Private sector participation in urban water supply in South Africa

The new Government of South Africa answer to inequalities in water provision caused by apartheid, has been guided by a policy of devolving responsibility to local structures (and assisting in creating such structures where they do not exist). At the same time the new Government has moved towards rationalizing the supply of water via decentralized Water Boards which have the power to reallocate resources from wealthy white areas towards poorer black areas. The Government is also exploring ways to manage scarce water resources efficiently through private/public sector partnership. This paper considers three general approaches to private sector involvement within the urban water sector in South Africa: (1) vertical unbundling - introducing competition by separating monopoly functions, which are to remain in the public sector, and from non-monopoly functions which can be privatized; (2) franchising - inviting the private sector to operate and invest in the network (concessions) and
to operate publicly funded infrastructure (affermage); (3) regulation - constraining monopoly power by rate of return regulation (assessing private sector operation in terms of past performance) or by retail price index minus efficiency regulation (providing the industry constraints within which it must work over a fixed period of time). These different approaches are considered in terms of the effects of private sector involvement on production efficiency, allocative efficiency, the capacity required for management, the general of capital, the effect of each approach on the promotion of equity, and the extent to which each approach is politically acceptable. Against this theoretical background, South Africa's limited experience of private sector involvement within the water sector is examined.