Box 3.4  Why Involve the Private Sector in Service Delivery?

An NGO's Perspective

The Mvula Trust entered into a partnership with the private sector in 1997 to help fulfil a key service-related reconstruction and development target of the new South African government, and since then it has had direct experience of the benefits and drawbacks of private sector participation in the delivery of water and sanitation services.

While Mvula has developed and worked with a participatory model for sustainable service delivery in poor rural areas, it also recognised that a project in South Africa involving the private sector was a feasible option as a delivery vehicle for water and sanitation improvements, and it was decided that we would achieve far more being a part of the process (and looking out for the poor stakeholders) than we would by distancing ourselves from the process.

Of course the benefits of private sector participation vary substantially with different types of contracts, depending on the financial resources that they bring to some projects, but our experience in the build-operate-train-transfer (BoTT) contract in South Africa suggests that the government gained access to improved management capacity through this public-private partnership.

The complex nature of a BoTT concession requires the private organisation responsible to have strong skills in contract administration, programme and project management, coordination and quality control. In addition, the private partners contribute technical knowledge in the planning, designing and monitoring of construction activities. The private sector can also provide guarantees and professional indemnity insurance required for large and capital-intensive contracts - something an NGO cannot do.

The partnership approach also brings an administrative benefit to government. By tendering only once for multi-year engagements, the government cuts down enormously on its traditional role and speeds up the process while maintaining accountability and oversight. As well as increased speed, the BoTT strategy can reduce administrative costs for government.

At the same time, and despite these contributions and benefits, the private partners represent an altogether new type of stakeholder, especially when working on improvements in poor areas. Their results-driven approach is frequently at odds with our work in mobilising and strengthening communities to take on operation and maintenance roles. We often find we are aiming for effectiveness while the hard-nosed private representatives (to varying degrees) are striving for efficiency.

In particular, private partners unfamiliar with poverty-related service improvements do not always grasp the need for social development inputs, or the need to build trust and commitment with communities through participatory processes. Many also do not display the flexibility and technical knowledge for service options that benefit poor consumers. Some would still like to see a supply-led approach adopted, despite the terms of reference.

In many respects, the capacity of the private sector to become involved in the delivery of services to the poor is dependent on individual champions from the private firms involved, and the difficulties seem due to the inflexibility of the private organisations with regard to new circumstances, as well as the over-riding profit motive, which arises from time to time.

Consequently, to function effectively, the partnership and the working environment require clear objectives, policies and principles before any work takes place. For an NGO working with a very different agenda, it is important to establish some rules on transparency. Despite the new management approach, when it comes to their own organisation the private sector can be very closed. But in a partnership involving an NGO, some issues - such as the level of profit - need to be transparent, or the NGO will feel uncomfortable being a party to the process. Similarly, it is important for government not only to set up the regulatory environment and ensure a properly designed contract, but to oversee how and when this is put in place. The private sector works best, and is most cost effective, when the outputs are known and the process from beginning to end can be quantified. More consideration needs to be given to the methodology for the procurement of private partners in ill-defined projects to avoid governments paying through the nose for the service that is being provided.

Jamie de Jager, The Mvula Trust, South Africa

Box 3.5 Why Involve the Private Sector in Service Delivery? 

A Low-income Community Perspective  

Before piped water services were introduced into a number of low-income areas of Buenos Aires, settlements relied predominantly on fetching water (especially from a nearby meat-packing plant), and water deliveries from a municipal truck. Looking back, the residents had many complaints about these water sources: the water was unsuitable for drinking; women and children spent some four hours fetching water every day, and often suffered back pains and injuries as a result. Two pregnant women described falling as they tried to carry water along muddy roads. The municipal truck delivered water up to three times per week, depending on the condition of the truck and roads. The service was irregular and the overall amount of water delivered was insufficient. Households had to ensure that someone was in the settlement at the time the truck arrived to secure deliveries. On one occasion, an influential politician intervened to ensure that the truck did not deliver water to a community that had failed to support him. Truck drivers often favoured customers who provided bribes, and obtaining water from the truck became the source of frequent disputes among neighbours.

From the perspective of the inhabitants of four informal settlements on the periphery of the metropolitan area, the involvement of the private sector was indispensable to gain access to an adequate water supply. The private operator was to manage the only source of potable water in the area. Research carried out by the NGO, IIED-AL and IIED suggested that the involvement of the private sector could radically improve access to potable water. In addition, residents believed that the intervention of the private utility would resolve a lawsuit between a contractor and the national government, which had prevented the extension of piped water services for more than a decade.

