External Delivery Mechanisms

1. External Delivery Mechanisms Module 3 What are the different options? JRT Joint Response Team - DWAF, SALGA, NT and dplg

2. Purpose of this presentation The purpose of this presentation is to: • Provide a broad overview of different external delivery mechanisms • Illustrate how different external arrangements can address service delivery challenges and needs • Highlight when the different external mechanisms are appropriate

3. WSA What is meant by External? • External means any mechanism that is outside of the municipality • It therefore requires a written agreement between the municipality and the external mechanism Service delivery agreement WSP Municipality

4. WSA Service delivery agreements (SDAs) and Mechanisms (WSPs) Service delivery agreement WSP Municipality There are different types of contracts (agreements) that a municipality can enter into with its service provider, which will regulate the relationship of the WSA and the WSP There are different types of service provider mechanisms depending on the needs and challenges that the service provider needs to address WSP

5. Service Delivery Mechanisms

6. WSA What are the different types of external service delivery mechanisms? • The Municipal Systems Act defines an external service delivery mechanism as: • Municipal Entity • Another municipality • Organ of state (including a traditional authority) • CBO • NGO • Any other institution or entity legally competent to operate a business activity Municipality WSP An external service delivery mechanism is OUTSIDE the municipality

7. 1. What is a Municipal Entity? • It is an entity over which a municipality has majority control, and can take any one of the following forms: • Private Company established in terms of the Companies Act • Service Utility established by by-law • Multi- Jurisdictional Service Utility (MJSU) established by agreement between municipalities • The Act no longer allows S21 companies and Trusts as municipal entities • Although a municipality has partial or full ownership of a municipal entity, it is an external mechanism because it is independently governed and managed

8. Regulation of Municipal Entities • Municipal entities are HIGHLY regulated! • They are regulated in terms of incorporation, for example, it is a requirement to show that the existence of the entity is necessary and feasible • The functioning of municipal entities is also regulated in terms of the MFMA in respect of • Financial governance • Financial accountability • Reports and reportable matters

9. 1a. Municipal Entity: Private Company • A municipality may: • establish or participate in establishing, or acquire or hold an interest in a private company • either acquire or hold full ownership, or acquire or hold a lesser interest • acquire or hold a lesser interest only if all the other interests are held by another municipality or municipalities or national or provincial organ/s of state

10. 1b. What is a Service Utility? Service utilities are: • established by a by-law • juristic persons (separate legal entities) • under the sole control of the establishing municipality

11. 1c. What is a Multi Jurisdictional Service Utility (MJSU)? • It is a joint venture established by a written agreement between two or more municipalities • Minister of dplg may request establishment in consultation with Minister of DWAF • The Systems Act states what must be provided for in agreement • Controlled by a governing body which is a juristic person (independent legal entity) • Accountable to municipalities

12. Advantages of a Municipal Entity A municipal entity: • can operate more independently than an administrative structure or trading unit within the municipality • can function on business principles • allows for greater flexibility, for example adjusting to the changes and demands of the customer base • provides for water services to be ring fenced (company can be structured such that income from water services is reinvested in water services as opposed to other municipal services)

13. When is a Municipal Entity appropriate? • When a single provider is the optimal service delivery mechanism across more than one municipality • When there is a need to share operational risk with an investor • When a regional option is the optimal option • When there is a need for change management • When there is a merging of different structures or services provision arrangements (e.g. powers and functions, redemarcation, DWAF transfers ) • Examples of municipal entities include Joburg Water and uThukela Water Services (Pty) Ltd.

14. 2. Another Municipality: The options? • Another municipality can include any of the following: • An LM within the DMs area of jurisdiction (where the DM is the WSA) • A DM where the LM is authorised • A Metro • A neighbouring DM or LM • Any other municipality

15. LMs can be used in both internal and external arrangements There are two ways to use LMs: • You can use them to provide support services (for example billing, customer care, legal services) to a decentralised internal mechanism through a support services agreement • You can appoint them as an external mechanism in terms of a service delivery agreement (SDA)

16. Capacity issues when appointing ‘another municipality’ • If the WSA decides (following a s78 process) to appoint another municipality to be the WSP, the WSA must satisfy itself that it has the capacity to enter into such SDA, for example capacity to manage and regulate the SDA • The municipality selected by the WSA to be the WSP must also do a feasibility study (s 80(3) of the Systems Act). • Both the WSA and WSP must check compliance with section 33 of the MFMA if there are financial obligations beyond 3 years

