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Contracting in transition economy municipal projects
The paper analyses optimal contract design in various municipal infrastructure
settings. Particular contract types considered are concessions, management
contracts and service contracts. The last of these is defined as a contract
between a municipal-owned company and a municipality. The paper argues that
contracts to the private sector should be awarded through a process of
competition. Contract design should provide a balance between risk mitigation
and incentives for efficient performance. This can best be achieved through
modified price cap regulation in the case of a concession, and
performance-related remuneration in the case of management contracts, where
performance is measured according to operating cost and service quality.
Recourse to expert panels and to arbitration can provide an alternative to
independent regulation here. For service contracts, which may be appropriate
as a first step to commercialisation or in well-run, small utilities,
performance-related remuneration is more appropriate than price cap
regulation. Well-designed contracts should lead to efficiency gains, and
therefore lower prices/subsidies and/or higher service quality.
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