Perhaps the most critical issue in the Stutterheim partnership arrangement is the marked imbalance in the capacity of the private and municipal partners (see Boxes 6.1 and 8.6). The council recognises this imbalance, and suggests that it is severely hampered in the partnership because it lacks the knowledge and skills needed to create a level playing field. While capacity deficiencies affect ongoing partnership arrangements, the lack of confidence to bring about structural change in the partnership to embrace the council's pro-poor alternatives is the key issue that concerns the municipality itself. In order to understand the lack of municipal capacity it is necessary to understand what this involves, and to distinguish between those capacity issues that are just matters of perception and those that are likely to affect the partnership in practice. The following discussion considers skills sets in the context of Stutterheim council and its administrative officials.

Understanding the external operating context of municipal service partnerships
During 2000, knowledge about the political and policy context of partnerships in South Africa grew significantly among the councillors, especially those who had become familiar with national government policy and trade union agreements. However, the schism between the national level and the implementation level in remote areas warrants attention from national-level supporting organisations. Administrative staff and councillors would benefit from capacity building to enhance their understanding of the opportunities and constraints created by the national policy context, including the policy on municipal service partnerships, integrated development planning, and service delivery to the poor. The ability of councils to provide feedback about implementation problems to national-level policy-makers should also be strengthened.

Strategic understanding of PPPs
The most significant capacity constraint in the municipality concerns the strategic understanding of PPPs. While a detailed skills assessment has not been carried out, gaps are evident in the capacity of both political and administrative officials. In particular, there is a fundamental lack of understanding of risk, and of the links between risk and contract duration. There is only limited knowledge of contract types, the role of service partnerships in urban management, and the strategic role of the private sector. In particular, there is little understanding of partnerships in the context of poverty-reduction activities, and the potential roles and benefits associated with private sector involvement in low-income areas.

Strategic management of the contract
One of the primary constraints on the development of a pro-poor contract is the capacity of the recently elected Stutterheim Council to bring about strategic change. In Stutterheim, the municipal management of the partnership has been limited to day- to-day operations. Decision-makers have lacked the confidence to reorient the contract so that it meets the redefined objectives of the municipality. Yet the council does have a strategic vision, which seems to be compatible with the institutional and social development objectives of contracts elsewhere. It has been hampered by its understanding of private sector opportunities, an imbalance in negotiating skills and a lack of understanding of the potential of the contract.

Financial analysis and planning
Another fundamental constraint on the effective implementation of the contract is a lack of financial analysis and planning, specifically in relation to water and sanitation services. Yet the council has a strong record in financial management and, properly motivated, should be more than able to lead a meaningful cost-benefit analysis of the PPP. The lack of this analysis to date stems from a narrow understanding of the contract - resulting in the belief that it is inflexible - and a strong feeling in the financial team that such an exercise would be pointless. There has been no attempt to compare the PPP with international benchmarks. This is an attitudinal constraint rather than a skills constraint. An improved understanding of the customer base and the implications of tariff structures is essential. The formulation of a tariff structure that benefits the poor over the non- poor and promotes water conservation and cost recovery is urgently needed. Exposure to alternatives developed elsewhere would broaden the understanding of the options available.

Ability to maximise the benefits for the poor
The municipality needs support in developing links between private sector activities in water and sanitation and low-income groups. The council's strategic goal contrasts with the existing implementation arrangements, in which the municipality itself carries out extension work to low-income areas and is responsible for the tertiary level of service. The council does not carry out hygiene promotion or community development activities in relation to water and sanitation service delivery.

In addition to the issue of tariffs mentioned above, the Council does not have the in-house knowledge to understand the role of willingness-to-pay and affordability studies (e.g., pre-paid meters are being introduced without proper analysis), and - critically - the concept of service gradation for the poor is not understood. Significant capacity building in pro-poor water and sanitation services and pro-poor partnerships would benefit the decision-making process.

Ability to develop a consultative and inclusive process
Most Stutterheim councillors are confident and skilled in their relations with civic organisations such as CBOs and trade unions.

The structures for consultation are well established and effective. If and when the contract is renegotiated, the council is committed to conducting a consultative process, and to establishing a contract that includes community involvement. The council has less experience in working with NGOs, but key councillors appreciate the importance of filling gaps with NGO expertise.

Understanding of legal and contractual aspects of partnerships
With the notable exception of the town treasurer, there is only limited understanding of the legal and contractual aspects of the contract. The legal jargon has proved to be a major hurdle to the understanding of key contract provisions, and the lack of ownership can be attributed at least in part to the lack of involvement of the existing council in formulating the contract. Although some staff members were in place at the time, the contract is not 'owned' by anyone.

There is of course some debate as to the extent of legal and contractual knowledge that is required. A number of factors currently make it necessary to improve capacity in-house: the complexity of administrating this particular contract, the marked disillusionment with the consultancy sector, and the reliance on municipal staff to undertake all tasks.

Ability to initiate and conduct contract negotiations
The council has a clear lack of confidence and ability to initiate contract negotiations. To date, the prevailing attitude has been to leave the contract alone. The nine contract amendments that have been made were initiated by WSSA. Yet the council has been discontent with the arrangement for some time. This inaction can be attributed to the lack of detailed provision for renegotiation in the contract, the imbalance in perceived negotiating skills, the lack of access to 'objective' support, and fear about the implications of decisions. Capacity building in negotiation is essential if the council is not willing to accept the support of skilled specialists.

Understanding of the management of water and sanitation services
Given the council's commitment to ongoing investment in infrastructure, it is essential that the administrative arm of the municipality is able to translate technical issues for the council. Other the last seven years, technical understanding has varied and capacity to advise the council has been mixed. Most importantly, there is a general lack of appreciation of the complexities involved in managing water resources, and of the social, health, economic and urban management issues surrounding water and sanitation services. The capacity that is required to promote innovative mechanisms to meet service needs is not apparent. Skills gaps in these areas need to be addressed through training or external support if council is to be properly advised in the future.