TASK FORCE FOR THE IMPLEMENTATION OF THE ENVIRONMENTAL ACTION PROGRAMME FOR CENTRAL AND EASTERN EUROPE, CAUCASUS AND CENTRAL ASIA GUIDELINES FOR PERFORMANCE-BASED CONTRACTS BETWEEN WATER UTILITIES AND MUNICIPALITIES Lessons learnt from Eastern Europe, Caucasus and Central Asia

This paper presents a summary of the major lessons learnt from the review of five cases of performance-based contracting in the water sector in three countries of Eastern Europe, Caucasus and Central Asia (EECCA), namely Armenia, Kazakhstan and Ukraine. The report also identifies good practices for designing and implementing such contracts. Although the target audience of these Guidelines is decision-makers from EECCA, the main principles of and approaches to performance contracting are similar and may be relevant for countries from other regions that are envisaging to introduce or are striving to strengthen and improve such contracts in the water sector. 3 FOREWORD In many countries in Eastern Europe, Caucasus and Central Asia (EECCA), governments are still experiencing significant difficulties in providing reliable and high quality water services to their citizens. Due to low investment levels and poor maintenance over the past 15 years or so, the municipal water supply and sanitation sector in EECCA is in critical conditions. Although most of the EECCA countries recognise the acuteness of the crisis in the sector, the reform process has been slow and the operational and financial sustainability of water utilities, key to the rehabilitation of water infrastructure, is still far from being achieved. A wide range of approaches for improving the performance of water and sanitation systems exists. Some options keep the operations in public hands, but change the operational incentives (as in the case of " corporatisation " of public water utilities that adopt formal, corporate structures). Other options involve private actors in a variety of ways and to a variety of degrees, ranging from private operation only to private operation, investment and ownership. In all of these options, however, the public authority remains responsible for overseeing the activity and for ultimately ensuring that public needs are met. In an increasing number of countries, the relative roles and responsibilities between local governments and utilities are being clarified through " performance contracts ". Ultimately, performance-based contracts, if developed properly, can help to lay the basis for the long-term sustainability of water utilities, increasing their efficiency and creating conditions where investment capital can be attracted. Generally, performance-based contracts are designed to help define the utility development goals and include time-bound performance targets against which the performance of the operator is measured. To support EECCA authorities that are willing to contractualise their relationship with their water utilities, the OECD EAP Task Force developed " …