FORUM A complex web of partnerships This article is excerpted from UN-HABITAT's new report, Water and Sanitation in the World's Cities: Local Action for Global Goals Urban water and sanitation utilities are virtually never sold off to private enterprises to use as they see fit. But there are several models of private sector participation and many variations, depending on the legal and regulatory frameworks, the nature of the company and the type of contract. In all of these models, regardless of the level of private sector involvement, the public sector role and the regulatory environment are critical. Finance is usually the paramount consideration driving governments to involve the private sector in water and sanitation utilities. Arguments and evidence favouring private sector participation may be influential. Political shifts can make a difference. In recent years, however, public sector decisions to radically increase the involvement of private enterprises are almost always related to the need for finance, even when undertaken by pro-private-sector governments. "We must be extremely careful not to impose market forces on water because there are many more decisions that go into managing water — there are environmental decisions, social-culture decisions." - David Boys of the UK-based Public Services International The most important aspect for private companies and their financial partners is the potential profit or rate of return. A key consideration is scale. Bankers and multinational water companies are looking for large-scale projects, with values of US$100 million upwards, in population centers with at least 1 million inhabitants. Smaller urban centers are unlikely to be attractive. The bidding process for large contracts typically starts with the government making the decision to privatise, and then having its team of legal, financial and technical consultants develop the bid documents. Companies then submit their bids accordingly. In cases where companies find a situation worse than they had expected, they usually try to renegotiate relevant terms of the contract. One of the justifications for private sector participation in urban services in low- and middle-income countries is that public funds and development assistance cannot finance the level of investment required to expand water and sanitation services to all of those lacking adequate provision. Without foreign private finance it is difficult to see how the required investments can be made. Unfortunately, the level of foreign private finance has been disappointing, even in projects involving private sector participation. Most finance for investment in water and sewerage services in the cities of low- and middle-income countries continues to come from development loans, equity finance and the public sector, with comparatively little investment from international corporations. "If you commodify water and bring in market forces which will control it, and sideline any other concern other than profit, you are going to lose the ability to control it." - Tim Concannon, Friends of the Earth. Regulation is often seen as a way of controlling a private company to ensure it does not abuse its monopoly position. The percentage of the world's population currently estimated to be served by formal private water providers and PPPs is still less than 10 per cent, although there are significant regional differences. In most of Africa, Asia and Latin America, a much higher share of households are served by informal or small-scale private water providers, and the share can rise as high as 70-80 per cent in some poorly served African cities, such as Bamako (Mali), Conakry, (Guinea), Cotonou (Benin) and Dar es Salaam (Tanzania). Such partnerships include: Service contracts which are usually short-term agreements whereby a private contractor takes responsibility for a specific task, such as installing meters, repairing pipes or collecting bills. Examples can be found in Mexico City and Uganda. Under a management contract, the government transfers the responsibility for the operation and maintenance of the water or sewerage network to a private company. An affermage contract is similar to a management contract, but the private operator takes responsibility for all operation and maintenance functions, both technical and commercial. A lease contract is similar to the affermage contract, except that the revenue is determined solely by tariffs. Under concession contracts, the private contractor manages the whole utility at its own commercial risk. Build-own-transfer contracts (BOT) are similar to concession contracts with the difference that the private contractor is responsible for constructing the infrastructure from scratch. The full privatization model has only been adopted in England and Wales, apart from a few small and isolated instances. The private company purchases the assets from the government and takes over their operation and maintenance as a business on a permanent basis, but under strict commercial rules. A joint venture is an arrangement whereby a private group forms a company with the public sector and private investors. There are also multi-utility contracts whereby a private company runs more than one type of utility. Finally, small-scale providers are important because they provide water and sanitation services to a very large proportion of low-income urban households. Without them, provision for water and sanitation would be much worse. They often serve populations living in areas that are difficult to serve with conventional water distribution and drainage networks. It is difficult to estimate how many people rely on them, but in many cities and smaller urban centres in sub-Saharan Africa and in low-income nations in Asia and Latin America, they are certainly far more important than large-scale private water companies. "For both developed and developing countries the public sector remains the preferred form of water service provision. Only 4 per cent of populations in Central & Eastern Europe, 5 per cent in the US, 4 per cent in Latin America, 3 per cent in Africa and 1 per cent in Asia has privatised water provision." - Eddie Cottle, Against the Current! : Water and Privatisation in the Southern African Region in a briefing paper at the EU-SADC Civil Society Conference in Copenhagen, Denmark