Feasibility Study for Private Sector Participation in Alexandria Water & Wastewater Systems

US Agency for International Development

Government of Egypt
Governorate of Alexandria

Feasibility Study for Private Sector Participation (PSP)
in the Operation & Maintenance of the Alexandria
Water & Wastewater System

FINAL REPORT

By

SEGURA/IP3 Partners LLC

Contract No. AFP-I-00-03-00035-00
Task Order No. 800

November 2004

Feasibility Study for Private Sector Participation (PSP) in the
Operation & Maintenance of the Alexandria Water & Wastewater
System

FINAL REPORT

Table of Contents

Chapter Title Page
Executive Summary i

1 Background and Scope of Work 1
2 Implementation Schedule 4
3 Policy Statement - Recommendations 6
4 Needs Assessment & Feasibility Studies 7
4.1 • AWGA - Metering Billing & Collections 7
4.2 • AGOSD - Septage Management, Site 9 N and 11
Transport
5 Transaction Implementation Plans 18
5.1 • AWGA - Metering, Billing & Collections 18
5.2 • AGOSD - Septage Management, Site 9N and Transport 21
6 Conclusions and Recommendations 29

Attachments
A1 AWGA’s Financial Statements 32
Table A1-1. AWGA’s Balance Statements 32
Table A1-2. AWGA’s Cash Flow 33
A2 AGOSD Income Statement 34
A3 Partial List of Individuals Contacted 35

System

Executive Summary

This report summarizes the activities performed by SEGURA IP3 consultants retained by
USAID Egypt under the SEGIR Privatization II IQC (Task Order No. 800), to conduct a
feasibility study for Private Sector Participation (PSP) in the operation and maintenance
of the Alexandria water and wastewater system, which was undertaken from March to
November 2004. During this period, the consultants reviewed extensive existing
information from prior technical assistance projects; interviewed relevant actors and stake
holders, gathered and analyzed additional data and had numerous working sessions and
meetings with representatives of the Alexandria Water Governmental Authority
(AWGA), the Alexandria Governmental Organization for Sanitary Drainage (AGOSD),
the Secretary General of the Alexandria Governorate and USAID, and the Holding
Company.

The initial Scope of Work (SOW) called for the delivery of the following products:

1) Project Implementation Schedule
2) Governorate Policy Statement Paper
3) Workshop on Policy Statement
4) Status Report & Needs Assessment
5) Feasibility Study
6) Workshop on Feasibility Study
7) Draft Transaction Implementation Plan; and
8) Final Report

Copies of the above deliverables have been submitted to USAID and Government of
Egypt (GOE) authorities and final versions of the same were produced for easier use in
CD format. The project was initiated in close coordination with the Governorate of
Alexandria (GOA) and the top management of the utilities.

A significant event in connection with this project was the enactment of Presidential
Decree No. 135 of April 27, 2004, which establishes the "Holding Company for Water
and Wastewater" and converts fourteen (14) organizations and public companies in the
sector into wholly owned subsidiaries. When the SOW for this project was prepared, the
Governorate of Alexandria was the main GOE policy decision-making entity. However,
the new Holding Company is now the organization in charge of the sector and significant

USAID - SEGIR Privatization II IQC Government of Egypt
Feasibility of PSP in the Water & Wastewater System, Alexandria

reforms are beginning to take place. Given the period required for the new entity to start
operating in earnest, this event had a direct impact on the proposed feasibility study.

In light of the above developments and after presentation of the Policy Statement Report,
and based on discussions held with USAID, the Chairpersons of AWGA and AGOSD,
and the Secretary General of the Governorate, the team was instructed to focus on
specific "service contracts" as prospective PSP activities: a) billing and collection for
AWGA; and b) PSP options for septage management, as well as for the operation of Site
9-N, and transport of waste materials for AGOSD. As a result, SEGURA IP3 consultants
focused on evaluating the feasibility of these service contracts and estimating the
potential impact they could have on the overall operation of the utilities.

As described in more detail in previous separate reports and summarized in the following
chapters, the potential impact of introducing PSP in the metering billing and collection
functions at AWGA is likely to generate significant additional revenues. In the case of
AGOSD, the evaluation had to be done at a pre-feasibility level due to shortcoming in
basic information; however, from the analysis conducted it becomes apparent that
important cost reductions can be achieved via licensing of septage collection and
disposal, in leasing out the operation of site 9N including composting and service
contract for transportation of dewatered sludge and other wastewater by products to this
site.

AWGA metering, billing and collection

The consultants considered two basic alternatives: a metering-only contract and a
comprehensive metering, billing and collection contract.

• For the metering-only alternative, AWGA would delegate to a private operator
the metering function, including installation, replacement, and meter reading.
The operator could read the meters with its own staff or directly supervise
AWGA’s staff. Further, and most importantly, AWGA would continue to be
the primary contact with the customer.
• For the comprehensive alternative, AWGA would delegate to the private
operator all the metering function plus billing and collection. Under this
alternative, the operator should be given full control over staff hiring and firing
matters and preferable over staff compensation.

The consultants recommended the comprehensive metering, billing and collection
contract as the most desirable and cost-effective alternative for AWGA. The contract
would be for a ten year period in order to allow the contractor sufficient time to amortize
the cost of new meters that will need to be purchased. A ten-year contract should also
allow AWGA sufficient time to learn from this PSP experience and evaluate ideas that a
contractor may offer to improve the continuity of service issues that exist in the pilot
area. This alternative has major advantages over a metering-only contract namely: 1) net
revenues for AWGA will be higher; 2) it will have a more profound and lasting impact on

SEGURA / IP3 JV Final Report -ii


AWGA’s commercialization practices as it will help to substantially improve
performance of AWGA’s branches.

This type of contract would be more effective if authorities implement policy changes to
support the contractor’s efforts to enforce collections and affords the contractor flexibility
to experiment with alternative type of meters and billing and collection practices. Further,
the contractor would need full control over employee compensation and hiring and firing
matters in order to be effective. This may cause AWGA to transfer some employees to
other organizational units outside of the branches in the pilot area. AWGA should
consider granting licenses to employees now working in this activity in exchange for
retiring from service.

Upon consultations with AWGA authorities, they expressed a preference for the
metering-only option. Thus, the team has focused on this alternative for the "Transaction
Implementation Plan" report submitted separately.

The consultants believe that these contract alternatives do not address the more
fundamental water supply management issues mentioned in the report. Investments
needed for the optimal rehabilitation of the distribution system that impact the quality of
service, as well as metering of water delivered to each zone will continue to be AWGA’s
responsibility and therefore outside the scope of any of these contract alternatives. A
much more capital intensive contract that places responsibility for network maintenance
on a contractor would be needed to address these issues. This type of contract would most
likely be a long-term concession contract, which ultimately fell beyond the scope of this
PSP initiative.

AGOSD Service Contracts Pre- Feasibility

AGOSD sought advice on how to structure service contracts for (a) septage collection
and disposal; (b) operation of Site 9N including composting; and (c) transportation of
dewatered sludge and other wastewater byproducts to this site.

a. Septage collection and disposal.
The consultants considered two basic alternatives to promote private sector participation
in the collection and safe disposal of septage: service contracts; and licensing of private
operators.

Service contracts. Under this alternative, AGOSD would delegate the collection and
disposal of septage to private operators. The contracts can be structured along two basic
options: 1) each area (or branch) is served by a pre-determined number of contractors; or
2) contractors are free to operate anywhere in the city. Under both options, a minimum
number of operators should be selected to insure competition. Service fees are
determined by AGOSD and operators collect them on its behalf.

SEGURA / IP3 JV Final Report -iii


Under both options contractors would operate under exclusive service conditions.
Therefore AGOSD has to strictly enforce control of “illegal” operators, and to develop
regulatory and supervisory functions to ensure that service contracts perform as intended.

AGOSD’s organization has had severe difficulties in managing the existing collection
and disposal of septage by its own forces, including rent-seeking opportunities that affect
its revenues. Therefore, it is unlikely that it will be successful in implementing and
monitoring these service contracts whose characteristics mirror, to some extent, existing
operations. Moreover, AGOSD lacks adequate operational data on the number and
location of septic tanks and frequency of service to make an informed decision on the
optimal size of the trucking fleet and thus on service fees to be charged to ensure the
financial viability of the operation.

