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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

Making sure that the desired option is of interest to the private sector

A government's preferred option may not be attractive to the private sector. Where regulatory capacity is weak, political commitment low, the regulatory environments uncertain, and information poor, a concession or a BOT would be difficult to implement. Table 7.5 summarizes the enabling conditions that a private sector operator/investor would need to see fulfilled to agree to a given arrangement at a reasonable cost.

Table 7.4 Private sector options and objectives


Objective

Option

Specific technical expertise

Improving managerial capacity

Improving operating efficiency

Improving investment efficiency

Strengthening management autonomy

Service contract

Yes

No

Some

No

No

Management contract

Yes

Some

Yes

No

Some

Lease

Yes

Yes

Yes

No

Yes

BOT

Yes

Yes

Yes

Yes

Yes

Concession

Yes

Yes

Yes

Yes

Yes

Divestiture

Yes

Yes

Yes

Yes

Yes

For a private sector option to be feasible, sustainable, and best suited to mobilize private sector skills and resources, it has to make sense technically, financially and politically. A technically sound arrangement is well targeted to the problem to be solved and is compatible with the existing legal framework - or includes supporting changes in that framework. A financially sound proposal is one that can be financed at a tariff that consumers are willing to pay - or with the aid of a fiscally responsible and politically viable government subsidy scheme. A politically sound proposal enjoys political support, both within government and among interested stakeholders. Experience around the world demonstrates that political commitment is absolutely crucial. To succeed, a political champion needs to provide support throughout the process of bringing in a private sector operator and/or financier in order to address sufficiently the concerns of key stakeholders. Political commitment is also essential to attract private sector interest. Potential private sector partners - and their financiers - will be looking for signs that the present government is willing not only to sign a contract but also to put in place regulatory arrangements that will protect their legitimate future interests. Unless there is a sense of political commitment, the private sector will provide less attractive bids or decide not to get involved.

Table 7.5 Private sector options and enabling conditions

Option

Requirement


Stakeholder support and political commitment

Cost-covering tariffs

Good system information

Developed regula-tory framework

Good financial rating

Service contract

Low

Preferred, but not necessary

Possible to proceed with limited information

Monitoring capacity for contract needed

Not necessary

Management contract with fixed fee

Low to moderate

Preferred, but not necessary

Possible to proceed with limited information

Monitoring capacity for contract needed

Not necessary

Management contract with performance incentives

Low to moderate

Preferred, but not necessary

Sufficient information required to define incentives

Moderate monitor-ing capacity needed

Not necessary

Lease

Moderate to high

Necessary

Good system information essential

Strong capacity for regulation and coordination essential

Not necessary

BOT

Moderate to high

Preferred, but not necessary

Good system information essential

Strong capacity for regulation and coordination essential

Better rating will reduce costs

Concession

High

Necessary

Good system information required

Strong regulatory capacity essential

Better rating will reduce costs

Divestiture

High

Necessary

Very good system information essential

Strong regulatory capacity abso- lutely vital

Better rating will reduce costs