At the time of project design, Panama’s National Water and Sewer Agency (Instituto de Acueductos y Alcantarillados Nacionales, IDAAN) faced serious capacity issues. IDAAN had not raised tariffs since 1982 (representing a 50 percent decline in the tariff’s real value), and by 2008 IDAAN’s operational deficit had reached US$34 million. Rather than focusing on improving the efficiency and quality of service across urban areas, IDAAN had largely concentrated its efforts on maintaining the status quo and responding to emergencies. IDAAN faced particular challenges ensuring service quality in low-income neighborhoods. In Colón, approximately 30 percent of the city’s 165,000 residents lacked access to reliable water service. Only 38 percent of Colón’s neighborhoods reported 18 to 24 hours of service per day (far below the national average of 70 percent). The Colón Business Unit was one of IDAAN’s worst-performing units. Tariff collection rates totaled only about 40 percent of billing, and nonrevenue water was estimated at 54 percent.
The Panama Metro Water and Sanitation Improvement Project took shape in response to IDAAN’s capacity issues and the significant operational challenges in Colón. The World Bank Team suggested utilizing a performance-based contract (PBC) for the construction, rehabilitation, and repair work required to improve both the commercial and the operational efficiency of the Colón Business Unit and the continuity of water service in Colón. Because IDAAN lacked experience with PBCs, the Bank Team, with the support of a US$70,000 Public-Private Infrastructure Advisory Facility Grant (TF011135), convened international experts to support the design and implementation of the contract and facilitated a knowledge exchange event with Honduras’s National Water and Sanitation Services Utility. The PBC transferred virtually full responsibility to the contractor for results on three key indicators. Fixed payments covered 70 percent of the contract value, with the remaining 30 percent going toward variable payments based on the contractor’s progress toward achieving key performance indicator targets. An international engineering supervision firm was hired to monitor PBC implementation and to independently verify achievement of the three key indicators by the contractor.