The private sector is obliged to invests in environmental protection as a response to regulation, legislation, and specific incentives. As it is of considerable prominence – and growing interest – at present, it becomes vital to delimit the role of the private sector in water services. The most important role that the private sector plays is in the financing water resource management through investment in service delivery in water supply and sanitation, and irrigation (typically when the source for irrigation water is ground water). Commercial banks and financial institutions play an important part in financing both public and private sector service providers.
The motives for growing involvement of the large and/or international private sector are:
- Financial – government passes on the cost and work of raising funds;
- Political – necessary but unpopular reforms (e.g. raising tariffs, collecting unpaid bills, reducing the workforce) are carried out by private companies rather than politicians;
- Expertise – private companies, if large or international, bring essential know-how in some technical and economic fields;
- Risk-sharing – if the return on capital is promising, private companies are typically more willing to take large risks than public authorities, the latter is tied to public interest.
The main types of private involvement (also known as privatisation and PPP) in water service provision are found:
- Full divesture – transfer of all public assets through sales, in which case, the private sector obtains full responsibility of the water supply network facilities and operations.
- Joint ventures – partial transfer of assets through share sales resulting in shared ownership and operating responsibilities between the private and public sector.
- Concessions – assets remain in public ownership, but use of the system is conceded to private operators for e.g. 20-25 years, who are expected to invest in specified improvements and expansion in return of fee collection or other form of payment.
- BOOTs (Build, Operate, Own, Transfer)/BOO (Build, Operate, Own) – schemes where contracts for the construction of particular infrastructure project is required and where ownership is handed to a public organisation after a specified number of years. In the BOO case ownership remains in the hands of the private sector.
- Leasing – the water system remains in public ownership, but is leased to private operators.
- Contracting out – the least controversial form of private sector involvement. A water undertaking sub-contracts certain functions to private firms, e.g. meter reading.
Even when water services are provided by the private sector, the government still has a key role in providing a clear regulatory framework, and ensuring that the poor are served and users are protected from excessive costs. Small scale or community level private sector involvement most often takes form through micro finance and community banks. These have shown to be great ways for poor people to finance small scale water infrastructure, for both domestic and agricultural use. However, when the funding of water supply and sanitation infrastructures depends entirely on the collective pooling of users, then it should not be seen as private but rather as community-based supply management (B2.03).
Private sector involvement can best deliver benefits in the following situations:
- Deteriorating levels of service, lack of repairs, backlog in new connections, etc.;
- Severe budgetary pressure on the water undertaking and government reluctance to subsidise;
- Good regulation is provided by government (A1 and A2) to ensure political and public confidence;
- Tendering is open and transparent, and single bidder situations avoided;
- Government ensures investment security through legislation (A3);
- Efficiency gains cannot be more cheaply and less controversially obtained by reforms to public undertakings (B2.01);
- The balance between up-front financial bonus gains and long term higher tariff costs is positive (see policy context, A1);
- Specific targets are set for delivering services to the poor and socially excluded.