Performance Based Contracts for Reducing Non-Revenue Water: Selected Lessons from International Experience

The document examines the use of performance-based contracts (PBCs) to reduce non-revenue water (NRW), contrasting them with traditional contracts. It highlights the benefits of PBCs, such as harnessing private sector technical expertise and aligning incentives through results-based payment. The author identifies key implementation challenges, including the need for accurate baseline data, the risk of 'cherrypicking' easy gains, and the difficulty of sustaining improvements after a contract ends. Drawing on examples from Brazil, Malaysia, Thailand, and Ireland, the paper provides guidance on scoping, risk-reward balancing, and procurement to support the implementation of similar frameworks in South African municipalities.

• Performance-based contracts (PBCs) offer four primary advantages over in-house or simple outsourcing: they provide access to specialized technical know-how, increase private contractor incentives through profit motives, reduce transaction costs by consolidating multiple small tenders into one large contract, and can leverage private sector financing and credit ratings for capital-intensive works.
• Reducing non-revenue water (NRW) is often hindered by a lack of political visibility, as the work involves 'humdrum' activities rather than high-profile infrastructure projects, and by internal municipal conflicts where engineering and commercial departments disagree on whether losses are physical or commercial.
• Successful PBCs require a carefully defined project coverage area, ideally with at least 10,000 connections and 'strong water isolation' to ensure the water balance can be reliably calculated. There is a risk of 'cherrypicking,' where contractors select areas for the easiest gains rather than the municipality's priorities.
• A critical distinction exists between 'target contracts,' which use arbitrary pre-determined volumes and penalties, and 'true performance contracts,' where the performance fee is directly proportional to the actual NRW reduction achieved.
• The lack of reliable baseline data and ongoing monitoring is a major obstacle to PBCs, as remuneration is partially dependent on measured savings. In South Africa, this is exacerbated by the fact that many municipalities struggle to deliver legally required 'water balances'.
• Payment risk is a significant barrier for private contractors, especially when dealing with public utilities with low creditworthiness. One suggested mitigation strategy is the use of an escrow account with a fiduciary assignment of receivables as collateral.
• Sustainability of NRW reductions is not guaranteed after a PBC expires; utilities must plan for the transfer of technology, managerial capacity, and budgetary provisions to maintain the network and address new leaks that appear after the contractor's departure.

APA

Schaub-Jones, D. (2013). Performance Based Contracts for Reducing Non-Revenue Water: Selected Lessons from International Experience. GreenCape. https://greencape.co.za/assets/Sector-files/water/Water-conservation-and-demand-management-WCDM/Schaub-Jones-Performance-based-contracts-for-reducing-non-revenue-water-selected-lessons-from-international-experience-2013.pdf

Chicago

Schaub-Jones, David. Performance Based Contracts for Reducing Non-Revenue Water: Selected Lessons from International Experience. GreenCape, 2013. https://greencape.co.za/assets/Sector-files/water/Water-conservation-and-demand-management-WCDM/Schaub-Jones-Performance-based-contracts-for-reducing-non-revenue-water-selected-lessons-from-international-experience-2013.pdf.

Wikipedia

{{cite report |last1=Schaub-Jones |first1=David |title=Performance Based Contracts for Reducing Non-Revenue Water: Selected Lessons from International Experience |publisher=GreenCape |date=December 2013 |url=https://greencape.co.za/assets/Sector-files/water/Water-conservation-and-demand-management-WCDM/Schaub-Jones-Performance-based-contracts-for-reducing-non-revenue-water-selected-lessons-from-international-experience-2013.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{schaubjones2013performance, author = {Schaub-Jones, David}, title = {{Performance Based Contracts for Reducing Non-Revenue Water: Selected Lessons from International Experience}}, institution = {GreenCape}, year = {2013}, month = dec, url = {https://greencape.co.za/assets/Sector-files/water/Water-conservation-and-demand-management-WCDM/Schaub-Jones-Performance-based-contracts-for-reducing-non-revenue-water-selected-lessons-from-international-experience-2013.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }