Box 3.7  Why Involve the Private Sector in Service Delivery?

A Donor's Perspective

In line with the broader trend towards decentralisation, which is shifting infrastructure responsibilities from national to municipal governments, municipal governments with whom DFID are working are, with our encouragement, turning increasingly to the private sector to find solutions. There is ample evidence under our programme to demonstrate that the involvement of the private sector in the delivery of urban services can reduce costs and improve the efficiency and scope of urban services while introducing new capital investment for the provision of services. The changing role of local government from direct service provider to regulating and facilitating the private sector continues to shape our approach in infrastructure service provision, which is increasingly advocating public-private partnerships (PPPs).

Through PPP, the advantages of the private sector - innovation, access to finance, knowledge of technologies, managerial efficiency and entrepreneurial spirit - can be combined with the social responsibility, environmental awareness and local knowledge of the public sector in an effort to solve urban problems. PPP provides a rich menu of ideas and models for local government to choose from, such as management contracts, concessions, franchises, leases, commercialisation and pure private entrepreneurship. Flexibility is the key and needs to be present in the choice of parties to play different roles.

Private provision of services is easiest to apply where consumers can be charged and competition is possible. While the type of private sector competition is dependent on the scale of the investment, the technology required and the maturity of the business sector, it will only be effective if independent regulators have the capacity to protect the public from excessive charges and ensure affordable services to low-income consumers. This applies not only to water supply and sewerage, but also to electricity supply, public transport and commercial refuse collection.

However, even where governments have put in place certain legislative and regulatory instruments as a means of improving the legal and commercial environment, and have introduced a level of economic pricing, they have frequently failed to inspire the confidence that is required to see PPP implemented successfully. Potential investors often see the available financial returns as insufficient to justify the risk.

The issue of municipal capacity needs to be addressed as PPP requires an enlargement and strengthening of the regulatory role of local government to monitor and enforce contracts and protect the interests of the public. Further constraints centre on the inability of local authorities to address the issue of equity around how private sector involvement in municipal service provision can ensure availability and accessibility to the poor, e.g. through safety nets and cross-subsidisation. This can be partly attributed to their failure in recognising possibilities for encouraging partnerships between community-based initiatives and the private sector.

There also exists strong opposition to the increased use of the private sector to provide services due to factors such as political opposition, the inability or lack of interest of the private companies in providing services at affordable prices, the insufficiency of local private sector management skills to provide services efficiently and effectively, etc.

DFID's experience is that donors can help municipalities to access private sector funding and management expertise in a number of ways:

•  sensitising key decision-makers to the possibilities offered by PPP;

•  helping to restructure utilities to make them open to private investment opportunities;

•  advising on enabling legislation;

•  assisting with the preparation and letting of contracts and the establishment of appropriate regulatory arrangements;

•  helping municipalities attract private sector partners by supporting investments with appropriate arrangements to help mitigate risks; and

•  once private sector investors are involved, encouraging partnerships with self-help organisations and NGOs to improve service delivery to the poor.

DFID is currently undertaking support in all these areas, much of it in partnership with other donors. We plan to continue with our work in this area and are particularly keen to build on existing and new partnership arrangements to this end.

J W Hodges, Head of Infrastructure and Urban Development Department, UK Department for International Development