of Indicative Contract Design 26 8.5 Key Decisions and Principal Criteria 27 Chapter 9  Procurement Phase 29 9.1 Generate Market Interest in the Transaction 29 9.2 Develop Request for Qualifications and Prequalify Proponents 30 9.3 Develop Request for Proposal (RFP) Package, Run Tender, and Evaluate Proposals 30 9.4 Reach Closure on the Transaction 31 9.5 Key Decisions and Principal Criteria 32 Chapter 10  Implementation and Oversight Phase 33 10.1 Ensure NRW Reduction According to PBC 33 10.2 Sustain NRW Reduction 33 10.3 Key Decisions and Principal Criteria 34 Appendix A  Glossary and Related Diagrams 35 Appendix B  Guidance on Contract Type 41 Appendix C  Terms of Reference 69 Appendix D  Suggested Report Outlines 107 Appendix E  Tools 111 Tables Table 1.1: Standard Documents, Tools, and Guidelines for Each Phase 2 Table 2.1: Benefits of NRW Reduction 3 Table 2.2: Successful NRW-PBCs Around the World 4 Table 4.1: Screening Tool for NRW-PBCs 11 Table 5.1: Project Goals and NRW Solutions 14 Table 5.2: PBC versus Conventional NRW Reduction Program 15 Table 5.3: Functional Scope Checklist 17 Table 5.4: Key Decisions Checklist 18 Table 6.1: Guide to the Expected Duration of Field Assessment 19 Table 7.1: Key Decisions Checklist 24 Table 8.1: Key Decisions Checklist 27 Table 9.1: Key Decisions Checklist 32 Table 10.1: Key Monitoring Checklist 34 Table A.1: Components of a Water Balance 40 Table B.1: Contract Types—Key Features 42 Table B.2: Information, Speed, and Risk by Contract Type 44 Table B.3: Which Contract Type to Use 46 Table B.4: Commercially–Focused PBC Case Studies 48 iv The Use of Performance-Based Contracts for Nonrevenue Water Reduction Table B.5: NRW-Driven Indicators and Targets 59 Table B.6: Output-Driven Indicators and Targets 59 Table B.7: Contractor Payment Types 60 Table B.8: Bill of Quantities with Unit Rates 64 Table E.1: Screening Tool Example 111 Table E.2: Scenarios—Data Availability versus Continuity of Supply 112 Table E.3: Scenarios—Key Attributes 112 Table E.4: NRW Practices Assessment Rating Fields and Criteria 124 Table E.5: NRW Management Rating Scale 126 Table E.6: Sample Tool—Aguas de Guariroba NRW Practices Rating 129 Figures Figure 2.1: Tradeoffs in Selecting Contract Type 4 Figure 3.1: NRW-PBC Project Preparation Process 7 Figure 5.1: Steps in Developing NRW-PBC Concept 16 Figure 7.1: Detailed Timeline for NRW Reduction Strategy for DBOM Contract 21 Figure 8.1: Detailed Timeline for PBC Design of DBOM Contract 25 Figure 9.1: Detailed Timeline for Procurement of DBOM Contract 29 Figure A.1: Water Supply System Inputs and Outputs 39 Figure E.1: Production Trends 117 Figure E.2: Financial Trends 118 Figure E.3: Water Loss Trends 119 Figure E.4: Practice Rating versus Performance Correlation Example 129 Figure E.5: Homepage of the WB-EasyCalc Tool (Excel) 130 The Use of Performance-Based Contracts for Nonrevenue Water Reduction v Chapter 1 Introduction This Operational Manual describes the process for planning and implementing ­ performance-based contracts (PBCs) for nonrevenue water (NRW) reduction (hereafter, “NRW-PBCs” or “PBCs”). It outlines how to assess when NRW-PBCs will be useful and the design and implementation process to follow. 1.1.  Audience The primary users of this manual are those involved in assessing, preparing, and ­ implementing NRW-PBCs. This includes governments, water utilities, regulators, consultants, contractors, and International Finance Institutions (IFIs). ­ 1.2.  How to Use the Manual This manual can be read in its entirety for general knowledge of NRW-PBCs and the ­NRW-PBC preparation process. Practitioners can also reference individual sections of the guide during the NRW-PBC preparation process. 1.3.  Organization of the Manual Chapter 2 describes what NRW-PBCs are, what benefits they provide, and the differences between four types of NRW-PBCs. Chapter 3 describes the seven phases in the NRW-PBC preparation process and how they are related. Chapters 4 to 10 detail each phase, namely: • Screening Phase—Determine, at low cost, if a location may benefit from an NRW-PBC. • Initial Assessment Phase—Assess the viability of an NRW-PBC and prepare an initial ­ NRW-PBC concept using data that is already available. • Field Assessment Phase (Optional)—If needed, gather and analyze additional data to see if an NRW-PBC will be beneficial. • NRW Reduction Strategy Phase—Define the specific objectives, scope, and targets for an NRW reduction; and develop a strategy. • PBC Design Phase—Design the contract and confirm its viability by preparing a business case. • Procurement Phase—Prepare the procurement documents and select a suitable contractor. • Implementation and Oversight Phase—Ensure effective and efficient NRW reduction in line with the PBC, and ensure the sustainability of NRW reduction. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 1   The appendices offer the following resources: • Glossary and Related Diagrams—Contains definitions of key terms used in the manual, together with explanatory diagrams • Guidance on Contract Type—Presents four NRW-PBC types and their variants. Also ­ contains a sample term sheet • Sample Terms of Reference (TOR)—Contains TORs for procuring consultants to advise on NRW-PBC assessment, design, and procurement • Suggested Report Outlines—Lists the reports for each phase and their suggested outlines • Tools for Assessing NRW-PBCs—Contains the tools for screening and assessment, ­ eferenced in the main text. as r Table 1.1 shows which documents, tools, and guidelines will be helpful and in which phase. TABLE 1.1: Standard Documents, Tools, and Guidelines for Each Phase Phase Standard TORs Tools and Guidelines Screening (Chapter 4) N/A Screening Tool (Appendix E.1) Initial Assessment (Chapter 5) Standard TOR for Initial Assessment (Appendix C.1) • Data Collection Sheet (Appendix E.2) • Trend Analysis Tool (Appendix E.3) • NRW Practices Rating Tool (Appendix E.4) • Water Balance (Appendix E.5) Field Assessment (Chapter 6) Standard TOR for Field Assessment (Appendix C.2) Note: Tools listed above for initial assessment can also be used for the Field Assessment NRW Reduction Strategy, PBC Design, Standard TOR for NRW Reduction Strategy, A sample Term Sheet for Performance-Based NRW and Procurement (Chapters 7, 8, 9) PBC Design and Procurement (Appendix C.3) Reduction Contracts (Appendix B.8) Standard TOR for NRW-PBC Oversight Assistance N/A Implementation and Oversight (Chapter 10) (Appendix C.4) 2 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Chapter 2 Overview of NRW-PBCs 2.1.  What Is an NRW-PBC An NRW-PBC is a performance-based contract for outsourcing technical, commercial, and construction activities related to nonrevenue water reduction, while providing the ­contractor reduction contracts with incentives to achieve the desired results. Unlike conventional NRW ­ ­ onnections replaced), in which contractors are paid based on inputs (for example, number of c number of illegal NRW-PBCs pay the contractor for outputs, such as amount of water saved, ­ connections detected, or number of customers receiving 24/7 service. NRW-PBCs differ from management contracts, concessions, leases, or other forms of ­ private sector participation, in that the utility retains control of utility operations and assets. The PBC allows the utility to take advantage of the expertise and incentivized performance of specialized private sector firms to reduce NRW. NRW-PBCs do not entail privatization of management, operations, or assets. 2.2.  Benefits of NRW Reduction NRW-PBCs can help utilities provide people with safe, reliable drinking water, through quick and effective NRW reduction. Table 2.1 lists the service, financial, and societal benefits of NRW reduction. 2.3.  Benefits of Using a PBC to Achieve NRW Reduction Regression analysis shows that NRW-PBCs are 68 percent more effective in achieving NRW reduction than utility-led NRW reduction program (Wyatt, Richkus, and Sy 2016). PBCs work well because they provide financial incentives that motivate the contractor to achieve NRW reduction. Incentives include output-based remuneration ($/m3/day saved or similar), targets (such as m3/day saved), and financial penalties for not meeting targets. These ­ ­ incentives transfer project risk from the utility to the contractor. TABLE 2.1: Benefits of NRW Reduction Service benefits Financial benefits Societal benefits • Reduces leakage • Reduces capital expenditure needed for new water • Improves climate resilience by reducing demand on scarce • Provides service to more sourcing and treatment plants water resources customers for longer hours • Increases utilities’ revenue due to the sale of the water • Reduces emissions of greenhouse gases because less • Improves water quality at tap saved, or water that was previously not billed for energy is required per unit of water sold by reducing contamination • Reduces operating costs per unit sold by reducing the • Makes cities more competitive due to improved service and amount of energy and chemicals required per unit sold less time spent collecting or treating poor quality water • Improves collections (if this is included in the • Reduces government subsidies to utilities, allowing public program) funds to flow to other social programs The Use of Performance-Based Contracts for Nonrevenue Water Reduction 3 TABLE 2.2: Successful NRW-PBCs Around the World Location Achievements Performance-Based Element Kuala Lumpur, Malaysia • Reduced NRW by 198,000 m3/day (10% of production) Lump-sum payment for achieving NRW reduction target • Avoided capital expenditure of about US$200 million Bangkok, Thailand • Saved 165,000 m3/day of water • Performance-based management fee, linked to actual • Avoided capital expenditure of about US$170 million water savings achieved New Providence, Bahamas • Saved 17,000 m /day of water (30% of production) 3 • 30% of compensation is performance-based, with • Reduced utility’s EBITDA loss by over 50 percent payment based on the volume of NRW reduction Sao Paulo, Brazil • Increased revenue by US$72 million (of which 75% was • Contractors paid based on increased volumes billed kept by the utility) • Reduced under-reporting of consumption by 41,000 m3/day, by replacing the meters of industrial and commercial customers Ho Chi Minh City, Vietnam • Saved 122,000 m3/day of water • More than 70% of remuneration for leakage reduction • Avoided capital estimated at US$120 million activities and management services was performance-based, based on m3/day saved ­ Sources: Kingdom 2006; World Bank, forthcoming; Wyatt 2018. In addition, PBCs bring specialized expertise. World-leading firms in NRW reduction can provide innovative solutions and introduce new technology. Through capacity building or training required under the PBC, they can transfer their knowledge to the utility, ensuring sustainability of NRW reduction. 2.4.  Examples of Successful NRW-PBCs FIGURE 2.1: Tradeoffs in Selecting Contract Type NRW-PBCs have been implemented around the world, in large cities and smaller towns, reducing both physical and High commercial losses and improving utilities’ financial Cost-plus contract ­ performance. Table 2.2 gives examples of the benefits from Incentivized program management contract NRW-PBCs, and notes how pay was tied to performance. 2.5.  Overview of Contract Types Speed 24/7 Self-optimizing contract Many types of NRW-PBCs are possible, each with different risk allocations and information requirements. Figure 2.1 summarizes the tradeoff between transferring risk and DBOM contract moving quickly for four distinct contract types—Design- Low ­ Build-Operate-Maintain (DBOM), 24/7 S elf-Optimizing, Low High Incentivized Program Manager, and Cost-Plus. Risk transfer 4 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Starting on the bottom right side of the diagram (highest risk transfer, lowest speed), the four options are: 1. DBOM Contract—Design-Build-Operate-Maintain (DBOM) contracts provide high levels of incentive and risk transfer by making the contractor responsible for all costs, with pay- ment dependent on the volume of loss reduction achieved. They also require construction of district metered areas (DMAs) and other physical infrastructure. They can be consid- ered the NRW reduction equivalent of a DBOM contract for water production and treat- ment. This contract type has several variants. The differences between the variants mostly concern the degree of risk transfer to the contractor, and how prescriptive the network ­ emodeling requirements are. rehabilitation and r Experience has shown that DBOM contracts can take years to prepare, given the informa- tion needed, the analysis needed, and the time bidders require to prepare their bids. Thus, this contract type is not always the best choice. The value of risk transfer and value for money that it offers need to be weighed against the time it may take to get the benefits. 2. 24/7 Self-Optimizing Contract—This model provides the contractor with incentives based on the value to the utility of key outputs—including customers moved to 24/7 supply and revenue collected—as well as the value of inputs, such as bulk water used. This design provides flexibility and reduces the engineering work required in contract preparation. So long as the utility can value the outputs it wants to achieve, the design of the works is adapted by the contractor as it gains more information. 3. Incentivized Program Manager Contract—Program management contracts separate the “brains” of the operation (planning interventions such as district metered areas (DMAs) and action leak control) from the “brawn” of implementing the works. A program manage- ment contract is a professional services contract, in which the utility pays a team of experts to design, procure, and supervise NRW reduction works. Actual implementation is done by third-party works contractors. The program manager is paid a program management fee—typically around 10 percent of the value of the works—and is also incentivized with performance pay for improvements on specified key performance indicators (KPIs). 4. Cost-Plus Contract (for use in Competitive Discovery)—Under this contract type, the con- tractor is paid for work done on NRW reduction at actual cost plus a margin. Actual cost is disclosed though an agreed “open book” process that allows the utility to see the costs the contractor incurred. The “plus” component would be a standard profit element, typically less than 10 percent over costs. Modest incentive payments for improvement in specified key performance indicators can also be included. The cost-plus contract is quick to implement, but typically does not maximize value for money. It is included because it can be used in a Competitive Discovery Approach. This The Use of Performance-Based Contracts for Nonrevenue Water Reduction 5 approach brings in several contractors to start work on selected zones. They share infor- mation with the utility that will generally be more useful than consulting engineers can gather, and which the utility can then use to prepare contracts with greater risk transfer for the rest of the network. Appendix B provides greater detail on the key features of each contract type—including how the baseline is set, how capital and operating costs are paid, how incentives are pro- vided, the level of flexibility, and indicative timelines. 2.6.  Considerations for Contract Design When designing an NRW-PBC, data availability, value of NRW reduction, and other factors are important considerations. Expert judgment, consultation, and adaptation of interna- tional precedents to local circumstances will be required—as set out in the subsequent chapters on process. ­ 6 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Chapter 3 Process Overview This chapter provides a brief overview of the phases in the NRW-PBC project preparation process. These are illustrated in Figure 3.1. Screening Phase KEY DECISIONS The purpose of screening is to quickly and cheaply discover if Screening an NRW-PBC is likely to be a useful tool for a utility. A Screening Tool—that uses indicators such as the level of • Is NRW reduction needed? NRW, long-run marginal cost, variable operating costs, the • Is an NRW-PBC suitable here? capabilities and interest of the private sector, and existence of favorable laws and policies—is used to answer two ques- tions: is NRW reduction needed, and if so, is an NRW-PBC the right approach? Initial Assessment Phase KEY DECISIONS In the Initial Assessment, the viability of the NRW-PBC is Initial Assessment and Field Assessment confirmed, and a concept of the NRW-PBC is developed. The contract’s objectives, scope, indicators, targets, contract • Is NRW reduction needed? type, risk allocation, and payment structure are defined. • Is an NRW-PBC suitable here? In some cases, data on system operations and infrastruc- • What should be the objectives, scope, ture is lacking, creating uncertainty in the components of indicators, and targets? NRW (Water Balance) and the cost of reducing NRW. If this is • Is it likely an oversight contract will be needed? the case, a Field Assessment may be required to gather miss- • How to ensure sustainability? ing information. Alternatively, a contract that is robust to (strong enough to handle and compensate for) a lack of infor- mation, such as an Incentivized Program Manager Contract, may be chosen. FIGURE 3.1: NRW-PBC Project Preparation Process Contract with low information requirements, and su cient existing data Field NRW Initial Screening assessment reduction PBC design Procurment assessment (optional) strategy Implementation and Contract with high oversight information requirements, and insu cient existing data The Use of Performance-Based Contracts for Nonrevenue Water Reduction 7 Field Assessment Phase (Optional) The purpose of the Field Assessment is to fill any information gaps that prevented decisions on whether an NRW-PBC is a good idea, or what the project concept should be. A field assess- ment may involve updating the customer database and associated water meter database, testing the accuracy of master meters and customer meters, measuring consumption of unmetered connections, and conducting surveys to estimate the prevalence of illegal connections. Other activities may include developing computerized geographic information ­ system-based (GIS-based) network maps, measuring continuity and pressure in different zones, tabulating the frequency of bursts and leaks on mains and service connections, and conducting step tests or night flow tests to estimate leakage. NRW Reduction Strategy Phase For DBOM contracts, the objective of the phase is to develop ­ eduction a program for NRW reduction, charting the optimal r KEY DECISIONS path by identifying specific measures to implement and • Which measures to reduce physical and spelling out how the network should be configured. commercial losses are most effective and cost For contracts with lower information requirements, this efficient in this situation? phase can be significantly streamlined. For instance, in an • How should the project be staged to deal with Incentivized Program Manager contract, little additional intermittent supply and zone performance? technical analysis will be required at this stage, as the ­ program manager is expected to collect missing data and • Is the project economically and financially plan the approach once hired. viable, and can it be financed? For any type of contract, this phase also includes a full financial and economic assessment of the project. ­ PBC Design Phase The objective in this phase is to design a PBC that will incen- KEY DECISIONS tivize the contractor to achieve efficient and effective NRW • What should be the scope, objectives, reduction and to prepare a business case to support this responsibilities, risk allocation, indicators, design. targets, and remuneration mechanisms? This phase entails specifying the contract’s objectives, • Is there sufficient interest from the private scope, responsibilities, risk allocation, indicators, targets, sector? and remuneration mechanisms. The indicative contract design should be tested in a market sounding to gauge pri- • Is the PBC feasible on economic, financial, legal, regulatory, environmental, and social vate sector interest and capabilities. A full business case set- terms? ting out the economic, financial, legal, regulatory, and • Is financing available? environmental feasibility should also be prepared. • How will the contract be supervised? Procurement Phase • How can sustainability be ensured? After the PBC has been designed, the procurement starts. The objective is to choose the most suitable contractor to 8 The Use of Performance-Based Contracts for Nonrevenue Water Reduction implement the NRW reduction project in a way that is com- KEY DECISIONS petitive, transparent and provides best value. This involves generating market interest, conducting a qualification round • Which firms are qualified to bid? to derive a short list, preparing a request for proposal (RFP), • What level of emphasis should be placed on running the tender process, evaluating bids, and awarding different proposal evaluation criteria to make the contract. the best selection? Implementation and Oversight Phase Implementation and oversight starts when the PBC is signed KEY DECISIONS and the contractor begins work. The objective is to ensure that NRW is reduced according to plan and that NRW reduc- • Is the PBC contractor complying with the tion is sustained after the contract ends. Some utilities may terms of the contract? hire an oversight contractor to perform these functions. • Is the quality of work and progress against Experienced utilities, or utilities implementing simple PBCs, targets as expected? may perform these oversight functions themselves. • What is the best approach to ensure sustainability of NRW reduction? The Use of Performance-Based Contracts for Nonrevenue Water Reduction 9 Chapter 4 Screening Phase The purpose of Screening is to quickly and cheaply discover if a location may be suitable for an NRW-PBC. It should be possible to carry out the screening in no more than a month or two using the Screening Tool (see Table 4.1). The Screening Tool uses quantitative and qualitative criteria to answer two key questions: • Is NRW reduction needed?—The Screening Tool checks for high NRW levels, a high ­long-run marginal cost (LRMC) of water, high variable operating costs, insufficiency of supply, and other factors that indicate NRW reduction is needed. • If NRW reduction is needed, is an NRW-PBC appropriate?—The Screening Tool checks for red flags, such as a legal framework that prevents PBCs or stakeholder opposition to NRW-PBCs. The tool uses a “stoplight” approach. Favorable conditions get a green light, unfavorable conditions get a red light, and mixed situations are marked with an amber light. If a location receives one or more red lights, an NRW-PBC may not be the best approach. Alternatively, all green lights would be a clear “go” signal, and an NRW-PBC is likely to be successful. Amber lights indicate “proceed with caution.” Information used for screening should be collected from several sources and cross-checked for reliability. The water supply regulator (if one exists), the water utility, and international financial institutions (IFIs) working in-country are good sources of information. TABLE 4.1: Screening Tool for NRW-PBCs Your Utility or Zone within Criterion Red Amber Green Your Utility NRW levels NRW <15% 15%40% NRW <300L/C/D 300800L/C/D Water supply reliability 24-18 hours <18 hours Variable operating costs $0.00$0.50/m3 Installed Capacity (Water Production) IC>250lpcd IC<250lpcd Resource scarcity Unlimited high-quality Between Red and Green All available water water available with little allocated, solutions such pumping or storage costs as desal being considered Demand growth (%p.a.) 0%4% LRMC ($/m ) 3 LRMC <$0.30 $0.30$1.00 Legal barriers to PBCs Yes Not Clear No Social support for PBCs No Not Clear Yes High priority on Ministry of Water No Not clear Yes improving water Ministry of Finance No Not clear Yes service in this area Conclusion of Screening • Red Light    • Amber Light    • Green Light Note: See Appendix D.1 for a screenshot of the Screening Tool using different illustrative scenarios; L/C/D=[TBD]; m=meter; lpcd=[TBD]; p.a.={TBD]; LRMC={TBD]. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 11 Chapter 5 Initial Assessment Phase The purpose of the Initial Assessment is to confirm the viability of the NRW-PBC and develop a concept for the NRW-PBC. The Initial Assessment comprises five activities: compile data, confirm if NRW reduction is needed, decide whether a Field Assessment is needed, confirm if a PBC is suitable for NRW reduction, and develop the NRW-PBC project concept. The Initial Assessment should take 1 month to 3 months, depending on data availability. Appendix C.1 includes a TOR to hire ­ consultants to perform the Initial Assessment. 5.1.  Compile Data Data should be compiled for key indicators in the following categories: • Water production capacity and current production • Distribution infrastructure • NRW levels and components • Service quality • Finances The Data Collection Template (see Appendix E.2) lists BOX 2.1: TOOLS TO CONFIRM NEED FOR NRW REDUCTION the indicators required. To the extent possible, multiple years of data should be compiled—including the past 3 Water Balance Tool—Provides a “top-down” Internatio­ years at an absolute minimum but preferably 5 years or nal Water Association (IWA) water balance as well as more. The data should come from records provided by the volumes and values of NRW components, KPIs, and utility or regulator. error bands for uncertainty analysis. Can be used to 5.2.  Confirm Whether NRW Reduction Is understand the size of the problem, and the robustness Needed of the data. The Trend Analysis Tool, NRW Practice Rating Tool, and Trend Analysis Tool—Provides a framework for ana- Water Balance Tool can be used to confirm if lyzing data trends on water supply, use, NRW, and NRW reduction is needed. What these tools do, and how related parameters for situational assessment. Can they can be used for this assessment, are described in  the be used to understand if things are improving, or box on the right. Examples of the outputs that the tools ­getting worse. produce are included in Appendices E.3, E.4, and E.5. NRW Practice Rating Tool—Provides a framework for Experts should also be consulted. Table 5.1 shows assessing and rating current NRW practices in utility examples of the optimal decision criteria experts would ­ municipality—which shows strengths and weak- use to assess if NRW reduction is needed, and rules of nesses and points to root causes of NRW. Can be used thumb that can be used when information is limited. The to assess major challenges, and the extent to which the table is arranged by potential goals of the NRW-PBC—for utility can or cannot address them on its own. example, provide 24/7 service—and specifies how NRW reduction can help achieve each goal. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 13 TABLE 5.1: Project Goals and NRW Solutions Optimal decision criteria for when NRW reduction is Rule of thumb that may indicate Goal Type of NRW reduction that can help desirable NRW reduction is desirable 24 Provide 24/7 service to Reduce leakiness of infrastructure, so that Physical loss reduction is If physical losses x > 30% current hours of supply more customers that physical losses do not increase as cheaper than equivalent It is likely that physical losses reduction is hours of supply increase increase in bulk supply warranted, unless adding to bulk protection in sufficient quantity to achieve 24/7 is unusually low cost (plentiful water nearby, gravity-fed, low treatment costs, low capital expenditure [capex] costs) Expand water service to Reducing physical losses in existing Physical loss reduction is If physical losses >15% and costs of new production more customers network will increase water available to cheaper than equivalent are at typical levels (say US$1 million/MLD or more) new customers increase in bulk supply NRW reduction is likely to be desirable Ensure enough water Reducing physical losses will increase the Physical loss reduction is If demand growth would require a significant new is available to satisfy amount of water available to meet future cheaper than equivalent bulk water scheme to be constructed within 5 expected demand increases in demand increase in bulk supply years, at a cost per million liters per day (MLD) of growth US$1 million/MLD (or more), and physical losses >15%, then NRW reduction is likely to be desirable Increase resilience and Lower levels of physical losses in the NRW reduction is cheaper If physical losses >20%, then NRW reduction is security of supply in the network means that any given level of than providing an equivalent likely to be desirable face of climate change storage can provide supply for longer increase in storage and other risks Improve financial • Reducing commercial losses will Is the present value (PV) • If total NRW >30% then reducing NRW is likely performance increase revenues of the cost of the NRW to be desirable • Reducing physical losses may increase reduction program less • If commercial losses >15%, then NRW reduction sales, or reduce costs than the PV of the increase is likely to be desirable • Improving collections (not strictly in operating cash flow • If collection efficiency is <95%, then including NRW reduction, but closely related) expected, when discounted collection improvement in any NRW reduction will increase operating cash flow at the utility’s cost of effort should be considered • Reducing energy consumption (not capital? NRW reduction, but related) will reduce costs Note: MLD=[TBD]; PV=present value. 5.3.  Decide Whether Field Assessment Is Needed In some cases, data on system operations and infrastructure is lacking, creating uncertainty in the components of NRW (Water Balance). If this is the case, a Field Assessment may be required to gather missing information (see chapter 6). Activities carried out during a Field Assessment, such as conducting night flow tests and updating the customer database, not only improve data quality but also allow the utility to get an early start on NRW reduction. Alternatively, a contract that is robust to a lack of information, such as an Incentivized Program Manager Contract, may be chosen. Such contracts include activities to find out the level of NRW with increasing accuracy and give the contractor the flexibility to adapt the NRW reduction work based on emerging information collected. 14 The Use of Performance-Based Contracts for Nonrevenue Water Reduction A contract with low information requirements is often a promising option, as the cost and time involved in acquiring better data on NRW through a Field Assessment can be prohibitive. Getting good data on NRW may require installation of new production meters, which can cost millions of dollars and take a year to procure and install. Estimating actual consumption may require testing and replacing numerous consumption meters. Estimating theft requires a program to find illegal connections. In other words, it is often not possible to estimate NRW and its major components activities of an NRW reduction program. precisely without implementing many of the ­ 5.4.  Confirm Whether a PBC Is Suitable for Reducing NRW If reducing NRW is desirable, the next question is whether a PBC is a good way to do it. Performance-based contracts often work well because they bring in specialized expertise and financial incentives that motivate performance. Whether or not using a PBC is a good idea depends on: • The urgency and value of reducing NRW • The capacity and maturity of the utility • Stakeholders’ views and interests Table 5.2 lists indicators that can help determine if a PBC is a good choice. A checkmark in the “High” column indicates that a PBC would be preferable to a conventional option if the utility scores high on the indicator. For instance, if the urgency and value of reducing NRW is high, it is an argument in favor of PBCs, given their proven ability to mobilize skills quickly and get results through strong accountability (Wyatt, Richkus, and Sy 2016). A checkmark in the “Low” column indicates that a PBC would be preferable to a conventional option if the utility scores low on the indicator. TABLE 5.2: PBC versus Conventional NRW Reduction Program Indicators High Low Urgency of reducing NRW P NRW Value of reducing NRW P Capacity of the utility to manage complex new endeavors P Level of expertise in the utility on NRW reduction Utility P Strength of incentives for good performance among utility managers and staff P Flexibility of expanding and contracting workforce to engage in NRW reduction activities P Willingness of stakeholders to engage private companies to carry out specific functions P Willingness of utility staff to cooperate with a specialized contractor P Stakeholders Ministry of Finance willingness to commit funds to the utility to manage P Water regulator’s confidence in utility’s ability to reduce NRW P Likelihood that skilled NRW reduction contractors will want to work in this location P Successful experience in country with outsourcing, PBCs and other public-private partnership arrangements P in the water sector or other sectors The Use of Performance-Based Contracts for Nonrevenue Water Reduction 15 5.5.  Develop the NRW-PBC Project Concept FIGURE 5.1: Steps in Developing NRW-PBC Concept If a PBC is identified as a good approach, the next step is to develop a concept for the contract. Developing an NRW-PBC concept requires expert judgment, consultation, A and adaptation of international precedents to local circumstances. While each case Establish possible goals is unique, a useful approach can be to determine possible goals, the scope, and then the contract concept, supervision arrangements, and sustainability arrangements, B as shown in Figure 5.1. Decide scope Which functions to include in contract? A. Establish possible goals NRW reduction is not an end to itself. Rather, it is a means to achieve goals such as C Design contract concept reduced cost, increased revenue, or improved service. Possible goals and how NRW • Contract type reduction can help a utility achieve them were listed in Table 5.1. • Phasing (time, geography, renewal) • Indicators In many cases, a utility will wish to implement complementary initiatives along- • Risk allocation • Financing arrangements side an NRW-PBC, such as: • Improving collections—If collection rates are low, many bills are not being paid. D Adding measures to improve collections can help the utility improve its financial Supervision arrangements performance. Table B.4 provides examples of NRW-PBCs with complementary initiatives for improving collections. E • Expanding production—In many locations, a mix of expanding production and Sustainability arrangements reducing physical losses will be the optimal way to provide 24/7 service and expand access. In this case, a loss reduction contract should be harmonized with invest- ment to expand production. One option is to combine loss reduction and production expansion into a single contract. Advantages of doing this include reducing transaction costs, and making coordination between the two initiatives easier. An important disad- vantage is that contactors that are good at production expansion may not necessarily be good at NRW reduction, and vice versa. • Universal metering—If unmetered customers are charged flat monthly rates for water con- sumption, they may well consume more water than they would if they were charged vol- umetric rates. Universal metering and other demand control initiatives can help utilities improve financial performance and reliability of supply. What goals the NRW-PBC should achieve, and if and how complementary initiatives should be pursued, should be determined in this stage. B. Decide functional scope The functional scope of the contract refers to the functions for which the contractor will be given responsibility. The desired functional scope will depend on the objectives of the pro- gram, the ease of contracting out any given function, and the synergies between functions. To be clear about functional scope, it may be useful to fill out a table like Table 5.3. 