Alexandria | AGOSD Steps Toward Transaction Implementation

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

AGOSD
STEPS TOWARD TRANSACTION IMPLEMENTATION

By

SEGURA/IP3 Partners LLC

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

November 2004

ALEXANDRIA
PRIVATE SECTOR PARTICIPATION
WATER AND SANITATION SERVICES
AGOSD

Table of Contents

Chapter Title Page
Executive Summary i

1 Background 1
2 Purpose of the report 2
3 Implementation activities common to all contracts 2
3.1 o Information enhancement 2
3.2 o Selection of transaction advisors 3
3.3 o Relocation of staff 3
3.4 o Assessment of condition of equipment 4
3.5 o Pre-transaction activities 4
o Creation of implementation unit 4
o Organization of data room 5
o Information memorandum 5
3.6 o Public relations and promotion activities 6
3.7 o Transaction 6
3.8 o Contract negotiations 7
3.9 o Transition period 7
3.10 o Contract monitoring 8
4 Specific implementation activities 8
4.1 o Licensing of septage collection and disposal 8
4.2 o Leasing of operation of Site 9N 9
4.3 o Service contracts for the transport of waste 9
materials
5 Responsibility matrix 10
6 Project execution timetable 10
7 Implementation preparation costs 12

ALEXANDRIA

Executive Summary

At the request of AGOSD, SEGURA/IP3 consultants developed the pre-feasibility
analysis for contracting three operational activities with private operators, namely1: 1)
septage collection and disposal; 2) operation of Site 9N; and 3) transport of wastewater
operational byproducts to site 9N. From this analysis the consultants recommended:

1. Licensing to private operators the collection and disposal of septage. These
licenses should be granted for two to three year periods.

2. Leasing the operation of Site 9N that handles the safe disposal of waste
byproducts and produces compost from dewatered sludge that is sold to local
markets. This leasing contract should be for 10 years, to allow the recovery of
likely investments by the private operator, related primarily to the production of
compost; and

3. Service contracts with several operators for the collection and transport of
wastewater byproducts (dewatered sludge, grit, scum and grease) from the two
waste treatment plants and 72 pumping stations to site 9N. These service contracts
should be granted for three to five years, to stimulate competition and to lower
future costs associated with re-bidding.

All these contracts will be of interest primarily to Egyptian operators. It is conceivable,
however, that foreign operators, in a joint venture with a local operator, may be interested
in the production and sale of compost from the operation of Site 9N.

These three contracts with private operators are closely interrelated, given that a) the
disposal of septage (contract 1) and transport of waste materials (contract 3) affect the
operation of Site 9N (contract 2); and b) most of the equipment used in these operations
is interchangeable and thus it is important to allocate them in an optimal way to ensure
the maximum net benefits from their use. Therefore, the consultants recommend pursuing
private sector participation in these operations simultaneously.

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

i

Steps toward transaction implementation

One important and urgent task for AGOSD is to allocate staff and resources to improve
the quality of information relevant to these operations. As indicated in the previous report
(cited), information shortcomings were the main reason why the development of these
projects could not be advanced to the feasibility level. The enhancement of information is
important to help minimize the perception of information risks by prospective bidders,
and thus to ensure a more positive response from them and better competition likely to
benefit the interests of AGOSD.

Base-line costs should be developed once this information is available to sharpen the
contracting strategy for each of these operational activities. The contracting strategy
should be compatible with a sound allocation of risks to contractors and AGOSD and
should aim to promote competition (for the market) for each of the contracts and during
the implementation phase (competition in the market) to optimize the benefits for
AGOSD.

These contracts are interrelated, however in the aggregate they are not large. Therefore, it
is advisable to retain one advisory consulting firm (TA advisors) to help AGOSD in their
simultaneous transaction. The profile of the TA advisors should include expertise in the
technical areas of wastewater operations, Egyptian legal system and in the
implementation of the transactions. This profile demands a synergistic mix of local and
expatriate professionals.

The TA advisors should accompany and support AGOSD on all aspects of the
transaction, as described in this report. If deemed necessary, they should also participate
in the evaluation of bids and negotiations that may follow and in the transition phase to
private operations of these services. It is the consultant’s opinion that given the nature of
the consulting work to be performed and the nature of the service contracts, the contract
with the TA advisors should be on a professional fee plus reimbursable costs basis.

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 as indicated previously 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.

ii

ALEXANDRIA
AGOSD

1. Background

The consultants developed, at the request of AGOSD, the pre-feasibility analysis for
contracting three operational activities with private operators, namely2: 1) septage
collection and disposal; 2) operation of Site 9N; and 3) transport of wastewater
operational byproducts to site 9N. From this analysis the consultants recommended:

1. Licensing to private operators the collection and disposal of septage. These
licenses should be granted for two to three year periods;

2. Leasing the operation of Site 9N that handles the safe disposal of waste
byproducts and produces compost from dewatered sludge that is sold to local
markets. This leasing contract should be 10 years, to allow the recovery of likely
investments by the private operator, related primarily to the production of
compost;

3. Service contracts with several operators for the collection and transport of
wastewater byproducts (dewatered sludge, grit, scum and grease) from the two
waste treatment plants and 72 pumping stations to site 9N. These service contracts
should be granted for three to five years, to stimulate competition and to lower
future costs associated with re-bidding.

