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What is the Water Purchase Agreement (WPA) in PPP Projects?

· 6 min read
Osama Ata
Osama Ata
Contracts Manager

The Lifeline of Water PPPs: Managing Water Purchase Agreements for Success

Introduction​

In the realm of Public-Private Partnerships (PPPs) within the water sector, particularly for essential infrastructure like desalination plants, the Water Purchase Agreement (WPA) stands as a foundational contract. A WPA is a long-term agreement between a public sector entity (the procurer) and a private sector entity (the project company) wherein the procurer commits to purchasing the water output of a facility built and operated by the project company. From a contract management perspective, the WPA is not merely a transaction document; it is the central pillar governing the entire lifecycle of the PPP project, dictating obligations, revenues, and risk allocation. Effective contract management of WPAs is paramount for ensuring both the financial viability of the project company and the security of water supply for the public. This article delves into the critical aspects of Water Purchase Agreements in PPPs, viewed through the lens of contract management best practices.

The Anatomy of a Water Purchase Agreement in a PPP​

A WPA in a water PPP typically involves a PPP Model over a long concession period, often decades-long (e.g., 30 years). Under this structure, the private consortium is responsible for financing, constructing, owning, and/or operating the water desalination plant. The core function of the WPA is the commitment by the public entity to purchase the entire water output at a pre-agreed tariff for the duration of the agreement.

Key elements typically found in a WPA that require meticulous contract management​

  • Detailed Specifications: Clear definitions of the required water quality, production capacity, and delivery points are crucial for performance monitoring. Contract managers must ensure ongoing compliance with these specifications.
  • Tariff Structure and Payment Mechanisms: WPAs usually feature a two-part tariff:
    • availability payments (covering fixed costs and return on investment, paid as long as the plant is available) and
    • production payments (based on the actual volume of water delivered, covering variable costs). Contract management involves overseeing invoicing, verifying production figures, and managing payment schedules. The WPA ensures long-term revenue stability through this mechanism.
  • Performance Guarantees and Penalties: The WPA sets out Key Performance Indicators (KPIs) related to plant availability (e.g., >90% annual availability), water quality, and efficiency. Contract managers are responsible for monitoring these KPIs, verifying performance reports, and applying contractual penalties for non-compliance.
  • Risk Allocation: A fundamental aspect of PPPs, the WPA clearly delineates the allocation of various risks. For instance, the consortium (SPV) bears construction risks, while the procurer mitigates market demand risk through the take-or-pay arrangement. Contract managers must understand these allocations to effectively manage potential issues and claims. The GI Hub's PPP Risk Allocation Tool provides guidance on typical risk allocation in water desalination projects.
  • Change Management: Procedures for handling changes to the project scope, technical specifications, or regulatory requirements are essential. Contract managers oversee the process of evaluating, negotiating, and documenting any agreed variations to the WPA. Policies to limit early and frequent scope changes are advisable.
  • Force Majeure and Relief Events: The WPA defines events beyond the control of either party that may excuse non-performance. Contract managers assess such events and their impact according to the contractual provisions. Natural marine environmental events might be shared risks.
  • Dispute Resolution Mechanisms: WPAs include mechanisms for resolving disagreements, such as negotiation, mediation, or arbitration. Contract managers should be familiar with these processes and strive for amicable resolutions.
  • Termination Clauses: The conditions under which the WPA can be terminated early by either party, along with the associated compensation, are outlined in these clauses. Understanding these provisions and seeking legal advice before any termination action is crucial for contract managers.

Contract Management Throughout the WPA Lifecycle​

Effective management of a WPA is a continuous process that spans the entire project lifecycle:

  • Pre-Financial Close: Contract managers ensure the WPA terms are bankable and aligned with the project's financing structure.
  • Construction Phase: Monitoring construction progress against agreed milestones and managing interfaces are key responsibilities.
  • Operational Phase: This is a critical phase where contract managers focus on performance monitoring against KPIs, managing payments, addressing operational challenges, and maintaining strong stakeholder relationships. Regular communication and information management are essential. The Procuring Authority may choose active or passive contract management depending on the risks and obligations assumed.
  • Renegotiation: Unforeseen circumstances may necessitate renegotiation of the WPA. Contract managers need to be prepared to assess the appropriateness of renegotiation while safeguarding the procurer's interests. Policies to limit frequent renegotiations should be in place.
  • Dispute Resolution: Should disagreements arise, contract managers guide the process of resolving them through the agreed mechanisms. Early and direct communication can help avoid escalation.
  • Handback (if applicable in BOT models): For BOT projects, WPAs include provisions for the transfer of assets at the end of the term. Contract managers ensure compliance with handback requirements and plan for service continuity.

Key Skills for Effective WPA Contract Management​

Managing complex agreements like WPAs requires a diverse set of skills. Drawing from the sources, essential contract manager skills include:

  • Understanding of contract terms and legal principles.
  • Strong communication and negotiation abilities.
  • Financial acumen to manage tariff structures and payments.
  • Technical understanding to monitor performance against specifications.
  • Risk management expertise to identify, assess, and mitigate potential issues.
  • Stakeholder management skills to build and maintain positive relationships.
  • Proficiency in using contract management software for centralization and compliance.

The Importance of Proactive Contract Management​

Effective contract management of WPAs goes beyond simply administering the agreement. It requires a proactive approach that includes:

  • Establishing a dedicated and well-trained contract management team with clear roles and responsibilities.
  • Developing a contract management manual to facilitate understanding and navigation of the complex WPA.
  • Implementing robust performance monitoring systems to track compliance with KPIs.
  • Maintaining a formal contract administration file with all relevant documentation.
  • Conducting regular stakeholder engagement to foster collaboration and address potential issues early.
  • Developing risk management contingency plans to address identified risks.

Conclusion​

Water Purchase Agreements are the lifeblood of water desalination PPPs, providing the framework for long-term collaboration between the public and private sectors to deliver essential water infrastructure. From a contract management perspective, meticulous attention to detail, proactive management throughout the project lifecycle, and a skilled contract management team are crucial for realizing the intended benefits of these partnerships. By effectively managing the complexities of WPAs, public sector entities can ensure a secure and affordable water supply, while private partners can achieve stable returns on their investments, ultimately contributing to the sustainable development of water resources.

References​