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close this bookWater for Urban Areas (UNU, 2000, 243 p.)
close this folder7. The role of the private sector in the provision of water and wastewater services in urban areas
close this folderPreparing for a private sector venture
View the document(introduction...)
View the documentPre-contract analysis
View the documentChoosing among the options
View the documentMaking sure that the desired option is of interest to the private sector
View the documentFinding and contracting a suitable partner

Choosing among the options

Once a government has worked through the preliminary analysis it may begin to choose among options available. To narrow down the options, the following key questions must be answered:

· What problems are to be resolved? If the purpose of bringing in the private sector is primarily to improve operational efficiency and management and administration, a management/lease-type contract would be most appropriate. If, in addition, investments are sought to increase service coverage and improve service quality, a concession may be the preferred solution. If there is need for a new plant, a BOT may be the best way of tapping private sector know-how and financial resources.

· What are the implications for tariffs? Do current tariffs cover costs? Can the private sector reasonably be expected to boost efficiency enough to meet the proposed service objectives without increasing tariffs? If not, will consumers be willing to pay higher tariffs? If not, will grant finance or subsidies to needy households be available?

· Does the envisioned regulatory framework provide sufficient support for the private sector to take on commercial risk and at the same time protect consumers from abuse of monopoly power? If not, can the necessary changes be made easily? If not, can parts of the regulatory function be simplified or contracted out in the short term? Can the risk of political interference be minimized?

· Do key stakeholders support or at least not oppose a specific private sector option? Can processes and policies be put in place to meet stakeholder concerns?

· Is information about the utility's assets good enough to serve as a base for a long-term contract? If not, can better information be produced rapidly or would it be better to take a staged approach: start with a management contract to assemble better information in preparation for a concession later on?

The answers to these questions will point governments to different choices or a range of choices for private sector participation. Table 7.4 depicts the relationship between private sector options and objectives. For example, a government seeking improvements in operating efficiency and responsiveness to consumers will prefer a management contract with performance incentives or a lease to either a service contract or a concession. A government seeking greater efficiency and new investment will prefer a concession or divestiture - or, for investment in bulk services, a BOT.