These contracts with private operators are closely interrelated as:

o The disposal of septage (contract 1) and waste materials (contract 3) effects the
operation of Site 9N (contract 2);

o 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 recommend pursuing private sector participation in these
operations simultaneously.

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

1


2. Purpose of the report

This report presents a draft transaction and implementation plan elaborating on the
sequence of activities required and estimated time necessary to implement them and
makes recommendations to ensure a positive response from potential operators.

The activities required to advance these projects have been grouped, for discussion
purposes, into five major phases:

1. Feasibility;
a. Information enhancement
b. Selection of transaction advisors
c. Relocation of staff
d. Assessment of equipment
2. Pre-transaction documentation activities;
a. Creation of implementation unit
b. Information memorandum
c. Organization of data room
3. Public relations and promotion activities;
4. Transaction; and
5. Transition period and contract monitoring.

All common phases and activities for each of the projects are considered first, followed
by the analysis of phases and activities specific to each project. The report also presents
a matrix of recommended day-to-day transaction responsibilities for AGOSD and by
extension the Government, and the transaction advisors, and a timetable for their
execution.

3. Implementation activities common to all contracts

3.1 Information enhancement

One important and urgent task is for AGOSD to allocate staff and resources to improve
the quality of information relevant to these operations. As indicated in the previous report
(cited), 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.

2


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,

3.2 Selection of transaction advisors

These contracts are interrelated. Therefore, it is advisable 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, as described in this report. If deemed necessary, they should also participate
in the evaluation of bids and negotiations that may follow and 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 consultant’s opinion that given the
nature of the consulting work to be performed and the nature of the service contracts the
first option is preferable.

3.3 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):

1. 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.

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

3


3. 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 options 1 and 2 have been recently successfully
implemented in Alexandria in the context of the solid waste management initiative
delegated to the private sector. Option three has also been successfully implemented in
other countries (e.g. Chile).

3.4 Condition of the equipment

As indicated in the previous report (cited) there are no updated records on the condition
of the equipment utilized in these operations. Therefore, it is important for AGOSD to
determine:

a. Equipment that is not worth repairing; it could be sold as scrap.

b. Equipment they would like to retain for other operations.

c. Equipment they would like to lease or sell to operators.

3.5 Pre-transaction activities

This phase includes:

1. Creation of an implementation unit. This unit, within AGOSD, 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:

o To liaise closely with and supervise the work of the TA advisors;
o To contact prospective bidders and invite them to participate;
o To prepare public announcements and call-for-bids documents;
o To answer in writing, following proper internal consultations, the questions
that interested operators may pose; and
o Carry out all activities leading to the successful implementation of the
contracts.

The size of this unit should be kept small. The recommended manpower for this unit is
presented in Table 1.

4


Table 1. Staff of implementation unit

Position Main responsibilities
Head of unit Management of the unit
Liaison with AGOSD senior management and other government
agencies
Official contact with prospective operators

Legal counsel Supervision of contract and legal documents
Procurement regulations
Search for relevant legal documentation to be deposited in data
room

Engineers (6) Supervision of information enhancement activities
Technical aspects related to each of the contracts
Search for relevant technical documentation to be deposited in
data room

Financial analysts (2) Supervision of information enhancement activities
Financial aspects related to each of the contracts
Search for relevant financial documentation to be deposited in data
room
Support staff Secretaries (3)

AGOSD staff participating in the transaction process will gain valuable knowledge of the
issues affecting each of the contracts and how they were resolved. In addition, this staff
should receive special training relevant to the supervision of these contracts, such as:
monitoring and evaluation, project supervision strategies and cost-benefit analysis. This
experience and training would make them the best qualified to be in charge of the
supervision, monitoring and evaluation of these contracts during their operational phase.

2. 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. 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).

5


This memorandum should present factual but not necessarily detailed information
about each of the contracts, and should include: a) invitation to prospective operators
to participate; b) the nature and size of the contracts; c) designation of official
contacts; and d) timetable of main transaction activities. It also informs interested
bidders about dates of official inspection visits to the sites and the protocol to access
information from AGOSD and the data room.

3.6 Public relations and promotion activities

o Public relations. Is an important and crucial activity throughout the implementation
phase oriented to gain acceptance from the population and staff to the proposed
organizational changes to bring private operators to help AGOSD improve its day-to-
day operations. In particular, it is beneficial to illustrate to:

1. The public at large, through press releases, media (radio and TV) presentations
and workshops with civil society organizations about AGOSD’s development
plans to improve services to the population, via private sector participation and
how they will benefit from these improvements.

