Beyond The Leaky Tap: Contracting Strategies For Non-revenue Water In South Africa (Part 2)

Introduction

Nearly half of South Africa’s treated water never reaches a paying customer. It leaks from aging pipes, escapes through faulty meters, or flows to connections that were never billed. Between 2012 and 2022, this non-revenue water (“NRW”) climbed from 37% to over 46% - a staggering loss that costs municipalities billions annually and leaves communities without reliable supply.

The problem is not simply technical. It is also regulatory, institutional and contractual. Addressing it requires more than fixing infrastructure; it demands rethinking how municipalities procure and manage water services.

In Part 1 of this series, we explored the scale of non-revenue water in South Africa, the technical and commercial causes behind it, and the two key barriers - private-sector risk and municipal capacity - that have prevented performance-based contracts from gaining traction. We also examined how Performance-based contracts (“PBC's”) classification under the procurement regulatory framework determines which approval pathway applies. This article picks up where Part 1 left off, turning to the practical contracting strategies municipalities can deploy: the Design-Build-Operate-Maintain contract and the 24/7 Self-Optimising contract.

Performance-based contracts (“PBCs”) offer a way forward. Unlike traditional procurement, where contractors are paid for inputs regardless of results, PBCs tie remuneration to measurable outcomes. The contractor that reduces water loss gets paid; the one that doesn’t, doesn’t. This shifts both risk and incentive to the private sector. Four main PBC models apply to NRW reduction: the Design-Build-Operate-Maintain (“DBOM”) contract, the 24/7 Self-Optimising contract (“24/7 Contract”), the Incentivised Program Manager contract and the Cost-Plus contract. Each engages distinct procurement considerations.
This article examines the first two strategies and considers the procurement implications that municipalities must navigate when pursuing them.

Design-Build-Operate-Maintain Contract

Under a Design-Build-Operate-Maintain contract (“DBOM”), the private sector bears the full cost of designing, building, operating and maintaining the infrastructure needed to reduce water losses. Payment depends entirely on results: the contractor earns a fee for every kilolitre saved against a verified baseline. If savings fall short, the contractor absorbs the loss. This “shared savings” model can deliver powerful incentives, but it also demands careful structuring.

Consider a practical example. A municipality contracts with a private firm to install district metered areas (“DMAs”) - zones within the network where water flow is continuously measured. The contractor identifies leaks, replaces faulty pipes and optimises pressure. If these interventions reduce losses by 10 million kilolitres per year, the contractor is paid a fee per kilolitre saved. If losses remain unchanged, the contractor receives nothing.

Some DBOM variants soften this exposure: the municipality pays for certain capital works upfront, with only the remaining remuneration tied to performance. Tender documents should specify a maximum payment rate per kilolitre saved and an overall remuneration cap -protecting the municipality’s budget without undermining the project’s commercial viability.

The stakes of contract design extend beyond commercial terms. Whether a DBOM contract triggers the Municipal Public Private Partnership Regulations depends on how much risk the contractor assumes. Where the contractor finances all or most of the work and recovers costs through a share of savings, the arrangement likely qualifies as a public-private partnership (“PPP”) -triggering a lengthy consultation and approval process which includes soliciting the views and recommendations of National Treasury and the sectoral Ministry.

Where the contractor receives only a modest performance bonus, it probably does not. This creates a tension: structuring a PBC to avoid the PPP threshold limits the degree of risk transfer, and thus the efficiency gains, that a full shared-savings model can deliver. The question municipalities must answer is not whether to avoid PPP requirements as a matter of convenience, but whether the risk transfer the municipality genuinely needs is best achieved within or outside that framework. Even where a PBC escapes PPP classification, it may still trigger the Municipal Asset Transfer Regulations if the contractor gains control over municipal assets.

Getting the procurement right, matters. DBOM contracts grant contractors access to critical infrastructure, so pre-qualification criteria must be rigorous. South African law permits a two-stage process: first, administrative compliance and technical qualification; then, price evaluation under the Preferential Procurement Policy Framework Act.

An independent auditor should verify performance data and incentive calculations -payment disputes have derailed PBCs elsewhere. Where a municipality lacks in-house expertise, a transaction advisor should be engaged early to structure tender documentation and ensure that contract terms attract credible bidders.

24/7 Self-Optimising Contract

Not every municipality can afford the financial risk of a full DBOM. Some have adequate budgets but lack the technical capacity to diagnose network problems and suffer high losses because supply is intermittent rather than continuous. The 24/7 Contract addresses this scenario. A contractor is paid to extend uninterrupted water supply to more customers, earning a performance fee for each household or business brought onto continuous service. The municipality can adjust the balance between a fixed overhead fee and the performance component: shifting more remuneration toward performance strengthens the contractor’s incentive but increases commercial risk; a larger fixed fee may attract lower bids but weaken the drive to deliver.

A distinctive advantage of this model is flexibility. Many South African municipalities do not know exactly where their pipes run, let alone where they leak. Requiring a fully specified scope of works at tender stage would delay procurement -or produce a scope based on guesswork. The 24/7 Contract sidesteps this problem by allowing the contractor to undertake a progressive discovery phase: mapping the network, creating DMAs, and determining the most effective interventions as information emerges.

Flexibility, however, does not suspend constitutional requirements. Procurement must still be fair, equitable, transparent, cost-effective, and competitive. Tender documentation should specify clear performance metrics, remuneration caps, and savings thresholds - ensuring that competition is meaningful and that the municipality retains control over outcomes. As with DBOM contracts, a municipality must assess whether the 24/7 Contract structure triggers PPP classification under the Municipal Finance Management Act.

Conclusion

Whichever model a municipality adopts, certain fundamentals apply. Data availability shapes tender design: the better the baseline information, the more precise the performance targets. Transaction advisors can help structure contracts that are both legally compliant and commercially attractive. Contracts should include incentives for sustaining savings over time, and mechanisms for transferring knowledge to municipal officials - so that gains outlast the contract term. Expert judgment, stakeholder consultation, and a willingness to learn from international experience remain essential. South Africa’s water crisis is too urgent for half-measures. The right contracting strategy, properly implemented, can turn a leaking network into a functioning one - and a liability into an asset.