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On May 3, 2002, following a nine-month international bidding process (the"Bidding Process"), the Puerto Rico Aqueduct and Sewer Authority (PRASA) entered into aten-year service contract with Ondeo de Puerto Rico, Inc., an affiliate of the French companySuez, for the operation and management of the Puerto Rico water and wastewater system. Theapproximately U.S.$4 billion contract represents the largest operation and management contractever awarded for water and wastewater services.Although the outcome was successful, the result was not always certain. Theenvironment in which the Bidding Process took place was a challenging one. At the time of thebidding, PRASA faced serious and escalating financial difficulties. The assets comprising thePuerto Rico water and wastewater system were in need of significant capital improvement. Theassets were also the subject of hundreds of administrative consent orders from various U.S.federal regulatory agencies. Bidders complained that they had not had an adequate opportunityto inspect and assess the system's facilities, which numbered in the thousands. The existingprivate operator of the system had less than a year left under its existing contract and relationsbetween PRASA and this operator had badly deteriorated. The heavily unionized workforce andthe general public were vehemently opposed to future private sector participation in the waterand wastewater sector.Not surprisingly, participants in the Bidding Process focused early on the risksthat they would be asked to assume under the service contract to be entered into by PRASA andthe winning bidder (the "Service Contract"). One of the principal reasons that the process wassuccessful was because PRASA was able to identify and prioritize at the outset the risks that itwould accept and those that it would not. Ultimately, PRASA was able to structure the ServiceContract in a manner that achieved its objectives but also addressed the concerns of most of thebidders.This article addresses the manner in which the risks associated with the longtermoperation and management of the Puerto Rico water and wastewater system were allocated.The article first describes the objectives that PRASA sought to achieve through the BiddingProcess and briefly outlines the manner in which the Bidding Process was conducted. The articlethen discusses the principal risks that bidders were asked to assume under the Service Contract,their reaction to such risks and how these risks were effectively allocated between PRASA andthe operator of the system.

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Edition: Vol. - No. Published: 06/15/2003 Number of Pages: 13File Size: 1 file , 280 KB