16 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Instructions: Place a ✓ in each column as appropriate to indicate whether a function will be included in the contract, or be done by the utility, or not addressed at all. TABLE 5.3: Functional Scope Checklist To be done by To be done by Not included in Function contractor utility project Reduce Physical Losses Reduce Commercial Losses Increase Supply Continuity Increase Collection Increase Energy Efficiency Expand Production Note: A description of specific responsibilities or rows disaggregating the functions further should be added when appropriate. See Appendix B.8.4. C. Choose contract type Many types of NRW-PBCs are possible, each with different risk allocations and different infor- mation requirements. After objectives and scope have been decided, choosing the type of con- tract is the next task. Here, there can be a tradeoff between transferring risk and moving quickly. These contract types, their advantages and disadvantages, and when to use them are described in Appendix B. Appendix B also provides sample term sheets to assist in devel- oping the key technical and commercial terms of various types of NRW reduction contracts. D. Develop supervision strategy A strategy for effectively supervising the contractor to ensure the contractor meets perfor- mance targets and quality standards should be outlined. Whether the utility will need sup- port for contract supervision should be determined. For experienced utilities or simple NRW-PBCs, an oversight contractor may not be needed. Chapter 10 describes supervision arrangements (and sustainability arrangements) in greater detail. A Standard TOR for PBC Contract Oversight Assistance is included in Appendix C.4. E. Include sustainability arrangements The concept should include mechanisms to promote the sustainability of the NRW reduc- tions achieved by the PBC. Options include requiring the contractor to train utility staff on how to use NRW management equipment or tools, and transferring said tools to the utility. 5.6.  Key Decisions and Principal Criteria Table 5.4 provides a checklist of the key decisions to be made during the Initial Assessment, and the principal criteria and analyses that should be used to make those decisions. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 17 TABLE 5.4: Key Decisions Checklist Key Decisions Principal Criteria and Analyses Is NRW reduction needed? • Service benefits • Financial benefits • Societal benefits • Project Financial internal rate of return (IRR) compared to new source development and/or other interventions (approximate) Is an NRW-PBC suitable in this situation? • The urgency and value of reducing NRW • The capacity and maturity of the utility • Stakeholders’ views and interests. Is the quantity and quality of data and level of • Specific data fields are needed to decide on the concept, and the methods for gathering such data uncertainty in the Project Concept sufficient to • Alternatively, pursue a contract type that is robust to a lack of information proceed to detailed NRW reduction Planning, or is a Field Assessment needed? 18 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Chapter 6 Field Assessment Phase (Optional) The purpose of the Field Assessment is to fill any information gaps identified in the Initial Assessment that prevented a decision being made on whether an NRW-PBC is a good idea, or what the project concept should be. After the missing information is collected, the steps from the Initial Assessment should be repeated. The Field Assessment will typically be carried out over a period of 3 months to 18 months depending on the scope of NRW reduction, and the number of customer connections. A guide to the expected duration of the Field Assessment is provided in Table 6.1. Appendix C.2 provides a standard TOR for a Field Assessment. The Field Assessment will usually require the purchase of measurement equipment and execution of minor civil works, such as installation of boundary valves, and small network reconfigurations for temporary DMAs. Such items can be built into the cost of the Field Assessment, as explained in more detail in the TOR. To collect new data, “Early Start” activities should be carried out. Early Start activities not only improve data quality but also allow the utility to get started on NRW reduction. This is because tasks that would otherwise be performed by the contractor are carried out before the contractor is hired. The information gaps identified in the Initial Assessment should determine which Early Start activities are carried out. Examples include: • Updating/verifying network diagrams, specifications and condition data, customer data- bases, and customer meter data; ­ ustomer • Developing or updating geographical information systems for infrastructure and c information; • Calibrating or replacing bulk meters and customer meters; • Conducting field surveys to identify illegal connections (perhaps just in selected areas) and measuring use at unmetered connections; • Compiling and analyzing burst and leak data, including burst and leak type, flow rate and duration, by location or zone; • Conducting detailed zone measurements of continuity, pressure, night flow, and other leakage parameters (such as N1) for use in conjunction with the real loss component analysis tool; such data could be compiled using temporary DMAs if network configuration allows zone isolation; TABLE 6.1: Guide to the Expected Duration of Field Assessment Functional Scope for 150,000–300,000 50,000–150,000 10,000–50,000 Improved Data Quality Connections Connections Connections Commercial Losses 8–10 months 6–8 months 3–4 months Physical Losses 8–10 months 6–8 months 3–4 months Both Losses 8–18 months 6–14 months 3–7 months The Use of Performance-Based Contracts for Nonrevenue Water Reduction 19 • Upgrading/installing automated operational data systems (bulk metering, reservoir ­levels, distributed flow, and pressure measurement with telemetry connection to a control cen- ter), if applicable; • Where it appears that heavy sectorization will be a part of the NRW-PBC, an Early Start activity here could be to develop or update a hydraulic model; • Improving NRW practice information systems such as work order management, which contribute to leak and burst rate analysis, estimation of rate of rise, and so on. After the missing data is collected, the steps from the Initial Assessment should be carried out, namely: confirm if NRW reduction is needed (Chapter 5.2), confirm if a NRW-PBC is suitable for reducing NRW (Chapter 5.4), and develop the NRW-PBC project concept (Chapter 5.5). The key decisions to make in the Field Assessment Phase are the same as in the Initial Assessment Phase (see Table 5.4). 20 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Chapter 7 NRW Reduction Strategy Phase The NRW reduction strategy comprises three steps: develop indicative strategy for NRW reduction, assess economic and financial viability, and consult stakeholders. The time spent on this phase depends on the contract type. For a DBOM, this phase requires the construction of complete DMA plans, estimating the cost of constructing DMAs and of physical loss reduction, and creating an accurate water balance. This would take about 5.5 months, as shown in Figure 7.1. For contracts with lower information requirements, time spent can be considerably reduced. For instance, for the Incentivized Program Manager contract, little additional tech- nical analysis will be required at this stage, as the program manager is expected to collect missing data and plan the approach once hired. A sample TOR for a consultant to advise on the NRW reduction strategy, as well as PBC design and procurement (as described in Chapter 8 and Chapter 9), is attached in Appendix C.3. The same consultant should advise on all three phases because the insights that come from developing the NRW reduction strategy are essential to the design of the contract and the procurement. 7.1.  Develop Indicative Strategy for NRW Reduction To develop an NRW reduction strategy, the following information may be required: • Reports from Initial Assessment and Field Assessment (if applicable) • Any strategic plans for the utility or development master plans for the locality • Capital improvement and expansion plans, including investment projects under way and their financiers • Government financial support to the utility, past and planned This strategy may include the following activities: • Recommendations on changes in network configuration, sectorization, network operat- ing practices, information systems, and analytic monitoring approaches FIGURE 7.1: Detailed Timeline for NRW Reduction Strategy for DBOM Contract Stage description Month 1 2 3 4 5 6 Develop an NRW reduction plan 1 Develop indicative strategy for NRW reduction 2 Assess economic and nancial viability 3 Consult stakeholders 1 Key: Work done 1 NRW reduction plan The Use of Performance-Based Contracts for Nonrevenue Water Reduction 21 BOX 7.1: GOING FASTER—TECHNICAL PLANNING If the DBOM Progressive Roll-Out contract is selected, the technical work could be limited to an indicative sketch of DMAs to be developed, along with indicative costs for DMA construction and leak reduction, and physical loss reductions. If the Competitive Discovery approach is selected, the technical work could be limited to identifying a few areas suitable for the initial pilots. These would be areas close to the distribution input that can be easily isolated and that are broadly representative of the city. In the case of a Self-Optimizing 24/7 contract, very little technical planning is needed as the contract gives the contractor the incentive to plan optimally. Similarly, for an Incentivized Program Manager contract, the program manager is expected to collect missing data and plan the approach once hired. Therefore, the technical analysis could be taken directly from the Initial Assessment Report. Guidance on Contract Type (Appendix B) can be referenced for details. • Recommendations on the best measures to reduce commercial losses. Options to consider include fixing, replacing, or installing meters; introducing electronic systems to reduce of data handling and billing errors data; or a survey of legal connections to understand the number of people served per connection. • Recommendations on the best measures to reduce physical losses. Options to consider include network pressure management, replacement of service connections, fixing leaks, improving the speed and quality of repairs, rehabilitation or replacement of mains, or the use of DMAs to monitor leakage levels on an ongoing basis. • The selection of a zone-based approach in the case of intermittent supply. Under these circumstances, the approach may be to work zone by zone, reducing physical and com- mercial losses, and restoring 24/7 service. Rehabilitated zones would be “ring-fenced,” and the contractor would move to adjacent zones. • The timeline, impact, and performance indicators for the project. 22 The Use of Performance-Based Contracts for Nonrevenue Water Reduction BOX 7.2: GOING FASTER—ECONOMIC AND FINANCIAL ANALYSIS It is not necessary to calculate the exact economic benefit or the exact financial impact. Rather, what is needed is to show that the economic benefit is above a certain threshold and that the project is financially viable. Because NRW reduction projects are often highly economically beneficial, project will likely yield an economic benefit above the threshold even if very conservative estimates are used. This means that estimates can be based on information with a wide margin of error, such as international benchmarks, greatly reducing the data collection needed. A similar approach can be taken for the financial analysis. Using conservative assumptions, if the project yields an increase in operating cash flow that has a present value greater than the capital cost of the program, then the project is financially viable. Provided the contract type allows the costs of the program to be capped and financing for that amount has been identified, the project may be considered financeable. 7.2.  Assess Economic and Financial Viability The indicative strategy for NRW reduction should be assessed if it is a good use of public resources and if it is able to provide good commercial returns. The strategy can be assessed using economic cost-benefit analysis and financial analysis. Where a thorough justification is needed, the analyses should be done for the following three scenarios: • NRW-PBC • Conventional NRW reduction program • No NRW reduction program (this scenario may include other measures to achieve the goal, such as by increasing water supply) The analyses should consider the capacity of the water utility to change its tariff structure and the capacity of the government to provide public finance. 7.3.  Consult Stakeholders The utility, key public sector decision makers, and other stakeholders should consult with each other to achieve consensus on the indicative strategy and adjust as needed. An illustra- tive outline for a summary report that could be produced at this stage is provided in Appendix D.4. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 23 7.4.  Key Decisions and Principal Criteria Table 7.1 provides a checklist of the key decisions to be made during the NRW reduction strategy phase and the principal criteria that should be used to make those decisions. TABLE 7.1: Key Decisions Checklist Key Decisions Principal Criteria 1. Which measures to reduce commercial losses are • Level and value of commercial losses most effective and cost efficient in this situation? • Cost and results from different interventions to reduce commercial losses 2. Which measures to reduce physical losses are most • Level and value of physical losses effective and cost efficient in this situation? • Cost and results from different interventions to reduce physical losses 3. How should the project be staged to deal with • Information on continuity of supply, water supply intermittent supply and zone performance? availability, pressures, and network condition by zone 4. Decision to proceed with an NRW-PBC • Results of an integrated optimal NRW Program • Economic viability • Financial comparison of the NRW-PBC to a no-project conventional NRW program option option and to a ­ 24 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Chapter 8 PBC Design Phase The purpose of the PBC design phase is to design a PBC that will incentivize the contractor to reduce NRW efficiently and effectively. A business case should be prepared to support this design so decision-makers can be confident in approving the project. The PBC design phase comprises four stages: finalize NRW-PBC project concept, develop indicative contract design, conduct market sounding, and assess feasibility of indicative contract design. The PBC design phase has three outputs: the final contract design, the busi- ness case, and a financial model containing the assumptions and calculations that support the business case. The design of a large DBOM contract would take about 4.5 months, as shown in Figure 8.1. If other contract types are chosen, the period for contract preparation will be shorter. For example, an Incentivized Program Manager contract might take just 2 months to develop. The TOR for a consultant to advise on PBC design (along with the NRW reduction strategy and PBC procurement) is included in Appendix C.3. 8.1.  Finalize NRW-PBC Project Concept At the start of this phase, the fundamental parameters of the contract should be finalized, including: • The objectives and scope of the contract based on the proposed NRW reduction strategy • The roles and responsibilities of the PBC contractor, the utility, and the oversight contrac- tor (see Chapter 10) as well as the roles of any national agencies • The allocation of risk under the contract and the responsibilities of the utility and the contractor 8.2.  Develop Indicative Contract Design The indicative contract design should specify: • Key performance indicators (KPIs) and targets FIGURE 8.1: Detailed Timeline for PBC Design of DBOM Contract Stage description Month 1 2 3 4 5 PBC design phase 1 Finalize the objectives, scope, roles and responsibilities, and risk allocation 2 Develop indicative contract design 3 Conduct market sounding 4 Assess feasibility of indicative contract design 5 Finalize contract design 1 Key: Work done 1 Contract design, business case, and nancial model The Use of Performance-Based Contracts for Nonrevenue Water Reduction 25 • Methods for measuring performance on the KPIs • Provisions and process for adjusting baselines or targets considering new information or cases of force majeure • Payment mechanisms • Scope of work, including the diagnostic/planning phase (if any), the reduction phase, and the maintenance phase • Mechanisms to ensure that NRW reductions are sustained after the contract ends. These may include training and transfer of systems A good approach is to consider several possible designs and evaluate them against each other, comparing the advantages and disadvantages of each. 8.3.  Conduct Market Sounding The purpose of market sounding is to ensure that firms are interested in the opportunity and to learn the type of contract that will attract competitive bids. The activity consists of con- tacting firms—both experienced international operators and local firms—about the opportunity. The channel of communication can be an online survey or a telephone interview. Firms would be asked questions about their level of interest in the transaction and factors that would make them likely to bid. The indicative contract design should be amended based on the results of the market sounding. 8.4.  Assess Feasibility of Indicative Contract Design Once an indicative contract design has been developed, the feasibility of the design should be assessed as follows: • Confirm availability of financing from sources including governments, IFIs, and commer- cial banks based on discussions with the potential financiers • Prepare a business case to demonstrate that the proposed NRW-PBC design is feasible, effective, better than alternatives, and appealing to bidders (an outline business case is provided in Appendix D.5) • Prepare a financial model to support the business case. The model should include clearly stated assumptions and forecasts of costs and revenues • Conduct legal and regulatory due diligence to ensure that the proposed contact complies with legal requirements and identify approvals needed • Conduct environmental, safety, and social due diligence to assess impact and ensure com- pliance with standards 26 The Use of Performance-Based Contracts for Nonrevenue Water Reduction 8.5.  Key Decisions and Principal Criteria Table 8.1 provides a checklist on the key decisions to be made during the PBC design phase and the principal criteria and analyses that should be used to make those decisions. TABLE 8.1: Key Decisions Checklist Key Decisions Principal Criteria / Analyses 1. Is the NRW-PBC design developed All stakeholders review and assess the Final Transaction Design and in this phase feasible, effective, and Business Case Report, determining if it: cost-efficient? • Has a rational allocation of responsibilities • Has appropriate objectives, targets, and incentives • Is effective and cost efficient compared to alternatives • Has manageable risks • Complies with regulations • Is of interest to potential bidders. 2. Do key stakeholders agree that the Stakeholders agree to proceed if: NRW-PBC should proceed? • The Contract Design meets the criteria directly above • They are willing to take on the roles proposed for them in the contract design. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 27 Chapter 9 Procurement Phase The purpose of the Procurement phase is to select a suitable contractor for an NRW-PBC. The selection process should be competitive, transparent, and provide best value. This phase comprises four stages: • Generate market interest in the transaction • Develop request for qualifications (RFQ) and prequalify Proponents • Develop request for proposal (RFP) and other documents, run tender, and evaluate proposals • Reach closure on the transaction The procurement of a large DBOM contract would take about 6 months, as shown in Figure 9.1. Other types of contracts could be procured more quickly. For example, an Incentivized Program Manager contract could be procured in 4 months because there is less information for both the Proponents and for the procurement entity to review. Similarly, a Cost-Plus contract with com- petitive discovery approach could be procured in 3 months if, instead of prequalification, pro- ponents were required to submit their qualifications along with their bids. A sample TOR for a consultant to advise on NRW-PBC procurement (along with the NRW reduction strategy and PBC design) is attached in Appendix C.3. 9.1.  Generate Market Interest in the Transaction The aim here is to make sure that qualified contractors are motivated to compete for the contract. To do this, key information about the opportunity (type and size) must be commu- nicated to prospective proponents. Prospective proponents to contact may include both international specialist operators and local firms. Channels of communication may include national papers, trade press, industry journals, and direct communications with firms. FIGURE 9.1: Detailed Timeline for Procurement of DBOM Contract Stage description Month 1 2 3 4 5 6 PBC procurement phase 1 Generate market interest in the transaction 2 Develop RFQ and prequalify proponents 1 3 Develop RFP and other documents run tender, and evaluate proposals 2 4 Reach closure on the transaction 3 Key: Work done by procurement team 1 Publish request for quali cation Work done by proponents 2 Send request for proposal to quali ed proponent 3 Sign PBC with the top-ranked proponent The Use of Performance-Based Contracts for Nonrevenue Water Reduction 29 9.2.  Develop Request for Qualifications and Prequalify Proponents The aim of this stage is to prequalify the firms or consortia that have the technical and finan- cial capacity required to perform the contract successfully. This can be done by issuing a RFQ. Any firms or consortia that meet the prequalification criteria set out in the RFQ would be prequalified. Generally, it will be desirable to include criteria covering the following topics: • Previous experience—For example, proponents may need to show they have implemented at least two similar contracts that have led to measurable NRW reduction. Client refer- ences may also be requested. • Skilled personnel—For example, proponents may need to propose specific staff members who have implemented similar contracts and who have the appropriate qualifications and years of experience for their proposed roles. • Financial capacity—For some contract types, like a DBOM contract, proponents may need to demonstrate that they can finance a substantial capital works program. However, for other types of contracts, such as an Incentivized Program Manager contract, limited finan- cial capacity would be required. The RFQ should also include an overview of the opportunity, an overview of the RFQ pro- cess and timelines, and detailed instructions to proponents. After the RFQ has been issued and submissions have been received, the firms that meet the qualification criteria are prequalified and informed accordingly. 9.3.  Develop Request for Proposal (RFP) Package, Run Tender, and Evaluate Proposals The aim of this stage is to select a suitable contractor for the NRW-PBC. The RFP package should be issued to the pre-qualified firms, inviting them to participate in a competitive ­ tender for the opportunity to win the contract. The RFP package should set out the project structure, requirements, and the details of the tender process. Documents in the RFP pack- age may include: • An information memorandum describing the project objectives, functional and geo- graphic scope, indicators, targets, minimum scope of work to be undertaken, phases, duration, and cost estimate • A draft NRW-PBC that reflects the final PBC design from the previous phase • The bid factor (see Table B.1 for how the winning bidder should be selected according to different contract types) • Evaluation criteria • Copies of any permits or approvals obtained for the project • Technical and financial information on the site • Detailed bid rules and instructions 30 The Use of Performance-Based Contracts for Nonrevenue Water Reduction • A timetable for the tender • Bid bond requirements (if any) • Stipulations to protect all parties from liability After the RFP is sent out, time should be allocated for responding to inquiries from propo- nents and hosting a proponents’ conference. Once the submissions have been received, the technical and financial proposals should be evaluated within the framework of the evalua- tion criteria outlined in the RFP. Based on the criteria, the utility (with other relevant ­ decision makers) should decide which proposal to accept. 9.4.  Reach Closure on the Transaction To reach closure on the transaction, the utility should negotiate with the top-ranked propo- nent to sign the contract. If the financing structure includes private finance, financial close must also be reached. It is generally best practice to leave as few unresolved details as possible to negotiations. In negotiations, the competitive pressure on the contractor is reduced, and the contractor may push to reduce its risk allocation. To mitigate this, the following approaches may be useful: • Work with proponents before proposals are due to ensure that little or no changes to the contract will be needed during negotiations. • Specify that proponents must indicate in their proposals a willingness to sign the contract without change. Alternatively, specify that proposed changes to the contract must be included in the proposal, and explain that any changes that lower the value for money of the NRW-PBC will result in a lower evaluated score. • Run competitive negotiations with two proponents. Arrive at a contract that is acceptable to both proponents and the public authority. Then ask both proponents to make their Best and Final Offers (BAFO) on the negotiated contract, and select the proponent with the better BAFO. • If private finance is involved, ask the financier(s) to be involved in the negotiations. Otherwise, there is a risk that after signing the contract (commercial close) the financier(s) will demand more changes before agreeing to release the funds (financial close). If a consultant has been engaged to advise the utility, assistance should continue through the start of the contract. The consultant can help the utility manage communications with the contractor and stakeholders as well as to help all parties understand their obligations per the contract. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 31 9.5.  Key Decisions and Principal Criteria Table 9.1 provides a checklist on the key decisions to be made during the procurement phase, and the principal criteria that should be used to make those decisions. TABLE 9.1: Key Decisions Checklist Key Decisions Principal Criteria 1. Which firms should be selected in the • Previous experience qualification process? • Skilled personnel • Financial capacity 2. What level of emphasis should be • Corporate technical experience on projects of similar scope and placed on different proposal evaluation scale criteria? • Personnel proposed • Adherence of the proposed plan of action to the NRW reduction plan • Innovation in the methodology • Familiarity with NRW in the country • Performance references • Cost per unit of NRW reduction and total cost • Weighting of technical and financial parameters in the selection process 3. How should the PBC contractor be • Criteria as stated in the RFP selected? 32 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Chapter 10 Implementation and Oversight Phase Implementation and oversight starts when the NRW-PBC is signed and the contractor begins work. During this phase, it is in the utility’s interest to ensure that NRW is reduced according to plan and that NRW reduction is sustained after the contract ends. Many utilities should outsource these oversight functions to a contractor who would mon- itor compliance of the NRW-PBC contract with the terms of the NRW-PBC and provide advi- sory support. A standard TOR for PBC Oversight Assistance is included in Appendix C.4. For experienced utilities or simple NRW-PBCs an oversight contractor may not be needed. 10.1.  Ensure NRW Reduction According to PBC The oversight contractor would carry out the following activities: • Monitor contract compliance—Monitor the compliance of the NRW-PBC contractor and the utility with the terms of the NRW-PBC. • Assess achievement of targets—Review reports and conduct inspections or verifications to certify that specific targets have (or have not) been met and recommend remedial measures. • Provide an independent review of proposed technical adjustments to NRW-PBC terms— Perform an independent evaluation of any proposed adjustment or assist in adjustments to contract technical terms such as baseline values, NRW targets, physical loss targets, commercial loss targets, average pressure, or continuity in project zones. • Provide advisory services—Advise the utility and consultant in cases where support is crit- ical to achieving the desired outcome of the NRW-PBC. These services could range from technical advice on a measurement issue to mediating a dispute between the utility and the contractor. 10.2.  Sustain NRW Reduction Several options for sustaining the benefits of the PBC beyond the contract term are possible, namely: • Follow-on contract—Another PBC could be competitively tendered for extended NRW maintenance or further reduction. This option may make sense if the utility feels that it does not yet have the capacity to manage NRW itself and NRW is still significantly above long-term targets. • Full transfer—The PBC contractor would transfer full responsibility for NRW management back to the utility. The PBC contractor’s activities may include capacity building of utility staff and management and transferring NRW reduction tools and systems to the utility. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 33 The utility would be responsible for ensuring that its staff are appropriately trained to use the tools and systems transferred over by the PBC contractor • Gradual transfer—The utility would initially take back some NRW management functions while continuing to have a PBC contractor manage other functions. The utility may grad- ually take on more functions as it further develops its capacity and improves its financial condition. Which functions to keep outsourced and which to transfer to the utility may be determined by geographic area or by the complexity of the activities. The oversight contractor would help by advising on how to structure and carry out a plan to sustain NRW reduction after the PBC has ended. The oversight contractor would super- vise the transitioning and training activities and monitor the effectiveness of the transition and sustainability efforts. 10.3.  Key Decisions and Principal Criteria Table 10.1 provides a checklist on the key monitoring parameters during implementation and the methods used to achieve these monitoring tasks. TABLE 10.1: Key Monitoring Checklist Key Decisions Principal Criteria 1. Is the PBC contractor/water utility complying with the • Activity reports terms of the contract, especially in the work program • Inspections/verifications on activities proposed? 2. Is progress on project targets on track, and if not, what • Verify measurements, calculations, and analyses remedial measures are needed? on contractor reports on progress toward targets 3. Are any requests reasonable? • Verify key assumptions/assertions that are the basis of the requests • Assess based on good engineering practice 4. How should NRW reduction be sustained? • Assess competencies of the utility to absorb NRW management responsibilities • Assess existing NRW level and value of further reduction. 