□  The characteristics of international business

In recent years, large international companies (also known as multinationals, transnationals, international corporations) have begun to participate in the delivery of a number of basic urban services, including energy, telecommunications and water and sanitation services. Municipalities are attracted to partnering with multinationals in order to obtain investment, efficiency and skills (see Chapter 3), but fundamentally aim to improve municipal services and build local capacity. Business goals are to make profits and develop new markets on a permanent basis.

International private companies are usually engaged in municipal service provision because they can provide three types of resources:

1.  professional management expertise in improving service efficiency and quality;

2.  technical expertise that a municipality (particularly a small municipality) cannot sustain, and the expertise developed through international research and development; and

3.  capital for investment in equipment and infrastructure costs.

The potential contribution of these companies cannot be ignored, even by the most sceptical observer. The Argentine, Colombian and South African contexts, as well as many others, all expose the operating efficiencies and improved service quality that can result from effective private sector involvement.4 International business often (but not always) brings its own capital, and its presence increases international investor confidence. This has significant impact on a municipality's capacity to fulfil its function. In the case of Colombia in 1995, the World Bank made it clear to Cartagena that private sector involvement was a prerequisite for Bank financing of the water and sanitation sector in that city. This swayed the incoming mayor to renegotiate the existing agreement with Aguas de Barcelona. As a result, the World Bank and the Inter-American Development Bank invested substantial funds in the sector.

What are the characteristics of multinational companies, and what do they bring to service partnerships? The multinationals involved in water and sanitation services, for instance, are characterised by the commercial nature of their operations, by their size, by their market share, by the experience, knowledge and technical know-how they have in the sector, by their access to capital and by the level of international confidence in their capacity.

Unlike its municipal partners, who are largely driven by political motives, the large-scale international business sector is primarily interested in financial incentives. It is controlled by owner-stakeholders and driven by profit goals. Private partners gain their power because they can access and provide finance for a partnership, and by their superior skills and knowledge base, augmented by their increased access to information at the local level.

While municipal partners are characterised by their adherence to municipal procedures, the international private operator is concerned with the (bilateral) contract established for the purposes of the partnership. When that contract describes inputs and outputs, the private sector approach focuses on these obligations, rather than outcomes. Evidence from two partnerships in South Africa indicates that the operators managed their roles within the partnerships strictly in accordance with the contracts - even where this was not the most effective approach - and their decision-making was driven by adherence to rules. This hindered other partners from pursuing more general partnership objectives concerned with long- term sustainability, and suggests that an outcome-based approach would have been more effective.

The international operator is concerned with two timeframes. The overall duration of a contract determines the financial decisions and actions of the operator. In many of the older water and sanitation concession arrangements, it has become clear that the programming of expansion mandates to poor areas is seen in the overall contractual context, and thus poor areas that are costly to upgrade have been programmed last. Yet at the same time, every business works within predetermined business cycles, and actions are often tailored to suit quarterly or annual profit reports to shareholders.

While total private sector involvement is still limited in absolute terms, their market share is certainly increasing (the comparative market share of the largest water companies operating in developing countries and the location of some of their primary operations are indicated in Box 6.5). Due to the attraction of the mega-cities and large urban agglomerations of the South, there is an increasing trend for international operators to set up national offices in countries that are heading towards private sector policies. Many have become involved in small initiatives to establish a foothold in the market, and to learn the idiosyncrasies of the operating context.

While a few international companies currently control the water and sanitation market in developing countries, there is also substantial evidence that each operator has a slightly different set of requirements and interests. Accordingly, each brings different competencies to the municipal function. An early finding of the research leading to this book was that international water operators have very different levels of interest in, capacity for and commitment to delivering services to the poor. While some show an outward commitment to poor consumers, and are exploring innovative tools and techniques to improve service coverage, others indicate that they do not adjust the level of service or the mechanisms for payment, nor do they consider labour-based technologies in their delivery to poor consumers. One operator representative was dismayed by the idea of the poor as active participants in the development process, and another by the argument that low-income areas and poor communities are diverse and may require individual solutions. Municipal officials involved in selection processes must be aware that international operators are not all the same, and do not have the same interests and expertise.

Analysis of the objectives of a handful of water and sanitation multinationals shows that company mandates focus on business, consumer satisfaction, efficiency and environmental sustainability. The inclusion of environmental sustainability in their mission statements is a reflection of their Northern roots. Yet, despite the fact that in developing countries over 50 per cent of consumers might be living at or below the poverty line, only one or two have included reference to improving services for the poor in their mission statements, or to formally recognising the social dimensions of their function.5

The core competencies of international operators generally lie with building physical infrastructure, and with undertaking operation and maintenance in 'developed' settings - those with substantial institutional and social infrastructures. This also includes clear and well-supported policy, financing and regulatory structures; processes of consultation and planning engaging large numbers of community and other organisations; and the presence of sophisticated professionals among the municipal and other groups that they work with. The degree to which international operators have successfully 'Southernised' their operations varies greatly but, even at best, is far from complete.

Multinational interest and roles in developing countries are affected by a number of factors. First, they are concerned with the enabling environment. Chapter 10 provides a description of the key policy, political, economic, legislative/regulatory and administrative factors that affect the development of service partnerships. They are concerned with risk, incentive structures, and cost recovery. One key issue associated with risk arises over the amount of capital investment and the time allowed for repayment; although long durations of concessions give longer periods in which to recapture costs, they also mean an increase in exposure to the risk of major political changes.

Incentive structures can be useful to clarify expectations, but companies also require information to enable them to establish possibilities and limits. The issue of cost recovery is often closely associated with risk, and arises when tariff issues are discussed. The company wants to know that there will indeed be a revenue stream that will provide sufficient repayment.

The potential role of the multinational service provider will be dependent on:

•  the demands of the public sector actors;

•  municipal capacity;

•  ability to pay international rates;

•  the risks of the operating context; and

•  the local risks the private sector is prepared to take (e.g., risk on operations and maintenance but not on capital investment).

Typically, the role of the formal private sector enterprise may be that of contractor, operator, monitor, manager, lessee, part-owner or financier. The water multinationals traditionally take on standard water production, treatment and distribution tasks in the project cycle such as planning, construction, strategic and practical management, technical design, operation and maintenance and customer management. They may also take on non-traditional tasks such as capacity building and the delivery of non-physical services, usually in collaboration with local organisations. Many international companies argue that if there is a demand for a service then they can provide it, but many others have proved that this is not always successful, and that they are better off sticking to their core functions.