For advocates of investment-linked partnerships, the service contract is considered a weak alternative, simply maintaining the status quo. This does not have to be the case. An innovative municipality could corporatise its own operations and, through the unbundling of different tasks, utilise the service contract as an opportunity to build the capacity of a range of small-scale local service providers. This may even involve contracting-out to previous employees who have established cooperatives or small enterprises.
The service contract is relatively simple to arrange, resembling the traditional construction contracts with which municipal engineering departments are familiar. The service contract does not bring with it the risk, and therefore does not need the complex regulatory environment critical to the concession. Municipalities are therefore able to embark on improvements much more quickly and not be concerned with the impact of the operating environment outside their control. The short duration means they can review the work done and make decisions easily, and the timeframe can adapt to electoral cycles.
The degree of competition achieved through the tendering process will vary considerably: it is dependent on the service, the historical development of providers and the performance requirements of the contract. The fundamental concern with the use of service contracts is directly linked to the short durations of the contract terms. Short terms provide little incentive to the private sector operator to make efficiency gains through its own investment (e.g., in better equipment or vehicles) or to build local capacity (in management or accounting skills). The individual or enterprise that takes on the service contract must guard against the risk that the contract will not be renewed. This often fails to meet a number of the economic objectives of private sector participation.
The capacity needed within the municipality is obviously very different for a service contract than more complex contracts. A skilled municipal official may well be able to successfully unbundle water and sanitation services and develop partnerships with a range of private and civil society actors. Most, however, will need training to broaden their perspective as to the opportunities available to them. Simple service contracts for specific improvement works or maintenance, for instance, can be administered by most engineering departments, and they are generally able to resolve most problems that arise.
The service contract thus offers enormous opportunities in relation to the development of small and medium micro- enterprises that deliver services to the poor, and it may also be one of the legal mechanisms used to engage NGOs to provide physical, social and institutional services. Yet the overall extent of reform taking place in conjunction with service contracts is limited, and thus their potential and impact is also limited. The key issues concerning the poor in relation to the three basic services of water, sanitation and solid waste are described below.
In less commercialised situations and those where large-scale inputs from the international private sector are not viable, the service contract can still assist a municipality in making small improvements in streamlining operations, promoting efficiency and developing a local competitive market of regularised entrepreneurs. In many situations where independent service providers supply poor-quality water or exploit poor consumers, municipalities can restructure provision by developing some regulatory instruments and utilising the service contract to structure service delivery more formally (see Box 6.15). Information on the existing methods of delivery is essential to the development of a strategy that utilises a service contracting approach to include independent providers.
Service contracts are also important stepping stones. Companies unwilling to invest or enter into lengthy contracts because of unstable political and economic situations may well be willing to enter into service (or management) contracts; or municipalities may wish to phase the work starting with a service contract to correct a deficiency (such as a lack of meters). In the Lesotho case illustrated in Box 8.4, due to the low capacity of the institutions, the World Bank recommended that a service contract for technical assistance be put in place as a precursor to any broader private sector participation.
Many of the water and sanitation projects funded by donors and delivered through NGOs or CBOs, for instance, have been carried out through service contracts. The lessons of these contracts are an important source of information for municipalities. The lack of sewerage networks in a vast number of cities means that the delivery of sanitation services may require quite different solutions than water supply. Existing independent providers currently provide a high proportion of the sanitation services available to the poor. Municipalities are often not a party to the arrangement. While some of these service providers are considered exploitative, others are not. Either way, it is clear that there is a need for the municipality to regulate their activities - for example, the dumping of sewage. The service contract may then become one legal instrument for bringing these important service providers into an integrated delivery system. Carefully planned and managed, this could result in improved reliability of service delivery and water quality, and less exploitation of poor households.
In solid waste, the service contract can bring enormous benefit to the city and to the poor, if municipalities are able to arrange effective agreements with contractors in sweeping and household waste collection. The service contract does not fundamentally change the informal system established with sweepers, waste-pickers, itinerant waste-buyers and resale agents.