17. When is another municipality appropriate? • When there is existing capacity within the municipality’s area of jurisdiction, for example where LMs who are not authorised have service provision capacity within the DM area, and it makes sense to decentralise • When a neighbouring municipality has capacity and is willing to provide the service • When there is a highly capacitated municipality that is able to achieve economies of scale without needing to share ownership, for example a Metro providing a service on behalf of an LM • When LMs in a district are authorised and they decide to centralise provision by appointing the DM to provide the services

18. 3. What is an Organ of State? • Any organ of state is any government entity such as a government department, administration within any sphere of government of any other institution exercising a public power or performing a public function in terms of legislation • The most likely organ of state in terms of water services provision (i.e. to be a WSP) is a Water Board

19. Process relevant to an Organ of State • An organ of state is subject to the PFMA and must inform National Treasury in writing and obtain approval from the Minister of DWAF prior to accepting an appointment to become a WSP • It is a “public sector entity” and therefore competitive procurement is not compulsory for appointment • Both the MFMA and the PFMA oblige the parties to avoid fruitless and wasteful expenditure (for example, the agreement between two organs of state, the municipality and the Water Board must still regulate the flow of finances in a manner that is viable for both parties)

20. Community Based Organisations (CBOs) • The Municipal Systems Act does not define a community based organisation • DWAF is proposing the following definition in the new draft of the Water Services Act: A not for profit organisation situated within a defined community that is mandated by that community to provide water services to that community on behalf of that community. • If the CBO is to be appointed by means of a service delivery agreement, competitive procurement is required in terms of the Systems Act, but may be exempt in terms of the new draft Water Services Act • A CBO must be legally competent to enter into a SDA in order to become a WSP

21. CBOs can be used in both internal and external arrangements • WSA’s may want to use a CBO to fulfil specific tasks and not to become a WSP - in such cases there is no transfer of risk and the WSA remains the WSP • CBOs can be used as a decentralised service delivery ‘agent’ or ‘contractor’ of the WSA if: • the WSA still remains the WSP, assisted by the CBO; • the CBO operates as an agent and not as an external mechanism. • If a CBO is to be appointed as a WSP they must be appointed through a competitive procurement process following a feasibility study

22. WSA CBOs as an external arrangement DM Where the CBO is fulfilling all the WSP functions it can be appointed as an external mechanism, namely the Water Services Provider (WSP) Service delivery agreement This option requires a feasibility study before procurement WSP

23. WSP WSA CBO as support to internal mechanism DM Often CBOs do not have the capacity to fulfill all the WSP functions. However they can be contracted to fulfil some functions such as daily operations and minor repairs. In this arrangement they are merely a contractor to the municipality. The municipality remains the WSP Support Services Contract This is a normal support contract arrangement and is not a full service delivery agreement, and therefore does not require a s78 process Community Based Contractor (water services agent)

24. When is it appropriate to use CBOs as WSPs It is appropriate to use a CBO as a WSP under the following conditions: • Where there is a community with structures able to make community management work • Where the infrastructure technology is such that the CBO can undertake all the WSP functions • Where the CBO has the necessary capacity or potential capacity to provide the services and is able to access whatever support it needs CBOs are often the most appropriate mechanism in remote areas and rural areas.

25. 5. Non-governmental Organisations • A non-governmental organisation (NGO) is a not for profit, service orientated, organisation which functions outside of both the government and business sector • Experience is showing that NGOs are interested in providing capacity and support to water service providers but generally do not want to take risk as the water service provider itself

26. 6. What comprises ‘any other institution’? • This is a very general and broad category enabling the WSA to conclude service delivery agreements (SDAs) with any parties if they meet the WSA’s requirements. • The only requirement is that they must be legally competent to operate a business activity • This category includes private sector providers • It also includes consortia of parties who may organise themselves to meet the specific output needs of the WSA

27. Private Sector • Contracting with the private sector is generally known as a public private partnership (PPP) • A PPP is a commercial transaction where the private party: • performs a municipal function • assumes substantial financial, technical and operational risk, and • receives a benefit for doing so, by way of: • compensation from the municipality • charges or fees collected by the private party from users or customers of a service provided to them; or • a combination of such benefits