Licensing. This policy-based approach, widely used in other countries, involves the
transfer of responsibility of septic collection and disposal from AGOSD to licensed
operators. Operators would keep the fees collected but should be required to pay in
addition to the licensing fee, a tipping fee (determined by AGOSD) to compensate
AGOSD for the costs incurred in processing these wastes.

Under this alternative, a pre-selected number of licensed contractors would operate in any
area of the city. It is important to promote adequate competition in the market to ensure
reasonable prices for service. This competition would eliminate, to a large extent, the
need to control prices.

Pre-selection of contractors can be carried out on a competitive basis and based on the
initial premium bidders are willing to pay over a minimum preset license fee. Licenses
could be granted for two-three years and the license fee established (including the
premium in the initial bidding), to cover as a minimum, AGOSD’s regulatory and
supervisory functions. At the expiration of the license, AGOSD can use the opportunity
to ascertain if additional operators are needed to foster competition and keep prices at a
reasonable level.

AGOSD regulatory and supervisory functions include: a) licensing operators; b)
monitoring their performance; and c) exercising the right to revoke licenses if operators
do not comply with service standards. Under this alternative, AGOSD supervisory
functions will be simplified, as it will not be directly involved in the collection and
disposal of septage or with the collection of fees.

AGOSD should consider granting licenses to employees now working in this activity in
exchange for retiring from service. Such employees could purchase or lease trucks from
AGOSD under special terms and conditions. USAID may be able to assist with the
financing through its Development Credit Authority (DCA) facility.

The consultants recommended the licensing option as it would eliminate AGOSD’s
operating losses and reduce illegal dumping. However, this option would require the
creation in AGOSD of a supervisory unit and the training of this staff. This unit would

SEGURA / IP3 JV Final Report -iv


monitor performance of operators and maintain adequate competition to ensure a fair
pricing system determined on the basis of supply-demand forces. It is important for
AGOSD to improve the quality of existing information, in particular the location of septic
tanks and characterization of septage (domestic, industrial and commercial), to reduce
information risks detrimental to AGOSD’s interests.

b. Operation of Site 9N.
There are two basic alternatives to delegate the operation of site 9N to a private operator:
a management contract and a lease contract. These two alternatives are quite similar in
scope but differ in the way decisions are made to price and sell compost and other by-
products, on the risks assumed by the contractor on the sale of compost and on the
bidding strategy.
Management contract. This contract can be structured for a 5 to10 year period and
interested contractors bid on the fee to manage the operation. Under this contract, pricing
decisions are made by AGOSD, and the main responsibility of the contractor is to operate
the facilities as specified in the bidding documents. Marketing decisions can be delegated
to the operator including incentives to reward its efforts to improve sales and reduce
costs. Investments, replacement, and maintenance costs are the responsibility of AGOSD.
It is possible however, to structure the transaction assigning some of these costs to the
operator, but this decision is likely to extend the length of the contract, increase the
management fee or both.
Leasing contract. This contract can be structured for a 10 to 15 year period, and
interested contractors will bid on an annual fee to be paid to AGOSD for the use of this
facility, including the equipment. Leasing fees can be tailored to benefit AGOSD in
response to the financial performance of the operator.
Under this alternative, sales and price decisions are the responsibility of the private
operator as well as investments (like reception facilities to handle septage and other
improvements deemed necessary) and maintenance costs.
Consultants recommend to AGOSD the lease alternative as it gives more incentives to the
private operator to fully optimize the use of this facility, to be more proactive in the
search for new customers and products (such as enhancing compost by adding nutrients
such as potassium) and to tailor prices to competitive products. These advantages, in turn
should benefit AGOSD as it can expect higher financial returns from the leased
operation.
The consultants also recommend that AGOSD makes an effort to improve the
information including projections of the supply of different waste materials to site 9N.
The consultants estimate that about 7-8 months are required for the full implementation
of this option.

c. Transport of waste materials to Site 9N.
Transportation of waste by-products and operation of site 9N are two different types of
businesses that require different managerial skills and equipment. Moreover,

SEGURA / IP3 JV Final Report -v


transportation costs of dewatered sludge, scum and grit are significant compared to the
operating costs of Site 9N.
Consultants recommend not to incorporate the transport of these materials into the
operation of site 9N, since this could make the combined contract not financially
attractive and will likely limit competition to the detriment of AGOSD.
Nonetheless, AGOSD has two basic options to deal with the transport of these materials
from the wastewater treatment plants, sewage pumping stations, and sewer cleaning
operations to Site 9N: 1) transporting these materials using its own resources; and 2)
delegating this activity to private operators under separate service contracts.
In both cases, there is a need to develop contractual operational arrangements between
AGOSD and the Site 9N operator; for instance, minimum quantities of materials
delivered to the site and hours of delivery.
Alternative one is a continuation of present practices where the possibilities of cost
reductions are not obvious. Alternative two presents coordination issues between the
operator and AGOSD. AGOSD needs to decide on the use of transport and handling
equipment that contractors would be operating. AGOSD can also delegate maintenance
costs of the vehicles to operators. Option two offers the potential for cost reductions
through competition for and within the market and therefore, the consultants recommend
it.

Transaction Implementation Plans – AWGA and AGOSD

AWGA expressed an interest in developing the transaction implementation plan for the
metering-only option; and has also indicated that it believes it can improve its billing and
collection efforts through internal efforts and does not wish to pursue the more
comprehensive metering, billing and collection option.

The activities needed to procure the services of a metering contractor will take up to nine
months, and will require the service of a transaction advisor and several AWGA staff.
The first three months of the transaction activities will include efforts to gather and refine
information that will be needed to allow bidders to assess the situation in the pilot area
and make a responsible bid.

Once the necessary background information has been compiled, promotional efforts can
occur, bidding documents prepared, proposals evaluated and a contract negotiated and
executed. These activities will take an additional three to four months to complete.

The consultants estimate that the transaction activities will cost L.E. 2.1 million.
Assuming a 10-year contract, it is approximately 6% of the total contact value.

A metering-only contract like the one envisioned for the pilot area should be considered
as an initial step toward a more comprehensive use of the private sector in AWGA. If this
is not AWGA’s and the Holding Company's intention, the consultants recommend that no
further action be taken on this transaction.
SEGURA / IP3 JV Final Report -vi


The consultants recommended to AGOSD licensing to private operators the collection
and disposal of septage, which should be granted for two to three year periods; leasing
the operation of Site 9N, that should be for 10 years; and service contracts with several
operators for the collection and transport of wastewater byproducts for three to five years.

The estimated time to carry out these projects through implementation is nine months.
This period includes about four months required to improve the information on all three
projects, which is critical to reduce information risks to interested operators and improve
AGOSD’s position.

The consultants estimate the costs of the transaction process, including AGOSD’s
activities and efforts to gather and refine information, at L.E. 4.2 million. The breakdown
of these costs is L.E. 2.9 million for the transaction advisor is L.E. 1.3 million for
AGOSD’s efforts.

Conclusions and recommendations

The consulting team has clearly indicated to USAID/ Egypt and GOE authorities that
although "service contracts" of this nature are steps in the right direction, they will not
address the structural problems facing the two utilities (especially in the case of
AGOSD). These problems include primarily: adequate maintenance of existing
infrastructure, capital investments to meet new demand, settlement of accumulated debt
and extremely low service rates, which do not make full cost recovery operation a
realistic expectation for the Alexandria W & WW utilities in the near future.

Given the significant steps undertaken by GOE with the creation of the Water &
Wastewater Holding Company and the Egyptian Regulatory Authority (EWRA), we
strongly recommend to include more comprehensive PSP alternatives in the reform
program and to undertake the proposed service contracts at AWGA and AGOSD as part
of the implementation of the sector reform.

SEGURA / IP3 JV Final Report -vii


System

1. Background and Scope of Work

The original Scope Of Work for this project stated as main objective - " to provide advice
to the Governorate of Alexandria on all economic, tariff, and regulatory matters related to
the preparation of a feasibility study for private sector participation in the water and
wastewater sector in Alexandria, concentrating on a management contract/concession
option. This feasibility study will take into full consideration the implications of the state
of water and wastewater sector reform (corporatization and creation of a regulatory
agency) currently underway in Egypt".

