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B1.8 Role of the private sector

Characteristics

The private water sector plays an important role in financing water resource management through investment in service delivery in water supply and sanitation, and irrigation (typically when the source for irrigation water is groundwater). Commercial banks and other financial institutions (such as the World Bank) play an important role in financing both public and private sector service providers. The private sector also invests in environmental protection as a response to regulation, legislation and specific incentives. As it is of considerable prominence and growing interest at present, this tool focuses on the direct role of the private water sector in water supply and sanitation.

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. Private companies are typically better at handling risks.

Small-scale or community-level private sector involvement depends on government economic policies enabling access to finance. Micro-finance and community banks allow poor people to finance small-scale water infrastructure, for both domestic and agricultural use. The main types of private involvement (also known as privatisation and PPP) in water service provision are through:

  • Contracting out the least controversial form of private sector involvement. A water undertaking sub-contracts certain functions to private firms, e.g. meter reading;
  • Leasing. The water system remains in public ownership, but is leased to private operators. In French-speaking areas this is relatively common;
  • Concessions. Assets remain in public ownership, but use of the system is conceded to private operators for a certain period of time, for example 20-25 years; the private operators are expected to invest in specified improvements and expansion;
  • BOOTs (Build, Own, Operate, Transfer) and BOT (Build, Operate, Transfer) are concessions, usually for new facilities. After a specified number of years, the facility is handed to a public organisation;
  • Joint ventures in operating companies;
  • Divestiture. An extreme form of privatisation, in which full ownership of assets is transferred to private shareholders. Stringent public regulation is required. The only large-scale example is in England and Wales.

Government has a key role in providing a clear regulatory framework, and ensuring that the poor are served and users are protected from excessive costs.

Lessons learned

The private water sector plays an important role in financing water resource management through investment in service delivery in water supply and sanitation, and irrigation (typically when the source for irrigation water is groundwater). Commercial banks and other financial institutions (such as the World Bank) play an important role in financing both public and private sector service providers. The private sector also invests in environmental protection as a response to regulation, legislation and specific incentives. As it is of considerable prominence and growing interest at present, this tool focuses on the direct role of the private water sector in water supply and sanitation.

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. Private companies are typically better at handling risks.

Small-scale or community-level private sector involvement depends on government economic policies enabling access to finance. Micro-finance and community banks allow poor people to finance small-scale water infrastructure, for both domestic and agricultural use. The main types of private involvement (also known as privatisation and PPP) in water service provision are through:

  • Contracting out the least controversial form of private sector involvement. A water undertaking sub-contracts certain functions to private firms, e.g. meter reading;
  • Leasing. The water system remains in public ownership, but is leased to private operators. In French-speaking areas this is relatively common;
  • Concessions. Assets remain in public ownership, but use of the system is conceded to private operators for a certain period of time, for example 20-25 years; the private operators are expected to invest in specified improvements and expansion;
  • BOOTs (Build, Own, Operate, Transfer) and BOT (Build, Operate, Transfer) are concessions, usually for new facilities. After a specified number of years, the facility is handed to a public organisation;
  • Joint ventures in operating companies;
  • Divestiture. An extreme form of privatisation, in which full ownership of assets is transferred to private shareholders. Stringent public regulation is required. The only large-scale example is in England and Wales.

Government has a key role in providing a clear regulatory framework, and ensuring that the poor are served and users are protected from excessive costs.


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