Where competition does not exist, contestable environments could be created to enhance the efficiency of contracted service providers.4 This is done mainly through the municipality continuing to provide services in part of its jurisdiction, deliberately not contracting, out services across the whole area to a private partner. There are two obvious impacts of this approach. The first is that it provides a public sector benchmark against which to measure the private operator's performance. Second, it means that the municipality retains some capacity and instruments (such as collection vehicles for solid waste) that should enable it to step in if the private sector participation arrangement fails.
There are essentially four ways to strengthen the contestability effect of such arrangements:
1. reducing the period of the contractual agreement or providing for a periodic review of performance, in consultation with the affected consumers;
2. introducing performance targets related to the quality of the service, the range of services, the prices charged for the services and overall market share, linked to penalties, or provisions that may lead to early termination of the agreement;
3. requiring comparable performance, relative to other providers (including the municipality) in similar circumstances, or in terms of international benchmarks; and
4. choosing a form of price control that explicitly requires the operator to make efficiency gains.
Clearly, these methods all require the development of effective and credible criteria and processes that must also be acceptable to the partner. If the regulation introduced in this manner increases uncertainty and risk to excessively high limits, the municipality may find it difficult to find willing partners. It should also make sure that the costs of such regulation do not exceed the efficiency gains obtained from contestability.