Competition among service providers helps to contain costs and ensure good service. It makes it possible for a municipality to test the market and get the best possible deal for its residents. Competition encourages those competing to set lower prices and offer good value for money. This serves as an incentive for the enterprise to become more efficient. As it achieves greater efficiency, the effects on price and quality of service benefits all consumers, including poor people.
Partnerships are only feasible where potential actors exist that are able to provide the required services at acceptable levels of quality and price. If capacity is lacking, or investors are averse to the risks involved, municipalities will fail to procure the services they want from the private sector. Where the range of potential private operators is limited, it is crucial to ascertain whether they would in fact be able to meet the standards required. In the absence of effective competition, many of the presumed benefits of PPPs can become compromised.
There are many facets to creating a competitive environment. Most of these occur, however, at higher levels of government. At a policy and regulatory level, government can define rights and establish laws to make it possible for private parties to engage in PPPs at reasonable costs. Among the obviously important options in this regard are competition laws and enforcement mechanisms, dropping legal barriers to entry, and promoting an appropriate code of conduct for doing business. The latter could be made conducive to competition through ensuring fair and equal access to relevant information and perhaps specific programmes directed at building a market of potential service providers and technical experts. The environment for partnerships must unambiguously discourage and prevent suppliers from conspiring (e.g., through dividing markets or rigging bids). Furthermore, the public sector, at higher levels and within municipalities, should respect commercial freedom and avoid arbitrary intervention.
Where there is a need for regulation, the challenge is to balance controlling mechanisms with the promotion of market dynamics in the longer term. The ultimate aim is to ensure quality services at affordable prices for consumers. To this end, sound regulation entails the use of a variety of approaches and instruments, such as minimum contract requirements, sector-sensitive price or rate-of-return regulations, quality requirements and open entry. It is often necessary to specifically ensure that the interests of poor consumers are well represented in decision-making and monitoring processes, so as to create an incentive to the operator to develop service solutions that reduce prices and help expand service coverage at affordable levels.
The aim is to create opportunities for a wider range of competitors, but also to ensure that they are realistic bidders. Clear output specifications about the scope, duration, asset and service requirements, ownership and management conditions and standards and risk transfers provide important information that makes bidding processes more competitive. By being as up-front as possible about these project dimensions, municipalities can allow bidders to prepare themselves for specific criteria. Throughout, care must be taken to not restrict competition through unequal provision of information.3
As it evolved, the PPP for solid waste management in Biratnagar, Nepal, has moved from an arrangement that pitted the municipality against an operator that overpowered it, beginning with an unsolicited bid, to an arrangement that favours the municipality excessively, imposing unsustainable costs on the private operator. The problems hold important lessons regarding governance, the management of unsolicited bids, and risk allocation in a partnership arrangement. The contract for municipal solid waste management in the city was initiated at the instigation of a private company soliciting for the work. No prior attempts had been made to study the problems and needs with respect to solid waste in the city. Without the necessary expertise and without technical support, the Biratnagar Sub-municipal Corporation entered into a 10-year contractual agreement with a US-based company, Americorp Environmental Services, in 1997. Municipal decision-makers were led to believe that a partnership with the private sector would not only improve the delivery of services within the city but would ultimately result in profits for the municipality itself. No institutional or financial appraisals or willingness-to-pay studies were carried out. No tendering, competition or other mechanisms were introduced to ensure transparency and accountability. There was no consultation process with civil society, the trade unions had little influence over the decision, and the contract was awarded without the inputs of independent technical advisors. Based on the attractiveness of the proposal, the charisma of the company representative and the written support of the US Embassy, the municipality embarked upon a partnership. The proposal was accepted at face value. As a result little effort was made to confirm the viability of the company through financial checks and assessments of previous work. The municipality did not carry out any studies to test the viability of contract options, nor did it seriously question the validity or feasibility of the technical proposal. Similarly, no institutional or financial appraisals were carried out and no willingness-to-pay surveys were undertaken to test community reaction to the introduction of fees for rubbish collection. Some progress was achieved in the initial stages, such as the purchase of a landfill site and some equipment, but soon the contractor borrowed widely from people and institutions locally and in Kathmandu. The municipality never knew about this. Then the investors began to realise that loans were not being honoured. In the final event, it was the local banks, through which the loans had been obtained, which exposed the financial incapacity of the company and refused the financing necessary for the project to move forward. The representative and instigator of Americorp fled the country. A local engineering consultant, SILT, stepped in and assumed responsibility for Americorp (see Box 6.7). It managed to get municipal approval for another attempt at revitalising the partnership, following the high levels of embarrassment that followed the collapse of the previous arrangement. Now, however, the allocation of risks has become a major problem and continues to threaten the sustainability of the partnership. The contract favours the municipality, and places an unfair risk on the private operator. In short, the risk arrangements are as follows: • the private contractor assumes all the risk; • the municipality is eligible for 10% of the profit, but no loss or investment; • fee collection is the responsibility of the private contractor, the municipality has no liability for non-payment; • the contractor is responsible for developing its own customer base for door-to-door collection, though the municipality plays some role in facilitating this process; and • the private contractor undertakes to develop a landfill site and recycling facilities and to make this commercially viable without significant contribution from the municipality. As a result, the partnership continues to flounder. The experience of this partnership highlights at least two major contracting issues. The first is the risk of unsolicited procurement. The bidder clearly had an information advantage over the municipality, and by taking the proposal at face value, the municipality entered a contract with a dubious contractor, without any regard to the financial, technical and institutional feasibility of the arrangement. Second, as far as the current arrangement is concerned, sustainable contracts are reasonable contracts. Contracts must be sensible and reasonable for both parties. Municipalities need to be aware that contracts that favour them, and transfer all risk to the private operator, have little long-term sustainability and are unlikely to lead to benefits to the poor. Municipalities may benefit in the short term, but ultimately - as an agency responsible for municipal service provision - the municipality cannot hope to secure workable arrangements while exploiting the private sector.
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