The tasks and deliverables agreed upon, were the following:

1) Project Implementation Schedule
2) Governorate Policy Statement Paper
3) Workshop on Policy Statement
4) Status Report & Needs Assessment
5) Feasibility Study
6) Workshop on Feasibility Study
7) Draft Transaction Implementation Plan; and
8) Final Report

In this report, the consulting team summarizes the key elements of the project and present
their conclusions and recommendations of the study conducted, covering each of the
above activities and reports.

The services

Drinking water supply. AWGA provides services to Alexandria, Marsa Matruh, and
parts of the Beheira Governorate. The area of service is quite extensive as it stretches
340 kms from east to west and 125 kms to the south.

AWGA’s sources of water are the Mahmodia and Noubaria canals fed by the Rosetta
branch of the river Nile. Water is treated in eight treatment plants with a total design
capacity of 3.5 million m3/day (mM3/day). Drinking water quality meets government
standards. However, intermittent supplies and low pressures in some areas and the use of
house storage tanks compromise drinking water quality.

Water production varies seasonally, being the highest in the months of July to September
and the lowest in January to March. The Water Master Plan indicates that projected
population growth in Alexandria and other cities points out to an “increased competition
for water in the Nile and its canal system” and that water withdrawn by AWGA being

SEGURA / IP3 JV 1


downstream of almost all other users is “seriously threatened from both a water quality
and quantity perspective”.

Close to 99% of the population is connected to the water distribution system; but some
areas of the city receive water less than 24 hours a day or at low pressures. The
distribution system is a network that includes 6,500 kms of water mains with diameters
from 75 mm to 1,500 mm; 43 pumping stations and 250,000 m3 of storage capacity.
Most of consumption is metered but it is estimated that about 5% of meters are
inoperative. In the last four years (2000-2003) water losses have remained at about 37 %
of production. This system was serving some 978,000 accounts in 2003. Table 1 shows
some of the main operational indicators of the water distribution system.

Table 1. Water Distribution Network Operational Indicators

Indicator AWGA Other cities 1/
Mts of pipe/account 6.7 6 – 24
Storage capacity/account; m3/user 0.3 0.7 – 3.0
Water losses; % 37 < 20 (best
practice)
Pipe bursts; total per 100 km/year2 630 <20 (best
practice)

During the period 2002-2004 AWGA has done a good job in balancing its cash flows so
as to be able to service most of its debt3 and to cover its cash operational expenditures.
Most AWGA investments are financed with loans from the National Investment Bank. A
smaller portion is financed by grants and customer contributions to investment. AWGA’s
bill collection effectiveness varied from 85% (2002) to 74% (2003) and 78% (2004).

Sewerage. AGOSD (Alexandria General Organization for Sanitary Drainage) was in
1979, to provide wastewater collection, treatment and storm drainage system for the city
of Alexandria and its surrounding areas. AGOSD’s wastewater collection and disposal
system serves some 83% of Alexandria population and includes:
• A pipe collection network of 2,390 kms with diameters between 200 and 2,750
mms
• Seventy two (72) pumping stations; and
• Two primary wastewater treatment plants with a design capacity of 1.20
million m3/day.
• Site 9N for the reception and disposal of waste by-products. Composting
operations also take place at this facility

1
Yepes, Guillermo & Augusta Dianderas. Water and wastewater utilities. Indicators. TWUWS, The World
Bank. 1996.
2
Based on information on ten branches. Not including Borg El Arab and Sahel.
3
A portion of the interest owed by AWGA to the National Investment Bank is converted into long-term
debt. Of an average yearly interest of L.E. 41 million, L.E. 13 million/year has been converted into long-
term debt between FY 2002 and FY 2004.

SEGURA / IP3 JV Final Report -2


Treated and untreated wastewater flows are discharged into Lake Mariout, south of the
city, without complying with the provisions of Law 48, which establishes standards for
wastewater effluents and mandates secondary treatment, chlorination and post aeration4.

Lake Mariout is a shallow body of water with a total area of some 5,000 hectares.
Population living close to Lake Mariout is affected by foul odors.

AGOSD’s cash flows have been clearly insufficient to cover its cash requirements. This
is the result of tariff levels, which are insufficient to cover even its cash operational
expenditures. AGOSD’s cash deficits have been covered by government contributions to
finance current expenditures and by arrears on its debts with the National Investment
Bank. As in the case of AWGA, AGOSD finances its capital expenditures program with
loans from the National Investment Bank.

Demand growth

The Water Master Plan projects a “significant growth along the periphery of Alexandria
City, in Ameriya and west of Alexandria. New highways around the city, new industrial
zones in Ameriya and Borg El Arab City, and tourism development to the west will all
drive future growth”. The projected population and water production growth is presented
in Table 2.

Table 2. Population and Water Production Projections

Year Population (millions) Maximum day
Average Peak summer demand
day (000 m3/day)
2000 4.14 5.22 1,950 a/
2007 5.07 6.30 2,800
2012 5.65 7.09 3,200
2017 6.25 7.88 3,600
2022 6.86 8.45 4,040
Source: CDM Master Plan (cited)
a/ Average production (AWGA)

Recent updates of investment needs indicate that in order to meet full service levels by
2022 AWGA will need to invest some L.E. 4,900 million. Similarly AGOSD will need to
invest L.E. 3,300 million over the same period.

Based on these recent investment estimates, Consultants have estimated the economic
costs (Average Incremental Cost)5 at:
• Water ~ L.E. 1.20/m3
• Sanitary drainage ~ L.E. 0.80/m3

4
WWGC. Alexandria Wastewater Program. Master Plan Update 1992.
5
SEGURA-IP3. Alexandria Water and Wastewater Services. Policy Statement, June 2004.



• Combined services ~ L.E. 2.00/m3

Clearly, both AWGA and AGOSD face a daunting challenge to recover all costs, meet
projected demand and improve the quality of services.

2. Implementation Schedule

This project covered a period of time of about 40 weeks, starting on March 18, 2204, and
schedule to deliver the final report and presentation on the first half of November 2004.

SEGURA/IP3 expatriate team worked on-field several times with an average of 2-week
visit period. The project had permanent support from the local team on data collection
and validation. This activity extended through mid October. Consultants prepared a total
of six reports (including this one) and presented them to representatives of AWGA,
AGOSD and USAID for further discussions.

Four main tasks were performed covering policy considerations statement, scope of work
adjustment, feasibility studies, and to conclude with the transaction and implementation
plans. A more detailed description of the activities and timing can be found in Table 3. as
a result, consultants presented seven reports (including this one) to representatives of
AWGA, AGOSD and USAID. These reports were thoroughly discussed with these
agencies.



Table 3. Alexandria Water & Wastewater PSP Study
Updated Project Implementation Schedule

- - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
March April May June July August September October November
TASK 1 (Policy Statement)
Initial Trip to Egypt (3/18-3/29)
Data collection and validation (local team)
Considerations for main policy decision making
* Report 1
Policy Statement
* Report (2)
* Team in Egypt - Policy - discussion
* Workshop (1)

TASK 2 (SOW adjustment - Service Contracts)
* Report (Needs Assessment merged into FS report)

TASK 3 (Feasibility Study)
* Team in Egypt - Service Contract for M/B+C
* Consultant in Egypt - Service Contract for Septage Mgt
* Briefings to USAID - AWGA - AGOSD
* Reports 3 & 4 - Feasibility M/B+C and Options Septage Mgt
* Team in Egypt -Service Contracts / Transaction Plan
* Workshop (2) - Service Contract Definitions

TASK 4 (Transaction & Implementation Plan)
* Report (5) - Transaction Implementation Plan - AWGA

* Report (6) - Steps Toward Transaction Implementation - AGOSD
* Final report (7)
* Final Presentation USAID/GOE

Religious holidays (Ramadan) -Oct 16 - Nov 14 (approx)

Notes: 1. Weeks start on Sundays, from March 21/04
2. Schedule shows deliverables, workshops and expatriate visits only

