Johannesburg Water

concluded

In April of 2001, Johannesburg metropolitan council signed a five-year manangement contract with Johannesburg Water Management Company (Jowam), a joint-venture company led by Suez subsidiary Ondeo, to manage over 500,000 connections and supply water to 3.5 million people. Johannesburg Water (JW) was established in January 2001 as the local water utility, the city of Johannesburg was the sole shareholder. The company formation was an outcome of the iGoli 2002 transformation plan embarked on by the former Greater Johannesburg Metropolitan Council. Johannesburg Water was mandated the responsibility of providing water and sanitation to three million residents of the City of Johannesburg. Annual turnover exceeded R 1.6 billion in 2001. The joint venture consisted of the U.K.'s Northumbrian Water Group (51%), Suez Lyonnaise des Eaux (known as SUEZ as of March 2001) (20%) and Water and Sanitation Services of SA (WSSA, 29%), itself a 50-50 Suez joint venture with Group 5, a South African company. Northumbrian Water Group was also 97.5% owned by Suez at the time of the contract signing, but beginning in May 2003 Suez began to sell its stake in that utility and by 2005 was completely divested. Johannesburg Water purchased water from the Rand Water Board, one of the largest bulk water suppliers in the world, and distributed it through a network of more than 9500km of water pipes and more than 100 reservoirs and water towers. The company collected waste water through a 9,000km network of sewers and treated the water at one of six treatment plants before discharging it back into the river system. It undertook metering, billing and collection, but only for top commercial customers. The city's revenue department dealt with other customers. The management contract had two incentive components. The first was a bonus, payable annually, on achievement of defined performance goals. The bonus was measured against achievement in five areas identified as important for the improvement of the utility’s overall performance. The performance achieved was graded against the improvement specified in the contract and a formula was used to determine what proportion of the sum allocated for the bonus was to be paid to the management contractor. This component had a value of R25m (US$3.2 million). The second was an incentive payment made as a percentage of the improvement in operating margin achieved by the management contractor in each year. This component had a value of R20m (US$2.5 million). In line with evolving international practice, the payment of the incentives was made after an independent assessment of utility performance by a reputable international firm. The percentage used to calculate the second incentive payment was the basis by which the winning bidder was selected. The bid process specified a fixed payment to be made to the operator. The amount was less than the costs expected to be incurred in performing their duties of the management contractor. In order to bridge the funding gap the bidders were expected to make an assessment of the extent by which they would improve the defined operating margin. Jowam’s management contract concluded in June 2006.