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close this bookHabitat Debate - Vol. 3 - No. 1 - 1997 - Partnerships (HABITAT, 1997, 65 p.)
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The Role of the Private Sector in Human Settlements Development

by Baris Der-Petrossian

Following the adoption of the Global Strategy for Shelter to the Year 2000 by the General Assembly of the United Nations in 1988, many Governments have shifted, or are in the process of shifting, their shelter policies towards the creation of an “enabling approach” which implies a deferential role for Governments: withdrawing from directly providing shelter and services to facilitating the efforts of others through creation of an appropriate regulatory and financial environment. Even though the nature of this process can vary from country to country, they have one thing in common: the acknowledgment of the crucial role that the private sector can, and does, play in human settlements development.

The Habitat Agenda adopted by the second United Nations Conference on Human Settlements (Habitat II) in June 1996, while underscoring the importance of private sector, has emphasized the need for increased partnerships for sustainable human settlements development.

The purpose of this article is to briefly present the various modalities through which the private sector can contribute towards shelter and infrastructure services delivery and how the United Nations Centre for Human Settlements (Habitat) can facilitate this process.

Characteristics of the private sector

The private sector provides goods and services through processes of market competition, on the basis of the costs of production and the prices that consumers are able and willing to pay. Private companies are able to respond to local needs efficiently and flexibly, and market forces and competition encourage innovation and economy and ensure responsiveness to demand. This is largely because the private sector’s survival depends on meeting the needs of consumers on a competitive basis.

While it is becoming widely acceptable that the private sector can be effective in improving human settlements conditions, it can be difficult for them to function well if a clear framework and a favourable business climate is not in place. In such circumstances, the alternative modality for involving the private sector in the human settlements sector would be, perhaps, the creation of public-private partnerships which would offer considerable advantages over a largely public approach to economic development, in general, and human settlements development, in particular.

‘While governmental aid by the rich to the poor nations remains vital, it is the private sector that has the biggest part to play....The great ideological battles of the past have been resolved and market capitalism has won the day. But the challenge for the corporate sector is to show that it has been a worthy victor....Market capitalism has no major ideological rival. Its biggest threat is from within itself. If it cannot promote both prosperity and justice, it will not succeed..... The corporate sector must see that profit and development of the world’s poorest nations could go hand-in-hand. Strengthening the partnership between the United Nations and the private sector will be one of the priorities of my term.’

UN Secretary-General Kofi Annan, addressing the World Economic Forum in Davos, Switzerland on 1 February 1997.

Potential areas for private sector involvement in human settlements

Human settlements development is a very complex process and requires numerous multisectoral and diverse interventions to be made by many stakeholders. However, the following priority areas could be suitable and feasible:

(a) Construction sector

(i) Manufacturing of building materials and components

Even though experience over the past several years has shown that private small-scale formal and informal enterprises have made considerable contributions towards supplying basic building materials, their efforts have not fully satisfied the increasing demand of these materials, particularly in low-income settlements. The reasons for this are: lack of technological know-how, lack of managerial and marketing capabilities, low-quality products and lack of capital and incentives.

Attracting local and foreign investment and promoting industrial production of materials could offer the private sector an excellent opportunity to improve the supply of materials and reduce their costs. Unlike other sectors of human settlement development - in which only specialized companies can be involved - the building materials sector, like other industrial manufacturing sectors, can attract foreign investment more easily.

(ii) Contracting and development

In the shelter sector in most developing countries, the bulk of construction work for shelter delivery is done by private small-scale contractors. However, this sector is facing considerable problems which need to be tackled if their performance is to be improved.

In its efforts to address the problems of small contractors in developing countries, UNCHS (Habitat) has recently concluded a research study, the results of which are compiled in a publication entitled: “Policies and Measures for Small-Contractor Development in the Construction Industry”.

In addition to the vital role that small contractors play in shelter delivery, the construction industry, in general, has the potential to attract both domestic and foreign large contractors/developers for executing major civil engineering works as well as large-scale housing projects. Owing to the fact that a major client of large construction works is the public sector, one of the important prerequisites for attracting large contracting firms would be the creation of a favourable climate through transparent and efficient supervisory and oversight services rendered by Government authorities.

(b) Infrastructure services

Traditionally, provision of infra-structure services has been the sole responsibility of Governments and local authorities. However, due to managerial and financial problems, many Governments in developing countries are changing their approach and are increasingly involving the private sector in the daily operations of infrastructure facilities and services.

There are quite a number of areas in which the private sector can contribute to the delivery of infrastructure services, but the most promising ones could be summarized as follows:

(i) Solid waste disposal

Pollution and health hazards caused by accumulated waste in urban areas are, perhaps, the most serious threats to the environment and to people’s health. Many cities today are producing waste at a rate which outpaces the capacity of municipalities to collect and dispose of waste in a timely and efficient manner.

Even though solid-waste management is a public responsibility, this does not necessarily mean that the public sector has to accomplish the task of collecting, disposing and even treating waste with its own resources. In fact, this is where the role of the private sector comes to the fore.

The various methods of private sector participation in solid-waste management are: contracting, concession, franchise, and open competition. The suitability of these methods may vary from location to location.

(ii) Urban transport

In many developing countries, because of the inability of the public sector to provide adequate transport service, the private sector has established alternative services and has captured a significant share of the market. Like many other sectors, it is obviously the responsibility of Governments to create a favourable climate to encourage the private sector to increase investments in the transport sector. In this context, competition is considered a critical component of an efficient transport system. Promoting competition, therefore, can improve the efficiency of public sector operations and can give people better access to various transport options.

(iii) Water supply and sanitation

The private sector’s role in water supply occurs through direct Government endorsement by means of contract and/or leasing arrangements. The public sector, in many countries, supplies water to many urban residents but is often unable to cover many low-income households. In response, private suppliers, often operating outside the law, provide water to many of these households.

In the area of sanitation, large percentages of the population in many developing countries have no access to adequate sanitation. Piped wastewater is not a readily affordable service. Even though the health hazards associated with accumulated stagnant water may justify Government-subsidized activity, interest in investing in this service has been minimal.

The private sector’s role in the provision of water supply can be extensive and can include: undertaking construction, management, administration, operations and maintenance and/or any of these components. Even where the public sector decides to control and operate the water supply system, some partnerships with the private sector are possible through contracting specific tasks such as billing, metering, maintenance etc.

(iv) Energy supply

Traditionally, energy (electricity) supply in many developing countries has been the responsibility of the public sector. However, experience has shown that in many instances, the public sector has failed to effectively meet the demand of city and village dwellers. Public-private partnerships for generating and distributing electricity has, in many countries, shown to be an effective way of improving the efficiency of the electricity supply.

The emergence of innovative technologies in the recent past for generating renewable energy sources such as solar, wind and biomass energy is yet another area where the private sector can easily enter the energy market.

The role of UNCHS (Habitat)

While UNCHS (Habitat) has long been aware of the important role that the private sector plays in human settlements development, its collaboration with the private sector has been rather limited. In the spirit of the Habitat II Conference and in a bid to put the Habitat Agenda into action, the Centre is now committed to reviewing the situation and cooperating more closely with the private sector.

Among the various avenues through which Habitat could expand its collaboration with the private sector is through “promoting investment” in human settlements. Habitat could play a catalytic role in encouraging more private sector investment in human settlements and in bringing together foreign investors from developed countries and the recipients from developing countries. For example, by organizing “Investment Promotion Forums”, Habitat could bring together foreign investors and Government authorities to discuss investment opportunities.

Baris Der-Petrossian is a Human Settlements Officer in the Research and Development Division of UNCHS (Habitat).