Where the responsibilities of the private firm go beyond narrow tasks to improving the overall level of service delivery, a compensation system based on operating profits from tariffs paid by consumers may be appropriate. The most extensive arrangements are those under which the municipality asks the private partner to provide the service as though it were a normal business, including responsibility for collecting user fees, paying operating costs and making capital investments, in exchange for keeping any remaining profits (see Box 7.14).
Despite the efforts that private firms make to increase their consumer base, they are fundamentally focused on the rates of return on their investment. For water and sanitation international operators, these are typically in the order of 20 per cent. The private partner has two clear aims in such arrangements: to minimise costs and maximise revenue. For the poor, this creates a relationship between the private sector operator and the consumer that is very different from that produced by fee-based remuneration. Private firms have considerable incentive to:
• increase tariffs;
• increase the rate of cost recovery (ensure effective billing and collection, ensure functioning of meters, establish targeted payment mechanisms);
• treat the consumer well to encourage payment;
• increase efficiency (e.g., reduce unaccounted-for water, remove illegal connections, improve ongoing maintenance and repair the system); and
• reduce the costs of production and disposal.
More limited arrangements include those in which the municipality continues to collect user fees, but pays a portion of any amounts above a specified level to the private partner. As with performance fees, payment systems based on operating profits give the firm strong incentives to control costs and provide high-quality services for which users are glad to pay adequate fees. If the services are provided in a competitive environment (such as recycling facilities), few complications arise beyond the normal ones of accounting for costs and revenues. If monopoly services (such as networked drinking water) are provided, however, extremely complicated regulatory issues arise, ranging from the levels of fees that may be charged to the levels of service to be provided (see discussions in this chapter on levels of service and tariffs).
A key concern arising in PPPs where compensation/remuneration is based on operating profit concerns the degree of transparency over profit margins. Obviously the private firm would prefer not to disclose profits, but this may cause some concern among other stakeholders and political pressure may be brought to bear. In the BoTT in South Africa, the private consortium operator includes an NGO that has an ideological objection to the lack of transparency in profit margins. When profit gets out of hand and is not thought to be in the interests of the poor, the municipality might explore whether or not this profit can be capped without creating disincentives that the private sector cannot bear. Obviously, the impact of any such actions on the willingness of the private firm to stay involved should be considered carefully, especially if the rules are changed after the partnership has been formed.
Box 7.15 The Business of Waste Collection | |
At seven in the morning the waste collectors of K.J. Enterprise report at the tiny office. They receive their handcart, forks and spades and set off in different directions. Each of the four teams of two men will collect the waste of about 70 houses. The collectors knock the gate to receive the waste, or find it already placed along the path. Most houses in their working area are big and the waste of four to five of these large households fills the handcart. The collectors push the cart to the main road and empty it at one of the temporary mini-dumps. In the course of the morning the company truck will pass to load the waste and transport it to the city dump. Meanwhile, the two fee collectors set out on foot to collect the waste collection charges, from households, shops, workshops, restaurants and small hotels. Most clients pay once a month, 1000 shillings (about US$1.25) per household, and there is a differentiated rate - according to size and type - for commercial establishments. Some of the street vendors pay daily: they cannot afford to pay a high amount at once and the fee collectors do not want to risk their disappeared before the bill is paid. The director of K.S. Enterprise is satisfied with the progress of his waste business. It is still difficult to ensure that enough clients pay, that he maintains a good relation with the local authorities and that he keeps his workers and equipment in good condition. But it is clear that people appreciate the service. Moreover, it provides him and his team with an income. The shift to private sector involvement in waste management in Dar-es-Salaam (see also Box 7.9) has created a new business opportunity. A few had started with waste collection and already built up some experience, but most enterprises knew little if anything about waste management. In this light it is remarkable that out of the initial 62 contractors who started operation in 1999, 55 were still providing services a year later. For the collection of refuse charges, each area of Dar-es-Salaam was designated by the City Commission as a high-, middle- or low-income area. The commission also determined the rates for refuse charges, after consulting the contractors about the expected operational costs and the willingness and ability of the public to pay these fees. Private households in high-income areas are required to pay approximately US$2.50 per month; in middle-income areas the rate per household is US$1.25 per month, and in low-income areas US$0.65 per month. Commercial establishments pay a fee according to the nature and size of the business, ranging between approximately US$6 and US$125 per month. The contractors, however, are allowed to negotiate the size of the fee with their customers. The contractors collect the fees directly from the households and commercial establishments. They are free to decide on their fee collection system. Monthly collection is the most common system, although daily payment or payment per waste collection are also used. The financial relations between the contractors and the City Commission are limited. The contractors do not have to pay for their permit. After a grace period to allow them to start up the service, they would have to pay the City Commission dumping fees of about US$1.20 per tonne of waste. The City Commission also announced it would rent out its vehicles to the contractors. In practice, however, it provides a secondary transport of waste to the dumpsite to some of the CBOs, without charging them for this service. In this way the City Commission effectively subsidises the waste collection. In the planning phase, it was assumed that it would be possible to cross-subsidise between high- and low-income areas - that revenue collected from high-income areas and business enterprises would compensate losses made in low-income areas, and this would be achieved by making one contractor responsible for high-income as well as low-income areas. Except for a few private companies, none of the contractors had the capacity to serve more than one area. In practice therefore, there are contractors who only work in low-income areas and whose earnings are barely enough for cost recovery. With the income earned from these low-income households, the costs for primary waste transport can be covered, but it is difficult to pay also for secondary transport of the waste to the dumpsite. The assistance of the city trucks is very important for these contractors. To a certain extent, unintended cross-subsidisation is taking place, not between contractors or areas, but between clients. The fact that contractors are allowed to negotiate collection fees with clients has led to a better balance of paying clients and poorer clients within an area. Also, some contractors apply flexible payment schedules, so that clients can spread payments in smaller amounts. Others collect fees when picking up the waste, rather than making special trips. This entrepreneurial behaviour has been reinforced by management training courses. The more explicit involvement of ward leaders and committees has further contributed to increased fee payments, although lack of income remains the most important complaint of the contractors. To finance their start-up costs, most contractors sought outside assistance in the form of handcarts, wheelbarrows, hand tools and protective gear; no substantial amounts of money were involved. Most start-up costs were covered by the contractors' own resources. But the contractors also pointed out the importance of their other income-generating activities, including street- sweeping contracts issued by the City Commission during the difficult start-up period. Some contractors also started to generate extra income through the sale of waste paper, plastic and tin cans for recycling, and voluntary labour. | |
Source: Reproduced from Bakker et al, 2000 | |