Performance-based contracts offer a pathway to efficient water management

Water is the lifeblood of a healthy people and planet, yet 2.2 billion people—one out of four—lack safe drinking water. A stark statistic to remind ourselves of on the occasion of World Water Day.

This burgeoning global water crisis threatens all aspects of development, with climate change-fueled extreme weather events, including droughts, further contributing to the scarcity of water resources. These challenges not only destabilize communities but also strain water supply systems, particularly in developing countries. At the same time, a staggering 40% of water is lost in urban water supply systems due to non-revenue water. This roughly means that for every two liters added to the system, one liter is lost, underscoring a critical inefficiency in water supply management.

Understanding water loss and the role of performance-based contracts

Water loss is a key concern in water management, encompassing water that either doesn't reach the consumer or isn't billed for. The water losses include both physical (like leakages and pipe bursts) and commercial (such as unauthorized consumption and meter inaccuracies) losses. These losses not only lead to reduced service quality but also have environmental impacts.

Performance-based contracts (PBCs) have emerged as a promising approach to tackle water loss challenges. These contracts involve specialized private companies in managing and reducing water loss. PBCs are structured to incentivize contractors to meet specific targets, like reducing water losses or enhancing revenue collection. In general, PBCs can make more rapid reductions at different starting levels compared to direct utility projects.

An analysis by the Public-Private Infrastructure Advisory Facility (PPIAF) and the World Bank’s Water Global Practice, in partnership with the International Water Association, shows that PBCs with the private sector are 68% more effective in reducing water loss than initiatives implemented by utilities alone. A good example comes from Ho Chi Minh City in Viet Nam, where a PBC initiated in 2009 led to the conservation of 122 million liters of water daily after six years, the equivalent of about 50 Olympic-size swimming pools each day! In financial terms, this PBC was a win too; it cost $15 million, far less than the $120 million it would have taken to supply the same volume of water through other means.

Ethiopia’s pioneering efforts in PBCs

Ethiopia, particularly its capital Addis Ababa, exemplifies the challenges and solutions in water supply management. The city's water supply utility, Addis Ababa Water and Sewerage Authority, serves around 700,000 water customers but grapples with water losses of 40–60%, metering challenges, and network issues, leading to the inefficient and poor water supply.

The World Bank supports countries as they work toward a water-secure world in a way that fosters inclusive and sustainable development. The Bank’s Water Global Practice, in collaboration with PPIAF, has been pivotal in implementing the first PBC for reducing water loss in Addis Ababa, marking a significant milestone in Africa.

While working on the project, the team faced the challenge of setting reliable data baselines for performance contracts. They developed a phased approach, allowing for a quick implementation that required only a rapid technical assessment to establish a reasonable baseline. The contract starts with input-based payments, gradually moving toward performance-based payments as more information is collected and accurate targets are determined.

This phased methodology is particularly beneficial for utilities in developing countries that lack reliable data. The successful implementation in Addis Ababa, now in its second phase, illustrates the potential of this approach in various contexts. It is already being replicated by the World Bank and PPIAF teams in other African countries, with contracts already signed in Togo and Ghana.

In addition to these developments, the International Finance Corporation (IFC) is actively involved in developing PBCs linked to its investment projects. In Brazil, for example, it collaborated with the state water utility Corsan in Rio Grande do Sul to define a strategy for water loss reduction, identifying quick wins to reduce loss and providing corporate financing. And in Amman, Jordan, large-scale water loss reduction programs are currently being structured through PBCs or other contractual forms.

PBCs: An effective tool

In many emerging markets and developing economies, high levels of water loss pose significant challenges to the financial and operational performance of water utilities. It also represents a growing risk in the face of climate change. Reducing water loss is an essential step toward achieving operational efficiency, creditworthiness, and climate resilience for these utilities.

While PBCs are not a universal solution, they are a crucial tool in addressing water loss issues. Leveraging the expertise and efficiency of the private sector, water utilities can significantly reduce water loss, improve revenue collection, and enhance service quality.

Related:

The Use of Performance-Based Contracts for Nonrevenue Water Reduction: Output of the Global Program on Developing Good PBC Practices for Managing NRW (Publication)

Using Performance-Based Contracts to Reduce Non-revenue Water (Publication)

Kigali Water: Lessons from one of Sub-Saharan Africa’s first water PPPs

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