2. AGOSD staff, through internal seminars, about the reasons for private sector
participation and how this participation will affect their positions.

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.

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

3.7 Transaction

These activities include the preparation and issuance of:

o Request for proposals. In local news papers 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.

o 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.

6


o 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 contracts.
An alternative to pre-qualification is to set minimum qualification criteria that bidders
have to demonstrate at the time of bid presentation. This approach requires the use of
a two-envelope bid proposal procedure: the first envelope contains all technical
information necessary to qualify the bidders including performance guaranties, and
the second the financial proposal. If a prospective bidder does not pass the minimum
qualification criteria it is disqualified and the second envelope is returned unopened.

o Bidding documents. Provides information about the scope of the contract, submission
of documents including performance guaranties, and bit evaluation and award
procedures.

o 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.

3.8 Contract negotiations

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.

3.9 Transition period

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.

7


3.10 Contract monitoring

The supervision of the service contracts entails:

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

4. Specific implementation activities

4.1. Licensing of septage collection and disposal

Information enhancement

As documented in the pre-feasibility report, 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

As recommended in the previous report (cited), 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.

8


Characterization of septage

This is an important activity that needs to be carried out in parallel with the census of
septic tanks. It purpose is to identify users, most likely from industrial, commercial and
hospital activities that generate with biological and physico-chemical characteristics that
can pose a danger to staff handling these wastes 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.

4.2 Leasing of operation of Site 9N


As recommended in the previous report, it is necessary to assess in greater detail:

1. 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.

2. 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).

4.3 Service contracts for the transport of waste materials


As documented in the previous report (cited) 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.

9


5. Responsibility matrix

The main responsibilities of different phases and activities during the transaction are
presented in Table 2.

Table 2. Implementation matrix

Phase Main activities Responsibility
a/
1. Feasibility
o Information enhancement Septic tanks; location, volume and
frequency of service. AGOSD
Characterization of septage
Volume of waste materials
Market analysis of compost
Development of base line and TA
cost-benefit analysis
o Selection of advisors (TA) Preparation of terms of reference AGOSD
Selection of consultants
o Staff deployment Definition of staffing deployment policy AGOSD

o Assessment of equipment Condition of equipment AGOSD
Decisions on its use

2. Pre-transaction Creation of transaction unit
documentation activities Information memorandum
Organization of data room

3. Public relations and Public and staff relations campaigns AGOSD / TA
promotion activities Promotion with prospective bidders

4. Transaction Bidding documents AGOSD/TA
Contact prospective bidders/operators
Organize visits of potential bidders

5. Transition and contract Transfer of operations AGOSD / TA
monitoring Monitoring and evaluation AGOSD

a/ AGOSD involves, as necessary, other government agencies
TA= Transaction advisors

6. Project execution timetable

As shown in Table 3, 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.

10


Table 3
AGOSD - Steps Towards Implementation
Time, months
Phase / activity 1 2 3 4 5 6 7 8 9 10

1. Feasibility
Septage
Site 9N
Transport of materials
Selection of transaction advisors
Staff deployment
Assessment of equipment

2. Pre-transaction activities
Creation of transaction unit
Information memorandum
Organization of data room

3. Public relations and promotion

4. Transaction
Bidding documents
Bid evaulation

5. Transition period

One week =
Continuous but not full time activity =

11


7. Transaction preparation costs

The consultants estimate the costs of the transaction process, including AGOSD activities
and efforts to gather and refine information at L.E. 4.2 million. The estimated cost of the
transaction advisors is L.E. 2.9 million, and of AGOSD’s efforts L.E. 1.3 million. An
estimate of the level of effort to implement these transactions is presented in Table 4.

Table 4. AGOSD - Estimated level of effort for the transaction
Transaction implementation costs, L.E (000).

T. Advisors AGOSD
Phase / activity Unit costs Staff-days
T. Cost Unit cost Staff-days T. Cost T. costs
Ex-pats Local Ex-pats Local

1. Feasibility 1473
Septage a/ 6000 1000 15 20 110 50 18,000 900
Site 9N 6000 1000 40 80 320 50 160 8
Transport of materials 6000 1000 10 20 80 50 80 4
Selection of transaction advisors 50 40 2
Staff relocation 6000 1000 5 5 200 30 6
Assessment of equipment 6000 1000 5 10 40 50 60 3

2. Pre-transaction activities 385
Staffying of transaction unit 50 1,800 90
Base-line 6000 1000 30 50 230
Information memorandum 6000 1000 10 5 65 b/
Organization of data room 6000 1000 b/

3. Public relations and promotion 6000 1000 40 100 340 b/ 340

4. Transaction b/ 1350
Bidding documents 6000 1000 180 120 1200
Bid evaluation 6000 1000 20 30 150

5. Transition period

Sub-totals 355 440 2535 20,170 1013 3548
Direct costs and incidentals 335 317 652

Totals 2870 1330 4200
Notes; a/ Includes employing university students to do the census
b/ Included in operation of transaction unit

12

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