34 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Appendix A Glossary and Related Diagrams Term Definition Authorized Consumption* The volume of metered and/or unmetered water taken by registered customers, the water supplier, and others who are implicitly or explicitly authorized to do so by the water supplier, for residential, commercial and industrial purposes. It also includes water exported across operational boundaries. Authorized consumption may include: Firefighting and training, flushing of mains and sewers, street cleaning, watering of municipal gardens, public fountains, and in some cases, schools, mosques, etc. These may be billed or unbilled, metered or unmetered, per local practice. Authorized consumption includes leakage and waste by registered customers that are unmetered. See Table A.1 for a diagram of the water balance components. Bill of Quantities (BOQ) A document used in tendering in the construction industry in which, when complete, tabulates the quantities and unit costs of many specific materials, parts, and labor rates for different categories of personnel. A sample BOQ is provided in Table B.8. BOQ-Basis As used in this manual, refers to a procurement and contracting approach in which: – The RFP specifies an indicative BOQ in which the types of units required, and the indicative numbers of each unit, is specified, but the unit costs are left blank. – Each bidder fills in the unit rates it would charge, and presents its expected cost of implementing the contract as the indicative quantities of each unit as specified in the RFP, multiplied by the unit rates proposed by the bidder. – The winning bidder is free to adjust the actual quantities of the items used, within set parameters and according to set procedures, and the final price is derived from the actual quantities of each item, times the bid price of each item. Billed Authorized Consumption Those components of authorized consumption which are billed and produce revenue. The Billed Authorized Consumption includes billed metered consumption plus billed unmetered consumption. See Table A.1 for a diagram of the water balance components. Collection Efficiency The percentage of the total amount billed that is collected. That is, the amount collected divided by the amount billed expressed as a percentage. Commercial Losses Includes all types of inaccuracies associated with customer metering as well as data handling errors (meter reading and billing), plus unauthorized consumption (theft or illegal use). Commercial losses are also known as “apparent losses.” See Table A.1 for a diagram of the water balance components. Component Analysis of Losses The determination and quantification of the components of the water balance. Connections The fixtures, joints and pipe connecting from the main to the measurement point or the customer curb stop, or where several registered customers share a physical hookup. The number of service connections variable is required for the calculation of several performance indicators. Continuity of Service The period of uninterrupted water distribution to customers divided by the maximum possible period (24 hours per day, 365 or 366 days per year). Contractor As used in this manual, the party to an NRW-PBC which is responsible for reducing NRW or achieving other results required by the NRW-PBC. Coverage The population with access to water services (either with direct service connection or within reach of a public water point) as a percentage of the total population under the utility’s service responsibility. Customer An individual or organization which is an authorized recipient of water services from the utility. table continues next page The Use of Performance-Based Contracts for Nonrevenue Water Reduction 35 table continued Term Definition Customer Metering Inaccuracies and Data Commercial water losses caused by customer meter inaccuracies and data errors in the meter reading and Handling Errors billing system. Customer Metering Inaccuracies: Apparent water losses caused by customer meter inaccuracies, typically from meters under-registering consumption and thereby measuring a lower volume than the customer population consumed. Data handling errors: Apparent losses caused by structural or random errors existing in the customer reading and billing systems, data transfer (to the billing system), accounting or archival functions of customer consumption management. Distribution System The totality of the network infrastructure, comprising service reservoirs, mains, service lines, valves, and fittings of all types used to deliver water from the utility’s treatment plants or points of delivery of imported treated water to the point of delivery to the customer. The distribution system also includes the treated water transmission system. Distribution Input* The volume of treated water input to a distribution system during the assessment period. See Figure A.1 for a sample diagram of the water supply system inputs and outputs. District Metered Areas (DMAs) A defined and permanent small zone in the distribution system (usually containing 500-3,000 properties) with one or more inflow points equipped with bulk meters. DMAs facilitate rapid discovery of unreported leaks, illegal connections, for minimum night flow testing, and pressure measurements. In some cases, DMAs are also equipped with pressure reduction valves. Field Assessment The phase of work described in Chapter 6 of this manual. Its purpose is to gather additional data needed to allow decisions on whether to and how to proceed with an NRW-PBC. Fixed Payments As used in the manual, a payment to a contractor under an NRW-PBC that does not vary according to either the amount of work done, or the results achieved. Incentive Payments As used in the manual, a payment to a contractor under an NRW-PBC that varies according to the results achieved Incentive payments are also known as “pay for performance.” Initial Assessment The phase of work described in Chapter 5 of this manual. Its purpose is to confirm the viability of the NRW- PBC and develop a concept for the NRW-PBC. In some cases, the data on system operations and infrastructure is lacking, creating uncertainty in the components of NRW (water balance). If this is the case, a Field Assessment may be required to gather missing information. Intermittent Supply When piped water, service is available to customers less than 24 hours per day for extended periods. Leakage Water lost from leaks, breaks, and overflows on transmission and distribution pipelines, service connections, or storage tank structures. See Table A.1 for a diagram of the water balance components. Leakage Control Any form of planned activities to reduce or control leakage. These include Active Leakage Control as well as other activities to reduce or control leaks such as can be through a regular planning of DMA inflow and billing checks. Long Run The period that, in theory, is long enough for everything to be varied, specifically the factors of production. Long Run Marginal Cost (LRMC) The minimum increase in total cost caused by an increase of one unit of output when all inputs (including capital) are variable. cf Marginal Cost (MC); Short Run Marginal Cost (SRMC) Management Contract An arrangement under which a service operator provides management services to the utility in return for a fee. Nonrevenue Water* (NRW) The difference between the volumes of system input and billed authorized consumption. Nonrevenue water includes not only the real losses and apparent losses, but also the unbilled authorized consumption. Equal to unbilled authorized consumption plus physical and commercial water losses. See Table A.1 for a diagram of the water balance components. 36 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Term Definition NRW-PBC A Performance-Based Contract which requires the reduction of NRW, or the achievement of other results (Nonrevenue Water Performance-Based which depend on controlling NRW. Contract) Objectives As used in this manual, the principal “big-picture” goal(s) of the NRW-PBC. These may be expressed as reducing NRW, or as improving service, or improving aspects of financial performance. Oversight Contractor A consultant engaged to assist a utility in monitoring and managing the PBC contractor (see chapter 10). Performance-Based Contract (PBC) A results-oriented contracting method that focuses on the outputs, quality, or outcomes achieved by the contractor, and ties at least a portion of a contractor’s payment, contract extensions, or contract renewals to the achievement of specific, measurable results. Performance Indicators The technical, financial, or operational parameters by which baseline performance will be determined, and by which performance will be measured over the contract period. Physical Losses Actual water losses from the system and the utility’s storage tanks, up to the point of customer use. In metered systems, this is the customer meter. In unmetered situations, this is the first point of use (tap) within the property. Physical losses are also known as “real losses.” Pressure Management Control of pressure at various points in the water network. The objective is often to reduce leakage while still providing adequate pressure at the connection. Pressure Reducing Valves are often used for pressure management. Pressure Reducing Valves A valve which maintains a uniform fluid pressure on its outlet side if pressure on the inlet side is at or above a design pressure. Raw Water* The volumes of bulk transfers of raw water across operational boundaries during the assessment period. (imported or exported) The transfers can occur anywhere between the abstraction point and the water treatment plants. Regulator A specialist agency of the government responsible for controlling the service levels provided by a provider, the tariffs charged, and sometimes other aspects of a provider’s performance or behavior. Revenue Water Those components of authorized consumption which are billed and produce revenue (also known as billed authorized consumption). Equal to billed metered consumption plus billed unmetered consumption. See Table A.1 for a diagram of the water balance components. Risk As used in this manual, an unpredictable variation in a parameter of importance to a stakeholder. Typically used to refer to a variation from expected values that would have negative consequences for one or more stakeholder. As an example, “earthquake risk” would refer to the probability that, contrary to expectations, an earthquake would occur at cause damage. “Interest rate risk” would refer the possibility that interest rates in the future would differ from what is currently expected. Scope The functions and activities to be undertaken by the contractor, together with the geographic area to which the contract applies. Screening The purpose of screening is to quickly and cheaply discover if a location may be suitable for an NRW-PBC. Screening should last 1 month to 2 months, depending on the ease of access to data. The recommended approach to screening is described in chapter 4. Service Contract A contract under which a company provides selected services apart from management (such as meter reading or billing and collection) to a utility in return for a fee. Short Run A period that is so short that changes cannot be made to factors of production. Short Run Marginal Cost (SRMC) The change in Short Run total cost as a result of a one-unit change in output in the Short Run, meaning over a period in which Capital Stock is fixed. Supplied Water* The distribution input minus the treated water exported. When it is not possible to separate transmission from distribution, supplied water is the transmission input minus the treated water exported. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 37 Term Definition System Input Volume* The volume input to water supply system during the assessment period. If the water balance calculation relates to a part of the global system, the system input volume should correspond to that part. See Table A.1 for a diagram of the water balance components. Targets The expected outcome value or net change in the value of a performance indicator, based on the work of the contractor (and associated parties). Tariff The price or prices a water provider charges its customers for water services. Transmission Input* The volume of treated water input to a transmission system during the assessment period. See Figure A.1 for a sample diagram of the water supply system inputs and outputs. Treated Water* The volumes of bulk transfers of treated water across operational boundaries during the assessment (imported or exported) period. The transfers can occur anywhere downstream treatment. The volume of water (if any) that is abstracted and delivered to consumers without any treatment shall also be accounted for as treated water in the scope of the water balance. See Figure A.1 for a sample diagram of the water supply system inputs and outputs. Treatment Input The volume of raw water input to treatment works during the assessment period. See Figure A.1 for a sample diagram of the water supply system inputs and outputs. Unauthorized Consumption Any unsanctioned use of water. This may include illegal water withdrawal from hydrants, illegal connections, bypasses to customer meters, or meter tampering. See Table A.1 for a diagram of the water balance components. Unbilled Authorized Consumption Those components of authorized consumption which are legitimate but not billed and therefore do not produce revenue. Equal to unbilled metered consumption plus unbilled unmetered consumption. See Table A.1 for a diagram of the water balance components. Utility A formal provider of water or sanitation services through a network. Water Abstracted* The volume of water obtained for input to water treatment plants (or directly to the transmission and distribution systems) that was abstracted from raw water sources during the assessment period. See Figure A.1 for a sample diagram of the water supply system inputs and outputs. Water Balance* A top-down audit of physical (real) losses of the whole system, starting with the total system input. A well-established water balance requires estimates of volumes of water to be made at each measurement point applicable to the system being evaluated. Where there are actual measures, data should be used. But in the absence of meters, a "best estimate" based on other related available data and sound judgement may be required. A water balance is normally computed over a 12-month period, and thus represents the annual average of all components. See Table A.1 for a diagram of the water balance components. Water Produced* The volume of water treated for input to water transmission lines or directly to the distribution system during the assessment period. The volume of water that is distributed to consumers without previous treatment shall be also accounted for in water produced. See Figure A.1 for a sample diagram of the water supply system inputs and outputs. Water Services Services involving the supply of water to people and organizations, the removal of wastewater from their premises, and the drainage of water from areas where it is not wanted. *Denotes water supply system inputs and outputs as defined by Alegre and others (2017). 38 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Water intake M Water abstracted M FIGURE A .1: Imported raw water (∗) M Exported raw water (∗) Raw water consumption Raw water mains and losses M Source: Alegre and others 2017. Treatment input Treatment operational Treatment consumption and losses Water produced M Imported treated M water (∗∗) M Transmission input Transmission consumption Transmission (**) = Can be located anywhere downstream treatment. and losses Storage tanks operational Storage consumption and losses Water Supply System Inputs and Outputs M Distribution input Exported treated M water (∗∗) (*) = Can be located anywhere between the water intake and the treatment. M Water supplied Distribution consumption Distribution and losses District M M metering The Use of Performance-Based Contracts for Nonrevenue Water Reduction M M M M M M M M M M water balance purposes Point of measurement for 39 TABLE A .1: Components of a Water Balance A B C D E Billed Billed metered, authorised consumption (including consumption water exported) [m3/year] Revenue water [m3/year] Billed unmetered [m3/year] Authorised consumption consumption [m3/year] [m /year] 3 Unbilled Unbilled metered authorised consumption consumption [m3/year] Unbilled unmerered [m3/year] consumption [m3/year] Apparent Unauthorised System losses consumption [m3/year] input Metering inaccuracies volume [m3/year] water losses [m3/year] [m3/year] Real losses Real losses on raw Nonrevenue [m3/year] water mains and at the water [m3/year] treatment works (if applicable) [m3/year] Leakage on transmission Water losses and/or distribution mains [m3/year] [m3/year] Leakage and overflows at transmission and/or distribution, storage tanks [m3/year] Leakage on service? connections up to the measurement point [m3/year] Source: Alegre and others 2017. Note: Consumption of water by registered cuscomers who pay indirectly through local or national taxation is deemed to be billed authorised consumption for the purpose of the water balance. 40 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Appendix B Guidance on Contract Type B.1 Guidance on Contract Type There is no single best design for NRW-PBCs. Each contract will be implemented under unique conditions. The quality of the water utility’s data, the availability of funds, the avail- ability of water, and the objectives of the program, will vary from place to place. To help decision-makers consider which type of contract could work well in their situa- tion, this Appendix presents four distinct contract concepts—DBOM, 24/7 Self-Optimizing, Incentivized Program Manager, and Cost-Plus (for use in Competitive Discovery). Each has its advantages, disadvantages, and conditions in which it is likely to be suitable. The follow- ing tables provide information about the four contract types as follows: • Table B.1 describes each contract in summary form, with its typical objective, how costs are paid, how baselines are set and performance incentivized, and the degree of flexibility the contractor has. • Table B.2 evaluates each contract type, indicating its strengths and weaknesses on factors such as information requirements, speed, and risk transfer. • Table B.3 guides decision-making by taking typical situations—defined according to the objective, information availability, and the need for speed—and indicating which contract types should be considered in each situation. The contract types described here focus on reduction of physical losses, though they can also include reduction in commercial losses and improvements in collections. In some cases, a contract that focuses solely on commercial losses or collections is what is needed. To help in designing such contracts, Table B.5 provides references to case studies of ­commercially-focused PBCs. Following the tables, there are longer descriptions of each contract type. These descrip- tions are in turn followed by sample term sheets intended to help practitioners specify vari- ous types of NRW-PBCs. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 41 42 TABLE B.1: Contract Types—Key Features Cost-Plus (suggested Incentivized Program DBOM 24/7 Self- with Competitive Manager (PM) Full Risk Transfer HCMC Variant Progressive Roll-Out Optimizing Discovery Approach) Higher Risk Lower Risk Objective Decrease physical losses Decrease physical Decrease physical losses Number of Any combination of: Any combination and sometimes also losses and sometimes and sometimes also customers on decrease physical losses; of: decrease commercial losses also commercial commercial losses continuous supply increase the number of physical losses, losses customers on continuous increase the supply; increase revenue/ number of receipts customers on continuous supply, increase revenue/ receipts Baseline Extensive consultant Extensive consultant By contractor as each By contractor in first By contractor in first By program (how is it set) study before bid study before bid DMA is created, verified phase, verified by phase, verified by auditor manager in first by auditor auditor phase, verified by auditor Measurement System Before bid, by utility/ Before bid, by utility/ By contractor as each By contractor as By contractor as each By contractor (how is it created) consultant consultant DMA is created, verified each DMA is created, DMA is created, verified as each DMA is by auditor verified by auditor by auditor created, verified by auditor Capital Cost Contractor bears the DMA creation paid DMA creation paid on Partially on BOQ Client pays actual costs, Utility pays Utility (how is it paid for) capital works costs; price on BOQ basis; BOQ basis; leakage basis, partially verified on open book Program Manager pays works paid per m3 reduced (bid leakage control, control meter through the fees basis which pays works contractor by contractor at level to meter installation, installation, and illicit paid per connection contractors directly, based cover costs) and illicit connection connection detection on 24/7 (the extent on competitive detection costs costs borne by of incentive and bid price, and borne by contractor; contractor; fee to reach risk transfer can certification fee to reach target target m3 reduction bid be adjusted by of works m3 reduction bid by by contractor at level to changing the ratio of by program contractor at level to cover costs payments) manager The Use of Performance-Based Contracts for Nonrevenue Water Reduction cover costs Contractors, Staff and Cost born by contractor; Costs related to Costs related to DMA Partly on a fixed fee Covered through a Covered through Operating Cash fee per m3 saved bid at DMA construction construction covered to cover contractor’s standard mark-up on the a program (how is it paid for) level to cover these costs covered through DMA through DMA BOQ; cost overhead, partly actual cost of works management fee, BOQ; cost related to related to active leak through the fee paid which is a standard active leak control control and commercial per connection on percentage of the and commercial loss loss reduction activities 24/7 cost of works reduction activities covered through fee covered through fee Incentive Payment is per m3 saved. If target level of Payment per m3 saved Payment per Could have small incentive Program manager’s Incentive (how is it provided) If savings for the budget loss reduction is not above a minimum, on connection on payments for achieving profit depends in payments are greater than expected, achieved, contractor rising block basis 24/7 (above a specific results; could be part on contractors to program contractor profits is penalized per threshold) incentives desire to win follow-on delivering to manager based m3 shortfall, and performance. work specified levels and on achieving incentivized for Penalties for use of budget desired results exceeding target with excess water input additional payments or reduction in service levels also incentivize efficiency Flexibility for Only minor DMA Only minor DMA Freedom to adjust DMA High, subject to Substantial freedom to Substantial freedom to design and Contractor adjustments; level of adjustments; level of number and design, meeting construction choose approach within adapt a program active leak control; level active leak control; as well as active leak quality standards set budget of illegal connection level of illegal control activities and detection connection detection illegal connection detection activities 3 Bid Factor Lowest cost per m Lowest cost to reach Lowest cost for standard Minimum number Quality of contractor, Maximum quality of team and to reach target loss target loss reduction DMA and metering of customers to be methodology, and team methodology provided for fixed reduction and for standard DMA program, bid as unit put on 24/7 before budget, or QCBS with strong quality program, bid as unit rates against BOQ incentive payments rating rates against BOQ start The Use of Performance-Based Contracts for Nonrevenue Water Reduction Note: BOQ=bill of quantities; DMA=district metered area; QCBS=[TBD??]. 43 44 TABLE B.2: Information, Speed, and Risk By Contract Type DBOM Cost-Plus (suggested Incentivized Program Manager (PM) 24/7 Self-Optimizing with Competitive Full Risk Transfer HCMC Variant Progressive Roll-Out Higher Risk Lower Risk Discovery Approach) Overall Information High Moderate Moderate Low Low Low Requirements Information Required Enough to cost loss reduction program to Simple indicative Bulk supply available; Specification of Specification of areas in which meet targets, including: maps showing value of moving a areas in which improvement sought; rules for Components of water balance to narrow number and location customer on to 24/7; improvement sought; competitive procurement and confidence intervals of DMAs; cost to approximate costs of rules for competitive information disclosure; indicative scope construct DMAs; reducing NRW procurement and of work Cost of constructing DMAs, and of customers in each information disclosure physical and commercial loss reduction DMA Complete plan of DMAs to be constructed and location of customers. May require GIS maps and a hydraulic model Overall Speed1 Slow Medium Medium Fast Medium Fast Time Required to 12 months 3 months 6 months 2 months 2 months 1 month The Use of Performance-Based Contracts for Nonrevenue Water Reduction Develop Information2 Time to Draft Contract 6 months 3 months 3 months 1 month 3 months 1 month and RFP Prequalification-Time 3 months 3 months 3 months 3 months 3 months 2 months Required3 Bidding-Time Required4 6 months 4 months 4 months 3 months 3 months 2 months DBOM Cost-Plus (suggested Incentivized Program Manager (PM) 24/7 Self-Optimizing with Competitive Full Risk Transfer HCMC Variant Progressive Roll-Out Higher Risk Lower Risk Discovery Approach) Flexibility to Adjust Low Moderate High High Moderate High (during contract) (must largely follow DMA and meter (may vary DMA size installation instruction plan) and design) Riskiness Maximum High High Moderate to High Low Moderate Low (for contractor) (depends on % performance pay) Risk Transfer (for utility) Maximum High Moderate Variable Zero Moderate Zero Note: DBOM=Design-Build-Operate-Maintain; DMA=district metered area; RFP=request for proposal. Procurement stages can be done partly in parallel, so that the award will be less than the sum of time for all stages. Actual times will depend on the size of the network and complexity of local conditions, so 1.  timelines need to be planned for each project individually. The important information from this table is the relative speed for each contract type, as these relativities should hold better than the absolute The Use of Performance-Based Contracts for Nonrevenue Water Reduction estimates. 2. Indicative, assuming Initial Assessment has been done. 3. From call for prequalification to decision. 4. From RFP issue to contract signature. 45 46 TABLE B.3: Which Contract Type to Use Information Importance of Goal Contract Type (likely to be suitable) Comment Availability Speed Reduce Physical Losses to: High Low DBOM Contract—Full Risk Transfer variant Gives optimal risk transfer when time and information are not constraints • Ensure enough water is available Competitive Discovery using cost-plus The competitive discovery approach (Box B.1) allows for quick contract to satisfy expected demand contract implementation, while providing information for contracts with stronger growth incentive properties to be procured in a second phase • Increase resilience and security DBOM Contract—Progressive Roll-Out Rolling out the DBOM contract DMA by DMA may require more Low High of supply in the face of climate variant information up-front than the competitive discovery approach, but change and other risks compared to competitive discovery, may give stronger incentives and avoid the complexity of a two-phase procurement Incentivized Program Manager Contract Fast and flexible option, but with limited risk transfer Improve Service to: 24/7 Self-Optimizing Contract Provides flexibility within the contract to trade-off complex variables such • Provide 24/7 service to more as hours of service, revenue collection, and bulk water inputs required customers Moderate to Revise DBOM Contract (to focus on 24/7) The DBOM models focus on reduction of physical losses. They could be Low High redesigned so that targets and payments depend on number of customers • Expand water service to more customers on 24/7. However, this redesign would require time and high levels of skill. Also, it might not be suitable for projects within multiple objectives • Achieve multiple goals Incentivized Program Manager—Low risk Flexible and fast contract to implement. Program managers can be The Use of Performance-Based Contracts for Nonrevenue Water Reduction incentivized to meet various desired goals, and can adjust over time to achieve them Low High Competitive Discovery using cost-plus An initial cost-plus phase can be quickly implemented. Phase one provides contract the time and information needed for development of a more complex, incentivized contract for phase two (see Box B.1) Increase Financial Performance — — Information on several contracts that have been used to increase revenue and collection is provided in Table B.3 Note: DBOM=Design-Build-Operate-Maintain; DMA=district metered area. Box B.1: Competitive Discovery Approach The competitive discovery approach has two phases. In the first phase, the utility brings in three highly qualified firms to each reduce NRW in a selected part of the network. To speed up this phase, cost-plus contracts are used. In the process of getting NRW down in the selected zones, the contractors will reveal information about the level and composition of NRW, and how much it costs to reduce. The utility uses this information to design the contracts for the second phase. These contracts may be DBOM or 24/7 Self-Optimizing contracts. The utility could offer one contract for the whole network, or divide the network into two or three zones and offer a contract for each. All three contractors from the first phase would be eligible to bid, as well as perhaps other firms. The advantage of the competitive discovery approach is not just that NRW reduction starts faster, but that better information can be uncovered than what may be possible through traditional NRW field assessments. The logic is as follows. DBOM contracts transfer a lot of risk to the contractor, so both the contractor and the client need to know how much NRW reduction can be achieved, and how much it will cost. If these numbers are not known, the contractor may bid a price or target which it cannot reach, and lose a lot of money. Conversely, if bidders bid conservatively, the utility might end up paying much more than it really needs to for the NRW reduction. The obvious solution might appear to be engaging consulting engineers to estimate NRW levels and costs before bidding out the contract. Indeed, this is often done. How- ever, the consultants are often unable to estimate the data with any precision, even if they spend months trying. This is because, in many cases, the only way to find the data needed is by implementing components of the NRW program. As examples, system input is often not known because production meters are lacking—installing production meters may cost millions of dollars, and take 6 months or more, given public pro- curement rules. Leakage often cannot be estimated because there are no hydraulically isolated zones with metered inflows, in which night tests can be done—in other words, creating at least one DMA may be a prerequisite for estimating leakage. The value of losses due to illegal connections—and feasibility and cost of reducing those losses— cannot be assessed without finding and regularizing illegal connections on a sample basis. In a situation where it is near-impossible to gain the data needed except by starting to implement the NRW reduction program, it makes sense to just get on with NRW reduction, rather that waste time and money on extensive fieldwork. However, con- ­ tractors cannot take risk on the cost of reducing NRW by a specified amount until they have information. Therefore, a cost-plus contract is a good way to start the process. The next challenge then becomes, “How can the utility use the information that the contractors reveal to get better value for money through stronger incentives and more The Use of Performance-Based Contracts for Nonrevenue Water Reduction 47 risk transfer?” This is where the second phase of the competitive discovery approach comes in. Rather than remain with a cost-plus contract for the entire network, the utility uses the information from phase one just as it would use a traditional field assessment. With this information, consultant can help the utility prepare highly-incentivized contracts for the rest of the system. All the information from the first phase is made available to all ­ ggressive bids. bidders, to reduce uncertainty levels, and so encourage more a TABLE B.4: Commercially-Focused PBC Case Studies Contract Objectives Name/Location/Date of Contract Brief Description Further Information/References Increase revenues at SABESP, the SABESP Large Meter Program, Replacement of 28,000 large IDB (2004) water utility serving the State of Sao SABESP, Sao Paulo, Brazil, volume customer meters using five Paulo, Brazil 2000–2003 100% performance-based contracts. SABESP revenues increased by US$72 million, with a PBC cost of US$18 million. Reduce small customer water meter Small Meter Replacement Program, Replacement of small customer IDB (2004) error, and increase revenues in Porto Porto Ferreira, Brazil 2002–2004 meters using a performance-based Ferreira, Brazil contract. Utility metered volume increased 30% and revenues increased 20%. Improve commercial management, Performance Based Service Contract, PBC Contractor Veolia conducted Marin, Fall, and Ouibiga (2010) including customer cadaster, ONEA Burkina Faso 2001-2006 a program to improve commercial metering and billing and financial operations, with embedded staff at ONEA. Over the 5 years, revenues increased 50%, the collections ratio improved from a minimum of 78% to 95%. Project cost about US$4.5 million over 5 years. Increase billing and revenue Micro-PSP Project, Madaba, Jordan, A PBC was developed by the Water GTZ (2009) collection, through improved, 2006–2009. In 2010, the project Authority of Jordan to improve GIS-based customer databases and was replicated in Balqa and Karak revenue in Madaba Province. improved billing and collections Governorates The contractor was paid a fixed operations fee for establishing a new GIS- based customer database and billing system, and also awarded a performance fee, based on 14% of the increase in revenue collected. Project has a payback period of about 2 years. 