In an era of smaller more localized water projects with increasing levels of community participation, understanding the cultural dimensions of water and related power relations becomes increasingly important to successful water management and water conflict resolution. Current practice still often relegates culture to anecdotal accounts in the place of detailed social impact assessments. Examples of selected case studies ranging from indigenous peoples to Mideast water disputes demonstrate that: 1)  different meanings of water exist in different cultures and subcultures 2) culture is a key component of power and decision making in water relations and management 3) the "culture of the project" may explain why certain projects take on a life of their own independent of communities 4) the power relations, the attitudes and beliefs about water, and water use patterns   of people are embedded in a matrix of culture  5) gender is an often ignored aspect of water management and 6) water resource development can impact a people's ability to preserve their culture and identity. The current uses and abuses of cultural assessments and the role of social scientists is in a state of flux and points to a new frontier of participatory research. The methodologies and philosophies associated with participatory research (particularly participatory action research challenge our usual ways of conducting research. These participatory methods also demand a separate pedagogy and different learning environments. The author's experiences with both the Participatory Action Network at Michigan State University and the Bailey Scholars Program underscores the challenges and rewards of participatory research and co-learning in academics. Participatory researchers assume new roles of purveyors of funding and new technologies for self empowerment of communities. In the final conclusion, the coming global water crisis is most likely to be solved by large numbers of communities solving their individual problems in a collaborative and participatory fashion.
 

Introductory Remarks:
     As the only anthropologist to speak at this conference, my role here must be to discuss culture. Also, anthropologists are a contrary lot- so instead of discussing water issues from the top down, I will begin from the bottom up.
I have set as my goal to have cultural issues trickle up (and in other words become integrated)  into water law, policy, and resource management. Given
that trickling up defies the law of gravity, this reflects the dilemma of introducing culture into a room full of engineers and policy makers.
    On a more sobering note, it is often the role of anthropologists to put a human face on the suffering of people in the wake of water crises, during periods of water scarcity and related famine, on the mismanaged water project, and on water development gone awry. It is our difficult task to document the destruction of humans and cultures that occur with water scarcity. We understand the shame and guilt of families that have children die of hunger and lack of water. In most human cultures, the sharing of food and water- reciprocity- is a fundamental glue that holds a culture together. When deprived, the inability to provide reciprocity is the first step in the unraveling of a social group (Howard and Millard, 1997). Water impacts the survival of cultures. At the same time, culture is not a trivial parameter in water and power relations.

