Understanding Issues

What can the public-private sector do to improve environmental services?

Extracted from: DANIDA Workshop Papers: Improving the Urban Environment and Reducing Poverty; December 5, 2000; Copenhagen, Denmark.

Private sector involvement in infrastructure provision has been increasing rapidly over the past decade, even in low-income countries. The fastest growth has been in the energy and telecommunications sectors but an increasing number of initiatives involve water, sanitation and waste management. Most of these have been in larger and more affluent cities, where there is more likely to be sufficient demand to attract private investment. Of the environmental services, water has received the most attention, and a small number of multinational companies (e.g. Vivendi, Suez Lyonnaise des Eaux, SAUR and Thames Water) have been involved in a number of concessions. Among the reasons typically given for cities turning to the private sector are:

  • to restructure a failing public utility;
  • to attract capital investment;
  • to improve technical and managerial efficiency.

According to conventional wisdom, public utilities tend to be overstaffed and inefficient. Public sector utilities often have no competitors and little financial incentive to be efficient. With governments under severe financial constraints, and private investors reluctant to lend public utilities, they also have difficulty obtaining the finance required for infrastructure investment. Also, public regulators typically control prices more vigorously than expansion targets. What can easily result is a financially insolvent public utility, providing low-priced services to the more affluent, and leaving low-income households to find more expensive or undesirable alternatives. In effect, it is often poor households that are worst affected by inadequate public sector provision. Historically, there have been many well-run public utilities but, especially when the public sector generally is under strain, they are the exception rather than the rule.

Even free-market advocates acknowledge that private provision has its own problems. Unregulated private companies are prone to:

  • Engage in monopolistic behavior – Urban infrastructure systems are natural monopolies, and monopolists can increase prices without losing a large share of their sales (unlike competitive firms, which must by-and-large accept the market price as given). This can lead to too little provision at too high a price.
  • Ignore public benefits consumers are unwilling to pay for – The price individuals are willing to pay for private sanitation and solid waste removal is unlikely to reflect all of the benefits, since a large share of these benefits go to others (just as many of the burdens a resident faces come from other people’s bad sanitation and waste). Even water provision provides public health benefits above and beyond those received by the consuming household.
  • Ignore quality deficiencies consumers cannot perceive – Unregulated private providers can increase profits by ignoring quality deficiencies, including even health-threatening pathogens and chemicals, so long as users cannot detect them.
  • Ignore the environmental costs of their own activities that they do not have to pay for – Unregulated private providers can also increase profits by releasing the waste and sewage in an uncontrolled manner, and potentially depleting the water resources.

Private-public partnerships attempt to gain the benefits of private provision without the disadvantages. Ideally, if prices are well regulated, private utilities will pursue efficiency as a means of maximizing their profits, without engaging in monopolistic behavior. Given appropriate quality control, health risks should be avoidable. Environmental costs can be taken into account in the agreement with the public sector. As long as low-income households are willing to pay the cost of water, private utilities will have the incentive to service them. Numerous studies have claimed to demonstrate that low-income urban households, currently not even offered water services, are willing to pay a price that ought to allow private firms to make normal profits. Good sanitation and waste removal may require subsidies or the enforcement of standards even at the household level. Working in partnership, however, the private and public sectors should in theory be able to design a system that provides services even to low-income households.

In practice, the existence of a public-private partnership is no guarantee that the advantages of both sectors will be realized, however. Without competitive market price signals, many of the advantages of private provisioning are lost. Moreover, private-public partnership can create new opportunities for corruption and rent-seeking, bringing out the worst features of both sides. Private companies may find it more profitable to invest in influencing key individuals in the public sector rather than in improving services. Public officials may view monopoly profits as a source of finance to be tapped rather than a cost to be minimized. Also, while private sector involvement in water provision is often portrayed as a means to insulate the sector from short-term political intervention, if provision is already politicized, private-public partnerships may merely serve to bring private actors more directly into the political process. Moreover, even well-intentioned regulators may not have the capacity to regulate effectively, and even well-run private utilities may not have the incentive or capacity to comply with the regulations.

If public-private partnerships are to provide environmental benefits to the urban poor, care has to be taken in setting up and regulating these partnerships, and innovative ways have to be found to ensure that the services do indeed reach the poor.

There are many different types of public-private arrangements, ranging from service contracts wherein a public entity hires a private company to provide specific tasks, to complete divestiture wherein private companies own, operate and manage the entire system. Public-private partnership is sometimes taken to refer to arrangements involving joint financing, but often refers more broadly to any arrangement where both public and private sectors play an active role.

A selection of arrangements particularly relevant to water services are summarized in Table 10.1. As indicated by the table, minor levels of private sector involvement typically cover aspects of operations and management, with increasing involvement progressively shifting the commercial risk, capital investment and asset ownership to the private enterprises. As indicated above, there is also a natural tendency for early involvement of large private enterprises to be in the larger more affluent cities.