48 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Contract Objectives Name/Location/Date of Contract Brief Description Further Information/References Improve all aspects of customer Customer Service PBC Contract, Operate all aspects of customer IDB (2015) service including new connections, EAAB, Bogota, Colombia 2003–2007 service including establishing new metering, billing and customer connections, customer database service updates, installing service lines and meters, meter reading, billing and customer service, with specific standards on time frames for different activities. Payment was based on a mix of indicators including volume of water sales, amount of commercial loss, complaints, and collections rate. Large increase in revenue achieved. Increase revenues at SABESP, the SABESP Large Meter Program, Replacement of 28,000 large IDB (2004) water utility serving the State of Sao SABESP, Sao Paulo, Brazil, volume customer meters using five Paulo, Brazil 2000–2003 100% performance-based contracts. SABESP revenues increased by US$72 million, with a PBC cost of US$18 million. Reduce small customer water meter Small Meter Replacement Program, Replacement of small customer IDB (2004) error, and increase revenues in Porto Porto Ferreira, Brazil 2002–2004 meters using a performance-based Ferreira, Brazil contract. Utility metered volume increased 30% and revenues increased 20%. Improve commercial management, Performance Based Service Contract, PBC Contractor Veolia conducted Marin, Fall, and Ouibiga (2010) including customer cadaster, ONEA Burkina Faso 2001–2006 a program to improve commercial metering and billing and financial operations, with embedded staff at ONEA. Over the 5 years, revenues increased 50%, the collections ratio improved from a minimum of 78% to 95%. Project cost about US$4.5 million over 5 years. Increase billing and revenue Micro-PSP Project, Madaba, Jordan, A PBC was developed by the Water GTZ (2009) collection, through improved, GIS- 2006–2009. In 2010, he project Authority of Jordan to improve based customer databases and was replicated in Balqa and Karak revenue in Madaba Province. improved billing and collections Governorates The contractor was paid a fixed operations fee for establishing a new GIS- based customer database and billing system, and also awarded a performance fee, based on 14% of the increase in revenue collected. Project has a payback period of about 2 years. table continues next page The Use of Performance-Based Contracts for Nonrevenue Water Reduction 49 TABLE B.4: continued Contract Objectives Name/Location/Date of Contract Brief Description Further Information/References Improve all aspects of customer Customer Service PBC Contract, Operate all aspects of customer IDB (2015) service including new connections, EAAB, Bogota, Colombia 2003–2007 service including establishing new metering, billing and customer connections, customer database service updates, installing service lines and meters, meter reading, billing and customer service, with specific standards on time frames for different activities. Payment was based on a mix of indicators including volume of water sales, amount of commercial loss, complaints, and collections rate. Large increase in revenue achieved. Each contract concept is described further below, including: • The contractor’s responsibilities • How contractors are paid • How contractors are selected Appendix B.8 contains sample terms sheets, which can be used to further develop and implement these contract concepts. B.2 DBOM Contract—Full Risk Transfer A DBOM contract bundles most or all components of an NRW reduction program into a single contract. Like a Design-Build-Operate-Maintain contract for a water abstraction and treatment facility, the contractor plans, designs, and carries out the loss reduction work. B.2.1 Contractor’s Responsibilities The contractor is responsible for both managing and implementing the NRW reduction pro- gram under its own account. This will typically include the installation of DMAs and other specified works for physical and commercial loss reduction. B.2.2 Payments There are two options: • The contractor is paid a set amount per m3 saved. This amount is calculated to be suffi- cient to cover all the costs of the program. The contractor bids its cost for achieving a set target level of reduction, but is then paid per volume of reduction achieved. 50 The Use of Performance-Based Contracts for Nonrevenue Water Reduction • The utility sets a budget. The contractor bids the quantity of reduction it can achieve for the budget. Over- or under-performance against the bid quantity is paid at the average cost per m3 implied by the bid. B.2.3 Selection Method Typically, contractors would first be pre-qualified, after which an RFP would be issued. The winning bid would be the one offering: • Lowest cost to achieve target (option 1) • Highest quantity for fixed budget (option 2) B.3 DBOM Contract—Ho Chi Minh City This contract is based on the one implemented in Ho Chi Minh city by Saigon Water Corporation. It differs from the full risk transfer model in that the establishment of DMAs is paid on a BOQ basis. A sample of Ho Chi Minh City’s DBOM contract is available at: https:// ppp.worldbank.org/public-private-partnership/library/water-performance-based-leakage reduction-contract-example-1. B.4 DBOM—Progressive Roll-Out The contractor establishes DMAs and instrumentation, and is paid on a BOQ basis for doing so. As each DMA is completed, baseline losses for that DMA are established. The contractor reduces physical and commercial losses, and is paid a specified monetary amount for each m3 of loss reduction above a specified level. B.4.1 Contractor’s Responsibilities The contractor’s responsibilities in a progressive roll-out contract are divided into two main tasks. Task 1: DMAs and Instrumentation DMAs. The contract requires the contractor to construct DMAs across the zone. The expected number of DMAs and average number of connections per DMA are also specified in the con- tract. An indicative map of DMAs is provided on best expert judgement (not based on a thor- ough study). The contractor is free to deviate from the map where this is warranted. The contractor is paid as each DMA is completed and certified. Instrumentation. The contractor installs any instrumentation and controls that are needed to assess performance, such as: production meters, district meters, and pressure sensors. These are installed in each DMA as it is created. Instrumentation needs are specified in the tender document, and bid on a BOQ basis. The contractor is paid for works on BOQ basis.1 The Use of Performance-Based Contracts for Nonrevenue Water Reduction 51 Task 2: Control NRW As each DMA is completed, the contract moves on to NRW control in that DMA. This consists of the following steps: 1. Establishing the NRW baseline for that DMA. Typically, this will involve: a. Put that DMA on 24/7 supply for period of [8] weeks b. Estimate total NRW and physical losses to establish baseline c. Certify baseline with independent expert 2. Reducing physical losses, through: burst repairs, active leak detection, fixing leaks, con- nection replacements, and mains replacement. 3. Reducing commercial losses (optional). If commercial functions are included in the con- tract, the contractor may be required to do some or all of the following: install meters, replace faulty meters, detect and regularize illegal connections, correct customer infor- mation in billing database, improve bill delivery, and collect arrears (not explicitly part of commercial losses). B.4.2 Payments Payment is made on a BOQ basis for Phase 1. That is, the contractor is paid an amount cal- culated from the units of actual work done, times the rate per unit that the contractor bid. For Phase 2, the contractor is paid for losses reduced, at a set rate of $/m3. The payment per unit saved should be set with reference to the long-run marginal cost of water and the likely cost of loss reduction. The amount paid per unit could be on a rising-block basis, with mod- est payments for NRW reductions that are easily achievable, through to larger payments as greater reductions achieved. Payment could be at different rates for physical and commer- cial loss reduction, if these can be differentiated. Most of the performance pay would be paid at the end of the contract, to ensure payment is only made for sustainable gains. To achieve budget certainty, the utility could establish an overall cap on the total amount of BOQ payments and performance pay over the life of the contract. This would encourage the contractor to optimize all parts of the work—Phase 1 as well as Phase 2. This budget cer- tainty would be especially important for utilities that are doing the project using an IFI loan, and that have no finance of their own to cover costs in excess of the loan amount. B.4.3 Selection Method Contractors are selected, following prequalification, based on lowest cost offered by a quali- fied bidder. • Qualification Criteria—Pass/fail. Demanding criteria are set to ensure only well qualified operators can be selected • Bid Factor—Lowest works price for assumed BOQ. The contractor bids a cost to construct a standard DMA, according to a pre-specified BOQ expected to be typical of the actual DMAs to be constructed. 52 The Use of Performance-Based Contracts for Nonrevenue Water Reduction B.5 Self-Optimizing 24/7 Contract A utility may use a self-optimizing 24/7 contract where it has intermittent supply and wants to quickly increase the number of customers with continuous supply while keeping the dis- tribution input volume constant. The contractor first installs a system that allows perfor- mance to be measured. Then, the contractor carries out the physical works and leak detection and repair needed to bring as many people as possible onto 24/7 service, within a fixed water budget and a fixed budget for works. B.5.1 Contractor’s Responsibilities The contractor’s responsibilities in a self-optimizing 24/7 contract are divided into two main phases: first installing a performance measurement system, and then increasing the number of customers on 24/7 supply. Phase 1: Install Performance Measurement System As the first step, the contractor must install a system that measures the number of customers on 24/7 supply for a given volume of water. Therefore, the minimum requirements for the performance measurement system would be: • All distribution input metered • Pressure sensors or surveys to estimate hours of service for all customers in the zone Next, the contractor establishes a baseline for input volumes and hours of service. An independent expert would then certify this baseline as accurate. Phase 2: Increasing Number of Customers on 24/7 supply The operator will be free to carry out whatever works and leak reduction activities it judges are needed to increase the number of customers on 24/7 supply, subject to remaining within the total budget specified. B.5.2 Payments The costs of Phase 1 would be paid on a BOQ basis. Unit rates would be specified in the bid- ding documents. The contractor would then be paid for work done based on actual quanti- ties times the unit rates. During Phase 2, the contactor’s payment is structured so that it optimizes results, using these three components: • A fixed fee that covers (some fraction of) the expected cost of the contractor’s manage- ment team. The riskier the situation, the higher the operator fee should be, to encourage contractors to commit their staff to the program. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 53 • A results payment for value that is calculated as follows: The number of additional customers on 24/7 (above the minimum set in the contract) Incentive pay per new customer on 24/7 ($/customer)2 • A penalty payment that is calculated as follows: Excess system input volume taken (m3) multiplied by the value of bulk water ($/m3) Plus Deterioration of service for other customers (hours) multiplied by Value of deterioration ($/hour)3 B.5.3 Selection Method Contractors are selected by competitive bid following prequalification: • Qualification Criteria—Pass/fail. Demanding criteria to ensure qualified operator. • Bid Factor—Specified minimum number of connections put on 24/7 before results-based payments start to apply. B.6 Cost-Plus Contract (with Competitive Discovery) The utility procures three contractors to each reduce NRW in a selected zone. This work is done largely on a cost-plus, open-book basis. The utility uses the information on cost of NRW reduction revealed through this process to design a Phase 2 contract. The Phase 2 con- tract may be a DBOM or 24/7 Self-Optimizing contract. One or more Phase 2 contracts are then bid out competitively. Phase 1: Open-Book Pilots The first phase begins after the utility selects three pilot zones. Zones should be as suitable as possible for NRW reduction, and typical of conditions elsewhere in the network. These zones could be large (for example 7,000 connections per zone); however, there is a trade-off between rapid impact and ensuring value for money (VFM). A larger zone means more rapid progress, but because in the pilot phase payment is on a cost-plus basis, the cost of improve- ments may be expected to be higher than in the subsequent phase. The utility then selects three contractors, one for each zone. Each contractor is given a fixed budget and tasked to maximize a service target within the fixed budget. Service targets may be one or more of the following: • Reduce bulk water requirement for constant service level • Increase number of customers on 24/7 for fixed bulk water budget • Increase revenue or collections for fixed bulk water budget Contractor’s Responsibilities The contractor’s responsibilities in a competitive discovery contract are divided into two main phases, open-book pilots and competitive offers. 54 The Use of Performance-Based Contracts for Nonrevenue Water Reduction The contractor will be required to design and build an adequate system for measuring per- formance. Typically, this would require metering all inflows to the zone and closing or metering outflows from the zone. Surveys, pressure sensors, or other systems are needed to assess progress toward a 24/7 supply target. In other respects, the contractor would be free to design and build whatever system it con- siders most effective achieving the goal within the budget. As an example, one contractor could construct DMAs, while another might proceed directly to replacing all connections, while the third invests in pressure reducing valves and active leak detection and repair. B.6.1 Payments There are several says in which procurement could be managed. One option is, during Phase 1, the contractor discloses all costs to the utility on an open-book basis, and the con- tractor recovers actual costs plus a margin. This margin would be specified in the bidding documents. In addition, performance payment may be made for progress on indicators. Performance payment would start from when the operator had established a baseline, and the baseline was certified as reliable by an independent expert. Alternatively, the desire to position for success in Phase 2 might be incentive enough. B.6.2 Selection Method The water utility should pre-qualify six or more contractors for a panel. Then, the utility will select three contractors from the panel for the cost-plus contracts. This competitive selec- tion will be based on quality. The quality factors considered will include: experience, team, references, and technical approach. B.6.3 Moving to Phase 2 Once sufficient information on the cost of NRW reduction was available, the utility, assisted by a consultant, would design and bid out the Phase 2 contract. The consultant would review information emerging from the contractors, and discuss with them a suitable contract design and indicative budget. The consultant would then prepare one or more contracts covering the remainder of the network. All three operators in the city, plus other pre-qualified opera- tors in the pool, would be invited to bid on the Phase 2 contracts. B.7 Incentivized Program Manager Contract (Lower Risk Option)4 An incentivized program manager contract separates contracting for professional skills and intelligence from contracting for construction. After the utility engages a program manager (PM), the PM designs, procures the implementation of, and supervises on behalf of the util- ity, the required NRW reduction activity. The implementation is done by competitively selected works contractors. These separate works contracts would be signed with the utility, but designed, tendered, and supervised by the PM. The program management fee consists of: a fixed component, a percentage of capital-works costs, and an incentive payment based on level of improvement achieved for fixed capital expenditure budget. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 55 B.7.1 Contractor’s Responsibilities The contractor’s responsibilities in a performance-based program management contract are divided into three main phases: planning, procurement, and supervision. Phase 1: Planning The PM would provide an indicative NRW reduction plan in its proposal. This plan would be included in the contract with the water utility. After the contractor started work, the PM would optimize the plan considering the new information. Minor changes to the plan (for example, timing, budget, and types of intervention) would be at the PM’s discretion. Major changes to the plan would require authorization from the water utility. The PM could justify major changes to the utility by showing how the proposed change would increase net bene- fits for the utility. Phase 2: Procurement During Phase 2, the PM would decide on the best strategy for procuring contractors to carry out NRW reduction tasks. First, the PM would group tasks into optimal procurement pack- ages. Second, the PM would run a competitive procurement for the contracts. The procure- ment would follow public procurement rules, and whatever procurement standards had been agreed with the client and funders. Third, the PM would evaluate the bids, select a preferred bidder, and then either award the contract (operating as the utility’s agent), or sub- mit the contract for approval and award by the utility. Phase 3: Supervision During Phase 3, the PM would supervise the contractors to ensure quality. The water utility would delegate the following responsibilities to the PM: inspecting the works done, ordering work to be redone, and certifying completion of milestones for payments. The utility would pay the contractors on approval of their invoices by the PM. B.7.2 Payment Payment to the PM depends on Payment Terms Sheets, which describe how the contractor will be compensated for performance. Typically, the program management fee would have three components: • A fixed component that covers management and design services • A percent (for example, 5 to 10 percent) of capital works costs • An incentive payment based on level of improvement achieved for a fixed capital ­expenditure budget Alternatively, the incentive payments could be structured as sharing in cost savings. First, the water utility estimates the CAPEX needed for the project. It then sets this money in a capital investment “pot,” which the PM uses to complete capital works. The firm is then paid 56 The Use of Performance-Based Contracts for Nonrevenue Water Reduction a percentage of any money left in the pot after the specified NRW reduction amount (or another target) has been met. B.7.3 Selection Method Under an incentivized program manager contract, program managers would first be short- listed. The PM would then be selected from among the shortlisted firms using selection based on cost and quality. Quality factors would include the bidder’s relevant experience, the indicative program proposed, and skills/experience of the team members. The cost fac- tor considered would be a fixed fee. The scoring system should weight the quality ­component heavily. Alternatively, a fixed budget evaluation could be used, in which the program management fee is pre-specified, and the contract is awarded to the bidder with the highest technical score. B.8 Sample Terms Sheet for NRW-PBCs A Terms Sheet describes the basic terms and conditions of a proposed NRW-PBC. The sample terms sheet is divided into three main sections: • Roles, Responsibilities, and Authorities of the Contractor—This part provides generalized sample terms for a DBOM contract, and for an Incentivized Program Manager Contract • Key Performance Indicators and Targets—This part is designed for use with any type of contract • Payments—This part is suitable for use with DBOM, 24/7 Self-Optimizing, and Incentivized Program Manager contracts B.8.1 Roles, Responsibilities, and Authorities of the Contractor Please note that all text in italics serves as instructions. NRW reduction Type of Performance-Based Contract Activity DBOM Contract Incentivized Program Manager Contract Specific Works The contractor shall design and implement The contractor shall design, procure the the Specified Works and Services set out in implementation of, and supervise on behalf Annex A of the utility, the Specified Works and Services set out in Annex A Leakage-Control The contractor shall design and implement The contractor shall design, procure the Services on the network a leakage control plan which implementation of, and supervise on behalf may include any or all the elements in Annex of the utility a leakage control plan which B, at the discretion of the contractor may include any or all the elements in Annex B, at the discretion of the contractor Commercial The contractor shall design and implement The contractor shall design, procure the Services on the network a commercial improvement implementation of, and supervise on behalf plan which may include any or all the of the utility a commercial improvement plan elements in the Annex C, at the discretion of which may include any or all the elements the contractor in the Annex C, at the discretion of the contractor table continues next page The Use of Performance-Based Contracts for Nonrevenue Water Reduction 57 table continued NRW reduction Type of Performance-Based Contract Activity DBOM Contract Incentivized Program Manager Contract Management of The contractor shall manage those utility The contractor shall manage those utility Utility Staff staff specified in Annex D staff specified in Annex D If no staff are specified, the contract shall If no staff are specified, the contract shall not manage any utility staff not manage any utility staff Whatever functions the contractor is not able Whatever functions the contractor is not able to perform with utility staff, it shall perform to perform with utility staff, it shall perform with staff it hires itself with staff it hires itself Capacity Building The contractor shall build the capacity of Choose one of the following options: the utility staff by carrying out the activities The contractor shall design, procure the specified in Annex E, to the standards there implementation of, and supervise on behalf specified of the utility a capacity-building program, which will include the activities specified in Annex E, to the standards there specified The contractor shall build the capacity of the utility staff by carrying out the activities specified in Annex E, to the standards there specified Handback Specify handback provisions as to quality of Not applicable works done, or systems installed, if applicable B.8.2 Key Performance Indicators and Targets Instructions The key performance indicators (KPIs) are quantifiable measures that the water utility can use to gauge performance and to compare performance to targets. Performance KPIs will often be used to determine incentive payments or penalties. Two tables with standard KPIs are provided, namely: • Table B.5 is suitable for contracts which focus on reducing NRW, such as the DBOM con- tract, and some cost-plus and program management contracts • Table B.6 is suitable for use with contracts focused on achieving 24/7 supply Readers should choose the appropriate table for their contract type. B.8.3 Payments Instructions How payment is structured will depend on whether the PBC is a DBOM, a 24/7 self-­optimizing, or an incentivized program manager contract. Table B.7 lists the various types of payments that a contractor can receive. The designer should fill in numbers for those payments included within the contract design, and delete the rest. 58 The Use of Performance-Based Contracts for Nonrevenue Water Reduction TABLE B.5: NRW-Driven Indicators and Targets NRW-Driven Quarter Unit Target or Actual Comments Indicator Q1 Q2 Q3 Q3 Objectives 2.1.1 Total NRW reduction m3/day Target Where possible, specify commercial and physical loss reduction Actual separately. Where that is done, 2.1.2 Physical loss m3/day Target total NRW reduction must be sum reduction Actual of two. If that is not possible, 2.1.3 Commercial loss m3/day Target specify total NRW reduction. reduction Actual local currency units Target Actual cash collected Target Actual Constraints 2.1.4 Average hours of hours/day Target service per day Actual 2.1.5 Minimum pressure mWc 1 Target across system Actual 1. mWc is a unit that measures pressure. It stands for “meters of water column.” TABLE B.6: Output-Driven Indicators and Targets Quarter Output-Driven Unit Target or Actual Comments Indicator Q1 Q2 Q3 Q3 Objectives 2.2.1 Revenue increase Local currency units Target If operator is responsible, include collections increase, and Actual consider not using the revenue Actual increase, since increased revenue should flow through to increased 2.2.2 Collections increase % change in Target collections. collections rate Actual cash collected Target Actual 2.2.3 Number of customers Number of Target with 24/7 service customers Actual Constraints 2.2.4 Bulk supply input m3/day Target Actual 2.2.5 Minimum pressure mWc Target across system Actual Note: mWc=meters of water column. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 59 TABLE B.7: Contractor Payment Types Incentivized Program Manager Payments DBOM Contract/24/7 Self-Optimizing Contract Contract 3.1 Management Specify here any cost-based fee that is to be paid for providing a team of Specify here any cost-based fee fee managers, or overhead management functions, independent of results. that is to be paid for providing a team of managers, or overhead management functions, independent of results. 3.2 Performance Payments that are based on performance depend on whether the contract This should be like the DBOM Fee1 uses NRW-driven indicators or commercially-driven indicators. version, but with the payments reduced by the value of Objective Payment per Unit investments financed by the utility NRW-driven indicators under the program manager Total NRW reduction US$/m3/day reduced version. Physical loss reduction US$/m /day reduced 3 Commercial loss reduction US$/US$ saved Commercially-driven indicators Revenue increase US$/US$ saved Collections increase US$/% increase in collections rate Number of customers with 24/7 US$/additional household on 24/7 service supply 3.3 Fee for Payment to the contractor will be on the basis of a BOQ with unit rates This will typically be percentage of Specified (see sample in Table B.8). the capital cost (for example, 5% Works and to 10%) as utility pays the actual Services capital costs to the works contractor, and the Program Manager only receives a program manage fee. 3.4 Input-based Specify here any payments to be made for physical inputs to leakage The program manager will be payments control that are made at the contractor’s discretion. In many cases this able to recommend additional for leakage will be zero, since the discretionary investment will be made to earn the investments, and the utility will control Performance Fee. However, where the investments will have benefits be free to implement them. The services beyond the contract life, and this is not compensated through the payment will be made to the works performance fee, some payment toward the value expected after the end contractors by the utility. The of the contract will be justified. This can be based on a BOQ with Unit program manager will receive a Rates like that for Annex F. Unit rates will typically below cost, to offset percentage of the capital cost (for the expected return to the contractor through the performance fee. example, 5% to 10%) for design and supervision of the works. 3.5 Input-based As for the leakage control payments, but for the discretionary As above. payments for investments aimed at reducing commercial losses or increasing commercial collections. improvement services 60 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Incentivized Program Manager Payments DBOM Contract/24/7 Self-Optimizing Contract Contract 3.6 Capacity In the event that some capital works will be privately financed, and Not applicable Availability the financing costs will not be met through performance fees or other Fee payment over the life of the contract, a capacity fee should be paid to cover the unmet financing costs of the investment, subject to the capital works financed continuing to perform as planned. 3.7 Financing If there are capital works that the contractor is expected to pay for (as Not applicable opposed to being paid by the utility for as construction milestones are reached) those should be specified here. It should also be noted how the contractor is expected to be able to make back the costs (including the cost of finance), for example through the Performance Fee, or the Availability Fee. 3.8 Liquidated Penalties depend on whether the contract uses NRW-driven indicators or As on the left, but should be damages output-driven indicators.2 expressed as a deduction from the performance fee only— Constraint Penalty per Unit liquidated damages in excess of Average hours of service per day US$/average-hour of service per the performance fees would be day below target waived. Minimum pressure across system US$/mWc below minimum level, as stated in the target Bulk supply input US$/m3/day of bulk water that is used in excess of the target 1. Please refer to the optimization framework described in World Bank (2016). 2. Penalties should generally be based on the economic value of the breach—Please refer to the optimization framework described in World Bank (2016). B.8.4 Annexes Referenced from Sample Term Sheets Instructions These annexes provide much of the commercial and technical details of the contract, and are referenced from the term sheets. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 61 Annex A: Specified Works and Services 1. List works the utility knows it wants implemented such as: Specification Number Locations Installation of Bulk Meters Creation of DMAs Creation of SCADA or Telemetry systems Pressure zoning Replacement of certain mains Replacement of connections Testing of meters and replacement of those that are faulty 2. List services known to be required such as: Services Detailed Description Creation of Hydraulic Model of the Network Development and Maintenance of Water Balance Tool Improvements to the customer cadaster Improvements to the billing system Improvements to the payment system (for example to allow payment by mobile money) Management of the billing system Management of the payment system Management of the collection of past due accounts, and Development of KPI Reporting System and Reporting of KPIs Creation of Hydraulic Model of the Network Annex B: Leakage Control Works and Services List Works and Services that the Contractor/Program Manager may perform on the network in pursuit of contractual targets and incentive payments, such as: • Creation of Hydraulic Model of the Network • Development and Maintenance of Water Balance Tool • Creation of a DMA Plan • Creation of a Pressure Zoning and Control Plan • Creation of a leaks and bursts reporting system • Active leak detection • Excavation of pipes and repairing of leaks and burst • Replacement of pipe sections • Replacement of connections 62 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Annex C: Commercial Services List Services that the Contractor/Program Manager may perform in pursuit of contractual targets and incentive payments, such as: • Improvements to the customer cadaster • Improvements to the billing system • Replacement of meters • Entry of new or updated customer records in the billing system • Improvements to the payment system (for example to allow payment by mobile money) • Management of the billing system • Management of the payment system • Management of the collection of past due accounts Annex D: Staff List here any staff that will be transferred to the Contractor/PM to manage, and their roles, and key terms and conditions that will apply such as the extent of direction that may be given, the working conditions that need to be respected, and whether the utility will con- tinue to pay the staff for all work done, or if the contractor will make any payment. Specify if the contractor is managing any existing groups of staff, such as a leak detection team or a billing department. Annex E: Capacity Building Specify capacity building measures that must be taken, and when, such as: • Training of utility staff • Creation of new organization structure, processes, job-descriptions, person-specifications • Ensuring that staff attain certifications professional or tertiary training organizations • Ensuring that utility systems attain certifications, for example ISO 9001 certification • Creation and transfer of management information tools such as Water Balances tools, Hydraulic Models • Creation and transfer of certain management processes and systems such as Telemetry Systems, Billing Systems or Payment Systems • Hand over to utility of certain equipment such as vehicles, acoustic couplers, meter repair equipment The Use of Performance-Based Contracts for Nonrevenue Water Reduction 63 Annex F: Bill of Quantities with Unit Rates A sample Bill of Quantities can be found in Table B.8 below, outlining how to record the unit prices for all equipment. TABLE B.8: Bill of Quantities with Unit Rates Total Item Description Unit Quantity Other Currencies USD 1 2 3 1 Installation of bulk meters 1.1 Supply and installation bulk meters: # Specify • DN 75 • DN 200 2 Creation of District Meter Areas (DMAs) 2.1 Establishment of one DMA, complete with investigations, detailed designs, Lump sum Specify tests, supply and installation of materials and equipment (including the laying of up to 20m of distribution mains), reinstatement of road and sidewalk surface, preparation of as-built drawing and other documentation, commissioning of PRV, and other miscellaneous works 2.2 Construction of additional DMA of inflow chamber for DMAs that require more # Specify than one inflow point, complete with investigations, detailed designs, tests, supply and installation of materials and equipment (including the laying of up to 20m of distribution mains), reinstatement of road and sidewalk surface, preparation of as-built drawing and other documentation, commissioning of PRV, and other miscellaneous works 2.3 Supply and installation of Ductile Iron pipelines and all fittings, including m Specify connection to the network, up to 2m in depth, including: detailed design, removal, and disposal of old pipe; sand bedding, testing, and disinfection; re-instatement of road, sidewalk, or any other surface • DN 200mm • DN 250mm • DN 300mm • Extra-over item for pipelines to be installed in more than 2m depth 2.4 Disconnection of service connections from DMA customer supplied from a main • a) # Specify outside the DMA, disconnection at the customer metering point and the pipe • b) # saddle, replacement of pipe saddle with repair clamp, installation of new HDPE • c) # service connection from metering point to new connecting point inside the DMA, complete with sand bedding, reinstatement of road, sidewalk, or any other • d) m surface, including the supply of all materials up to a maximum pipe length of 10m 1-inch service connection to be connected to main of diameter: • a) 80-125mm • b) 150-250mm • c) >250mm • d) Extra-over item for pipe length >10m 2-inch service connection to be connected to main of diameter: • a) 80-125mm • b) 150-250mm • c) >250mm • d) Extra-over item for pipe length >10m 64 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Total Item Description Unit Quantity Other Currencies USD 1 2 3 3-inch service connection to be connected to main of diameter: • a) 80-125mm • b) 150-250mm • c) >250mm • d) Extra-over item for pipe length >10m 3 Creation of SCADA or telemetry systems 3.1 Creation of SCADA # 1 3.2 Installation of Telemetry system # 1 4 Pressure zoning 4.1 Supply and installation of pressure sensors # Specify • 0-2.5 bar, 4-20 mA, 0.25% FS • 0-6 bar, 4-20mA, 0.25% FS 4.2 Construction of chamber of pressure regulators # Specify • DN 100 • DN 200 4.3 Supply and installation of pressure regulation valve # Specify • DN 100 • DN 150 • DN 200 • DN 250 5 Replacement of certain mains 5.1 Supply and installation of uPVC pipelines and all fittings, including connection m Specify to the network, up to 2m in depth, including: detailed design, sand bedding, testing, and disinfection; re-instatement of road, sidewalk, or any other surface • OD 121.9mm • OD 177.3mm • Extra-over item for pipelines to be installed in more than 2m in depth 5.2 Supply and installation of Ductile Iron pipelines and all fittings, including M Specify connection to the network, up to 2m in depth, including: detailed design, sand bedding, testing, and disinfection; re-instatement of road, sidewalk, or any other surface • DN 200 • Extra-over item for pipelines to be installed in more than 2m in depth table continues next page The Use of Performance-Based Contracts for Nonrevenue Water Reduction 65 TABLE B.8: continue Total Item Description Unit Quantity Other Currencies USD 1 2 3 5.3 Detailed design, supply, and installation of sluice valves, complete with # Specify connection to the existing distribution network, complete with all fittings and materials required, including re-instatement of road or sidewalk surface • DN 80-100mm • DN 100-125mm • DN 125-150mm • DN 200mm • DN 250 mm • DN 300mm • DN 350mm • DN 400mm 6 Replacement of connections 6.1 Supply and installation of service connections for new customers, installation of # Specify new HDPE service connection from (and including) the pipe saddle to metering point, complete with sand bedding, reinstatement of road, sidewalk, or any other surface, including supply of all materials up to a maximum pipe length of 10m 1-inch service connection to be connected to main of diameter: • a) 80-125mm • b) 150-250mm • c) >250mm • d) Extra-over item for pipe length >10m 2-inch service connection to be connected to main of diameter: • a) 80-125mm • b) 150-250mm • c) >250mm • d) Extra-over item for pipe length >10m 3-inch service connection to be connected to main of diameter: • a) 80-125mm • b) 150-250mm • c) >250mm • d) Extra-over item for pipe length >10m 7 Testing of meters and replacement of those that are faulty 7.1 Read meters # Specify 7.2 Maintain meters # Specify • ½ inch • ¾ inch • 1 inch • 1 ½ inches 66 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Total Item Description Unit Quantity Other Currencies USD 1 2 3 • 2 inches • 3 inches • 6 inches 7.3 Reposition meter chamber # Specify 7.3 Relocate meter chamber # Specify 7.4 Supply and replace meter, in course of maintenance # Specify • ½ inch • ¾ inch • 1 inch • 1 ½ inches • 2 inches • 3 inches • 6 inches 8 Creation of hydraulic model of the network 8.1 Hydraulic model of network # 1 9 Development and maintenance of water balance tool 9.1 Water balance tool # 1 10 Improvements to the customer cadaster 10.1 Describe a specific improvement to the customer cadaster Specify Specify 11 Improvements to the billing system 11.1 Describe a specific improvement to the customer cadaster Specify Specify 12 Improvements to the payment system 12.1 Configuring payment system so mobile money payments are accepted # 1 13 Management of the billing system 13.1 Bills sent in a timely manner % Specify 14 Management of the payment system 14.1 Describe a specific improvement to the management of the payment system Specify Specify 15 Management of the collection of past due accounts 15.1 Financial arrangements reached with accounts that are over [specify number of US$ Specify days] days past-due 15.2 Past-due accounts collected on # Specify 15.3 Report on number and value of past-due accounts collected and to be collected # Specify 16 Development of KPI reporting system and reporting of KPIs 16.1 KPI Reporting System # 1 16.2 Reports on KPIs prepared on time and to an adequate quality # Specify Note: •  Payment will be made at the fixed price per unit of work done •  If the number of units varies from what was expected, payment will be on actual units, subject to a process that validates that any increase in units above projections is justified •  If the payments are specified in a currency that is expected to devalue in real terms over the contract period, the unit rates should be subject to annual inflation indexation. