# 1. **Introduction**

# 1.1

1.1 The Republic of Guinea has recently taken steps to restructure dramatically the urban water supply sector and to rehabilitate operations and improve financial performance. The Intemational Development Association (IDA), the World Bank affiliate that lends on concessional terms to the poorest countries, is supporting these reforms through a Second Water Supply Project (Credit 1985-GUI) that became effective on October 5, 1989.1 A new state enterprise, _Soci&t6 Nationale des Eaux de Guin6e_ (SONEG), now owns the urban water supply facilities and has entered into a lease contract with a new water management company, _Soci&t6 d'Exploitation des Eaux de Guin6e_ (SEEG), for the operation and maintenance of the urban water supply systems.<sup>2</sup> SEEG, which is expected to function as a commercial enterprise with complete autonomy in the exercise of day-to-day operational decisions, will retain an agreed portion of the tariff it collects from customers (the lease-contractor rate) and will submit the remainder to SONEG as rent.

# 1.2

1.2 The government has agreed to raise tariffs gradually to a level that will cover sectoral operating expenses, including depreciation, and yield an acceptable financial return on system assets and the lease contractor's equity. During an intecim period, the lease-cuntractor rate will be supplemented on a declining basis by the IDA credit; allocations from the National Budget will cover part of SONEG's debt service, also on a declining basis. In addition, the IDA credit will contribute to the rehabilitation of existing facilities, the expansion of the Conakry water supply system, and consultancy services for SONEG. The African Development Bank, the French Caisse Centrale de Cooperation Economique (CCCE), and the European Investment Bank are co-financing the expansion investments.

1.3

1.3 This paper will outline the theoretical arguments that are relevant to the project design, describe the institutional arrangements that were adc 'ed, examine the key provisions of the legal documents, and explain how the major issues . at arose during project preparation were addressed. Part 2 presents, as background, general economic theory regarding the roles of the public and private sectors in providing public services. In Part 3, the main features and advantages of lease contracts are discussed, and the experience in CMte d'Ivoire with lease contracts and concessions for water supply is summarized. The recent history of the water supply sector in Guinea is outlined in Part 4. Part 5 discusses key features of the new institutional and financial arrangements. Particular attention is devoted to the lease contractor selection process, the role of IDA funding, key provisions of the legal documents, and the resolution of uncertainties regarding the application of World Bank Group procurement policies to this case. Conclusions are preser-ed in Part 6.

1.4 Although this type of arrangement has been used successfully in both Europe and Africa, the project under examination is still in the very early stages of execution, and it will be several years before the design can be evaluated in light of actual experience. It is the first case in which the World Bank has financed a lease contract as a package. With this in

1. This study is based in part on the Staff Appraisal Report for the IDA credit prepared by Alain Locussol and Richard Verspyck (Report 7304-GUI).

2. SEEG is a mixed enterprise owned by the Republic of Guinea (49 percent) and a consortium of French firms (51 percen).