Allocation of key responsibilities for private participation options
Option Operations and maintenance Commercial risk Capital investment Asset ownership Contract duration
Service contract Public and private Public Public Public 1-2 years
Management contract Private Public Public Public 3-5 years
Lease Private Shared Public Public 8-15 years
Concession Private Private Private Public 25-30 years
BOT/BOO** Private Private Private Private and public 20-30 years
Divestiture Private Private Private Private or private and public Indefinite
**BOT is short for Build, Operate and Transfer; BOO is short for
Build Operate and Own.

SOURCE: Stottman, Walter (2000), “The role of the private sector in the provision of water and wastewater services in urban areas” in Juha J. Uitto and Asit K. Biswas, Water for Urban Areas, United Nations University Press, Tokyo.

While providing better living environments for the poor has not been one of the principal objectives of most public-private partnerships, if more efficient service delivery results, there is at least the potential to improve service delivery in low-income areas. Realizing this potential is likely to require special measures, however. This is due only in part to the economic difficulties poor households face in paying for such services, and the political difficulties they face in dealing with discriminatory practices. Depending on the city and neighborhood, there may be difficulties with:

  • Insecure tenure – whether due to illegal settlement or the threat of new development, insecure tenure is common in deprived neighborhoods, and can discourage private investment in infrastructure, since residents may later be displaced and cease to be paying customers.
  • Physical obstacles – low-income settlements are often located in areas that are difficult to service because of such as narrow roads, steep slopes or other obstacles.
  • Lack of household funds for down-payments – poor households often have particular difficulties making the lump sum payments that may be required in order to connect to water or sewerage, and are generally more able to afford the equivalent in a series of small payments.
  • Low levels of trust and poor communication – the relationship between poor households and service utilities is often characterized by mutual suspicion and difficulties on both sides in distinguishing genuine difficulties from purposeful misrepresentation.
  • Conflicts between formal and informal systems – poor households would often benefit from hybrid systems, that build on or work with pre-existing infrastructure and institutional arrangements, while large utilities often have difficulty accommodating what they may view as substandard infrastructure and informal institutions (including those involving other private sector actors such as small scale waste pickers or water vendors).
  • Collective service use and special needs – in order to save money, poor urban dwellers often share services (including public standpipes, toilets and waste collection sites, but also extending to shared private facilities), which can in turn create different service needs and undermine progressive tariffs that apply low prices to small consumers.

Many of these difficulties apply whether a service utility is public, private or some hybrid. High levels of private participation do provide new challenges as well as new opportunities, however. Concessions, with their long time horizons, create a special challenge, since decisions made early on in the process can have implications for several decades. Some of the questions relevant to public-private agreements are given below:

Prior to agreement:

  • Are residents of deprived areas directly represented in the process, along with other stakeholders?
  • Are issues of particular concern to poor households being given due consideration?
  • Does the tendering process require the private bidders to be explicit about how they will address the difficulties involved in providing services to deprived areas?
  • Is the extent to which the bids address poverty-related issues given sufficient weight in the evaluation process?

On agreement:

  • Is the public-private agreement supportive of a broader strategy to improve services in deprived areas?
  • Are the efforts on the part of poor households to solve their own problems supported or undermined by the agreement?
  • Have specific provisions and targets been included to help ensure that services will be provided to deprived areas?
  • Has explicit mention been made of the need to offer options that are likely to address the particular difficulties poor urban dwellers face in both paying for and taking advantage of environmental services?


  • Are the utility’s failures to meet poverty-related targets vigorously pursued?
  • Is the government fully supportive of the private partner’s attempts to improve services in low-income areas?
  • Are residents in deprived areas adequately aware of their rights, as well as their obligations?

Individual companies with responsibilities for environmental service delivery are bound to resist new impositions that entail uncompensated pro-poor measures. On the other hand, provided the terms and conditions are clear, and the overall agreement is sufficiently profitable, private companies should have no objection to engaging in pro-poor agreements. Indeed, all other things being equal, a reputation for serving low-income households is a potential asset for a private company, both in the public arena and in the search for development assistance (which remains an important source of funds for public-private partnerships). Moreover, those companies with successful experiences serving deprived settlements are likely to actively support a pro-poor emphasis, as this will give them a competitive edge in winning contracts. It is notable, for example, that Lyonnaise des Eaux, has published a report on Alternative solutions for water supply and sanitation in areas with limited financial resources that includes a discussion of how technologies, institutional approaches and even contracts could become more pro-poor. It would be wrong to assume that private enterprises have a selfless interest in serving the urban poor, but equally wrong to ignore the potential for making it in their self-interest.

To date, public-private partnerships only account for a small share of environmental service provision in Southern cities. Ultimately, success with public-private partnerships depends not just on the willingness of private companies, but the capacity of local governments and regulatory bodies to negotiate effectively, encourage competition, engage with other stakeholders (including low-income residents) and form partnerships that serve the public interest. This capacity is closely linked to local governance. Indeed, given good local governance, decisions on both whether and how to engage the private sector are far more likely to be economically informed, environmentally sound, and equitable.