28. Public private partnerships • Municipalities may enter into PPP agreements, but only if they can demonstrate that the agreement will - • provide value for money to the municipality • be affordable for the municipality • transfer appropriate technical, operational and financial risk to the private party • Provide benefit for the poor

29. Requirements of PPPs • The process of embarking on and concluding a PPP agreement must comply with the regulations issued under section 120 of the Municipal Finance Management Act • Before a PPP is concluded, the municipality must conduct a Feasibility Study…

30. PPPs and Feasibility Studies The Feasibility Study (FS) must – • explain the strategic and operational benefits of the PPP for the municipality in terms of its strategic objectives • take into account all relevant information • describe in specific terms - • the nature of the private party’s role in the PPP • the extent to which this role can be performed by a private party Continued …

31. PPPs and Feasibility Studies • describe in specific terms how the proposed agreement will – • provide value for money to the municipality • be affordable for the municipality • transfer appropriate technical, operational and financial risk to the private party • impact on the municipality’s revenue flows and its current and future budgets • The feasibility study must also motivate for the capacity of the municipality to effectively monitor, manageand enforce the agreement

32. When is it appropriate to use the private sector? • When the private sector party is able to bring the requirements to meet the service delivery challenges that the municipality faces • These may be skills, expertise, technology, innovation, training, and in some cases access to funding • When the municipality knows exactly what it wants to achieve through the partnership and it can set very clear key performance indicators • When the risks to be transferred can be managed by the private partner

33. Service Delivery Agreements (SDAs) Service delivery agreement

34. What is a service delivery agreement? • A service delivery agreement is a contract between a WSA and a WSP which: • appoints and authorises the WSP to deliver water services to the whole or part of a local community • is a written document • sets out the roles, responsibilities, rights and obligations of each party so that the objectives of each party can be achieved • provides for the WSA to resume control of the service on termination of the agreement • must be signed by the municipal manager (accounting authority) • must be authorised by the full Council

35. Purpose of a service delivery agreement? • Using an external arrangement is all about accessing skills, expertise and resources to address needs and challenges that cannot be addressed through an internal mechanism • The SDA must therefore be designed to respond to those specific needs and challenges • The purpose is to set out what each party must do in order to achieve the service delivery needs and objectives for the benefit of the community • The SDA is a negotiated instrument and it must be practical and realistic about what can be expected of each party

36. Why must WSAs regulate service delivery? • Irrespective of the municipality’s choice of service delivery mechanism (i.e. who the WSP is) the WSA is ultimately responsible and accountable to the local community • The WSA must ensure that the consumers’ best interests are served • It must also ensure that the services provided are in accordance with national norms and standards as well as the municipality’s bylaws • The WSA must ensure that the services are efficient, affordable, economical, and sustainable • To this end it must put monitoring and other regulatory measures in place to ensure proper performance and delivery of services by the water services provider (whether it is an internal or external mechanism)

37. Different types of SDA • There is a generic categorisation of contract types • The Municipal Systems Act refers to contracts as SDAs • The structure of a contract must be driven by needs and challenges and how risk and responsibilities are to be allocated between the parties • The key distinguishing features of different contracts: • Duration (short/medium/long term) • Transfer of risk (operational/technical/financial/legal) • Value of investment and expected rate of return • Complexity of implementation

38. Generic types of SDAs

39. When does a support contract become an external service delivery mechanism? • This needs to be determined on a case by case basis • When the mechanism takes responsibility for the WSP function, for example: • It is providing the full service on behalf of the municipality , such as operations, maintenance, planning, customer care, contract management, revenue collection, staff management • It is taking a large portion of the risk and is measured on outputs, such as number of households served with a certain level and quality of service • It is responsible for managing delivery, rather than simply performing tasks

40. WSA External Option: Management Contract NEED FOR TECHNICAL AND MANAGEMENT EXPERTISE Management Contract WSP • Purpose: To appoint an operator to manage the operational aspects of water services provision function (external WSP) • Obligations of contractor: • Operate and maintain the water works (system) • Deliver water services to the customers • Manage the budget annually approved by Council • Achieve agreed upon key performance indicators (KPIs) • Manage staff but do not take transfer • May include extension of infrastructure / services but limited responsibility for funding this • Municipality generally still responsible for collecting tariffs and for raising capital • Final Outcome: Staff managed and capacitated for a medium term while service delivery continues and is improved

