Few municipalities have been trained in negotiation skills and techniques. Many municipalities are not well prepared for negotiations with the private sector and hence may have agreed to contract provisions and amendments that were inappropriate to the task. Building municipal capacity for improved negotiation requires an emphasis on the need for attentive listening as opposed to lecturing, careful analysis and measured reflection as opposed to instant responses, an ability not to accept facts and figures at face value but to analyse them at length, and careful consideration of the extent to which any proposal addresses the required needs and objectives, especially those regarding the poor. These skills are best learnt by watching others apply them in practice. This means that it is advisable for any municipality to enlist the support of an expert negotiator in the first instance, and thereafter to attempt to negotiate one or two smaller contracts 4 as part of the learning process.

Municipalities can enter into a legal agreement called a Memorandum of Understanding, which enables them to pursue a negotiated form of contract. This stage is helpful for a wide range of reasons. For the private operator it provides an opportunity to collect the information it needs to clarify on price. For other actors such as NGOs and small-scale providers, it provides an opportunity to increase familiarity, and for the municipality it provides an opportunity to develop a collaborative partnership and establish the participatory ground rules of the partnership. It allows the partners to explore each other's objectives and competencies and to try to create an appropriate partnership that fits the skills of each partner. It enables the partners to identify skills gaps and develop pilot schemes and other mechanisms for working with the poor.

This final stage leads to the development of contracts that spell out the key aspects of the arrangement and establish the legal framework for the service delivery.