SEGURA / IP3 JV Final Report -
5


3. Policy Statement - Recommendations

The recommended policies, consistent with Decrees 135 and 136 of 2004, center on six
priority areas:

a) Governance. To promote efficient and high standards of service throughout the
country local differences are recognized. Local government authorities and the public at
large, as main stakeholders, can play an important role in defining priorities to meet
particular local needs and in increasing accountability of service providers. To promote
this participation local and central government sector agencies should strive to:

• Seek active participation of local authorities in the board of directors of local
companies;
• Seek active participation in the board of directors of non-government members to
bring their perspective and vision, and enrich the dialogue.
• Delegate responsibility to subsidiary companies for financial and personnel
management, and planning and construction responsibilities to promote
accountability
• Allow subsidiary companies to retain operational cash surpluses to finance
investments and debt service requirements. If is deemed necessary on distributive
grounds, to capture some of these cash surpluses, the holding company can define
a percentage of revenues from each utility to be transferred to the holding
company.
• Empower the public and the users through education campaigns to give them a
better understanding of the issues in sector development.

b) Pricing of services. Pricing of water and sanitation services will aim to reconcile
four important objectives:

• Efficient use of resources and water conservation by recovering economic costs
and metering consumption.
• Financial viability of service providers by allowing them to cover all financial
costs.
• Social development by ensuring that all inhabitants have access to adequate basic
services at affordable prices.
• Transparency in tariff setting and adjustments to foster good planning, and to
promote their understanding by policy makers and the public.

c) Personnel management. Service providers should have discretion, within labor
laws, to manage their personnel and to provide incentives to encourage higher levels of
efficiency and better response to users needs.

d) Financial Viability. Service providers should have incentives to promote the
gradual implementation of tariffs that reflect financial requirements to cover operational,
rehabilitation and expansion costs and debt service obligations.



The government will promote the development of reliable long-term financing for the
sector while avoiding distortions to capital markets and undue fiscal pressures.

e) Private sector participation. Participation of the private sector will be promoted
as a means towards achieving sector development goals. Participation of the private
sector will be sought to serve two main goals:

• Efficient and sustainable services. Through the know-how, and more agile
private sector management systems, practices and decision making processes.
• Financing. To provide the capital to expand services and to promote a more
efficient use of existing infrastructure.

f) Regulation. To promote high levels of efficiency in operations and investments
and better customer relations, the regulatory system will make use of complementary
instruments such as: i) Command and control, or explicit directives to influence
behavior of sector agencies and to promote desirable sector outcomes; ii) Policy
incentives designed to achieve higher productivity gains and service standards; and iii)
Benchmarking to promote competition by comparison of performance among service
providers.

4. Needs Assessment & Feasibility Studies

4.1 AWGA – Metering, Billing & Collection

The pilot project is a complement to AWGA’s ongoing institutional development
program. Its objective is to improve customer services, improve revenues and reduce
costs and use this experience with a private operator, through an adequate benchmarking
and information system, to improve branch operations. The pilot area consists of 3,600
km2 located in the western part of Alexandria, with about 125,000 customer accounts,
and includes three branch offices: Ameriya, Borg El Arab, and Sahel (see Table 4).

The effects expected by AWGA are twofold: first, improved operations in the pilot area,
as a result of the work of the private contractor and, second, improved performance of
AWGA-operated branches, as a result of the “comparative competition” with the
privately-operated branches.

AWGA provides water service to virtually 100% of the population in the pilot area. A
recent willingness to pay survey indicates that most customers in the pilot area consider
the quality of the services as fair to poor because of low water pressure and intermittent
service.

Domestic customers represent 98% of the total customer base but only 30% of the total
billings. This distribution clearly indicates a high level of cross-subsidies (discussed in



some detail in the Policy Statement Report). Most domestic customers are billed bi-
monthly based on the results of meter readings. Further, many domestic customers live
in apartment buildings and are billed based on the results of a master meter for the
building and individual apartment sub-meters. The difference between the master meter
reading and the total readings of all sub-meters is prorated to all sub-metered customers
in the apartment building.

Table 4. Pilot Project Customer Base
(End of FY 04)

Item Branch
Ameriya Borg Sahel Total
El Arab
Water Supply Accounts (No.)
• Domestic 72,490 22,700 26,440 121,630
• Large 640 1,170 300 2,110
• Government 710 330 270 1,310
Total 73,840 24,200 27,010 125,050
Service Area and Accounts Density
• Total service area (km2) 1,800 1,300 500 3,600
• Density (accounts per km2) 41 19 54 35

Large customers are defined as those that have a meter 2” or greater. Large customers
represent 2% of the total customer base in the pilot area, 39% of water volume billed and
50% of the total billings. Government customers only include government agencies.
Public companies, including state owned enterprises, are classified as large customers.
Government customers represent 1% of the customer base, 17% of water volume billed
and 19% of the total billings.

Contract options and feasibility

Consultants considered two basic alternatives for a contract with a private operator: i)
Metering only, and ii) Comprehensive metering, billing and collection.

Metering only
Under this alternative, AWGA would delegate to a private operator the metering
function, including installation, replacement, and meter reading. The operator could read
the meters with its own staff or directly supervise AWGA’s staff. AWGA’s branches
would continue being the primary contact with the customer, as well as being responsible
for billing and collection.

The consultants consider that a metering contract with the appropriate incentives would
lead to a significant increase in the volume of water billed, particularly for large and
government accounts. The effectiveness of the contract to increase the volume of water
billed to domestic customers is, however, dependent to a large extent on the authority



delegated by AWGA to the private contractor to purchase the most cost-effective meters
available in the domestic or international markets.

The private contractor could achieve the expected improvements in water billing through
the implementation of:
• Alternative metering technologies.
• Systematic meter replacement and repair programs.
• Strict control of meter readers.

To provide adequate incentives for good performance, the contract should include a fix
payment to the contractor for achieving the targets established in the contract, penalties
for non-meeting the targets, and bonuses for exceeding the performance targets.

Comprehensive metering, billing and collection
Under this alternative, AWGA would delegate to the private operator all the metering
function plus billing and collection. Under this alternative, the operator should be given
full control over staff hiring and firing matters and preferable over staff compensation.

The consultants consider that a comprehensive metering, billing and collection contract
with the appropriate incentives has the potential to significantly increase the volume of
water billed and the collection rate. The effectiveness of this contract to achieve the
desired goals is dependent, however, on the authority delegated by AWGA to the private
contractor to:
• Purchase the most cost-effective meters available in the domestic
or international markets.
• Enforce bill collection through appropriate penalties to delinquent customers,
including shutting-off the services and fines.
• Experiment with alternative billing and collections practices with domestic
customers.
As in the case of the metering-only contract, the operator’s remuneration would be based
on a fix payment for achieving the targets established in the contract, plus penalties for
non-meeting the targets, or bonuses for exceeding them.

Actions common to both contract alternatives

To achieve the full benefits under both contracts is necessary to:
• Conduct a user census to determine that customers are accounted for and properly
classified and to refine the information on the need for additional meters.
• Provide incentives to implement alternative meter technologies, such as
automated meter reading6.
• Replace broken meters in the pilot area (about 5% of all meters).
• Conduct accuracy test on most meters to determine a cost-effective replacement
program.

6
The selection scope of alternatives depends on the relative price charge to different consumers. Better
meters are more accurate but cost more. Therefore, AGOSD needs to balance these higher costs against
additional revenues (benefits) in order to decide on the most cost-effective technologies.



These contracts would most likely be of interest to a joint venture that includes a meter
manufacturing company and an information technology company. Given the relatively
small size of the contract it is most likely that the interested companies will have already
a significant presence in Egypt. Egyptian companies interested in these contracts should
be given incentives to enter into long-term technical assistance agreements with
international companies to improve their opportunities and know how to enter into these
contracts.

As shown in Table 5 the results of the financial feasibility of the service contracts are
positive:

A metering only contract has the potential of increasing annual collections in the pilot
area by about L.E.11.2 million or about 20% of current annual collections and net
revenues by L.E. 7.6 million. The consultants believe this is a reasonable estimate based
on the current meter conditions in the pilot area and the results achieved by other utilities
that have implemented similar metering programs.