41. WSA External Option – PPP NEED FOR URGENT INVESTMENT WSP Concession • Purpose: To access funding upfront to extend service delivery where government sources of funds are not available in the short term, but can be paid over a period of time • Features of the SDA: • Longer term because the WSP needs to recoup its money invested and earn a return • WSP takes operational, technical and funding risk • In addition to managing service delivery, the WSP must extend service delivery • The municipality must set proper tariffs, allocate equitable share for free basic services, access grant funding such as MIG and support credit control and debt collection • Final outcome: Accelerated service delivery which is affordable

42. Key components of a SDAs • The objective of the agreement • For example: improved service delivery for the local community • The scope of the appointment of the WSP by the WSA • Duration (term) • The area to be served (jurisdiction) • Process for variation • General obligations of the WSA • Setting policies and passing by-laws • Approving budgets • Tariff setting • Approving or amending IDPs and WSDPs

43. Key components of a SDAs • General obligations of the WSP Depends on the mechanism chosen and the risk to be transferred to the WSP - but can include functions such as: • provide water services in accordance with the Constitution, Water Services Act, policies and by-laws of the WSA, and specific contractual terms • publish a customer charter • ensure consumer friendly billing • develop a business plan

44. Key components of a SDA • Funding service delivery • Budgets and business plan • Setting tariffs, allocating equitable share and accessing MIG • Credit control and debt collection • Asset operation, extension, management • maintenance/ extension/ funding/ insurance • Mechanisms for monitoring and enforcing performance: • Communication forum (co-ordinating committee) • Key performance areas and Indicators • Penalties • Breach • Dispute Resolution: What happens if there is dispute (mediation/ arbitration/ legal action) • Termination: When can the contract be terminated and the consequences of termination

45. Risks • The appropriate allocation and mitigation of risk is critical to the success of the agreement • Risk allocation has costing implications. The more difficult it is to manage a risk, or the more likely it is that the risk will happen, the higher the price will be • Risks need to identified at the feasibility stage, and will influence the value-for-money calculation • Risk allocation must be made clear in the bidding documents • Risk allocation will influence the competitiveness of bid prices • If fundamental risk allocation is shifted in bid negotiations, this may result in challenges from unsuccessful bidders

46. Types of Risks • Revenue Risk The risk that customers to whom services are provided do not pay for services and the risk that suppliers will substantially increase prices • Operating Risk The risk that the service provider cannot operate the provision of a service to the expected standard due to inadequate maintenance, industrial action, etc. • Demand / Affordability Risk The risk that the demand for the services may be less than the projected demand. This may be affected by factors such as the increase in raw materials that influences the affordability of the service

47. Types of Risks • Non-performance Risk The risk that one of the parties to the agreement will be unable to meet its contractual obligations • Political Risk The risk of expropriation, nationalisation, war, exchange controls and the stability of the government • Legal / Policy Risk The risk of substantial changes within the legal system, particularly with respect to labour, tax and environmental issues • Resource Risk The risk that needed natural resources (such as water or electricity) is not of the required quantity or quality

48. Types of Risks • Unforeseen Circumstances Risk This is the risk that unexpected and uncontrollable natural or human made conditions such as earthquakes, floods or war may occur that will negatively impact on the services • Residual Value Risk The risk that assets are returned to the municipality on completion of an agreement in a condition less than expected due to inadequate maintenance during the period of the agreement • Regulatory Risk The risk that service standards may require additional funding or that setting of tariffs and profit margins may be limited

49. Monitoring and Regulation • The municipality is ultimately responsible for service delivery • The success of every contract depends on the ability and capacity of the municipality to effectively monitor and regulate the performance of its service provider in accordance with the provisions of the service delivery agreement • The municipality can use different means to ensure proper monitoring of a service delivery agreement, for example: • It may appoint consultants to review the performance of the service provider at regular intervals • It can identify a project officer to monitor performance • It can allocate internal resources to undertake the task • Whatever means is used it is critical that those fulfilling the monitoring and regulatory function have sufficient capacity, experience and expertise

50. Contract Management Plan • The Municipal Finance Management Act requires the Municipality to • Prepare for contract management so that both parties are able to meet their respective obligations to achieve the contract objectives • Identify a project officer with appropriate skills and expertise • A Contract Management Plan should encompass issues such as: • Partnership management (systems and procedures to manage accountability and relationship) • Performance management (systems and achievements to achieve the output specifications) • Variation management (systems and procedures to enable changes to be made)