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 67 Notes 1. Payment on BOQ basis is the actual units times the rate per unit bid. 2. The bid documents will specify the “value of 24/7” on a $ per customer basis. This should be an estimate of the benefits to a customer of moving from intermittent to continuous supply. The value of 24/7 per customer is derived from the total cost of bringing a customer onto 24/7 through increase in input volumes. Alternatively, it could be calculated through contin- gent valuation methodology, health and times savings, or revealed customer preferences. 3. The bid documents would specify what the contractor is to be charged for excess bulk water use, or reductions in service to other customers. 4. The higher risk variant is not described here. The difference between the higher and lower risk variants can be seen in Table B.1. 68 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Appendix C Terms of Reference C.1 TOR for Initial Assessment Phase DRAFT TERMS OF REFERENCE Project/Assignment Title: Initial Assessment of Suitability of Performance-Based Contracts for NRW reduction in Location: Date of Assignment: A. BACKGROUND AND OBJECTIVES Country, Municipality, Utility [In this section a description on country, municipality, and utility background should be described.] Objective of this Assignment The objective of this assignment is to assess local qualitative and quantitative data to make ­ncluding: several key decisions on the best path forward in NRW project preparation, i • Assess the level of NRW, and impact of NRW on the utility and customers, in more detail than conducted in the Rapid Screening Activity. Does the level warrant an NRW Project or not? If not, the project preparation should stop, and perhaps other sites be ­ roceed considered. If the level or impact is high, analysis and planning should p • Prepare an initial Project Concept, including Scope, Objectives, Targets, a rough ­ oncept, cost estimate and explanation of the level of uncertainty of the in the Project C to the extent possible with the available data and time frame. • Does an NRW-PBC look like a good approach? In other words, does the local situa- tion conform with the technical, financial and socio-cultural conditions under which PBCs are most conducive? If not, a conventional NRW Project should be designed and implemented. If so, preparatory work would continue, as described below: • Is the quantity and quality of data about the water supply infrastructure and utility operations sufficient to proceed directly to detailed NRW Reduction Planning and PBC Design, or is a Field Assessment required to better understand the NRW situ- ation? Criteria Include data quality, preliminary water balance uncertainty, depth of understanding of the causes of NRW, utility capacity, skills and practices, etc. As indicated in the project preparation Flowchart, the Initial Assessment follows and builds on the results of the Screening Activity. Steps after the Initial Assessment could The Use of Performance-Based Contracts for Nonrevenue Water Reduction 69 include a halt of project preparation activity, initiation of a Field Assessment Activity, or initiation of detailed NRW Reduction Planning. Summary of the Scope of Work The scope of this Initial Assessment assignment includes: • Compilation of existing data on relevant technical, financial, institutional and mana- gerial parameters, as well as rating of existing NRW practices. • Situational Assessment: An analysis of the recent trends on volume and value of losses, approximate water balance, water supply coverage and service quality, to define a broad scope, objectives, targets, approximate cost of a NRW program, and level of uncertainty given current information and key constraints to address in the Program Design. • Review of the suitability of the PBC approach, including technical and financial anal- yses and an assessment of the interest, any concerns about, and capacity to oversee a PBC approach. • Preparation of a Project Concept Paper, succinctly outlining the scope, objectives, targets, approximate cost, financial viability, and suitability of a PBC approach for implementation of the NRW program. The Project Concept Paper should also suc- cinctly address the level of uncertainty given current information, need for oversight assistance for the utility (to work with the PBC contractor), preliminary ideas for ­ ­ sustainability/follow-on activities after the PBC and key constraints/risks to address in the PBC design. • If warranted, preparation of the TOR for a Field Assessment Activity. The output/deliverable several reports covering the topics above. It is expected that the activity will have an approximate duration of 2–3 months, and require 6 to 8 work weeks of a team of 2 experienced NRW consultants—one focusing on technical aspects and the other focusing on financial and institutional aspects—and 1–2 local consultants to support data collection and analysis activities. The duration and level of effort should be refined, considering the local situation, data availability, logistics, size of the city, etc. Previous work assessing suitability of NRW Reduction This assignment builds on work already done to investigate the suitability of a ­ Performance-Based Contract for NRW reduction to achieve the goals of the utility. [Describe here the work done in the Screening. State that those reports will be provided to the shortlisted consultants. Describe any other preparatory work done.] Related work [If the NRW-PBC is part of a larger investment or reform project, describe here the other components of the project. Mention useful reports and other documents, and say that they will be made available to the shortlisted consultants.] 70 The Use of Performance-Based Contracts for Nonrevenue Water Reduction B. SCOPE OF WORK 1. Compile Existing Relevant Data Based on available records from the utility, discussions with the different departments within the utility and national water institutions, compile existing relevant data to support the decisions/assessments for this assignment. Parameters for data collection are listed in the Data Requirements for Initial Assessment Table (see Annex), but, broadly speaking, include the following categories: • Water supply resources, facilities, operations • Total volumes produced and billed to customers, on a monthly or at least quarterly basis • Distribution infrastructure specifics • Water Supply Service Quality • Utility Commercial Operations and Finances • Current NRW Practices • Recent NRW Performance Trends While such a standard will be difficult in some locations, a general target of 5 years of data is highly desirable. Three years is a bare minimum, and 10 years would be excellent. 2. Situational Assessment Based on the Analyses outlined in the Data Requirements for Initial Assessment Table (see Data Collection Template), the consultants will work with the utility to compile a prelimi- nary assessment of the recent trends in water resource availability, water supply coverage and service quality, volume and value of losses, approximate water balance, current NRW Practices, utility management effectiveness in order to estimate the root causes of NRW components, key technical, managerial and financial challenges to NRW management. The results of this analysis should be: • A recommendation on whether an NRW reduction program appears likely to be eco- nomically and financially viable, as well as technically desirable; and • Defined scope, objectives targets, approximate cost of an NRW program, and level of uncertainty given current information. Recommended Tools for use throughout the Initial Assessment include: Data Require- ments for Initial Assessment Trend Analysis, NRW Practices Rating, World Bank EasyCalc Software, NRW Project Benchmarking, NRW Diagnostic Summary, Target Setting/Optimi- zation, and NRW Project Financial Comparison. 3. Review of the Suitability of the PBC approach The consultant should conduct extensive discussions with utility officials, local gov- ernment officials, and other relevant stakeholders to analyze the suitability of a PBC The Use of Performance-Based Contracts for Nonrevenue Water Reduction 71 approach based on the following conditions, under which a PBC approach is most viable: • Major constraints exist on water resource availability, currently or expected in the future • High levels of NRW, especially in combination with water scarcity, low coverage, and poor water supply service with intermittent water supply • High water production cost, such as using desalination or high energy costs and requirements • Limited or low utility expertise in NRW planning and reduction • Utility cannot expand staff to reduce NRW and then scale back staff to maintain low NRW • Well established local companies with experience in utility operations and NRW • Successful experience in country with outsourcing, PBCs and other public-private partnership arrangements in the water sector or other sectors The consultant should make a recommendation on whether a PBC is likely to be an effec- tive way of implementing a cost-effective NRW reduction plan. This ­recommendation should consider the factors in Table 5.2. 4. Preliminary Recommendation on Contract Type and Scope The consultant should note the desired objectives of a NRW reduction project, and rec- ommend the area, functional scope, and type of contract that would be most suitable for achieving the objectives in the specified area. The consultant should then prepare a Draft Project Concept Paper providing an outline of the potential project, including: • Executive Summary • Profile of the utility: service territory, water resources, production facilities, coverage, technical and commercial networks, operations, service quality, management struc- tures, effectiveness, resources and capacities, cost structures, financial condition, etc. • Findings on the NRW Trends, NRW Practices, Preliminary Water Balance • Impact of NRW on the utility and customers, approximate targets and benefits of reduction • Outline NRW reduction Program Strategy • Suitability of the PBC Approach • Recommend contract goals, scope, and type • Risks to implementation–operational, technical, institutional, financial and policy/ regulatory • Local in-house utility capacity and how to build it if it is not in place, to ensure sus- tainability when the PBC contractor has gone 72 The Use of Performance-Based Contracts for Nonrevenue Water Reduction • Preliminary recommendations on a strategy for supervision, including on the need for an oversight contractor • Preliminary recommendations on sustainability mechanisms • Recommendation on the need for a Field Assessment Phase, based on current data quality and the level of uncertainty in the data and Project Concept overall This assessment will be used only for an initial estimation of the potential scope of an NRW Reduction Program, a realistic reduction target given a discussion on the time period and magnitude of financing needed to pursue such an NRW Reduction Program, as well as the concept for a suitable PBC. This information is often used as input to a develop- ment financial institution’s Project Concept Note (such as the World Bank) and to national and local government institutions in their discussions and planning of forward investment programs and budget. The findings from the Initial Assessment will be refined, and detail added, in the later stages of the process. After presentation/discussion of the Draft Project Concept Paper with stakeholders, the consultant will prepare a final version. 5. Review the Need for a Field Assessment Where the current available information is not sufficient to allow stakeholders to pro- ceed with an NRW-PBC, or to develop a practical contract concept, the consultant should ­ discuss, the need for a Field Assessment to gather more data to be able to arrive at an International Water Association (IWA) water balance with error bands under plus or minus 20 percent. The consultant will clarify why such an activity is necessary, and what issues the follow-up assignment needs to take into consideration. Next the consultant will pre- pare a customized TOR for a Field Assessment assignment, adapted from the template Field Assessment TOR, given the situation and needs/requirements of the utility. In preparing the TOR for a Field Assessment, the consultant will identify any minor civil works or equipment needed, such as installation of bulk meters or creation of one or more pilot DMAs. The consultant will provide cost estimates for any such works and equipment, and assess whether the utility can procure and pay for them, and whether these items should be included in the scope of work for the Field Assessment. C. METHOD The consultants will work with utility staff and managers. Most of the work is envisioned to be conducted in-situ. The consultants will develop an inception report with his/her work plan, data requirements and methodology and whenever necessary to familiarize the different stakeholders in the utility and national oversight institutions during inception, provide a short orientation about NRW Reduction and performance-based contracts. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 73 The work will be qualitative and quantitative and will draw on information made available by the utility and data collected by the consultant in cooperation with the utility. The utility will provide all available data and cooperate with the consultant to ensure that the best possible data is provided and the correct analysis can be made. D. DELIVERABLES/SPECIFIC OUTPUTS EXPECTED FROM ­ASSIGNMENT Based on the above tasks the following reports to be produced: • Report A: Inception Report (Work Plan and Method)—1 week from mobilization • Report B: Draft Situational Assessment Report—3-4 weeks from mobilization • Report C: Draft Project Concept Report—6-7 weeks from mobilization • Report D: Final Project Concept Report—8-9 weeks from mobilization • Report E: TOR for Field Assessment Activity (if required)—9-10 weeks from ­mobilization E. SPECIFIC INPUTS TO BE PRESENTED BY THE CLIENT The Client will make available all relevant documents. All information should be treated as confidential and not used for any other purpose. F. SPECIAL TERMS & CONDITIONS / SPECIFIC CRITERIA Language All primary reports (Reports A, B, C, D, and E) should be prepared in the primary language of the client (in this instance: [xxxx]) as well as in English and delivered in Word format. Timing/Assignment Duration The Consultancy will start on [xxxx]. The assignment is expected to be completed in [xxxx] days. Reporting The Consultants will report to [xxxx] based in [xxxx]. Payment Schedule [xxxx] 74 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Required Qualifications and Experience Team Leader—The NRW Engineer or the Utility Finance, Economics, and Institutional Spe- cialist should be proposed as Team Leader. NRW Engineer—The NRW Engineer shall have demonstrated successful experience in ­ Nonrevenue Water projects. S/he must have at least 10 years of experience in water supply in similar country contexts with demonstrated experience in NRW issues. Specific expertise on designing NRW projects is required. Extensive familiarity with the use of the IWA Water Balance tools, methods of assessment and reduction of real losses (pressure management, active leak detection, DMAs, etc.) and apparent losses (customer metering, control of ille- gal connections) and in the use of performance-based contracts is required. Utility Finance, Economics, and Institutional Specialist—The Utility Finance, Economics, and Institutional Specialist will have at least 5 years of experience working with financial, commercial, and institutional aspects of utility management of utilities, including custom- er metering, billing systems, collections management, control of illegal connections, util- ity accounting, financial management, budgeting, tariffs) structures and demand manage- Management ment programs, bills collection) in developing countries. The Utility Finance/­ Specialist will have financial analysis skills and will be able to develop a preliminary finan- cial assessment of the proposed NRW-PBC program. The Specialist will be familiar with the use of the IWA Water Balance as well as billing systems, collections, financial man- agement, budgeting, organizational frameworks, management practices, tariff structures, and in the use of performance-based contracts Local Engineer/Utility Management Specialist—The national engineer/utility Management Specialist will be an experienced engineer/utility manager and have at least 10 years of experience dealing with water supply, water distribution, metering, NRW projects, and ­ utility operations. The specialist will have experience and knowledge about both apparent (commercial) and technical (physical) losses. S/he will be familiar with the operations of the relevant water network and familiarity with the terrain of the service area. S/he will have advance level skills in the use of Excel and working familiarity with the IWA Water Balance tools. The Specialist will have good interpersonal skills and able to organize and support stakeholder dialogues with customers, utility staff, and other stakeholders. Key Background Documentation • Program Concept Note • NRW-PBC Operations Manual, with Annexes • Relevant utility reports and documents Potential Downstream Work (if applicable) Downstream work is possible following this assignment, for participation in the poten- tial Field Assessment Activity, the NRW Reduction Planning, Contract Design, Transaction Management or Supervision. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 75 C.2 TOR for Field Assessment Phase DRAFT TERMS OF REFERENCE Project/Assignment Title: Field Assessment for Nonrevenue Water Reduction and Preparation of Performance-Based Contract Project Location: [xxxx] Date of Assignment: [xxxx] A. BACKGROUND AND OBJECTIVES Country, Municipality, Utility [Describe here the background of the country, municipality, and utility.] Objective of this Assignment The objective of this assignment is to work with [utility] in [country] to gather information needed to make a decision on whether an NRW-PBC is desirable in [location], and if so, what kind of contract it should be. This assignment follows an Initial Assessment in which available information was assessed to see if an NRW-PBC was a good option, and additional information needed before a de- cision would be made was identified. It is expected that the Field Assessment will supply the information needed, and if a deci- sion is made to proceed with an NRW-PBC, feed into detailed design and implementation of that PBC. Summary of the Scope of Work The scope of the proposed assignment includes four sections: 1. Situation Analysis 2. Initiate Early Start Data Quality Activities 3. Conduct a Detailed Baseline/NRW Assessment 4. Develop the NRW Reduction Program Strategy SCOPE OF WORK Section 1 Inception The consultants will need to update/field validate and complete the data collected and identified for improvement during the Initial Assessment step, and then gather the additional information as specified below. ­ 76 The Use of Performance-Based Contracts for Nonrevenue Water Reduction The consultant will prepare an Inception Report, including 1) the new information or factors identified that were not considered in the TOR or Initial Assessment, and 2) a detailed work plan that specifies the inputs and resources required for the activities under this TOR, the necessary time frame, and contents of the outputs. Note: The TOR for the Field Assessment should be prepared by the consultant for the Initial Assessment, and should specify precisely the additional information or analysis that is re- quired. What follows are various components that may typically be required. The consultant can draw on these, but should delete whichever component is not needed for making the relevant decisions, and add any other components not listed here that are required. Component 1: Early Start Data Activities Early start activities to improve data accuracy, improve the level of interest of bidders, and to get an early start on preparation activities for NRW reduction. Such activities may include the following: • Updating/verification of network diagrams, specifications and condition data, • Updating/verification of customer databases, and customer meter data • Conducting field surveys to identify illegal connections (perhaps just in selected areas) • Measurement of use at unmetered connections to improve estimates of unmetered use • Development or updating of geographical information systems (GIS) for infrastruc- ture and customer information • Detailed zone measurement of continuity and pressure • Upgrading/installation of automated operational data systems (bulk metering, reser- voir levels, distributed flow and pressure measurement with telemetry connection to a control center), if applicable • Calibration/replacement of bulk meters • Calibration/replacement of large customer meters • Additional testing of customer meters • Improvements to NRW practice information systems such as work order manage- ment, which contribute to leak and burst rate analysis, estimation of rate of rise etc. • Creation of temporary DMAs (areas of 2,000—5,000 connections) including inflow metering and ring fencing customer database • Creation of pilot DMAs for leakage monitoring, network assessment, and training purposes • Hydraulic modeling (in situations where major pipe network changes are needed) The Use of Performance-Based Contracts for Nonrevenue Water Reduction 77 • Where it appears that heavy sectorization will be a part of the NRW-PBC, an early start activity here could be to develop or update a hydraulic model—note this will not always be needed and will often be generated by the PBC contractor but in some cases, it will be appropriate to have at this stage to give better information to the bidders and ensure the interest of bidders as well as ensuring that the PBC contractor can ramp up to start saving NRW faster. Note: it will not always be possible to install permanent DMAs at this stage or at the beginning of the PBC as there may simply not be reasonable pressure or hours of water supply available to do so. Permanent DMAs are only really required when the utility has the capacity in place to respond “next day” to a new leak. Many utilities are not there yet. In many situations around the world just undertaking a visual survey will greatly exceed the number of leaks which can be properly fixed by the utility. However, setting up tempo- rary DMAs to properly validate the components of real loss, and the elements/consumers within the area is a good idea and can be done using the consultants’ temporary equip- ment. The number of temporary DMAs will depend upon the confidence required and the variability of the initial results and can start with a few and build up to a maximum for the value in the contract. Where there has been a rapid assessment undertaken, an idea should be given as minimum and maximum. This phase will extend near to the end of the contract, but work on Section 3 and 4 can begin several months after the start of Section 2. Component 2: Prepare a Baseline The consultants will work with the utility to prepare a detailed baseline that will include: • Improved network plans (GIS if available) and updated customer information. • Results of testing in pilot DMAs (areas of 2,000—5,000 connections) including inflow metering and ring fencing customer database. • Results of field tests on each of the aspects of the IWA water balance such as: Source meter accuracy, customer meter accuracy, illegal connections, household consump- tion patterns, night time consumption, determine the level of NRW etc. and test NRW reduction activities, both commercial and technical. • Results of bottom up pressure leakage and time leakage field tests to identify what will happen when changes are made to time of supply or operating pressure, or both. • Calculations of improved estimations of the system input and output volume for the period. • Reviews of billing records and determine the volumes of billed consumption. Determine the potential losses due to inefficiencies of the billing system and/or the billing process. • Estimates for unbilled authorized consumption components and the total volume of unbilled authorized consumption. 78 The Use of Performance-Based Contracts for Nonrevenue Water Reduction • Estimates for the various components of unauthorized consumption and determina- tions of the annual volume of unauthorized consumption based on information to be made available and/or provided by the utility. • Improved calculations volume of NRW, volume of physical losses and commercial (real and apparent) losses. • Undertake a disaggregated component analysis of the volumes of real and apparent losses • Having mapping and modeling in this stage will also help to build local capacity by having local engineers and technicians working with the Field Assessment contractor • Conduct a careful analysis of the revenue and cost structure of the utility and unit variable and long run marginal costs of utility operations and maintenance that would inform the NRW Reduction Program Strategy planning. Component 3: Prepare the Water Balance Based on the available information/analysis, discussions with the different departments within the utility, the consultants will prepare an improved water balance for the entire network for a period of 12 to 24 months in accordance with the format of the International Water Associ- ation, and assessment of resulting uncertainty. World Bank (WB) EasyCalc Software is highly recommended. Component 4: Analyze the Data and Describe the Root Causes of NRW Based on all data collected, field tests undertaken, NRW Trends, NRW Practices ratings, and component analysis of both physical and commercial losses, describe the root causes of NRW and the most effective and realistic interventions to reduce the losses. Review the total volume and value of the NRW components for the short, medium, and long term using optimized routines directed towards the highest NPV based around the minimum scope of work (heavy or light on infrastructure). Component 5: Recommendations on NRW Program Components Based on the findings above, the consultants will recommend measures to reduce physical and commercial losses, which may include: • Physical (Real) Losses  Flow measurements—bulk metering  Sectorization and District Metered Areas (the latter if appropriate)  Pressure management—pressure zones  Leakage control—speed and quality of leak repair, active leak detection  Network rehabilitation/replacement, especially service connections The Use of Performance-Based Contracts for Nonrevenue Water Reduction 79 • Commercial (Apparent) Losses  Customer metering—meter under registration, full metering  Meter management—domestic and commercial customers  Meter reading—Illegal connections  Data handling—improve accuracy Component 6: Appraise the Financial Desirability of the NRW Reduction Program The consultants will cost out the NRW reduction Program and conduct a financial appraisal (preliminary FIRR, NPV, pay back) of the proposed NRW Reduction Program. Final Report: Comprehension Outline Prepare a report outlining the Key Findings of this Assignment, which will include: • Executive Summary • Introduction—Key summary facts of the utility: technical and commercial network, operations, management, resources and capacities, cost structures, service area and demand and hydraulic features • Situation Analysis—Presentation of findings on the Preliminary Water Balance • NRW reduction Program Strategy and Potential NRW Improvement Measures • Gaps in good standard operating procedures (SOP) for purchasing, inspection, instal- lation, maintenance, and suggestions how to improve • Review of the hydraulic model scenarios where applicable for heavier infrastructure projects • Local availability of good materials or justification for imported products for the PBC • Financial and Implications and Appraisal • Recommendations • Minimum scope of work to be undertaken by each key activity for the PBC contractor (This is critical and ensures and apples to apples comparison of the offers when it comes to bid analysis) • Risks to implementation—Looking at operational, technical, institutional, financial, and policy/regulations • Local capacity in-house, outsourced, how to build it if it is not in place to ensure sus- tainability when the PBC contractor has gone • TOR for an oversight contractor if required based on local capacity review above Note: Delete those elements not required—add other elements that are required. 80 The Use of Performance-Based Contracts for Nonrevenue Water Reduction B. METHOD The work will be qualitative and quantitative and will draw on information made available by the utility and data collected by the consultant in cooperation with the utility. The utility will provide all available data and cooperate with the consultant to ensure that the best possible data is provided and the correct analysis can be made. Any modest civil works (for DMAs etc.) required to be undertaken in Sections 2 and 3 could be carried out primarily through the support of the utility and undertaken and paid for outside this contract. However, experience has shown that it may be better to bundle modest civil works and equipment in the Consulting contract and not have to rely on installations and payments from the utility who in many cases may not have the capacity or the urgency at this point in the process. Therefore, the consulting firm should provide details of the anticipated works that in their proposal in and updated in their inception report and agreed with the utility. The equipment necessary to be used in undertaking Sections 2 and 3 will be brought in by the consulting firm and leased through the firms’ contract and will be included as part of their financial proposal. C. DELIVERABLES/SPECIFIC OUTPUTS EXPECTED FROM ­ASSIGNMENT Based on the above tasks the following reports to be produced: A. Inception Report: Assessment of the Current Nonrevenue Water Situation, Work Plan, and Preliminary Recommendations B. Report on Early Start Data Quality Activities and Detailed Baseline C. Report on new information found D. Reports like in the Initial Assessment (desirability of NRW reduction; suitability of PBC; scope and type of contract) E. Draft TOR for Oversight Contract, if required F. In addition, every 3 months a short progress report will be prepared, highlight- ing issues and problems encountered, deviation from schedule, and updated planning D. SPECIFIC INPUTS TO BE PRESENTED BY THE CLIENT The Client will make available all relevant documents. All information and background ­ echnical documents provided as part of this RFP are for the sole purpose of preparing the T and Financial proposal for this assignment. All information should be treated as confiden- tial and not used for any other purpose. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 81 E. SPECIAL TERMS & CONDITIONS / SPECIFIC CRITERIA Language All primary reports (Reports A, B, C, D) should be prepared in the primary language of the client utility as well as in English, unless otherwise specified, and delivered in Word format. The primary reports will be concise, management reports that are in the range of 30-50 pages. The progress reports should be in the language of the client and an executive summary in English. Timing/Assignment Duration The Consultancy will start on [xxxx]. The assignment is expected to be completed in [Ini- tial Assessment consultant to indicate] months. Reporting The Consultants will report to [xxxx] based in [xxxx]. Payment Schedule [xxxx] Required Qualifications and Experience The Core Team will be composed of a Team Leader (Water Specialist), Lead Engineer, and Utility Commercial Specialist. In case the Core Team is composed of international consul- tants (because of for instance lack of capacity and experience with PBC for NRW in the country), it shall then also include local experts guaranteeing thorough local presence and coordination with the local partners. The Consultant will be responsible for mobilizing the necessary Due Diligence and Survey Team and administrative back-stop on the ground to complete the assignment in the time required. The Core Team will have the following qualifications: • Team Leader—Either the Water Specialist/Engineer or Utility Finance/Management Specialist should be proposed as the Team Leader. • Water Specialist/Engineer—The Water Specialist/Engineer shall have demonstrated successful experience in Nonrevenue Water projects. S/he must have at least 15 years of experience in water supply in similar country contexts with demonstrated experi- ence in NRW issues. Specific expertise on designing NRW projects will be a plus. The Team Leader Specialist will have practical experience the use of the IWA Water Bal- ance, uncertainty analysis, field measurement techniques related to NRW and com- ponent analysis tools. • Utility Finance/Management Specialist—The Utility Finance/Management Special- ist will have at least 5 years of experience dealing with commercial, financial, and 82 The Use of Performance-Based Contracts for Nonrevenue Water Reduction managerial aspects of utility management in developing (customer metering, billing systems, collections management, control of illegal connections, utility accounting, financial management, budgeting, tariffs) structures and demand management pro- grams, bills collection) in developing countries. The Utility Finance/Management Specialist will have advanced financial analysis skills and will be able to develop financial assessment of the proposed NRW-PBC program. • Analyst/Specialist—A national analyst will support the team in logistics and data collection and analysis. The Specialist will have 10 years of experience in urban water ­ supply in the country. S/he will be familiar with the operations of the relevant water network and familiarity with the terrain of the service area. S/he will have advance level skills in the use of excel and working familiarity with the IWA Water Balance tools, hydraulic analysis and GIS where applicable. The Analyst/Specialist will have good interpersonal skills and able to organize and support stakeholder dialogues with customers, utility staff and other stakeholders. • Engineer—The national engineer will be an experienced engineer and have at least 10 years of experience dealing with water supply, water distribution, metering, NRW projects and utility operations. The engineer will have experience in developing base- lines and have knowledge on both apparent (commercial) and technical (physical) losses. S/he will be familiar with the operations of the relevant water network and familiarity with the terrain of the service area. S/he will have advance level skills in the use of excel and working familiarity with the IWA Water Balance tools, hydraulic analysis and GIS where applicable. The Analyst/Specialist will have good interper- sonal skills and able to organize and support stakeholder dialogues with customers, utility staff and other stakeholders. • Data collection technicians—The data collection technicians will be familiar with the challenges of collection field data, updating plans, locating assets, and leak detec- tion and repair supervision in developing country situations. The technicians will be local where the assets exist and a mixture of expat and local where they do not in order to build capacity. They should have a minimum of ten years experience and be educated to technician level. Key Background Documentation • Program Concept Note • TOR for Initial Assessment • Report(s) from Initial Assessment • TOR for Development of NRW Reduction Investment Plan and PBC Project Design and Procurement Relevant project documents as available, including, in all cases, a background note out- lining the situation of the specific country/city project. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 83 Potential Downstream Work (if applicable) Downstream work is possible following this assignment for the repetition or scale-up of the approach, including the support envisioned under the accompanying Terms of Reference for the Country Support: Development of a Performance-Based Contract in Nonrevenue Water Management. ­ C.3 TOR for NRW Reduction Strategy and PBC Design and Procurement DRAFT TERMS OF REFERENCE Project/Assignment Title: Country Support: Development of NRW Reduction Investment Plan and PBC Project Preparation and Transaction Location: [xxxx] Date of Assignment: [xxxx] A. BACKGROUND AND OBJECTIVES Country, Municipality, Utility [Describe background of country, municipality, and utility.] Objective of this Assignment The objective of this assignment is to develop a Performance-Based Contract for NRW Reduction, and procure a suitable contractor, in order to [state Objectives for the NRW Reduction Program determined at the previous stage. These objectives should be what will be achieved by the NRW Reduction Program and may include: improve continuity of supply; improve water quality; enable expansion of access; improve the financial position of the utility; reduce energy consumption and greenhouse gas (GHG) emissions]. Summary of the Scope of Work The scope of work is divided is divided into three phases: 1. Develop a NRW Reduction Plan, including technical and commercial aspects, and demonstrate its economic and financial viability 2. Design a Performance-Based NRW Reduction Contract that is attractive to the market and stakeholders 3. Manage competitive process to select contractor and assist with start-up 84 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Progress to the second and subsequent phases will depend on (a) satisfactory completion of the previous phase by the consultants; (b) recommendation by the consultants that it is advisable to proceed to the next phase; (c) agreement by the utility and other key decision makers to proceed. Previous work assessing suitability of NRW Reduction This assignment builds on work already done to investigate the suitability of a Performance-Based Contract for NRW reduction as a way to achieve the goals of the util- ­ ity. In particular, [Describe here the work done in the Initial Assessment and (if one was done) the Field Assessment. State that those reports will be provided to the shortlisted consultants. Describe any other preparatory work done.] Related work [If the NRW-PBC is part of a larger investment or reform project, describe here the other components of the project. Mention useful reports and other documents, and say that they will be made available to the shortlisted consultants.] B. SCOPE OF WORK Phase 1: Develop an NRW Reduction Plan The consultant is to develop an NRW Reduction Plan that indicates the technical and com- mercial approach to reducing NRW. The Plan is to show how this approach will achieve the objectives given above, and give an indicative cost. The consultant is also to report on the economic viability of the plan, and how likely it is to receive financing. In developing the Plan, the consultant shall carry out the following tasks. 1.1 Review the existing Assessment to check conclusions and identify risks and ­mitigants At the start of the assignment the consultant will: • Review the Assessment of NRW previously carried out • Identify any areas in which the consultant has doubts about the conclusions from the previous assessment • Confirm that the key stakeholders are interested in proceeding with a NRW-PBC • Identify data gaps and risks, and propose ways these gaps and risks can be addressed in development of the plan, the contract, and the transaction The output from this task will be an Inception Report which describes the above items and modifies the approach the consultant submitted in its proposal, to the extent justified by new information. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 85 1.2 Document the existing situation Note: While all the information listed in 1.2 is needed, if that information has been recent- ly gathered in the Assessment Phase, the information can simply be made available to the consultant, and the need to gather it removed. To ensure a common understanding of the context in which the NRW reduction plan must operate, the consultant shall provide a summary assessment of the organization of the utility, its service levels and financial performance. This summary assessment shall include: • A description of the service area, services provided, customer consumption profile, geographical/hydraulic context, availability of water and demand forecast • A brief history of the organization and current management • Capital improvement and expansion plans (current and planned). Investments proj- ects under way and their financiers • Government financial support to the utility, past and planned • Identification of main issues and challenges facing the utility in general • A NRW assessment, developed by the consultant, building on the work done in the previous assessment. This shall be done to the level of detail permitted by availability of information, and shall identify confidence intervals so that the effect of inade- quate data can be understood. This assessment shall include:  A completed IWA Water Balance  An estimate on accuracy of the collected data and a description how the data was collected (giving sources) for each of the water balance items  Relevant data on commercial and technical performance of the utility, including age of the network, adequacy of billing systems, etc.  All relevant activities in the past 10 years to reduce NRW  Staff and equipment availability for NRW reduction, as well as staff capacity and experience with NRW reduction  An assessment of record keeping on NRW levels, and of asset condition • Recommendations on the areas to focus a NRW improvement strategy on. These rec- ommendations must be demonstrably based on:  The levels of the key components of NRW (commercial, technical, theft, metering problems) in the utility  A clear analysis of the various causes of NRW  An indicative analysis of the value of reducing both physical and ­ commercial losses, considering the value of water saved and of increases in revenue The output from this task will be an Inception Existing Situation Report covering the above items. ­ 86 The Use of Performance-Based Contracts for Nonrevenue Water Reduction 1.3 Develop Indicative Strategy for NRW Reduction Note: The strategy shall be sufficiently detailed to enable its cost, and benefits and financial implications to be identified. However, if the contractor will be given discre- tion in how to reduce NRW, it does not need to be developed to be optimal, or at the level of specificity that it could be bid out as a works contract. In other words, the strategy should show the feasibility of NRW reduction and indicate an approach that will work, but it need not be the optimal approach. Detailed designs are not needed at this stage. Optimization and detailed design may be left to the contractor, provid- ed the intention is to draft a contract that provides for this. The information below should be edited to make clear the degree of detail and precision required from the consultant. The consultant shall prepare an Indicative Strategy for Reduction of NRW. The Indicative Strategy shall be based on successful approaches adopted in other similar situations, and shall include: • Recommendations on changes in the network configuration, including, where appro- priate: production metering, creation of DMAs, retail metering, pressure manage- ment, and similar initiatives • Changes in network operating practices, including in areas such as: passive and active leak detection and repair, response to mains burst, and scheduling of supply • Changes in commercial strategy, such as: improvement of the customer cadaster, changes in metering practices, changes in metering reading, billing and collection processes and practices • New information systems and analytic approaches, which may include: improvements in monitoring elements of the water balance, use of GIS, and hydraulic modelling of the network • Any other investments or changes in operational practices that would be required In addition, the consultant shall provide: • Estimates of the cost of implementing the strategy • An indicative timeline, showing the likely phasing and duration of each component of the plan • Quantified estimates of the effect the strategy will have on physical and commercial losses, and other physical and financial benefits it will offer, such as more customers on 24/7 supply, or increased revenue and cash receipts • Key Performance Indicators which can be used to track progress on the NRW reduc- tion plan, and the levels on these indicators that would be expected to be reached at various points in the plan The Use of Performance-Based Contracts for Nonrevenue Water Reduction 87 The strategy should explain how all elements will be integrated and phased, and how they will together achieve the objectives sought. The output from this task will be an Indicative Strategy for NRW Reduction covering the above items. 1.4 Assess the economic and financial viability of the indicative strategy Note: The degree of detail and precision required in the economic and financial assess- ment should be consistent with the type of contract being developed (See Guidance on Contract Type and Manual Section 4). It should also be acceptable to show that econom- ic and financial parameters exceed specified minimum thresholds—with a high degree of likelihood, as opposed to calculating them precisely. Section 1.4 below should be amend- ed appropriately. The consultant shall provide an economic cost benefit analysis of the proposed program, a financial analysis, and an indicative financing strategy. This shall include the following components: • An economic analysis, which shall be guided by the Optimization Framework presented in Discussion Paper 4 of World Bank (2016), and include:  An estimate of the net economic benefits of the Indicative Strategy  An analysis of whether the Indicative Strategy is the least cost way to achieve the benefits (among a range of plausible alternatives, including supply augmentation and demand side management)  An analysis of the sensitivity of the estimate of net benefits to key assumptions, including assumptions on the value of physical water saved, the value of reduc- tions in commercial losses, and the discount rate  Suggestions on opportunities for economic optimization of the strategy  The approximate confidence intervals on the estimates  The major risks to achievement of the net benefits expected • A financial analysis of the Indicative Strategy, both at the project and utility level. This analysis shall include an historical analysis, and financial projections over a fore- cast period, which shall be the proposed period of the strategy implementation, and at least 5 years thereafter. The following components are to be included in the finan- cial analysis:  An analysis the utility’s financial performance over at least the last five years. This shall include a review of five years of financial statement and cashflows, ­ calculations of standard financial ratios related to financial viability and bankability, and a brief commentary on the main drivers of the financial performance 88 The Use of Performance-Based Contracts for Nonrevenue Water Reduction  Projections of the utility’s financial performance over the forecast period, under a situation in which the NRW reduction strategy is not implemented— this shall include projections of the Income and Expenditure statement and Balance Sheet, as well as projections of operating cashflows and net cashflows  Forecasts of the change in cashflows that would result from the Indicative NRW Reduction Strategy, for each year of the forecast period  Relevant financial indicators for the Indicative Strategy, including the break-even period, the Financial IRR, and the NPV (at various plausible discount rates)  Projections of the utility’s financial performance over the forecast period, under a situation in which the NRW reduction strategy is implemented—this shall include projections of the Income and Expenditure statement and Balance Sheet, as well as projections of operating cashflows and net cashflows  Relevant financial indicators of viability and bankability for the utility, over the forecast period, under the assumption that the Indicative Strategy is ­implemented • An Indicative Financing Strategy. This strategy shall:  Indicate the financing required by the Indicative Strategy  Identify any additional financing the utility will require to be able to perform effectively over the period  Identify possible sources of such financing, and their advantages and ­disadvantages  Recommend sources of financing for the NRW Reduction Strategy, as well as sources for any additional financing the utility will require The output from this task will be an Economic and Financial Analysis, covering the above items. 1.5 Consult on the Indicative NRW Reduction Strategy The Consultant shall consult with the utility, key public sector decision-makers, and other stakeholders, with a view to achieving consensus on the NRW Reduction Strategy to be followed. In doing this, the Consultant shall: • At the commencement of the project, identify all key stakeholder, and develop a communication strategy for all stakeholders • At or soon after Project Inception, brief the key stakeholders on the objective of the assignment and the proposed workplan • Consult with stakeholders as appropriate during the analysis The Use of Performance-Based Contracts for Nonrevenue Water Reduction 89 • Present the Indicative Strategy and Economic and Financial Analysis to key stake- holders—be clear that the intention is that the plan is for the strategy to be imple- mented with assistance of a specialized firm under a Performance Based Contract • Take stakeholders comments and wishes into account in finding ways to improve the Indicative Strategy, from a technical, commercial, economic, financial and stake- holder acceptability perspective The output from this task will be a Stakeholder Consultation Report, summarizing how stakeholders have been consulted, the views they expressed, and how the consultant proposes to incorporate those views in the NRW Reduction Plan. 1.6 Proposed NRW Reduction Plan The Consultant shall prepare a Proposed NRW Reduction Plan by: • Improving the work done already under this phase, to consider stakeholder c ­ omments • Integrating the improved analytic work into a Draft NRW Reduction Plan • Submitting the Draft NRW Reduction Plan for comments • Taking into account the comments and producing the Proposed NRW Reduction Plan The outputs from this task will be a Draft NRW Reduction Plan, and a Proposed NRW Reduction Plan. Each of these outputs will include the same content as required in the Indicative Strategy and the Economic and Financial Analysis, integrated into a coherent whole, and updated as needed based on comments from stakeholders and the client. The client will then consider the Proposed NRW Reduction Plan and decide whether to proceed to design of a Performance Based Contract for NRW Reduction. Note: Consider agreeing with the client that the work will automatically proceed to Phase 2 after 4 weeks of consideration by the client, unless the client requests a different approach within that 4-week period. ­ Phase 2: Develop Design for a Performance Based NRW Reduction Contract The Consultant is to develop the concept, transaction structure and term sheet for a suitable Performance Based Contract for NRW Reduction. In developing this Contract Design, the consultant shall carry out the following tasks. 2.1 Define the objectives, scope, responsibility and risk allocation for the contract The Consultant shall define the objectives and scope of the contract, including: • The service improvements, cost savings, and revenue increases the contract is expected to produce, by itself or in combination with other initiatives. These are to be expressed as objectives, and also as indicative quantified targets 90 The Use of Performance-Based Contracts for Nonrevenue Water Reduction • The NRW reduction that that the contract is expected to achieve. This shall be dis- aggregated into physical and commercial improvements. Indicative targets are to be provided. Physical loss reduction should be expressed in cu.m per time period (not as a percentage of input volume). The benefits from reductions in commercial losses should be expressed in currency units. Relationships between the expected gains and other factors such as network pressure, hours of supply, extent of network, number of connections, tariffs, and availability of bulk water supply, should be described in quantitative terms. • The scope of the contractor’s responsibility. This should be defined in general terms, considering possible elements such as:  Work related to creation of information, such as installation of production meters, SCADA systems, GIS systems, and development of hydraulic models and water balances  Work on the network, such as creation of DMAs, pressure management, pipe replacement, replacement of connections, passive and active leak detection, leak repair, burst repairs  Work related to the commercial function, such as customer cadaster, testing or replacement or installation of customer meters, improvements in meter-reading, billing systems, bill preparation and delivery, and collection of bills  Work that is outside traditional NRW reduction contracts, such as improve- ments in energy efficiency, collection of overdue accounts, improvements in customer service and call centers, adoption of mobile money, installation of pre-payment metering systems, installation of water dispensers, and the like  Maintenance of the system after the targeted gains have been made  Training, capacity-building, and hand-back. The Consultant shall propose an allocation of risks under the contract, and the respon- sibilities of each of the parties. To do this the Contractor shall: • Define the contractor’s responsibility and the utility’s responsibility for each item in the scope. For example, in some cases the Contractor could be responsible for all aspects of that item (such as installing DMAs), and the utility could be responsible only for approving plans, and providing access to the network. In other areas, the Contractor might be responsible just for advising the utility, and the utility might be responsible for implementation. The degree of discretion accorded to the Contractor in each area shall be defined. • Create a risk register that includes all material risks in implementing the NRW Reduc- tion Plan. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 91 • For each risk, advise on whether it should be allocated to the contractor, the util- ity, or shared or allocated to some other party. Provide a justification for the ­recommendations. The output from this task will be an Objectives, Scope, Responsibilities, and Risk Report, covering the areas mentioned above. 2.2 Develop an Indicative Transaction Design After receiving feedback from the client on the Objectives, Scope, Responsibilities and Risk Report, the Consultant shall revise that report and develop it into an Indicative Con- tract Design. The Indicative Contract Design shall include: • A Terms Sheet that sets out:  Responsibilities of the Contractor  Responsibilities of the Utility and other public sector entities  Objectives and targets  Payment structures  Governance, monitoring, and dispute resolution arrangements • Funding and financing mechanisms, which set out:  How the capital costs of the program will be financed  How the contractors program management costs will be funded  How the costs of monitoring and dispute resolution will be covered  How the utility will be able to fund its operations and any complementary invest- ments needed to enable the desired objective to be achieved • Any other matters needed to make the contractual design a success. The output from this task will be an Indicative Transaction Design, covering the areas mentioned above. 2.3 Carry out a market sounding to ensure there is market interest in the proposed contract concept The consultant will sound out suitable, potential bidders to see if there is sufficient market interest in the transaction to create competitive tension, and if necessary take the results into account to propose amendments to the Indicative Transaction Design. To do this, the consultant shall: • Identify suitable potential contractors that it would want to bid on the opportunity • Develop a suitable mechanism—such as a survey, or a structure interview ­ template— transactions, to learn from these potential contractors their level of interest in the ­ 92 The Use of Performance-Based Contracts for Nonrevenue Water Reduction and factors that would make them more or less likely to bid, and apply that ­mechanism • Summarize the findings • Recommend any changes to the Indicative Transaction Design warranted by the ­report The output from this task will be a Market Sounding Report, summarizing the level of market interest, and detailing any changes to the design proposed, with reasons. 2.4 Confirm availability of finance for the project The consultant shall confirm that finance is available for the project. The consultant shall: • Check that the financing strategy developed in Phase 1 is still realistic • Talk with potential suppliers of finance to ascertain their interest in providing the finance needed, and check the conditions that would have to be met for them to provide finance • Confer with the utility and other key public sector decision makers to ascertain their willingness to comply with the conditions • Set out the financing strategy and structure for the transaction, and how the condi- tions for attracting finance can be achieved The output from this task will be a Finance Strategy, summarizing the proposed fi- nancing sources, how the financing will be structured, and how the financing conditions can be met. 2.5 Legal and Regulatory Due Diligence identify The consultant shall carry out a legal and regulatory due diligence. This shall ­ any standards that the PBC needs to comply with. Among the legal questions that must be considered are relevant contract law, labor law, delegation of public authori- licenses, utility regulation, and rights of way and access to land and infrastructure. ty, ­ The output from this task will be a Legal and Regulatory Due Diligence Report, summa- rizing the above items to the extent that they are relevant to the design of the transaction. 2.6 Environment, Safety and Social Due Diligence The consultant will assess the extent to which the Indicative Strategy and Transaction Design will have environmental, safety, or social implications, and recommend what ­ needs to be done to ensure compliance with local and national standards, in these areas. Cost implications must also be identified. The output from this task will be an Environment, Safety and Social Due Diligence Due Diligence Report, summarizing the above items. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 93 2.7 Produce Business Case for Proposed Contract Design The consultant shall produce a Business Case for the Proposed Contract Design. This Busi- ness Case will pull together the results of the preceding analysis to demonstrate that the proposed NRW Reduction Strategy and Performance Based Contract Design are feasible, beneficial, and better than alternatives. The output from this task will be a Business Case which includes: • The proposed Contract Design • The expected costs, benefits, and financing arrangements for the proposed Contract Design and NRW Reduction Strategy • An indicative procurement strategy • An indicative timetable for implementation • A summary of the main risks that could affect the proposal, and how they may be mitigated • A comparison of the recommended option with two other options for the delivery of the NRW reduction strategy. One of these options shall be a plausible approach to delivering NRW reduction by the utility itself. The Business Case shall describe, and in so far as possible, quantify the advantages and disadvantages of the different delivery mechanisms. 2.8 Consult with stakeholders on the Contract Design The consultant shall consult with the utility, key public sector decision-makers, and other stakeholders, with a view to achieving consensus on the Contract Design to be adopted. To do this the consultant shall: • Consult with stakeholders as appropriate during the analysis for Phase 2 • Present the Business Case to key stakeholders • Take stakeholders comments and wishes into account in finding ways to improve the Contract Design and other aspects of the proposed approach The output from this task will be a Contract Design Stakeholder Consultation Re- port, summarizing how stakeholders have been consulted, the views they expressed, and how the consultant proposes to incorporate those views in the Contract Design. 2.9 Finalize Contract Design Taking into account the consultation with stakeholders, the consultant is to finalize the Transaction Design and Business Case, and recommend whether to proceed to Phase 3. The outputs from this task will be a Final Transaction Design and Business Case. The client will then consider the Final Transaction Design and Business Case and decide whether to proceed to design of a Performance Based Contract for NRW Reduction. 94 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Note: The degree of detail, and the time required for all the above works should be specified considering: the work already done in the Assessment Phase; the type of con- tract that was envisaged in the Assessment Phase; and the size of the contract. Also, consider agreeing with the client that the work will automatically proceed to Phase 3 after 4 weeks of consideration by the client, unless the client requests a different approach within that 4-week period. Phase 3: Manage Competitive Selection Process for Contractor The consultant shall run a competitive process to select a suitable contractor to imple- ment the NRW Reduction Strategy under the approved Performance Based Contract. To do this, the consultant shall perform the below tasks. 3.1 Generate market interest in the transaction The consultant shall develop a strategy to inform potential bidders about the transaction, and generate bidder interest. After the client agrees to the strategy, the Consultant shall implement it. This strategy may include generating coverage in the trade-press, advertis- ing the opportunity, and contacting potentially interested firms directly. 3.2 Develop qualification criteria and qualify prospective bidders The consultant shall develop and apply an appropriate set of qualification criteria. This shall include: • Recommending a qualification strategy, including:  Qualification criteria  Information to be used to assess if the criteria are met  Whether to do prequalification • Agreeing the approach to qualification with the client If prequalification is chosen, the consultant will then: • Develop Prequalification documents • Assist the client in issuing prequalification documents • Assist the client in receiving the prequalification document • Prepare a prequalification report for the client indicating for each applicant the e ­ xtent to which it meets the qualification criteria • Assist the client in communicating to applicants if they were pre-qualified or The outputs from this task will be a Recommended Qualification Strategy and, (if pre- ification report. qualification is chosen), the Prequalification documents, and a Prequal­ The Use of Performance-Based Contracts for Nonrevenue Water Reduction 95 3.3 Developing Performance Based Contract and any related documentation required for the transaction The consultant will develop all transaction documentations required, including the Per- formance Based Contract. Other documents required might include: Guarantees, Perfor- mance Bands, or Implementation Agreements, depending on the situation and type of contract. The Contract and other documents must reflect the agreed Transaction Design, and be consistent with international best practice and local law. 3.4 Setting targets, incentives payments, and determining bid variable or other eval- uation criteria The consultant will finalize the incentive payments, targets, bid variable, and evaluation criteria to be used in the transaction. These shall be designed with reference to Discussion Paper 4 found in World Bank (2016). In particular, the consultant shall prepare, for inclusion in the Contract or RFP • Clear description of the performance indicators to be used in the contract • Current baseline for each indicator (where available and required for the contract) • Targets for each individual indicator, and specification of their contractual signifi- cance (if any) • Specifications for how each indicator is to be measured under the contract • Rules for setting or adjusting baseline values after an initial phase of work, if required • Payment or other incentive mechanisms related to progress on the performance ­indicators • Other payment formula • Payment disbursement arrangements • Mechanisms for monitoring performance, including as applicable by independent monitoring consultants. Data for setting baselines, targets, cost-estimates, should be those produced in Phase 2 3.5 Developing Request for Proposal The consultant shall develop a Request for Proposal (RFP) document. This RFP shall: • Provide bidders with the information they need on the opportunity • Explain the bidding process and rules • Make the evaluation criteria clear • Include all transaction documents • Protect the client, and government, from liability 96 The Use of Performance-Based Contracts for Nonrevenue Water Reduction The consultant shall provide a Draft RFP to the client and then adjust it following client comments to produce the Final RFP. The outputs produced under this task are a Draft RFP and the Final RFP. 3.6 Running transaction process The consultant will run the transaction for the client. This will include • Proposing a transaction strategy and agreeing it with the client • Advertising the opportunity (unless the client chooses to do this itself) • Issuing the RFP to pre-qualified firms (or interested firms, if prequalification is not used) • Running a data room, bidders conference, and site visits, if appropriate • Responding to bidder queries. The consultant shall establish and follow high quality processes and systems to ensure the integrity of the competitive selection process. 