The alternative of comprehensive metering, billing and collection has the potential of
increasing annual collections in the pilot area by L.E. 16.8 million or 30% of existing
annual collections, and increasing net revenues by L.E.11.0 million

Contract Financial Feasibility
(annualized L.E. in Millions)
Item Metering Comprehensive

Collection increase from: 11.2 16.8
Broken meters 2.8 2.8
Improved metering 8.4 8.4
Collection activities - 5.6
Expenses increases from: 3.6 5.8
Meter related 2.9 2.9
Renovations & IT - 0.5
Contractor staff 0.7 1.8
Performace bonus - 0.6

Additional net collections 7.6 11.0
As % total pilot area collections 14% 20%



Whenever an organization contracts-out part of its activities, a contract administration
unit is needed to ensure that the contractor is performing as expected and meeting the
performance standards included in the contract. In this case, AWGA’s contract
administration functions will require a small group of qualified staff with experience in
data processing, commercialization, and financial issues. Legal and technical audit
resources would also be needed periodically. On a full time equivalent basis, the contract
administration unit would probably range from 4 to 6 people depending on the contract
option selected.

To effectively discharge its contract administration functions AWGA will require:
• Good information about the performance of the private contractor and its
compliance with contractual clauses.
• An adequate system to resolve issues arising from AWGA and the contractor
providing different interpretations of contractual clauses.
• An adequate system to compare performance among AWGA’s-operated branches
and the contractor-operated branches.
• An adequate interface between the contractor and AWGA’s operational
departments.

The information requirements depend on the services to be provided by the contractor,
the operational targets stipulated in the contract, the basic payments to the contractor and
the bonuses for superior performance. These requirements should be precisely spelled
out in the service contract.

The location of the Contract Administration Unit within AWGA’s organization is another
important point to consider. One of the options is to establish it as an advisory function
to the Chairperson. This option has several positive aspects, including (a) providing a
clear signal to the staff about the importance attached to the contract and (b) promoting
the independence of the Unit from the operational departments, which may have a vested
interest in the status quo. Alternatively, the contract administration unit could be
established as part of AWGA’s central revenues and customer department. The positive
aspects of this option include (a) in-depth knowledge of commercialization issues by
current staff and (b) uniformity in dealing with commercialization issues in all branches.
Possible objections to the second option include lack of objectivity in dealing with the
private contractor, and resistance to the implementation of new approaches.

As there is no experience in AWGA on the administration of service contracts like the
one proposed for the pilot project, it is important to provide adequate training to the staff
of the Unit. The training should aim at providing the staff a good understanding of the
objectives of the contract, administration of service contracts, and negotiating skills.

4.2 AGOSD – Septage Management, Site 9N and Transport

AGOSD has identified three operational activities where it would like to assess the
viability of private sector participation (PSP) through service contracts: i) Collection and



disposal of septage; ii) Operation of Site 9N waste disposal facility for wastewater by-
products and sludge composting; and iii) Transport of waste byproducts to site 9N.

These projects can be structured to provide incentives to the private operators to reduce
AGOSD costs and/or increase revenues, while affecting AGOSD labor force as little as
possible.

Collection and disposal of septage

AGOSD provides collection and disposal of septic tank waste to residents and businesses
within its area of operations on a fee basis. This activity was assessed by CH2MHILL in
a 2000 report7. The report estimates that there are about 180,000 septic tanks in
Alexandria, most of them serviced by AGOSD. Septage collection and disposal is also
provided by an unknown number of private operators whose operation is considered
illegal.

AGOSD trucks are dispatched on a request or pre-set schedule basis to pump out the
contents of septic tanks (assumed in the report as once a year on average) and deliver the
waste material to authorized receiving sites. However, the report indicates that “in some
cases, sewage is discharged directly into the sewer system at street manholes sites”, with
undesirable consequences on the operation of the sewerage system. The consultants
understand the situation today has changed little as not all septage is discharged to the
sewerage collection system with possible illegal discharges to local waterways. This
outcome likely applies also to illegal operators.

The report also indicates that AGOSD’s septage program is also affected by “a general
lack of detailed operations” and suffers from “the absence of an accounting system which
does not permit concise control systems to exist or provide accountability to [its]
managers”. The report also recognizes that in spite of assistance received from AGOSD
personnel, “it was necessary to proceed with minimal data. This was particularly true in
determining the number of septic systems in the service area and the detailed cost for
[the] vehicles assigned to the septic program”. These information shortcomings persist
today.

The present outcome of the septage operation strongly suggests that AGOSD has severe
limitations to control the staff in charge of providing this service, as well as the safe
discharge of the septage. It is also clear that this operation, as presently implemented,
represents a heavy drain on AGOSD financial resources.

Consultants considered two basic alternatives to promote private sector participation in
the collections and safe disposal of septage: a) service management contracts; and b)
licensing of private operators.

7
CH2MHILL. Privatizing the AGOSD Septic System, Cleaning & Hauling Program. January 2000.



a) Service management contracts
Under this alternative, AGOSD would delegate the collection and disposal of septage to
private operators. These contracts can be structured along two basic options: Each area
(or branch) is served by a pre-determined number of contractors8 and trucks to foster
competition; and Contractors are free to operate anywhere in the city.

Under both options contractors charge the price defined by AGOSD (under clear and
specified criteria), operate under exclusive service conditions and collect fees on behalf
of AGOSD. Contractors, in turn would be paid by AGOSD for services rendered.

AGOSD main responsibilities would be to: a) control “illegal” operators; and b)
supervise operations and enforce applicable laws and regulations to ensure that service
contracts perform as intended, including the safe disposal of septage.

Under present conditions, service management contracts can be problematic to
implement as:
• AGOSD’s organization is not adequately prepared to monitor payments to
contractors and thus to ensure that it will receive all the proceeds from this
operation.
• AGOSD lacks adequate operational data on the number and location of septic
tanks and frequency of service to make an informed decision on the adequate
size of the trucking fleet. However, this decision will affect the financial
viability of the operation. Moreover, AGOSD is also in a weak position to
determine, ex-ante, the service fee operators can charge in each area. In
particular, if fees are too low it risks that some zones will not receive service,
thus encouraging “illegal” operations or rent seeking.

b) Licensing
Under this alternative, a pre-selected and adequate number of licensed contractors, to
promote competition for services, operate in any area of the city. This competition is
essential to ensure good services and to eliminate, to a large extent, the need to control
prices9. Service fees are collected and kept by the licensee and AGOSD receives the
license fee.

The license fee can be established to cover as a minimum, AGOSD’s regulatory and
supervisory functions. Selection of contractors can be carried out on a competitive basis
and based on the initial premium bidders are willing to pay over a minimum preset
license fee. Licenses could be granted for two to three years.

AGOSD should have the right to revoke the license at any time for lack of compliance
with operating norms. At the expiration of the license, AGOSD can use the opportunity

8
Contracting this service with only one operator for the whole city or for one particular zone will remove
any competition in the market to the detriment of service.
9
The exception could be in the initial 2-3 years of the contract to ensure a smooth transition and wider
acceptance of users to the license system.



not to renew the license of poor performers and to ascertain if additional operators are
needed to foster competition and keep prices at a reasonable level.

Under this alternative, AGOSD supervisory functions will be simplified, as it will not be
directly involved in the collection and disposal of septage or with the collection of fees.
Its primary role will be as grantor of the licenses and regulator and supervisor of service
quality.

AGOSD should consider granting licenses to its employees working in this activity, in
return from them leaving the company, and to lease or sell them the vehicles under
special terms and conditions. USAID may be able to assist with the financing through its
Credit Development Facility (CDF).

Under both alternatives AGOSD needs to define:
• The number of trucks, if any, that it is prepared to lease or sell to interested
operators, and
• The relocation of staff working in this service, or the conditions imposed on
operators for the incorporation of this manpower in their labor force.

For the latter, the private operator should have full control over these employees.
Otherwise, protracted discussions are likely to occur, as inadequate control of personnel
is detrimental to the efficiency and quality of service.

Septage wastes pose several environmental risks that require careful handling and
disposal. Septage, particularly from industrial or commercial activities can contain
harmful or toxic substances to humans, crops and the environment at large. Similarly
wastes from hospitals can contain highly infectious viruses, bacteria and/or radioactive
materials10. Nonetheless, a program for the systematic characterization and monitoring of
septage from these institutions needs to be developed and enforced (law 37 of 1967)11
and non-approved establishments should be mandated to dispose these wastes at specified
sites and under tight and controlled conditions.