While the research indicated considerable potential for engaging private utilities in improvement efforts, it also demonstrated that switching to a private utility does not in itself solve the problem of improving water and sanitation in low-income areas. Community residents and leaders believe that the primary reason for the success in the four communities can be attributed to the collaborative nature of the approach. The collaborators included Aguas Argentinas (the private utility), local government, CBOs, an NGO and a number of the local residents. Multi-sector collaboration was viewed by most of the residents as the only means through which they could gain access to water and sanitation services, given the infrastructure charges imposed by the utility at that time, and the lack of land titles. The contribution of labour on the part of the communities and of building materials on the part of local government and NGOs helped to overcome the first constraint. The participation of local government was indispensable for convincing the utility to provide services despite unresolved land tenure issues.

The process was not straightforward by any means. Although Aguas Argentinas had expanded its water networks to an area near the four settlements, the company's expansion plan did not include the informal settlements because their inhabitants lacked land ownership. (According to the agreement of the concession, the private operator was exempted from expanding services to areas where land ownership and physical layout were not regularised.) Furthermore, given that the expansion was to be financed through an exorbitant infrastructure charge, it was obvious that low-income groups would not be able to afford it. Thus, the poor were not going to be served. Ultimately, constructive pressure from all parties led to action by Aguas Argentinas to meet the needs of the low-income communities. The company realised that it needed to learn from a direct involvement in informal settlements. An added incentive was that illegal connections were a source of significant water loss, likely to increase with the expansion of the networks and add to political and public relations problems. Simply ignoring the plight of the urban poor was not in keeping with the image the company was trying to project.

As a result of the collaboration, 4500 residents of these settlements gained access to water supply services, and 2400 of these residents gained access to sewerage. No other initiative in these settlements has ever achieved the same widespread support and participation from residents. They testified that access to water represented the most cherished collective experience and brought about fundamental improvements in their living conditions. After decades of organising their daily routines around obtaining water, and still suffering from ill-health due to its insufficiency and low quality, the inhabitants of four low-income settlements in Buenos Aires have, due to private sector involvement, what they perceive to be a sustainable supply of potable water.

IIED-AL, Buenos Aires, Argentina

Box 3.6 Why Involve the Private Sector in Service Delivery?

The Water and Sanitation Program Perspective

There is no doubt that in many parts of the world, the reform of existing water and sanitation service delivery arrangements is urgently required. The most stark illustration of this need is the millions of poor and informally settled urban households that lack access to even the most rudimentary safe water and sanitary facilities.

In many places the private sector is already a major supplier of services (ranging from vended water, through latrine-pit emptying and disposal services, to large-scale private or community-based distribution systems). This 'informal', 'small-scale' or 'local' private sector is often critically important for the poor, providing appropriate services and flexible payment arrangements. The sector is often criticised for providing services at high cost (particularly for vended water), but recent research shows that many small-scale operators provide excellent value for money, reliable services and payment arrangements that are more manageable for the poor than those associated with networked systems.

Sometimes policy-makers may decide that a radical increase in the role of the 'formal' private sector is the only politically viable way to achieve the necessary change in performance. However, this strategy will not necessarily generate gains for poor consumers. Recent high-profile transactions in the water sector have tended to place less emphasis than is required on the importance of serving poor people (a significant proportion of potential consumers in most cases). This happened either because it was assumed that efficiency gains would benefit the whole population, or for reasons of political expedience, which caused reforms to be hurried through with insufficient time to consider the nature of the consumer base. Clearly, with a decade of learning behind us, it is time to start a more active engagement early in the reform process to bring the needs of poor people to the forefront.

Once a government is committed to reform it is important that all the options are considered, and their potential to improve access for poor consumers is evaluated alongside considerations of efficiency and increased capital investment.

Why use the private sector? In situations of deteriorating utility performance, the large-scale private sector (often international) may be a vehicle for improved efficiency, increased investment and better cost recovery. These benefits can only be realised if the transaction is well designed, if regulatory control is effective, and if government is willing to step back from the day-to-day provision of services. There is a very significant risk that poorly designed transactions may harm poor consumers. Particular care is needed to ensure that small and local providers are not displaced through careless design of the contract, and that sloppy tariff design does not create disincentives for the operator to connect new poor households.

The local private sector may have a major role to play in operating parts of the water or sanitation system (or entire systems in smaller towns). Local private operators may be well placed to operate public toilets, which often provide excellent services for poor people. Municipalities need to accommodate the potential of these operators, formalise them where appropriate and ensure the right level of regulatory control (to open up the market while securing minimum output standards).

The informal private sector (small-scale, non-profit NGOs and CBOs) is often ignored and frequently harassed, but it is sometimes heavily involved and provides appropriate services (as we have seen). Municipalities have to learn new ways of working with the private operators as partners, again providing a supportive environment.

The objective of reform should always be to improve service delivery, and to secure better, safer and more affordable services for poor people. Private sector participation is not an end in itself, it is one possible way to improve service delivery. In order to be able to select the most appropriate approach, capacity needs to grow: professionals must learn more about the poor, and local government must learn more about the options for effective service delivery, including the private sector.

Mukami Kariuki, Clarissa Brocklehurst and Barbara Evans, The Water and Sanitation Program