Affermage contracts allow a private operator to deliver services with a greater degree of freedom than is possible with a management contract. What regulatory and institutional framework is required for this complex form of public private partnership (PPP) to fulfil its promise? What capacity development is needed for municipal officials and politicians to manage private sector participation (PSP) effectively?

A working paper from GHK International assesses the chequered history of an affermage contract in the South African town of Stutterheim against the background of national changes in both private sector participation and water policies. It highlights the need for explicit agreement in an affermage contract on what constitutes capital improvement and what is covered under operation and maintenance. Urging the municipality to make the most of the opportunities of PSP, it stresses the need to support municipalities in acquiring the capacity needed to achieve pro-poor objectives through PPPs.

On the eve of apartheid’s demise, the Stutterheim municipality signed an affermage contract with a private operator (primarily owned by Lyonnaise des Eaux) to manage, operate and maintain water and sanitation services in this Eastern Cape town for a period of ten years. The operator is responsible for the cost of operation and maintenance (but has no responsibility for revenue collection) while the municipality has to fund all capital investment.

Today’s democratically elected council is concerned to practice community-oriented and participatory approaches to development and feels constrained by a contract it has inherited. Trapped by its contractual obligations; lacking an understanding of how the PPP might converge with its poverty reduction (particularly economic development) initiatives; and lacking the skills for strategic management and negotiation, the council’s relations with the operator are often strained. The council has blocked proposals to extend operator services into black communities - but it seems to have done so due to preconceptions of PSP and without adequate information such as a cost benefit analysis.

Other findings, which emerge include:

• The Council's water tariff structure is anti-poor and anti-environment. The poor pay more than the better off. There is no incentive to conserve water. But this was not intended by the Council.
• The limited financial and human resource capacity of Stutterheim (like that of other municipalities) blocks the implementation of pro-PSP changes at national level. Such policy change must be accompanied by capacity building if it is to become meaningful.
• A lack of exposure to PSP elsewhere means that municipal decision-makers may not yet know 'what they do not know'.
• The turnover of both staff and politicians severely affects institutional capacity and hampers the relationship with the private partner.

Globally relevant lessons for municipal officials, policy-makers and professionals facilitating poverty-focused private-public partnerships in the delivery of municipal services include the need for:

• Ongoing municipal capacity building: democratic local government means that newly-elected politicians often need to develop the skills to understand the potential of PSP and the council's partnering role and responsibilities.
• A more even playing field - local government officials need to learn not just how to strategically manage PPPs, but also how to renegotiate and implement them to achieve their objectives.
• Greater sharing between municipalities of lessons and experiences of different kinds of PPPs. Lack of exposure to information means that weak partnerships are self-perpetuating.
• The affermage is a complex contract to manage especially without a regulator equipped to arbitrate when disputes arise.
• Cost benefit analyses are needed to make appropriate decisions in favour of or against PSP in service delivery.
• Many of the older PPP water and sanitation contracts lack a poverty-focus. There is a need to improve targeting and to reconsider the scope and processes of delivery. Skilled specialists are needed to support municipalities achieve pro-poor objectives.

Source(s):
‘Favourable Policy and Forgotten Contracts: Private Sector Participation in Water and Sanitation Services in Stutterheim, South Africa’, GHK Working Paper 442 01, by Janelle Plummer, November 2000 Full document.

Funded by: DFID (IUDD)

id21 Research Highlight: 5 April 2002

Further Information:
Janelle Plummer
GHK International
526 Fulham Rd
SW6 5NR
London
UK

Tel: +44 (0)20 7736 8212
Fax: +44 (0)20 7736 0784
Contact the contributor: plummerj@ghkint.com

GHK International, UK

Other related links:
'Providing water to the poor: Assessing private sector participation'

'Getting municipalities ready to work with the private sector: experience from Zimbabwe'

UNDP focuses on Public-Private Partnerships for the Urban Environment

'PPPs, PWUs or PUPs? Alternatives to private sector water delivery'