Consultants were not able to obtain information on the characterization of septage
material in Alexandria.

Existing AGOSD sewerage infrastructure provides several non-exclusionary alternatives
for the proper disposal of septage; they include:
• Addition to both wastewater treatment plant head works.
o At a point immediately upstream of the screening and grit removal
processes, or
o At selected manholes to large drainage pipes upstream of the treatment
plants (current disposal practice in Alexandria).

10
The factor that differentiates commercial and industrial from domestic septage is not the type of
establishment generating the waste; rather it is the type of wastage being produced.
11
The Ministries of Agriculture and of Environmental Affairs regulate the disposal of these wastes.



• In this alternative, it might be necessary to impose septage discharge restrictions
at each wastewater treatment plant, to prevent overloading or operational
disruptions.
• Disposal at Site 9N. Septage would be delivered to a holding pond to improve
dewatering and handling at peak flows.
• Direct addition to the sludge dewatering facility.

Direct addition of septage to the dewatering facility reduces the loading to the primary
treatment process thus eliminating potential problems that could affect the quality of the
primary treatment system. However, as septage is resistant to dewatering, it can also
complicate the operation of the MDF and increase the wear of pumps, if septage is not
previously screened and de-gritted.

The first two alternatives are the most promising and should be studied in more detail to
determine the location, characteristics of receiving facilities and loading parameters.
Consultants cannot recommend alternative 3 at this time for lack of adequate operational
information. If this alternative is of interest to AGOSD, consultants suggest field tests for
a representative period of time (3-6 months) to assess its overall feasibility.

A cost-benefit optimization is particularly sensitive to the distance between septage
collection and disposal, the number of septic tanks and volume emptied per year.
Therefore with the scant information available, the financial viability of the two proposed
alternatives and the impact on potential private operators and AGOSD cannot be
developed with any degree of confidence.

SEGURA/IP3 considers that the licensing alternative is the most desirable option for
AGOSD. This alternative has major advantages over a service contract approach,
including:
• AGOSD will be able to cut operational losses of over L.E. 6 million per year
almost immediately.
• AGOSD does not need to control prices, as the presence of an adequate number of
certified operators will promote competition in the market and thus fair pricing.
• AGOSD needs only to create a supervisory unit to provide information to
potential users and receive feed back from them, and to ensure that that licensed
operators meet required standards of service, and customers receive a satisfactory
service.
• The licensing fee can be easily adjusted to cover the cost of the supervisory unit
and even produce a surplus for AGOSD.
• Illegal operators can be brought under control, as licensees will likely report them
to proper authorities.
• The period of time between license renewals can be set to promote healthy
competition

If this alternative is selected AGOSD needs to:
• Develop a regulatory framework and operating policies and the organization and
functions of the supervisory unit.



• Determine the level of tipping fees that private operators should pay at points of
discharge to cover handling costs at receiving stations.
• Make an informed decision about the possible auction or leasing of unneeded
service trucks to potential licensees.
• Develop a political acceptable policy to deal with staff working in septage
collection activities.

Operation of Site 9N

Site 9N is located some 40 kilometers south west of WWTP and has an area of about 150
hectares (360 feddans). Facilities at the site include administration building, warehouse,
maintenance area, operational equipment and pilot green areas. Some 60 staff works at
this facility.

Site 9N receives dewatered sludge, grit, scum and screenings from the two major
wastewater treatment plants (East and West) and sewage pumping stations, as well as oil,
grease and screenings from industries and commercial establishments. Grit and scum
loads represent about 25 percent of the total handled at this site. Site 9N could also be
adapted to receive and compost septage.

Operations at Site 9N include: a) composting of dewatered sludge transported by truck
from the mechanical dewatering facility (MDF) at the West wastewater primary
treatment plant (WWTP); b) grit treatment; and c) sanitary landfill of for industrial
wastes. One of the local uses of compost and treated grit is to improve the conditions of
calcareous soils, common in the area.

The manager of Site 9N operations indicated that during FY 2004, this site received from
AGOSD’s operations about 300 tons/day of dewatered sludge, 30 m3/day of grit, 20-30
m3/day of screenings and 20 m3/day of scum. It also received about 20m3/month of
industrial wastes, mainly from three companies. The volume of septage is not known as
there is no reliable information on the number and volume of septic tanks in the area and
how often, on average, they are served.

There are two basic alternatives to delegate operation of site 9N to a private operator: a) a
management contract, and b) a lease contract. These two alternatives are quite similar in
scope but differ in the way decisions are made to price and sell compost and other by
products, and on the bidding strategy.

a) A management contract can be structured for a 5 to10 year period and
interested contractors bid on the fee to manage the operation. Under this alternative,
pricing decisions are made by AGOSD.

The main responsibility of the contractor would be to operate the facilities as specified in
the bidding documents. Marketing decisions can be delegated to the operator including
incentives to reward its efforts to improve sales and reduce costs. Investments,



replacement, and maintenance costs are the responsibility of AGOSD. It is possible
however, to structure the transaction to assign some of these costs to the operator, but this
decision is likely to extend the length of the contract, increase the management fee or
both.

b) A Leasing contract can be structured for 10 to 15 year period, and interested
contractors will bid on an annual fee to be paid to AGOSD for the use of this facility,
including equipment. This fee can be set to provide additional benefits to AGOSD if
operating results are substantially better than anticipated and adjusted periodically for
inflation. Under this alternative, sales and price decisions are the responsibility of the
private operator as well as investments (like reception facilities to handle septage and
other improvements deemed necessary) and maintenance costs.

To set realistic bidding conditions there is a need to have better market information about
supply and demand to assess the economic potential of a full-fledged operation. This
market analysis should include price comparison with alternative fertilizer products as
well as an input analysis to ascertain with greater confidence the amounts of dewatered
sludge and septage that can be expected during the life of the contract.

In addition to the market assessment, the financial and economic viability of such
contract can be enhanced if:
• A tipping fee for the reception of septage, grease and any other acceptable waste
material is imposed (most likely this would be determined by AGOSD as there is
no competition for this service)
• Reception of waste materials is open to other governorates; and
• AGOSD can guarantee a minimum amount of dewatered sludge and enforce
adequate disposal of septage.

Contracting the operation of Site 9N and the production of composting can be a win-win
situation for AGOSD and a private operator. AGOSD can benefit financially from a more
efficient operation and a more aggressive marketing approach. A private operator can
also bring needed know-how and more streamlined management practices that are likely
to reduce costs and thus increase net revenues. On the other hand, AGOSD’s supervisory
functions would be simplified if the operator is given a free hand to decide on the selling
price of its products or production of enhanced compost.

Based on this pre-feasibility analysis, the consultants recommend therefore adopting the
lease alternative as it gives more incentives to the private operator to fully optimize the
use of this facility including equipment, to be more proactive in the search for customers
and in tailoring prices to competitive products. These advantages, in turn should benefit
AGOSD as it can expect higher financial returns from a lease operation.

It is important to reduce information risks to improve the response of interested bidders
for the operation of Site 9N. The experience of consultants in other international
contracts, indicates that perceived information deficiencies by prospective bidders tend to
lower the price (lease fee) they would be willing to offer at bidding time. This negative



perception would be detrimental to the stream of financial benefits to AGOSD. As the
size of this contract is small, it does not seem practical to expect that interested bidders
make a significant investment (due diligence) to ascertain inputs over which they have no
control (projection of quantities and characteristics of materials delivered to the site) and
market opportunities for the compost. Therefore, the bidding outcome will be greatly
enhanced if AGOSD undertakes this input and market analysis.

Transport of dewatered sludge and other wastes to Site 9N

Transportation of waste by-products and operation of site 9N are two different type of
business requiring different managerial skills and equipment. Therefore, consultants
recommend not incorporating the transport of these materials into the lease operation of
site 9N, as this incorporation will make the combined contract not financially attractive
and will likely limit competition to the detriment of AGOSD.

Nonetheless, AGOSD has two basic options to deal with the transport of these materials
the wastewater treatment plants and sewage pumping stations to Site 9N:
• Transporting these materials it using its own resources and at its own cost.
• Delegating this activity to private operators under separate service contracts.

