Small-scale private service providers (SPSPs) have long played a quiet but important role in the provision of water and electricity. They vary in scope, scale, and the types of constraints they face. For governments seeking to learn more about how SPSPs can serve their citizens, consider these points:

SPSPs are significant service providers in many countries, particularly in periurban, rural, and remote regions, and may be the only viable operators in some contexts. SPSPs are estimated to reach as much as half the population in some countries, particularly in post-conflict situations and other cases of weak or failed states. Overall, it is estimated that up to a quarter of the urban population in Latin America and nearly half of urban dwellers in Africa rely on SPSPs for at least a portion of their water supply. They often compensate for—or supplement—the limited financial and human resources of the public sector.

The local private sector accounts for over 85 percent of all private sector investment in water services and the potential for local financing of small-scale water supply is significant. The local private sector has demonstrated its ability and interest in the development and management of water supplies even in remote or difficult locations that are unattractive to formal providers. Despite unclear legal or operational status and sub-optimal financing arrangements (primarily from the informal market) these providers have made significant investments in water supply and electricity systems. Establishing a clear policy and a supportive regulatory framework for SPSPs could free up scarce public financing for less attractive segments of the market and reduce costs, thereby improving prices for consumers.

Cost Recovery Prices provided by small-scale private network systems are a fraction of the price charged by traditional water vendors. An analysis of the comparative costs of small piped private networks shows that the per unit cost of water delivery can be as little as 10 percent of the cost of purchasing water from vendors. That is, where public utilities fail, small piped systems prove an economical solution—particularly when considering that they do not generally require the types of ongoing subsidies provided by governments to public utilities.

Where water sourcing or energy supply technology presents barriers to entry, PPPs may be designed to share that risk. World Bank Group experience working with SPSPs in countries like Paraguay has allowed for the expansion of SPSPs into areas where sourcing risks would otherwise have prevented their investments. Public transfers for borehole drilling and output-based subsidies for connecting the poor have been key.

Small-scale providers have the potential to become local private operators in small towns, and over time, in medium and large towns. With growing recognition of their role in water supply and electricity services, SPSPs are evolving from owner-operators of isolated systems to developer-operators of formally recognized systems in small towns or multi-village areas (such as Paraguay and Uganda). While SPSPs’ prior experience in the informal sector may not adequately prepare them for formal bidding processes, experiences in several countries demonstrate that with the right support and consortium-building, SPSPs can become an important channel for the development of local private sector capacity for water supply and electricity service.

While small entrepreneurs are unlikely to take on the responsibility for massive rehabilitation or expansion projects in large metropolitan areas, SPSPs can help fill the growing gap in private financing of infrastructure by serving marginal urban communities, periurban areas, and outlying and rural communities. These are often the most costly clients to serve for large investors, the last to receive connections, and the targets of controversial universal service obligations imposed upon private investors and concessionaires.

This article is based on a series of papers and articles by Jordan Schwartz, Mukami Kariuki, Franz Drees-Gross, Alex Bakalian and Michael Schur.