3.7 Assisting the client to receive and evaluate bids The consultant will assist the client in receipt and evaluation of the bids by: • Organizing a secure system for receipt of bids in accordance with the transaction rules • Assisting the client to evaluate bids by preparing a report which, for each bid, assesses:  It compliance with the bid requirements  The extent to which the bidder meets the qualification criteria  The score on the bid variables • Assisting the client to notify bidders of the result, in accordance with the bid rules The output produced under this task will be an Evaluation Report document compli- ance, qualification, and evaluation score, for each bidder. 3.8 Reaching commercial (and if relevant financial close) on the transaction The consultant will assist the client to negotiate with the one or more bidders, in ­ accordance with the bid rules, in order to reach a successful signature of the contract and other transaction documents. If the transaction structure includes private finance, the consultant will assist the client to reach financial close. 3.9 Supporting the client during the first 3 months after the contractor mobilizes The consultant will assist the client in the first 3 months of implementation of the con- tract. To do this the consultant must dedicate at least 24 days of input from relevant The Use of Performance-Based Contracts for Nonrevenue Water Reduction 97 staff, at least half of whom must be based at the client’s site. During this period the consultant will help the client to: • Interpret the contract • Understand and perform its own obligations • Respond to questions and requests from the contractor • Ensure the contractor delivers as required by the contract • Manage stakeholder communications C. METHOD The work will be qualitative and quantitative and will draw on information made avail- able by the utility. The utility will provide all available data and cooperate with the consultant to ensure that the best possible data is provided and the correct analysis can be made. D. DELIVERABLES/SPECIFIC OUTPUTS EXPECTED FROM ­ASSIGNMENT The deliverables are for this work are divided by Phase and listed below. • Phase 1: Develop a NRW Reduction Plan  Inception Report  Inception Existing Situation Report  Indicative Strategy for NRW Reduction  Economic and Financial Analysis  Stakeholder Consultation Report  Proposed NRW Reduction Plan • Phase 2: Develop Design for a Performance Based NRW Reduction Contract  Objectives, Scope, Responsibilities, and Risk Report  Indicative Transaction Design  Market Sounding Report  Finance Strategy  Legal and Regulatory Due Diligence Report  Environment, Safety, and Social Due Diligence Report  Business Case 98 The Use of Performance-Based Contracts for Nonrevenue Water Reduction  Contract Design Stakeholder Consultation Report  Final Transaction Design and Business Case • Phase 3: Manage Competitive Selection Process for Contractor  Recommended Qualification Strategy (if prequalification is chosen)  Prequalification documents  Prequalification report  Draft RFP  Final RFP  Evaluation Report E. SPECIFIC INPUTS TO BE PRESENTED BY THE CLIENT The Client will make available all relevant documents. All information and background documents provided as part of this RFP are for the sole purpose of preparing the Tech- nical and Financial Proposal for this assignment. All information should be treated as confidential and not used for any other purpose. F. SPECIAL TERMS & CONDITIONS / SPECIFIC CRITERIA Language All reports should be prepared in English, unless otherwise specified, and delivered in Word format. The financial model shall be delivered in Excel format. An executive summary of the various documents may be provided in the primary lan- guage of the client. Timing/Assignment Duration The Consultancy will start on [xxxx]. The assignment is expected to be completed in 21 months. Each phase should follow the timelines set below: • Phase I: 7 months • Phase II: 5 months • Phase III: 9 months Reporting The Consultants will report to [xxxx] based in [xxxx]. Payment Schedule [xxxx] The Use of Performance-Based Contracts for Nonrevenue Water Reduction 99 Required Qualifications and Experience The Core Team will have the following qualifications: • Team Leader—Shall have demonstrated successful experience in leading the design and implementation of utility improvement projects involving performance based contracts. S/he must have at least 10 years of experience in structuring and implementing perfor- mance based contracts in water supply in similar country contexts, with demonstrated experience in NRW issues. Specific expertise on designing and implementing PBC for NRW will be a plus. One of the other specialists may fill the Team Leader role. • NRW Reduction Specialist—Must be a qualified Engineer and have at least 10 years of experience dealing with NRW projects and operations. Must have experience in developing baselines and have knowledge on both apparent (commercial) and tech- nical (physical) losses, including in developing countries (as well as experience deal- ing with NRW under conditions of intermittent supply [to be included if intermittent supply is characteristic of the client utility]). • Contract Design Specialist—Must be qualified in law or economics (or preferably both) and have at least 5 years of experience in designing performance based contracts for infrastructure. Experience with water utilities, and NRW reduction, is desirable. • Financial Specialist—Must have at least 5 years of experience with financial modelling of infrastructure, with proven experience with water projects in developing countries. Specific experience in modelling NRW projects—whether PBC or traditional TAs—will be a plus. • Utility Commercial Specialist—The Utility Commercial Specialist will have at least 10 ­ tilities years of experience dealing with commercial aspects of utility management of u (customer metering, billing systems, control of illegal connections and thefts, tariff structures and demand management programs, bills collection) including in develop- ing countries • Legal Specialist – Must have 5 years of experience advising on complex ­ commercial contracts related to infrastructure, and must be familiar with the laws of the country concerned as regards utility regulation and licensing, contracts, and labor law. • Environmental and Social Specialist—Must have at least 5 years of experience advis- ing on environmental and social impacts and compliance for infrastructure projects, and in the country in which the project is located. In case the Core Team is composed of international consultants (because of, for instance, lack of capacity and experience with PBC for NRW in the country), it shall also include local experts for local knowledge and coordination with the local part- ners. The consultant will be responsible for mobilizing the necessary team to com- plete the assignment in the time required. 100 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Key Background Documentation Program Concept Note—Relevant project documents as available, including in all cases a background note outlining the situation of the specific country/city project. Potential Downstream Work (if applicable) Downstream work is possible following this assignment for the repetition or scale-up of the approach. C.4 TOR for PBC Oversight Assistance DRAFT TERMS OF REFERENCE Project/Assignment Title: Oversight/Support Contract for Nonrevenue Water PBC Reduction Contract in [xxxx] Location: [xxxx] Date of Assignment: [xxxx] A. BACKGROUND AND OBJECTIVES Country, Municipality, Utility [In this section describe the background of the country, municipality, and utility.] Objective of this Assignment The objective of the Oversight/Support Contract is to: • Provide the utility with an objective, third-party review of the performance of the PBC Contractor • Assess the contractor it in comparison to the terms and conditions of the PBC Con- tract, to facilitate the best possible project outcome • Help the utility manage the contractor • Build contract oversight supervisory capacity in the utility Summary of the Scope of Work The scope of the proposed assignment includes the following tasks: • Preparation of an Oversight/Support Plan • Verification of Contractor Reports, Activities, and Results The Use of Performance-Based Contracts for Nonrevenue Water Reduction 101 • Provision of technical and programmatic advisory services to the utility on PBC con- tract oversight/compliance, quality control, and monitoring • Consultant-led training for the utility on PBC contract oversight/compliance, quality control, and monitoring Organization and Design of Activities in this ToR ­ ater s This Activity should be conducted by a firm, specialized in management of w ­ ector consultants reporting infrastructure and O&M projects, or possibly a group of individual ­ accountability. A large to the Team Leader, with clear and effective management and ­ project will require the use of a firm, but a smaller one may only require one or two consultants. If applicable and possible, consultants involved in the Initial Assessment, Field Assessment, or subsequent phases of the project preparation should be involved in this ­ Oversight/Support Contract, at least in an advisory capacity to the firm, or in a super- visory capacity. Experience with previous oversight projects has led to the conclusions that 1) the decision to have an oversight contract and 2) the magnitude (“weight”) of that contract needs to be examined from the start of the project design process, and certainly not after the fact (as has happened in several cases). The project objectives and minimum scope of work need to be analyzed along with the flexibility the PBC contractor may have, in the final contract, to identify a correct level of oversight. Also, as the PBC con- tractor is being selected the previously mentioned considerations need to be weighed with the capability of the selected PBC contractor to ensure: • The oversight contractor has enough authority and “backing” from the utility to prop- erly monitor and ensure that the PBC contractor and utility are undertaking their ­ respective roles, and so that the PBC contract has sufficient flexibility so that useful interventions from the oversight contractor can be implemented easily and in time. • In the case of a strong PBC contractor and a weak utility, the oversight contractor needs to have a sufficient budget and influence so they will be a technical and project support arm involved not only in helping to keep the contract on track, but also in ensuring capacity building and sustainability. B. SCOPE OF WORK Task 1: Preparation of an Oversight Support Plan The Consultant will prepare a Project Oversight/Support Plan, at the beginning of the activity, based on Project planning documents, the PBC Contract, and input from both the utility and the PBC Contractor. The Oversight Plan should be fully coordinated and tuned to the phases, scope, objectives, targets and milestones of the specific contract. Depending on the skill level ­ of the utility and the PBC contractor, specific areas of emphasis should be added. 102 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Task 2: Verification of Contractor Reports, Activities and Results The consultant will review all PBC Contractor reports, verify the accuracy of the reported outputs and outcomes and/or identify any material discrepancies that should be understood and potentially addressed by the utility. The scope of the Oversight will be designed based on the scope of the PBC Contract and the capabilities of the utility, but could include the following: civil works, installation of customer meters, operation of billing and commercial systems, installation and O and M of monitoring/information systems and associated monitoring equipment, NRW reduction and control activities, the quality of materials used or workmanship utilized, required studies or analyses (such as baseline updates or target adjustments), requests for Contract modifications, or similar deliverables under the PBC Contract. Note: The specific activities under this task will depend on phases, scope, objectives, targets and milestones of the specific contract. Specific activities for which such advi- sory services are to be provided should be added. Task 3: Provision of Technical and Programmatic Advisory Services to the Utility The consultant will provide technical and programmatic advisory services to the utility to assist it to address any discrepancies it wishes to address or modifications desired to reports, or procedures used under the PBC Contract. Note: The specific nature of that advisory services will depend on phases, scope, objec- tives, targets and milestones of the specific contract. Specific activities for which such advisory services are to be provided should be added. Task 4: Consultant-led Training for the Utility The consultant will provide training to the utility on PBC Contract oversight, quality assurance and project monitoring, towards the objective that the utility could conduct such activities in the future, without external assistance. Note: The specific nature of that training will depend on the specific context. Specific training needs, based on the specific tasks under the PBC and overall oversight experience of the utility, should be added. The consultant will provide a series of reports, as outlined in Section D below. C. METHOD The work will be somewhat qualitative, but mostly quantitative and will draw on global experience in project oversight, compliance, quality assurance, and outcome monitor- ing. The utility and PBC contractor will provide all available data and cooperate with the consultant to ensure that the best possible data is provided and the correct analysis can be made. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 103 D. DELIVERABLES/SPECIFIC OUTPUTS EXPECTED FROM ­ASSIGNMENT Based on the above tasks the following reports to be produced: A. Inception Report: Describing an updated project Oversight/Support Plan, refined and updated from the preliminary Oversight/Support plans developed during project preparation, the consultant’s proposal for this assignment, and the results of exten- sive discussions with the utility and PBC Contractor. B. Regular Quarterly Reports: Every 3 months a summary report will be prepared, high- lighting activities conducted, summary results, issues and problems encountered, deviation from schedule, and updated planning, if any. C. Regular Annual Reports: Every 12 months a more detailed report with Executive Summary will be prepared, outlining activities conducted, results achieved, issues and problems encountered, deviation from schedule, and updated planning, if any. D. Report on Capacity Building: At the end of the capacity building, a report should be delivered saying what was done, what effect it had, and any further capacity building recommended. E. Draft and Final Report on Oversight/Support for the <> PBC Project, including overall results, lessons learned, recommendations for any follow-on activities, and recommendations for future NRW-PBC Oversight Support Contracts. Note: The dates and formats of reports should be adjusted to match the requirements of the contract. E. SPECIFIC INPUTS TO BE PRESENTED BY THE CLIENT The Client will make available all relevant documents. All information and background documents provided as part of this RFP are for the sole purpose of preparing the Tech- nical and Financial proposal for this assignment. All information should be treated as confidential and not used for any other purpose. F. SPECIAL TERMS & CONDITIONS/SPECIFIC CRITERIA Language All primary reports (listed above) should be prepared in the primary language of the client utility as well as in English, unless otherwise specified, and delivered in Word format. The primary reports will be concise, management reports. Compiled monitoring data/indicators will be provided in a consistent Excel format and will be user friendly. 104 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Timing/Assignment Duration The Consultancy will start on [xxxx]. The duration of the assignment will be the same as the PBC Contract, but could be extended, should the Client request so, to allow for ongoing monitoring, technical assistance and training and other forms of support to ensure that the impact of the PBC is fully measured and benefits are sustained (to the extent they can be with advisory support activities). Reporting The Consultant will report to [xxxx] based in [xxxx]. Payment Schedule [xxxx] Required Qualifications and Experience The Project Team will be composed of the following specialists • Water Specialist Team Leader/Engineer—The Team Leader shall have demonstrated successful experience in Nonrevenue Water projects. At all times, the Team Leader will be available for support and backstopping to the Technical Team. S/he must have at least 10 years of experience in water supply in similar country contexts with demon- strated experience in NRW issues. Specific expertise on designing NRW projects will be a plus. The Team Leader will have practical experience the use of spreadsheets, statistical packages, project monitoring and oversight, the IWA Water Balance, uncer- tainty analysis, field measurement techniques related to NRW and component anal- ysis tools. The Team Leader will also have experience in project management in the context of water and sanitation utilities. • Analyst—A national analyst will support the team in logistics and data collection and analysis. The Specialist will have 10 years of experience in urban water supply in the country. S/he will be familiar with the operations of the relevant water network and familiarity with the terrain of the service area. S/he will have advance level skills in the use of excel and working familiarity with the IWA Water Balance tools, hydraulic analysis and GIS where applicable. The Analyst/Specialist will have good interper- sonal skills and able to organize and support stakeholder dialogues with customers, utility staff and other stakeholders. • Data collection technicians—the data collection technicians will be familiar with the water system construction activities, instrumentation, meters, pressure transducers, etc., the challenges of collection field data, the practical necessity for updating plans and procedures in developing country situations. The number of technicians will depend on the scale of the project, but at least 2—one on civil works and quality con- trol and the other on instrumentation and monitoring. The technicians will be local to where the assets exist. They should have a minimum of 5 years experience and be educated to technician level. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 105 • Financial analyst—position to be included if reduction in commercial losses, improve- ments in collections or other improvements in financial performance are targeted by the contract. The analyst should be qualified with a degree in finance, economics, or accounting, and have at least 5 years experience on projects focused on improving the financial performance of water utilities in developing countries, including experi- ence with efforts to reduce NRW and improve collections. Key Background Documentation • Program Concept Note • ToR for Initial Assessment, plus Report(s) from Initial Assessment • ToR for Field Assessment, if applicable plus Reports from the Field Assessment, if any • ToR for Development of NRW Reduction Investment Plan and PBC Project Design and Procurement, plus reports prepared under this TOR • The PBC Contract, and any amendments to the PBC Contract • PBC Contractor Reports including, potentially, baseline refinement studies, updated plans (with, indicators, revised targets, time frames, etc., other major technical or managerial reports, and regular progress reports • Other relevant project documents as available Potential Downstream Work (if applicable) Downstream work is possible following this assignment for extension of the duration of the oversight support activities, and/or repetition or scale-up of the approach. 106 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Appendix D Suggested Report Outlines D.1 Screening Phase Screening Report: • Executive Summary (process undertaken, criteria used, summary of results, and any fol- low up actions that may be needed before proceeding to the Initial Assessment) • Introduction (initial input from stakeholders and geographic scope selected) • Methodology (data requirements, data availability, data quality) • Ranking (criteria, weightings, deliberations) • Results (initial results, feedback from stakeholders, and final results) • Discussion (level of confidence in the results, span of ratings across different candidate locations) • Recommendations • Annex with data collected and rating/ranking information D.2 Initial Assessment Phase Initial Assessment Report: • Executive Summary (analyses undertaken, summary of results and key decisions and any follow up actions needed before proceeding in the preparation process) • Introduction (profile of the utility and overview of the TOR) • Data Collection (data requirements, data availability, data quality) • NRW Situational Assessment (water supply and NRW trends, volumes and values of NRW, initial water balance and uncertainty level, NRW practices) • Suitability of a NRW-PBC (technical, financial, and institutional considerations) • Indicate NRW-PBC project concept, including objectives, contract type, and key indicators • Perspectives on Project Oversight and Sustainability of Results • Risks to implementation–operational, technical, institutional, financial and policy/ regulatory • Recommendations on next steps and PBC NRW Concept • Recommendation on the need for a Field Assessment Phase, based on current data quality and the level of uncertainty in the data and Project Concept overall • Annex with data collected and results of analyses • Annex with TOR for Field Assessment, if needed The Use of Performance-Based Contracts for Nonrevenue Water Reduction 107 D.3 Field Assessment Phase Field Assessment Report: • Executive summary (data collection and analyses undertaken, summary of new findings/implications, changes to the Project Concept, key decisions, and any follow up actions needed) • Introduction (profile of the utility, summary of Initial Assessment, and overview of the site-specific TOR for Field Assessment) • Data collection (target data parameters, data collection mechanisms, results, and any lim- itations observed) • Revised NRW Situational Assessment (water supply and NRW trends, volumes and values of NRW components, results of component analysis, revised water balance and uncer- tainty level, and NRW practices) • Suitability of a NRW-PBC (technical, financial, and institutional considerations) • Revised Project Concept (scope, objectives, indicators, targets, time frame, approximate cost, results of FIRR and EIRR, Draft Plan on Transition/Sustainability of Results) • Recommendations on next steps • Summary of key decisions and recommendations • Annex with data collected and results of analyses The consulting team/consultant should also prepare a presentation version of the Executive Summary to be used in dialogue with country stakeholders. D.4 NRW Reduction Strategy Phase Report of NRW Reduction Strategy Phase: • Executive Summary—Data collection and analyses undertaken, summary of new findings/ implications, changes to the Project Concept, key decisions, and any follow up actions needed • Introduction—Profile of the utility, summary of Initial Assessment, and overview of the site-specific TOR for Field Assessment • Short-term activities that can begin in parallel if necessary, such as updating of system plans, census, loading customers, etc. • Development of the Indicative NRW reduction Strategy options identified, method and results of optimization routines, and approach in the case of intermittent supply and cost • Proposed NRW reduction Strategy: work proposed, operational changes proposed, time- line, impact, and performance indicators for the NRW reduction project 108 The Use of Performance-Based Contracts for Nonrevenue Water Reduction • Economic appraisal of the NRW reduction Strategy—Analyses conducted and results • Financial appraisal of the NRW reduction Strategy—Analyses conducted and results • Suitability of a NRW-PBC—Technical, financial, and institutional considerations • Draft Plan on Project Oversight/Support Contract and Transition Sustainability Activities • Recommendation on whether to proceed with a NRW-PBC • Recommendation of next steps • Summary of key decisions and recommendations; and • Annex with data collected and results of analyses D.5 PBC Design Phase Reports of PBC Design Phase Final Transaction Report: • Executive Summary • Introduction—Background and topics covered • Results of the market sounding and implications for the Contract Design • The proposed Contract Design, including responsibilities of the Contractor, responsibili- ties of the utility and other public sector entities, objectives and targets, payment struc- tures, governance, monitoring, and dispute resolution arrangements • A comparison of the recommended option with two other options for delivery of the NRW reduction strategy (one of these options shall be a plausible approach to delivering NRW reduction by the utility itself) • An indicative NRW-PBC procurement strategy • Draft Plan on Project Oversight/Support Contract • Next steps • Summary of key decisions/recommendations • Annex with data collected and results of analyses Business Case Report: • Executive Summary • Introduction—Background and topics covered • The expected costs, benefits, timetable, and financing arrangements for the proposed Contract Design and NRW reduction Strategy • A summary of the main risks that could affect the proposal, and how they may be mitigated The Use of Performance-Based Contracts for Nonrevenue Water Reduction 109 • A comparison of the recommended option with two other for delivery of the NRW reduc- tion strategy (one of these options shall be a plausible approach to delivering NRW reduc- tion by the utility itself) • Summary of key decisions/recommendations • Annex with data collected and results of analyses • A financial model setting out the assumptions which support the business case The consulting team/consultant should also prepare a presentation version of the Executive Summary to be used in dialogue with country stakeholders. D.6 Procurement Phase The Procurement Phase has two expected reports: the prequalification report and the eval- uation report. These reports are to help the contract authority evaluate the applications to be prequalified and to evaluate the proposals. D.7 Implementation and Oversight Phase Reports of the Oversight Contractor: • Inception Report—Describing an updated project Oversight/Support Plan, refined and updated from the preliminary Oversight/Support plans developed during project prepara- tion, the consultant’s proposal for this assignment, and the results of extensive discus- sions with the utility and PBC Contractor. • Monthly Reports—Every month a summary report will be prepared, highlighting activities conducted, summary results, issues and problems encountered, deviation from schedule, and updated planning, if any. • Annual Reports—Every 12 months a more detailed report with Executive Summary will be prepared, outlining activities conducted, results achieved, issues and problems encoun- tered, deviation from schedule, and updated planning, if any. • Report on Capacity Building—At the end of the capacity building, a report should be deliv- ered saying what was done, what effect it had, and any further capacity building recommended. • Draft and Final Report on Oversight/Support for the PBC Project, including overall results, lessons learned, recommendations for any follow-on activities, and recommendations for future NRW-PBC Oversight Support Contracts. 110 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Appendix E Tools E.1 Screening Tool The Screening Tool—a qualitative and quantitative scorecard—is used to identify cities, towns or locations which may be good candidates for NRW-PBC Projects. Below you will find a screening tool example (Table E.1), as well as background data (Table E.2 and Table E.3). TABLE E .1: Screening Tool Example Criterion Red Amber Green Ajuga Moreno Nkane Rallamah NRW levels NRW <15% 15%40% ● ● ● ● NRW < 300L/C/D 300 800L/C/D ● ● ● ● Water supply reliability 24-18 hours <18 hours ● ● ● ● Variable operating costs $0.00-0.50/m3 cost >$0.50/cu.m ● ● ● ● Installed Capacity (Water IC > 250lpcd IC < 250lpcd ● ● ● ● Production) Resource scarcity Unlimited high-quality Between All available water water available with allocated, solutions ● ● ● ● little pumping or such as desalination storage costs being considered Demand growth (%p.a.) 0%4% ● ● ● ● LRMC ($/cu.m) LRMC <$0.30 $0.30$1.00 ● ● ● ● Legal barriers to PBCs Yes Not Clear No ● ● ● ● Social support for PBCs No Not Clear Yes ● ● ● ● High priority on Ministry of No Not clear Yes ● ● ● ● improving water Water service in this area Ministry of No Not clear Yes ● ● ● ● Finance Conclusion of Screening ● ● ● ● The Use of Performance-Based Contracts for Nonrevenue Water Reduction 111 TABLE E .2: Scenarios—Data Availability versus Continuity of Supply Continuous supply intermittent supply Adequate Production Insufficient Production NRW reduction will allow NRW reduction will not 2437 allow 2437 Good data 1 Information on variables in checklist is readily available Ajuga Continuous supply and good data Assumed for data in most cases Poor data 2 3 4 Moreno Nikane Rallama Continuous supply and Continuous supply and Continuous supply and good data good data good data TABLE E .3: Scenarios—Key Attributes Name Ajuga Moreno Nkane Rallamah Description Small Tropical Island Provincial Town Medium City Major City Data Availability Good Poor Poor Poor No. of Connections 50,000 50,000 100,000 250,000 Water Production Capacity High Adequate Low Low Continuity of Supply (Hours/day) 24 24 12 6 Average Operating Pressure (m) 40 25 20 15 NRW (%) 34% 51% 53% 53% Level of NRW, L/C/D 478 482 704 956 Level of NRW, L/C/D (wsp) 800 800 2400 Level of Apparent Loss, L/C/D 120 unknown unknown unknown Level of Real Loss, L/C/D (wsp) 360 assumed to be high assumed to be high assumed to be high Extent of Customer Metering 100% 50% 50% 50% 112 The Use of Performance-Based Contracts for Nonrevenue Water Reduction Name Ajuga Moreno Nkane Rallamah Expected Growth in Demand (m3/month) 3% 1% 2% 6% Current Cost of Water ($/m produced) 3 $1.00 $0.50 $0.40 $0.65 Average Variable Operating Costs $0.40 $0.15 $0.15 $0.30 Long-Run Marginal Costs (LRMC) $2.00 $0.50 $0.50 $2.50 Cost of Water from Next Supply ($/m produced) 3 $1.50 $0.75 $0.50 $1.00 Average Tariff ($/m sold) 3 $2.00 $0.50 $0.40 $0.30 Operating Ratio (operating revenues/operating costs) 1.00 0.80 0.65 0.50 Social Opposition to Performance-Based Low Moderate High Moderate Contracts (PBCs) Political Support for Water Supply Ministry of High Moderate High High improvements Water Ministry of Moderate Low Low High Finance E.2 Data Collection Template Area Importance Parameter Data High Water Production Maximum Capacity, 1,000 m3/day for each supply facility Medium % of pumped versus gravity feed supply Medium Type of pumps where majority of pumped supply High Raw water storage volumes Water Supply High Type of supply metering with description of meter calibration procedures Medium Inter-annual variations (L, M, H) High System Input Volume, 1,000 m3/day High Measured Billed Volume, 1,000 m3/day High Estimate of Unmeasured Billed volume, 1,000 m3/day, with rationale used High Number of Authorized Customers (accounts) (residential, commercial, etc.) The Use of Performance-Based Contracts for Nonrevenue Water Reduction 113 Area Importance Parameter Data High No. of Connections (active, inactive, illegal, legal but tampered) High Length of Mains, km Distribution Infrastructure Medium Lengths of different types of pipe material, by diameter Medium Distribution storage volumes Medium Description of extent of sectorization Medium Presence and use of District Metered Areas (DMAs), if any High Number of connections and customers with micro-metering Medium Number, type, and average age of most common customer meters Medium Results of customer meter accuracy testing, if any (and process used) Medium Coverage of water supply services with direct connections High Average time supply is provided (hours/week) High Number of connections with 24/7 supply year-round Service Quality High Extent of the use of roof tanks, if any High Utility minimum pressure requirements at property line Medium Utility corporate attitude on supply to 2/3 story buildings instead of jockey pump High Average distribution system pressure, by zone if possible Medium Results of water quality testing at connections, if any (potability) High Recent Financial Statement (audited if possible) Medium Components of Operating Costs Finances Medium Capacity, Timing, and Cost of next Supply Facility High Tariff Structure—classes, steps, unit prices, fixed charge Medium Monthly Management Reports (if they exist) E.3 Trend Analysis Tool The Trend Analysis Tool1 is a method to assemble utility context and performance data in a systematic and complete manner. This tool can help to: understand of the evolution of per- formance over recent years; benchmark current performance; and monitor progress over time. The trend analysis tool complements other tools included with the Operations Manual, including the IWA Water Balance Tool (World Bank EasyCalc) and the NRW Practices Rating Tool. Together they form a powerful suite of tools for to identify important aspects of NRW for improvement, or to evaluate the impact of projects or programs to reduce or control NRW and related parameters. E. 3.1 Principal Parameters Tracked There are several parameters tracked using this tool, including: • System Attributes and Operations – Coverage within Utility Service Territory 114 The Use of Performance-Based Contracts for Nonrevenue Water Reduction – Connections – Customers – % Metered Customers – Length of Mains – Connection Density – Supply Continuity, % – Average Pressure – Production Capacity – Capacity Utilization, % – Water Production – Total Water Billed – Total Nonrevenue Water – Water Billed, liters/connection/day – NRW, Liters/Connection/Day – Reported Leaks on Mains/100 km of Mains/Year – Unreported Leaks on Connections/1,000 Connections/Year – Infrastructure Leakage Index (ILI) Note that this is a complete, ideal, list of parameters and indicators. Many utilities will not have the full set of data available. Even with only partial data some useful trends can be found, Figure E.1 and Figure E.2 shows samples of the graphical presentation of the information, for the case of Belize Water Systems. In the first, overall consumption is rising as connec- tions rise, but total NRW is falling, yielding a roughly constant requirement for water pro- duction. The second figure shows the same parameters by connection, where we can see billed water per connection is nearly constant, but as NRW is decreased, so is water produc- tion requirement. • Water Utility Finances – Operational Revenue from Water Services – Operational Revenue from Sewerage Services – Other Operational Revenue – Non-Operational Revenue – Total Revenue – Operational Cost of Water Services – Operational Cost of Sewerage Services The Use of Performance-Based Contracts for Nonrevenue Water Reduction 115 – Administrative Costs – Other Operational Costs – Total Operational Costs – Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) – Depreciation – Earnings before Interest and Taxes (EBIT) – Debt Service – Taxes, if Any – Net Earnings – Operating Costs Recovery Ratio – Revenue Collection Ratio – Cost of Water Production/Volume Produced – Revenue per Volume Billed (average tariff) Note that this is a complete, ideal, list of parameters and indicators. Many utilities will not have the full set of data available. Even with only partial data some useful trends can be found. In this case, we can observe that the financial situation in this government owned corpo- ration has vastly improved—EBITDA has risen from about BZ$6 million to BZ$14 million, and net earnings has risen from a negative number to a positive one. Cost of water production, effective average tariff, and operating cost coverage ratio have remained roughly constant. 