The first alternative is a continuation of present practices, where the possibilities of cost
reductions are not obvious. The second one should contemplate hiring at least 2-4
operators to ensure adequate competition. However, this alternative poses coordination
issues between the operator and AGOSD. Nonetheless, this alternative offers the
potential for cost reductions through competition for and within the market and therefore
consultants recommend this option.

In both cases, there is the need to develop contractual operational arrangement between
AGOSD and site 9N operator. For instance, minimum quantities of materials delivered to
Site 9N and hours of transport, collection and delivery.

The consultants recommend that AGOSD delegates responsibility for the transport of
dewatered sludge and other waste materials to site 9N, to private operators under separate
service contracts.

5. Transaction Implementation Plans

5.1 AWGA – Metering, Billing & Collection

Two options were identified for PSP in a pilot area of AWGA’s service area: i) A
metering only, and ii) A more comprehensive

AWGA has expressed an interest in developing the transaction implementation plan for
the metering only option. AWGA has also indicated that it believes it can improve its



billing and collection efforts through internal efforts and does not wish to pursue the
more comprehensive metering, billing and collection option.

Private Sector Participation Metering Activities

The metering only contract envisioned by the consultants would be a 10-year contract
that delegates a number of activities to a contractor in the pilot area. These activities are
expected to include the following:
• Conduct a customer census and identify illegal connections.
• Based on the customer census, reclassify customer accounts to tariff categories
indicative of actual use.
• Replace broken meters.
• Relocate inaccessible meters so they can be read more easily.
• Test and replace meters over 2” as soon as practical.
• Install advanced meter technology for large and government accounts.
• Test and replace apartment master meters.
• Expand the use of hand held meter reading devices in Ameriya and Borg El Arab.
• Purchase motor cycles for meter readers and redesign meter routes as needed.
• Replace most domestic meters over a 5 to 10 year period with higher class meters.

Many of the above activities have taken place to some extent through technical assistance
programs supported by USAID. In the consultants' opinion, a PSP contract for metering
services will build upon the technical assistance already provided and offers a mechanism
to ensure that the assistance is sustainable on a long term basis.

The above activities are estimated to result in annual revenue increases on approximately
L.E. 7.6 million. The amount could be more if a large number of illegal connections are
found which often occurs when a customer census is conducted.

It is also likely that the above activities will improve the collection rate if the customers
believe that there water use is being more accurately measured. Inaccurate meter readings
are currently one of the reasons some customers do not pay their water bills.

The installment of advanced meter technology for large and government accounts, could
include implementation of hand held meter reading devices, more sophisticated
automated meter reading (AMR) or Smart meters. Telephonic reading may also be
possible depending upon security access allowed by customers.

For purposes of estimating the potential increase in billings the consultants have assumed
AMR would be used. However, each bidder is likely to propose alternative technologies
that they believe will be most effective for the situation. The consultants have no bias
toward any particular technology and believe the final decision should be based on a cost-
benefit evaluation of proposals that are received.



Potential Bidders

The companies to bid on a metering only contract will probably include a joint venture
between a meter manufacturer and a local service provider and /or international water
companies. The consultants believe there are several companies that will have a keen
interest in this opportunity.

The level of interest and ultimate costs of the metering-only contract will be influenced
by the bidders understanding of the potential size of this opportunity. If the bidders
believe this is an opportunity limited to one pilot area in Alexandria, the level of
competition will be limited and thus the costs higher than it might otherwise be.

AWGA could also consider a requirement in the contract to install meters in the
distribution system (technical meters) to measure the amount of water delivered to the
pilot area. This type of activity would allow the volume of unaccounted for water to be
monitored and measured and provide valuable information to help solve the continuity of
service issues described in the needs assessment and feasibility report. At least in the
Sahel area, the installation of technical meters requires minor changes in the distribution
network. In the other two areas more extensive modifications are needed.

It is worth mentioning that some utilities that have contracted-out services, like metering,
allow their employees to bid on the contract. In AWGA’s case some of the managers in
the pilot area branches could organize themselves as a local company and pursue a joint
venture with one or more meter manufactures. AWGA would need to support this type of
initiative and possibly provide some technical assistance to get it started.

Transaction Activities

Table 6 includes a Gantt chart of the major tasks that will be involved in securing the
services of a qualified contractor for a metering only contract.

Moreover, evaluation of proposals and contract signature is likely to take more than one
month. The Transition can start on month 10.

As shown in Table 6, the transaction process will take up to nine months to complete
from the date a transaction advisor is retained. The first three months of the transaction
process includes activities to gather and refine information and to make decisions on
policy matters that will have an impact on employees in the pilot area. Once these matters
are resolved, the transaction will take an additional six months of elapsed time to
complete.



Table 6. AWGA - Transaction Activities

Months
Activities
1 2 3 4 5 6 7 8 9 10

1 Retain a transaction advisor
2 Organize a contract administration unit
3 Prepare and enhance existing metering data
4 Agree on policy and legal matters
5 Issue RFQ
6 Evaluate qualification statements and short list firms
7 Conduct site visits with short listed firms
8 Prepare and issue RFP, including draft contract
9 Evaluate proposals and select firm
10 Begin transition assistance

Contract Costs

The total value of the metering only contract over a ten year term to the winning
contractor is estimated at L.E 36 million. By international standards this is a small
contract. Further, considering the fact that the contractor will not be able to fully control
all of the metering operations, most contractors will be reluctant to accept contract terms
that base too much of their compensation on incentive payments for increasing the
amount of annual billings. The contractor will most likely be paid a fixed fee for every
meter read and a fixed payment for every meter replaced based on meter size. In the
consultants' opinion, a small performance bonus ranging from 5% to 10% of increased
annul billings would be an appropriate performance bonus. If this is done the estimated
fixed payments would be reduced.

Level of Effort

The consultants estimate the costs of the transaction process, including an estimated
value of AWGA’s efforts to gather and refine information, at L.E. 2.1 million, or
approximately 6% of the total contract value. The estimated cost of the transaction
advisor is L.E. 1.8 million and the estimated values of AWGA’s efforts are L.E. .3
million

5.2 AGOSD – Septage Management, Site 9N and Transport

The consultants developed, at the request of AGOSD, the pre-feasibility analysis for
contracting three operational activities with private operators, namely12: i) septage
collection and disposal; ii) operation of Site 9N; and iii) transport of wastewater
operational by-products to site 9N.

12
SEGURA-IP3. AGOSD Pre-feasibility study-October, 2004



These contracts with private operators are closely interrelated as:
• The disposal of septage (contract 1) and waste materials (contract 3) effects the
operation of Site 9N (contract 2);
• Most of the equipment used in these operations is interchangeable. Therefore, it is
important to allocate this equipment in an optimal way to ensure the maximum
net benefits from their use.

Therefore, the consultants recommended pursuing private sector participation in these
operations simultaneously.

Implementation activities common to all contracts
1. Feasibility
a) Information enhancement
One important and urgent task is to allocate staff and resources to improve the
quality of information relevant to these operations. Information shortcomings
were the main reason why the development of these projects could only be
advanced to the feasibility level. The enhancement of information is important to
help minimize the perception, by prospective bidders, of information risks and
thus to ensure a more positive response from them and better competition likely to
benefit the interests of AGOSD.

Once this information is available, a base-line cost contracting strategy for each
contract can be developed. This strategy should be compatible with a sound
allocation of risks to contractors and AGOSD, and to promote adequate
competition (for the market) for each of the contracts and during the
implementation phase (competition in the market), to optimize the benefits for
AGOSD.

b) Selection of transaction advisors
Due to these contracts are interrelated, it is recommended to retain an advisory
consulting firm (TA advisors) to help AGOSD in executing these transactions
simultaneously. The TA advisors should accompany and support AGOSD on all
aspects of the transaction. If deemed necessary, they should also participate in the
evaluation of bids and negotiations that may follow as well as in the transition
phase to private operations of these services.

