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Private sector participation in the development of water infrastructure pro-poor, or Africa’s Developing Countries, requires rethinking the design of both water sector transactions and the regulations.
The water services sector has many uncertainties, either natural, governmental or financial. The private sector investment in the water services can only be addressed in light of the financial risks foreseen, investment returns, possible sector incentives and its impacts on the quality of life for urban poor.
In the Developing Countries of Africa, where the majority of its population is poor, the traditional models or approaches to private participation in water sector can unavoidably erect barriers to improving service for low-income households in developing countries. The current approach frequently involves exclusive control of a local monopoly over a long period and an obligation to provide service to all or to all who request it within the area of exclusivity
A project finance structure which allows water projects - with attractive cash flow and risk profiles - to secure long term private capital, has become increasingly pivotal in international financial allocations and the nations’ budgeting process. Financing water projects is now conditional on two local factors: first to have an attractive cash flow and second an attractive risk profile. In other words it should have a low risk profile, which many of African urban, let alone low-income or rural, communities lack.
Some of the water sector challenges are:
(a) Water is expensive to convey or transport but comparatively cheap to store.
(b) Most of water industry infrastructure is buried which makes it difficult to assess. This might result in difficulties in investment’s planning and pose risks for contract design and negotiation.
(c) Significant currency risk, as customer pay in local/domestic currency that does not match international debt and equity financing.
(d) So far, little competition has been introduced in the different components of water supply.
The first wave of privatisation of the water industry was driven by the international donors and financiers to Sub-Saharan Africa as the only way for service delivery. The commercialisation of water services was suggested through 2 models: the French model of PSP (management concessions), and the English model of PSP (the fixed assets and management concessions). The latter was shunned by the investors due to the high cost of investment, lack of accurate information on water assets, the over employment in the water sector, and low financial and economic endowment of the communities served.