116 The Use of Performance-Based Contracts for Nonrevenue Water Reduction FIGURE E .1: Production Trends 14,000 14,000 60,000 60,000 connections waterconnections 12,000 12,000 50,000 /year 50,000 /year 33 10,000 10,000 m 1000m 40,000 40,000 volume,1000 8,000 ofwater 8,000 30,000 30,000 Watervolume, 6,000 6,000 Numberof 20,000 Number 20,000 4,000 4,000 Water 2,000 10,000 10,000 2,000 0 0 0 0 22 33 44 55 66 77 88 99 00 11 22 33 44 55 /1 /0 /0 /0 /1 /1 00 /1 /0 /1 /0 /0 00 /1 /1 /0 /0 /0 /1 /1 /1 /0 /1 /0 /0 /1 1/ 10 7/ 12 14 11 13 99 66 22 44 33 55 88 1/ 10 7/ 12 14 11 13 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 22 00 00 00 00 00 22 00 22 22 22 22 22 22 22 22 22 22 22 22 Total water Total production, 1,000 water production, 1,000 mm3/year 3 /year Total water Total billed, 1,000 water billed, 1,000 m m3/year 3 /year Nonrevenue water, water, 1,000 m3/year 1,000 m 3 /year Water connections Water connections Nonrevenue 1,000 1,000 894 894 900 843 Water production, L/connection/day Water production, L/connection/day 900 843 772 Water 772 billed, L/connection/day Water billed, L/connection/day 800 800 721 722 L/connection/day NRW, L/connection/day 721 722 690 697 NRW, 690 697 700 657 700 657 616 616 596 592 596 596 592 596 571 573 600 600 571 573 465 465 479 479 500 500 436 436 437 437 434 434 427 432 432 432 432 435 435 437 437 432 432 432 432 431 437 437 427 431 400 400 414 300 378 414 300 378 336 336 284 289 200 200 284 289 262 262 265 265 225 225 100 100 181 181 159 159 160 164 164 140 160 140 135 135 0 0 11 22 33 44 55 66 77 88 99 00 11 22 33 44 55 66 /0 /1 /0 /0 /0 /1 /1 00 /1 /0 /1 /0 /0 /1 00 /1 /0 /1 /0 /0 /0 /1 /1 /1 /0 /1 /0 /0 /1 /1 1/ 10 7/ 12 14 11 13 15 00 99 66 22 44 33 55 88 1/ 10 7/ 12 14 11 13 15 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 22 00 00 00 00 00 22 00 22 22 22 22 22 22 22 22 22 22 22 22 22 22 The Use of Performance-Based Contracts for Nonrevenue Water Reduction 117 FIGURE E .2: Financial Trends $45 $20 EBITDA, net earnings, BZ$, millions $40 Operating costs and revenues, $35 $15 $30 BZ$, millions $10 $25 $20 $5 $15 $10 $0 $5 $0 –$5 20 08 20 09 20 04 20 05 20 06 20 13 5 20 11 20 12 20 14 20 0 20 07 20 02 20 03 /1 /1 / / / / / / / / 01 / / / / 01 01 01 01 01 01 01 01 01 01 01 01 01 20 Operating costs Operating revenues EBITDA Net earnings Change in costs over time $5.00 2.20 $4.50 2.00 $4.00 1.80 1.60 $3.50 1.40 $3.00 1.20 $2.50 1.00 $2.00 0.80 $1.50 0.60 Cost of water production, BZ$ /m3 produced $1.00 0.40 E ective average tari , BZ$ /m3 billed $0.50 0.20 Operating cost coverage ratio $0.00 0.00 20 04 20 05 20 06 20 08 20 09 20 10 20 /11 20 12 20 13 20 14 5 20 02 20 03 20 07 /1 / / / / / / / / 01 / / / / 01 01 01 01 01 01 01 01 01 01 01 01 01 20 NRW Components Figure E.3 shows the estimated top down water balance over time, a two-fold reduction in apparent losses, and about a fourfold reeducation in real losses. For the last four years, the graph of real loss shows only small loss reductions and only minor reductions in the Infrastructure Leakage Index, given constant pressure. 118 The Use of Performance-Based Contracts for Nonrevenue Water Reduction FIGURE E .3: Water Loss Trends Estimated components of water losses 500 450 Real losses, L/connection/day 400 Apparent losses, L/connection/day 350 300 250 390 359 200 249 200 208 150 187 192 155 100 117 98 102 109 88 83 50 68 68 65 62 59 54 52 49 43 40 36 33 30 31 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 /0 /0 /0 /0 /0 /0 /0 /0 /0 /1 /1 /1 /1 /1 /1 /1 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 450 35 400 RL/connection/day 30 Average network pressure(m) 350 Infrastructure leakge index (ILI) 25 300 250 20 200 15 150 10 100 5 50 0 0 3 4 5 6 1 02 20 3 20 4 20 5 6 7 8 9 0 1 2 /1 /1 /1 /1 /1 /0 /0 /0 /0 /0 /0 /0 /0 /1 /1 1/ 12 13 14 15 00 02 03 04 05 06 07 08 09 10 11 0 20 20 20 20 20 20 20 20 20 20 20 20 20 The Use of Performance-Based Contracts for Nonrevenue Water Reduction 119 E.3.2 Results Summary 120 The table below shows a tabulation of key parameters and indicators generated by this tool. Cascal Ownership Belize Water Services, Ltd WATER SYSTEM ATTRIBUTES 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Average Water Network Mains 895 910 950 958 981 1002 1044 1073 1084 1134 1182 1228 1322 1359 Length (km) Average No. of Water 36,620 37,404 38,616 39,414 40,107 41,119 42,983 44,223 45,074 46,237 47,421 48,522 50,619 54,019 Connections Connection Density 40.9 41.1 40.7 41.1 40.9 41.0 41.2 41.2 41.6 40.8 40.1 39.5 38.3 39.7 (Connection/km) Customers with Meters, % 100% 100% 100% 100% 100% 100% 100% 3 Billed Water, m /Connection/ 11.5 12.6 13.3 13.3 13.2 13.0 13.1 13.1 13.2 13.3 13.1 13.1 13.1 13.3 month Average Network Pressure (m) 30 30 30 30 Continuity of Service, % 100% 100% 100% 100% Reported Mains Leaks/km/year Reported Connections Leaks/1,000 Connections/year FINANCES and RESOURCES Operating Revenue, 1,000 BZ$ $19,301 $21,167 $22,301 $25,909 $27,322 $27,448 $28,866 $29,673 $31,047 $34,869 $35,327 $33,583 $34,923 $39,821 Operating Costs, 1,000 BZ$ $15,270 $15,030 $15,236 $16,861 $16,905 $16,868 $18,705 $19,216 $18,494 $21,810 $23,673 $24,512 $24,640 $25,724 Operating Cost Coverage Ratio 1.26 1.41 1.46 1.54 1.62 1.63 1.54 1.54 1.68 1.60 1.49 1.37 1.42 1.55 Cost of Water Production, BZ$/m3 $1.36 $1.23 $1.40 $1.63 $1.60 $1.63 $1.71 $1.81 $1.82 $2.17 $2.31 $1.74 $1.75 $1.71 Variable Cost of Water Production, BZ$/m3 Effective Average Tariff, $3.821 $3.743 $3.627 $4.123 $4.304 $4.279 $4.264 $4.256 $4.334 $4.728 $4.725 $4.391 $4.383 $4.618 BZ$/m3 sold The Use of Performance-Based Contracts for Nonrevenue Water Reduction NRW PERFORMANCE Nonrevenue Water, 465 479 336 284 289 262 265 225 181 159 160 164 140 135 L/Connection/day Nonrevenue Water, % 55.1% 53.6% 43.5% 39.4% 40.0% 38.0% 38.1% 34.2% 29.4% 26.7% 27.0% 27.6% 24.5% 23.6% Water Losses, L/Connection/day 427 459 314 262 267 241 244 203 159 138 138 143 118 113 Apparent Losses, L/Connection/day 68 68 65 62 59 54 52 49 43 40 36 33 30 31 Real Losses, L/Connection/day 359 390 249 200 208 187 192 155 117 98 102 109 88 83 Apparent Loss/Billed 18.0% 16.5% 15.0% 14.3% 13.5% 12.8% 12.0% 11.3% 9.8% 9.1% 8.4% 7.7% 7.0% 7.0% Authorized Consumption Real Losses, m3/km/day 14.7 16.0 10.1 8.2 8.5 7.7 7.9 6.4 4.8 4.0 4.1 4.3 3.4 3.3 Infrastructure Leakage Index (ILI) 2.43 2.59 2.07 1.96 Pressure Manangement Index (PMI) 1.50 1.50 1.50 1.50 Global Leakage Index 3.65 3.89 3.10 2.95 The Use of Performance-Based Contracts for Nonrevenue Water Reduction 121 E.3.3 Instructions for Use of the Spreadsheet A blank spreadsheet is provided on the PBC webpage with this description for use in project preparation and monitoring. The spreadsheet itself is quite straightforward in that year-by- year data can simply be added into the respective lines. Rows with gray shading contain formulas, and should not be adjusted. The graphs should populate correctly, although time scales and axes scales may have to be manually adjusted. The more difficult part of the task of Trend Analysis is obtaining the data, and conducting some quality control. In general, data sources include: • The utility itself • A national or state/province-level regulator, if applicable • Sector studies performed by an oversight Ministry • Sector studies by regional or global development finance organizations • Specific project analyses for the utility or region in question from websites of donor organization • Associations of regulators such as Asociación de Entes Reguladores de Agua Potable y Saneamiento de las Américas (ADERASAS) in Latin America • Other utility benchmarking sites • The International Benchmarking Network for Water and Sanitation Utilities (IBNET), the World Bank database on utility parameters It will often happen that various sources contradict each other. In general, it is best to start with the base parameters as opposed to derived parameters. For example, start with total volume produced, and total volume billed, and derive NRW in the spreadsheet to verify the derived data. Simple typos can be present even in official reports. One common source of data confusion is that many organizations are not fully transparent on the time frame for a reported parameter or derived indicator. For example, a volume of water production could be reported as a total over a year, but the number of connections could be reported as an end-of-year figure. The ratio of these two values would give an inaccurate value of average volume produced per connection, over the year. An average number of connections over the year should be used, which could be approximated from the average of 1) the connections at the end of the year in question and 2) the number of connections at the end of the previous year. Therefore, detailed notes should be made for each parameter as to the source, assump- tions made and any corrections made. If an important parameter is missing, this gap should be noted. Provisional values may be used, but they should be highlighted. 122 The Use of Performance-Based Contracts for Nonrevenue Water Reduction E.4 NRW Practice Rating Tool The purpose of the NRW Practice Rating Tool is to 1) document the practices being conducted to reduce and control NRW, and 2) provide a quantitative rating on the completeness and maturity of practices in different domains of NRW management. The results show strengths and weaknesses of the current fields of practice. The NRW Practice Rating Tool can be used to prepare: • An initial assessment of existing practices at the water utility • A work plan to introduce new or improved practices • A training program to introduce new or improved practices • A monitoring report (for example, repeat every 6 months to measure progress on practice improvement) • Information to assist in decision making on possible outsourcing of specific practices or functions, to improve practices or reduce NRW • A comparison of the NRW Practices and performance with other utilities This version of the tool has a two-level assessment approach. The 12 Rating Fields are sep- arated into two groups—a set of 8 Basic Fields, and 4 additional Advanced Fields. If a quick analysis is required a rating can be prepared using just the 8 Fields. Any comparison of Practices in different utilities is to be made the number of Fields utilized should be consistent. This version of the tool has six Practice Rating Fields, including: 1. NRW Program Management 2. Information Systems 3. Water Balance Practice 4. Apparent Loss Reduction and Control 5. Real Loss Reduction and Control 6. Monitoring and Analysis Table E.4 shows the Rating Fields and Criteria. The table on the next page shows the actual rating system for one of the fields—NRW Management. This detailed table provides guidance on the specific practices associated with a given rating. The example provided is for the case of Aguas de Guariroba, a concession operator in Brazil. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 123 TABLE E .4: NRW Practices Assessment Rating Fields and Criteria 124 Nonrevenue water practices assessment rating fields and criteria Apparent loss reduction an Practices field Program management Information systems Water balance practice Real loss reduction and con Mtronlitoring and analysis control Rates utility practices on Rates utility practices on Rates utility practices Rates utility policies and Rates utility policies Rates utility practices on NRW program leadership, establishing information on water audit / water activities on all components and activities on all use of experiences, program organization, planning, systems, and keeping them balance as per IWA of apparent loss reduction components of real loss results, and information Description of budgeting, human and up to date so that NRW terminology and and control reduction and control system data to assess plans practices field material resources, planning and programs methods, focusing on and procedures, and revise incentives and use of are based on accurate accuracy and validity strategies, plans and targets outside resources information 1 Top management Information systems plan Water audit / water Planned customer database Leak repair capabilities Regular water balance update interest/leadership balance procedures verification/update regarding good NRW management 2 NRW management General NRW information Estimation of system Written guidelines on Leak repair time— Assessment of NRW plans and organization system (key indicators and Input (master customer meter class and distribution pipes activities for effectiveness and trends) metering) – including meter sizing cost efficiency for planning imports and exports 3 Communication and Water source/supply Estimation of billed Written guidelines on meter Leak repair time—service (Large) customer consumption coordination among information system metered consumption replacement, based on connections monitoring departments regarding (customer metering) financial analyses NRW 4 NRW program planning Billing and customer Investigation and Customer meter reading Use of pressure management Billing accuracy and efficiency and budgetting information system analysis of customer control and efficiency investigation and improvement metering inaccuracies improvement 5 Oversight of plans and Water distribution network Estimation of billed Use of customer meter workshop Active leakage control Monitoring of arrears and deliquent Criteria for Basic NRW Practices Assessment budgets maps and data systems unmetered consumption for meter testing program based on accounts (GIS or other) financial considerations 6 Technical skill level Maintenance management Estimation of Reduction of the number Use of district meter areas Pressure monitoring and control and training of NRW system unbilled authorized of unmetered connections, (DMAs), zones, or sectors The Use of Performance-Based Contracts for Nonrevenue Water Reduction personnel consumption especially large uses (goverment, etc) 7 Technical resources Program on data validity Estimation of Program to reduce unknown Pipe rehabilitation/ Customer reporting feedback available improvement unauthorized or unauthorized use: replacement policies and system/call center, with consumption unauthorized connections, implementation, based on response rate monitoring meter tampering, bypasses financial considerations 8 Reporting and public Information systems Estimation of data Public education on water Information / promotion Regular NRW monitoring information on NRW int egration/ handling errors use, cost of water supply, and to the public and local reports progress, targets, compatibility consequences of unauthorized authorities on the plans, and budgets use importance of prompt reporting of bursts 9 Advanced, ongoing, Database on pipe material, Use of uncertainty Program for residents Analysis of pipe material, Monitoring and quality control staff training / capacity age and condition, break analysis to examine of slum areas with burst frequency, age etc on the team and their efforts building rate expected range of unauthorized connections to for planning rehabilitation on reducing unknown and or water audit results, “legitimize” their connections and/or replacement unauthorized water use by category 10 Use of internal awards Database on meter type, Use of leak/burst Use of disconnection policy Efforts to reduce or Quaility control on crews or and recognition size, class, and age records for leakage for non-payment eliminate storage tank contractors which conduct leak for excellent staff component analysis overflows or leakage detection, repairs, rehabiliation performance or replacement works 11 Performance-based Database on DMA Night flow testing and Assessment of different type Regular maintenance of Zone or DMA compensation bonus configuration and analysis to estimate or class of water meters valves, air valves, PRVs, performance analysis systems for staff performance leakage for both large and small hydrants and mains customers flushing The Use of Performance-Based Contracts for Nonrevenue Water Reduction 12 Experience in Water network hydraulic Water balance refinement Use of AMI / AMR systems Use of flow/perssure/noise Use of SCADA for real time contracting for NRW model using a comparison of (perhaps for large sensors to detect leakage monitoring and operational services top-down and bottom up customers only) optimization Criteria for Advanced NRW Practices Assessment audit methods 125 TABLE E .5: NRW Management Rating Scale 126 NRW Management Practices Rating Scale Enter Rating Rates utility practices on NRW which best None Poor Deficient Adequate Good Excellent leadership, organization, planning, describes the budgeting, human and material situation 0 1 2 3 4 5 resources, incentives and use of 1 Top management interest / 4.5 Top management has Top management has Top management has Top management Top management thinks Top management leadership regarding good NRW no understanding, very little understanding, some understanding, thinks NRW is NRW is important, requests and reviews management information or concern information or concern information or important but reviews information on NRW reports, provides about NRW about NRW concern about NRW does not want to NRW status, but has financial and other allocate resources only allocated limited support to NRW to improving it resources to improving it activities and holds staff accountable 2 NRW management organization 5 There is no unit for the There is no Unit for the There is no Unit for There is a cross– There is a specific unit There is a specific unit management of NRW – management of NRW but the management of unit task force for for the management of for NRW management no particular unit is in different departments NRW but different the management NRW, with a designated with its own staff and charge of NRW communicate periodically departments of NRW, with leader; however there a high level leader on what they are doing communicate a designated are some responsibility who reports to top consistently and leader to ensure overlaps with other management and works coordinate their consistent departments with other departments activities to some communication and as necessary degree coordination 3 Communication and coordination 4.5 The communication The communication The communication The communication The communication The communication among departments regarding NRW between departments between departments between departments between between departments between departments is nonexistent: (planning, commercial, is loosely structured departments is is well structured and is well structured planning, commercial, water production, water but infrequent – semi well structured fairly frequent. The and frequent—various water production, distribution, finance) annually or quarterly— but infrequent— various “functions” meet “functions” meet water distribution, is very infrequent: for is no coordination of semi annually or quarterly or monthly, monthly, coordinate finance example, only in writing NRW related activity quarterly. There is and coordinate activity activity on NRW and during the annual little coordination on NRW informally exchange planning process of NRW related information and ideas The Use of Performance-Based Contracts for Nonrevenue Water Reduction activity frequently 4 NRW program planning and 4.5 The utility has no The utility has no targets, The utility has The utility has The utility has a short run The utility has a 10 budgeting targets, plans or plans or budget for NRW only informal some targets and NRW management plan, year NRW management budget for NRW management, but sees targets, plans, or plans, but no with a rough baseline, plan, with targets, management, and has that this should be started budget for NRW formal budget for targets, activities, and a strategies, activities, little if any interest to management, which NRW; targets are program budget but does financial analyses, and develop them are part of budget for based on “rule of not monitor progress a program budget for distribution or another thumb,” without a closely capital and operational department reliable baseline expenditures 5 Oversight of plans and budgets 4.75 Utility management Utility management pay Utility management Utility management Utility management Utility management does not supervise no attention to progress only briefly reviews only briefly and regularly reviews reports reviews reports and activities focusing on on plans and expenditures progress on plans and sporadically and convenes quarterly convene broad monthly NRW on NRW management. expenditures on NRW reviews progress meetings with staff meetings with staff management, once on plans and working on NRW to working on NRW to each year expenditures on assess progress and help assess progress and NRW management, solve problems help solve problems for example twice a year, and provides comments. 6 Technical skill level and training of 4.5 The skill level of The skill level of The skill level of The skill level The skill level of The skill level of NRW personnel engineering personnel engineering personnel engineering personnel of engineering engineering personnel engineering personnel and operational crews and operational crews is and operational crews personnel and and operational crews is and operational crews is very poor and poor, and they receive no is poor to adequate, operational crews good and both staff and is excellent, staff want they receive no NRW training but there is interest in is adequate, and the company want to to learn more, and some training improving skills there is some improve skills training is underway interest in more training 7 Technical resources available 4 The utility has no The utility has some The utility has some The utility has a The utility has a The utility has a full special equipment special equipment for special equipment for modest supply of reasonable supply of supply of special for NRW work, such NRW work, but the NRW work, but the special equipment special equipment for equipment for as pipe locators, equipment is rarely used equipment is rarely for NRW work, such NRW work, such as NRW work, such listening devices, leak out of lack of interest or used due to its age as pipe locators, pipe locators, listening as pipe locators, correlators, pressure training and poor condition listening devices, devices, leak correlators, listening devices, sensors and data and which are used pressure sensors, and leak correlators, loggers data loggers pressure sensors and data loggers, and investigates new technologies 8 Reporting and public information on 4.75 No reporting or The utility has no program The utility has a small The utility has The utility has a modest The utility has a strong, The Use of Performance-Based Contracts for Nonrevenue Water Reduction NRW progress, targets, plans, and distribution of to provide information to program to provide a small annual quarterly program to proactive quarterly budgets information to the the public regarding NRW information to the program to provide provide both summary program to provide public on NRW is public by providing information to the and detailed information both summary and carried out summary reports to public by providing to politicians, detailed information to newspapers and local summary reports newspapers, NGOs, and politicians, newspapers, municipal officials to newspapers the public, via print schools, NGOs, and the and more detailed media, their website, and public, via print media, information to social networking tools their website, and social local officials and networking tools the public via its 127 website table continues next page table continued 128 9 Advanced, ongoing, staff training/ 4.75 No staff ever receive Staff training is seen Some senior staff Senior and mid-level Senior and mid-level The utility has a capacity building any training as important but is not receive sporadic staff receive some staff receive some comprehensive staff planned, budgeted, or training training at least every training at least every development and conducted 2 years year, as part of an retention plan. ongoing program 10 Use of internal awards and 3 There are no programs There are sporadic There are sporadic There are quasiregular There are regular The utility has a regular recognition for excellent staff to give awards or programs to give awards programs to give programs to give a monthly programs to monthly programs to performance recognition to staff for or recognition to staff awards or recognition few annual awards or give multiple awards give multiple awards good performance for good performance, to staff for good recognition to staff or recognition to staff and recognition to staff but the reasons for performance, and for good performance , for good performance, for good performance, the choices are not the reasons for the and the reasons for across many departments across all departments; communicated choices are clearly the choices are clearly and the reasons for top management are communicated to all communicated to all the choices are clearly clearly visible in the staff communicated to all staff process 11 Performance-based compensation 4.75 There is no linkage A pay scale with at Staff who exhibit A small portion of A major portion of senior All staff have some bonus systems for staff between staff least some performance good performance senior and mid-level and mid level staff form of incentive pay performance and incentive is desirable, but received non- staff compensation is compensation is based for good performance. compensation not premitted financial “rewards” for based on performance on performance their performance 12 Experience in contracting for NRW 3 The organization The organization has The organization has The organization The organization and its The organization and its services has no experience or considered utilizing considered utilizing has used external staff have made some staff have considerable interest in utilizing external resources for external resources resources for NRW use of external resources experience utilizing external resources for NRW activities, but have for NRW activities, activities, specific for NRW activities, and external resources for NRW activities no experience or internal and have identified areas where external know specific areas NRW activities, make capabilities to do so. specific areas where expertise would where external expertise good choices on which external expertise be most beneficial, is most beneficial activities to outsource would be most but procurement and which not to, and beneficial, but have mechanisms are the best methods to no experience or cumbersome and procure the services internal capabilities impede good use of to do so these resources NRW Management Rat 4.3 NRW Management Rat 100 87 Comments: The Use of Performance-Based Contracts for Nonrevenue Water Reduction TABLE E .6: Sample Tool—Aguas de Guariroba NRW Practices Rating Period Location: Águas de Guariroba covered: 2014 Weighted scoring to Rating of NRW practices 100 NRW practices eld Poor De cient Adequate Good Excellent Basic None Weight Net Score score 0 1 2 3 4 5 (%) score NRW management and 4.3 87 100 87 planning Information systems 4.1 81 100 81 Water balance practice 4.4 87 100 87 Apparent loss management 4.5 91 100 91 Real loss management 4.5 90 100 90 Monitoring and analysis 4.5 90 100 90 Overall NRW practices rating 4.4 88 100 88 Weighting should only be applied when one or more particular practice elds are more important than others. Prepared by: For example, if water production costs are very high, real loss management is very important, so a higher weighting for real loss management could be applied. A higher weight would lower the net score for that area. Arturo Vegas To balance scoring, adjust other weights to arrive at a net weight of 100% Date: Comments: 9/12/2015 Note: The overall NRW practices score for Aguas de Guariroba is 88 out of a possible 100 points—very high for NRW practices. The rating in the different fields are all strong. Lastly, it is important to note that a correlation can be made between the Practices Scores in different Latin American utilities and their NRW Performance. Figure E.4 shows a very clear correlation—utilities with a high Practices Score have low NRW, and vice versa. FIGURE E .4: Practice Rating versus Performance Correlation Example 1800 1600 1400 NRW: L/connection/day R2 = 0.8718 1200 1000 800 600 400 200 0 20 30 40 50 60 70 80 90 100 NRW practices rating (0-100) The Use of Performance-Based Contracts for Nonrevenue Water Reduction 129 E.4 Water Balance Tool The Water Balance Tool is a spreadsheet-based software called WB-Easy Calc, found on the PBC website. It is used to understand inflow, consumption, and losses of a water utility. Water balance in its simplest form means that the total levels of water consumption and losses equals the system input. This tool helps to benchmark, understand basic relationships, and ultimately prioritize work and investments. The water balance tells the magnitude of the different components of NRW, as well as the confidence level attached to the estimates. Application This tool operates in many languages, and reveals the water loss situation, and ultimately the availability/reliability of data, level of understanding, and current problems and issues. Calculating the Water Balance with this tool takes four steps: 1. Determine system input volume 2. Determine authorized consumption (billed and unbilled) 3. Estimate apparent (commercial) losses 4. Calculate real (physical) losses Figure E.5 shows the home screen of the WB-EacyCalc tool. FIGURE E .5: Homepage of the WB-EasyCalc Tool (Excel) Note: WB-EasyCalc Version 5.07, accessed September 2016. 130 The Use of Performance-Based Contracts for Nonrevenue Water Reduction References Alegre, Helena, Jaime M. Baptista, Enrique Cabrera Jr., Francisco Cubillo, Patricia Duarte, Wolfram Hirner, Wolf Merkel, Renato Parena. 2017. Manual of Best Practice: Performance Indicators for Water Supply Services. 3rd ed. London: International Water Association Publishing. German Technical Cooperation Agency (GTZ). 2009. Improving Water Utility Performance through Local Private Sector Participation: Lessons learned from the micro-PSP in Madaba, Jordan. Bonn: GTZ. Inter-American Development Bank (IDB). 2004. Private Sector Performance Contracting in the Water Sector: The Case of SABESP. Washington, D.C.: IDB. . 2015. “Bogota Columbia Case Study,” NRW Training Course, IDB, Mexico. . 2016. “IDB Technical Cooperation Project: NRW Trends.” Excel tool, IDB, Washington, D.C. Kingdom, Bill, Roland Liemberger, and Philippe Marin. 2006. “The Challenge of Reducing Non-Revenue Water (NRW) in Developing Countries—How the Private Sector Can Help: A Look at Performance-Based Service Contracting.” Water Supply and Sanitation Board Discussion Paper 8. World Bank, Washington D.C. Marin, Philippe, Matar Fall, and Harouna Ouibiga. 2010. Corporatizing a Water Utility: A successful case using a perfor- mance-based service contract for ONEA in Burkina Faso. Washington, D.C.: World Bank. World Bank. Forthcoming. “Service Contract: Ho Chi Minh City, Vietnam.” NRW Case Studies. World Bank, Washington, D.C. . 2016. “NRW Reduction Optimization Framework.” Discussion Paper 3, World Bank, Washington, D.C. . 2016. “Optimal PBC Design: Issues and Options.” Discussion Paper 4, World Bank, Washington, D.C. Wyatt, Alan. 2018. “Case Study: Performance based contract for non-revenue water reduction and control—New Providence, Bahamas.” Water and Sanitation Division, Technical Note IDB-TN-813, The Inter-American Development Bank, Washington, DC. Wyatt, Alan, Jennifer Richkus, and Jemima Sy. 2016. Using Performance-Based Contracts to Reduce Non-Revenue Water. Washington D.C.: World Bank. The Use of Performance-Based Contracts for Nonrevenue Water Reduction 131 W18032