The advisors can be retained on a professional fee plus reimbursable expenses
basis, or on a professional fee plus success fee basis. It is the consultants' opinion
that given the nature of the consulting work to be performed and the nature of the
service contracts the first option is preferable.

c) Staff reallocation
The staff currently assigned to these three activities will likely be affected by
AGOSD decision to delegate these operations to private operators. The
consultants understand that AGOSD would prefer to minimize this impact.
Therefore, AGOSD needs to develop a consistent staff policy to manage this



initiative in a fair and transparent basis and balance its interests with those of the
staff and operators. Towards this goal, AGOSD should consider several options
(and combinations):

• Staff can be offered the opportunity to join the private operator. Staff would
be allowed to take a leave of absence without pay but with the option to be
reincorporated, say after two years, if the staff so decides. It is in the interest
of a private operator to hire some, but not necessarily all, AGOSD staff
working in these activities. However, the operator needs to be given full
authority over this staff, as otherwise accountability of the operator will be
compromised. Therefore, AGOSD needs to reconcile its own and private
operators concerns to reach a workable and effective solution.

• Staff not willing to take a leave of absence or not selected by the operator can
be transferred to other positions within the organization.

• Selected staff, particularly those working currently in the septage collection
and disposal or in the transport of materials to site 9N, could be given the
opportunity to bid on these contracts, on condition that they resign from
AGOSD if they are selected.

Consultants were informed that the first two options have been recently
successfully implemented in Alexandria in the context of the solid waste
management initiative delegated to the private sector.

d. Condition of the equipment
There are no updated records on the condition of the equipment utilized in these
operations. Therefore, is important for AGOSD to determine:
• The equipment that is not worth repairing; this equipment could be sold as
scrap.
• The equipment that it would like to retain for other operations.
• The equipment that it would like to lease or sell to operators.

2. Pre-transaction activities
a. Creation of the implementation unit within AGOSD, which should have the
mandate to carry these projects successfully to completion. The head unit
should report directly to the Chairman to ensure that the requests for
information from other departments are carried out promptly. The main
functions of the unit will be:
• To liaise closely with and supervise the work of the TA advisors;
• To contact prospective bidders and invite them to participate;
• To prepare public announcements and call-for-bids documents;
• To answer in writing, following proper internal consultations, the
questions that interested operators may pose; and



• Carry out all activities leading to the successful implementation of the
contracts.

b. Information memorandum. Its purpose is to inform prospective bidders on
the general nature of the contracts and to invite them to participate. This
document should be prepared once AGOSD has made the key decisions
relevant to each contract (in particular type of private sector participation and
policy on reallocation of staff).

c. Organization of the data room. All documents pertinent to these contracts
should be classified and stored at a centralized point and made available to
interested contractors. A log of all visitors and information requests should be
maintained.

3. Public relations and promotion activities
• It is important in all public relations activities to offer factual information
about the present service conditions, and to make realistic promises about the
expected benefits and impact on different users. In particular, they are
beneficial to illustrate to the public at large, about AGOSD’s development
plans to improve services to the population, via private sector participation
and how they will benefit from these improvements; and AGOSD staff,
through internal seminars, about the reasons for private sector participation
and how this participation will affect their positions.

• The purpose of the promotion activities is to raise the interest of prospective
private operators and listen to their concerns. Promotion activities include
workshops with professional associations; contacts with national and
international operators that may have an interest in these contracts; and
organization of technical visits for operators to illustrate in detail the scope of
the proposed contracts.

4. Transaction
These activities include the preparation and issuance of:
• Request for proposals. In local newspapers and international trade magazines.
This information often includes a general description of the contracts, cost of
documents. It indicates the date for presentation of documents and the form
and time limits for clarifications.
• Field visits and pre-bidding conference. Interested bidders should be invited to
visit the project sites under the guidance of AGOSD and for formal
discussions to foster comments from interested bidders on the bidding
documents.
• Pre-qualification documents. In general, it is customary to pre-qualify
interested contractors. However, care should be taken to avoid an early



decision on this matter as if the number of pre-qualified bidders is inadequate
it will have an adverse effect on the competition for the contracts13.
• Bidding documents. Provides information about the scope of the contract,
submission of documents including performance guaranties, and bit
evaluation and award procedures.
• The contract. Contains all contractual obligations, conflict resolution
provisions (arbitration), forms of payment and non-compliance penalties. It
should be prepared (in draft) as early as possible to elicit a meaningful
response from prospective bidders. Amendments, if deemed appropriate, are
introduced in response to these comments.

Depending on the overall approach to the bidding process, final contract negotiations
may or not be part of the transaction process. In some instances, consultations with
prospective bidders are sought in earnest to accommodate, to the extent possible, their
concerns to the contract. If this approach is followed, it is customary to request that all
bidders sing the pro-forma contract to signal their acceptance to all contract conditions.

5. Transition period & Contract Monitoring
It is important to plan for an orderly transition of operations to private operators.
Therefore, the transition needs to be developed with an adequate level of detail to avoid
disruptions in service. This transition includes the legal possession of sites and equipment
by the operators and the transfer of AGOSD staff to contractors. During this process
operators begin a more thorough familiarization with the service they will be in charge
of, and AGOSD staff should be attentive to promptly iron out any glitches in the transfer
process.

The supervision of the service contracts entails:
• Periodic reporting by operators in accordance with pre-established rules and
formats set in the contract;
• Validation of this information by the Supervisory Unit;
• Monitoring and evaluation of contracts;
• Spot and random checks to assess operators’ performance;
• Comparison of performance when several contractors are involved in similar
operations (collection and disposal of septage and transport of waste materials to
site 9N);
• Periodic meetings with operators to discuss matters of common interest; and
• Applying remedial actions when necessary.

6. Specific implementation activities by type of contract
i) Licensing of septage collection and disposal

13
An alternative to pre-qualification is to set minimum qualification criteria that bidders have to
demonstrate at the time of bid presentation. If a prospective bidder does not pass the minimum qualification
criteria it is disqualified and the second envelope is returned unopened.



Information enhancement: It is important for AGOSD to develop reliable information
regarding the location of existing septic tanks and volume, and frequency of service. This
activity should be closely coordinated with AWGA as it can be used to validate the
information on the billing system. As part of this exercise, it is also advisable for
AGOSD to update its capital investment plans and population growth for the next 5 to 10
years as they will affect the number and location of septic tanks to be served in the future.

Definition, design and construction of septage receiving stations: Septage can be
safely discharged at the head-works of existing waste treatment plants and at site 9N. For
the first two, there is a need to define where these reception facilities will be located and
to design and build them. In addition, limitations on the septage discharge on these plants
should be defined to avoid operational disruptions. The construction cost of these
facilities is modest and not likely to exceed L.E. 100,000 each. Construction of septage
reception facilities at site 9N can be delegated to and paid for by the operator of this site
as part of the leasing arrangements.

Characterization of septage: This is an important activity that needs to be carried out in
parallel with the census of septic tanks. Its purpose is to identify users, most likely from
industrial, commercial and healthcare activities that generate waste with biological and
physical-chemical characteristics that can pose a danger to staff or to the environment.
Based on these findings certain wastes are likely to be excluded from being discharged at
reception facilities. Both private operators that collect septage and operators at receiving
stations should be thoroughly familiar with these restrictions.

It is also good practice to establish routine and spot checks of septage that will be
accepted at each of the receiving stations. Routine characterization analysis should be
done by AGOSD or contracted with an independent and qualified laboratory.

ii) Leasing of operation of Site 9N
Information enhancement is necessary to assess in greater detail:
• The volumes and likely seasonal variations of different materials to be
received at this site, including projections over the life of the lease. It should
be noted that the contractor will have no control over these quantities, some of
which (dewatered sludge in particular) are critical to the financial viability of
the compost operation.
• The potential market for compost. Given that the size of the lease contract is
small, it does not seem realistic to expect that potential bidders will perform a
thorough due diligence process to assess the demand for this product
(potential users, volume and price).

iii) Service contracts for the transport of waste materials
It is necessary to improve information related to the volumes and projections, over the
life of the contract, of materials to be transported to site 9N.



Project execution timetable

As shown in Table 7, the time to carry out these projects to implementation is estimated
at nine months. This period includes about four months required to improve the
information on all three projects, which as indicated previously is critical to reduce
information risks to interested operators and improve AGOSD’s position.


Feasibility Study for Private Sector Participation in Alexandria Water & Wastewater Systems

Feasibility Study for Private Sector Participation in Alexandria Water & Wastewater Systems

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