Leases—a way to pass on commercial risk

Under a lease arrangement a private firm leases the assets of a utility from the government and takes on the responsibility for operating and maintaining them. Because the lessor effectively buys the rights to the income stream from the utility's operations (minus the lease payment), it assumes much of the commercial risk of the operations. Under a well-structured contract the lessor's profitability will depend on how much it can reduce costs (while still meeting the quality standards in the lease contract), so it has incentives to improve operating efficiency. (See Table 1, Allocation of key responsibilities under the main private sector participation options.)

Leases have been widely used in France and Spain and are currently in place in the Czech Republic, Guinea, and Senegal. They were also used in Côte d'Ivoire until replaced by a concession.

Leases leave the responsibility for financing and planning investments with the government. So if major new investments are needed, the government must raise the finance and coordinate its investment program with the operator's operational and commercial program.

Leases are most appropriate where there is scope for big gains in operating efficiency but only limited need or scope for new investments. Leases have also sometimes been advocated as stepping stones toward more full-fledged private sector involvement through concessions. But their administrative complexity and the demands they place on governments for commitment are nearly as great as those of concessions, so a lease is a much bigger first step than a management contract.

"Pure" leases are rare, however. Most place some responsibility for investment on the private partner, if only for rehabilitation works. These contracts operate as a hybrid between a lease and a concession contract.