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Contracting in transition economy municipal projects

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