     I have just participated in a writing project on water  and I am going to borrow heavily from the examples of my colleagues to stress the ways in which culture is a critical parameter in relations of power and water (referring to Water, Power, and Culture edited by John Donahue and Barbara Johnston 1998).  In reflective learning, one begins with a question and proceeds by answering and asking more questions.  In this case, why focus on culture? It
is because it is at the level of culture that water policies and principles are operationalized. Water use patterns are a product of behaviors and attitudes that are both embedded in a cultural matrix and a result of cultural conditioning.
     Lastly, in attempting to understand that changing behaviors on the ground usually means bringing about profound cultural change, I want to discuss a social movement and a philosophy of empowerment  for change. There is a movement for a type of participatory research that is growing inside academia and in development circles.  If we are entering an era of increasing numbers of smaller more localized participatory water projects, then we will need new methods for conducting and evaluating these types of projects. What research tool and methodologies will be needed in this new millennium?
     The future may  lie less in the hands of the engineers as it does in the abilities of those who understand the social and cultural aspects of water use and management. Concrete and steel may be giving way to projects that empower more of the world's population at a local level to design, build, and maintain their own water projects and to settle their own disputes. The challenge to academia is to develop methodology that considers the uniqueness of culture, searches for cross-cultural lessons, and that is empowering and participatory. The concepts of participation, empowerment, and democratization are entering the scientific vocabulary.
     Yet, the bulk of researchers in the social sciences and in natural resource management are not yet trained in grassroots participatory research. Although researchers in the Global South have been aware of the philosophy and concepts of participatory research for over 30 years now (at least since Paolo Friere (1970a) began writing about his methods for empowerment),  it is as if we in the Global North have suddenly just rediscovered them. Participatory research means different things to different people and the participatory research community is divided into different subgroups ranging from the most participatory usually known as participatory action research or PAR to the more structured participation models known as action research in education. Action learning has been a respectable part of education for decades now and its popularity waned and now is again on the rise.
     The case of PAR  in development, resource management, and anthropology in the United States is a little more complex. Precursors to today's participatory and emancipatory research like the VICOS project in the Peruvian highlands that empowered former hacienda (plantation)  compassion to manage their own lands were initially misunderstood and ridiculed although VICOS is still a success today after some 35 plus years (Doughty, 1987).  Today, we are in the midst of a boom in participatory networks like the PARnet at Cornell. Web sites and participatory networks in academia are blossoming.
     At Michigan State University, a group of graduate student approached me to be their non advisor advisor (someone to advise them but not in the classical sense). Through the students and my own research efforts, we are in the very early stages of experiments in building a participatory action network and in working out the many challenges that are inherent in doing participatory research. There are enormous challenges to be faced.  Funding agencies still, for the most part, do not understand participatory research even when these same agencies call for participatory projects. Participatory methods do not lend themselves easily  to precise time lines, milestones, and predetermined goals- all the earmarks of what funding agencies want most in funded projects.
     There are no canned methods for doing participatory action research. This not to say that we have abandoned hypothesis testing and quantitative methods- but we have at our disposal an arsenal of new qualitative and participatory tools to supplement and contrast traditional research methods. Because the research focus is on experiential learning, the focus of the research becomes on producing grounded theory. In the course of the reflective learning involved in participatory research, we are knocking at the very foundations of science and questioning many of the premises we thought we understood.  This is research, according to Laura Nader (see Nader, 1996), at the boundary of science and local knowledge. It is a science that incorporates local insights and vocabulary into the scientific inquiry itself. It is a sobering and unsettling process by which  we may be creating  a new scientific vocabulary and new type of scientific inquiry- one where the scientist is not at the center of the research universe. Researchers are developing a new epistemology. This is science, research, and water projects driven by communities, cultures, and individuals. The scientist is only one member of the team. When it works, it is truly science in the service of people.
     The processes would be difficult enough in themselves- as we struggle to define and redefine what is validity and rigor in this new arena of science. For the first time, scientists are faced with the unique dilemma of including non-scientists in research and having to explain the nature and results of their work to local communities. Researchers are being asked to give back to the communities from which they extracted information. In this coming era of increasingly participatory projects, engineers and scientist of all sorts will be called upon to train a new category of researcher, the community researcher -  local people trained and empowered to understand, collect, and interpret their own water data, to decide their own water allotments, to protect their water quality, and even in some cases to build their own water structures. The scientists, engineer, and planners become part of the community and the associated ongoing social experiment. Understanding the role of culture in water practice becomes essential to this kind of research- and perhaps one of the greatest challenge of the coming millennium.

      Currently, anthropologists and social scientists are still frequently asked for rapid social impact assessments and rapid evaluations rather than full integrated social assessments as permanent members of water and resource management teams. Culture is still too often relegated to anecdotal information - the "local color" syndrome in assessment reports. The popularity of providing a nice quote, "chief somebody of such and such tribe made this profound and heart wrenching statement about the meaning of the water in their lives" - this takes the place of a detailed cultural and social assessment. This , in part, explains why more water projects are cultural failures than engineering or structural failures.
     Participatory processes are also hampered by the persistence of shallow definitions of participation- the "town meeting as cathartic experience" where participation is reduced to a venting process whereby local communities are allowed to express their anger after being informed of  a pre planned project.  We have all seen the process: after excluding the local community in  planning, the community is allowed to express their feelings- after which  the project continues as previously planned.  When the community organizes to block the proposal and a  dispute erupts, no one should be surprised. This can be contrasted with a more participatory process that involves the community from the onset and is flexible enough to build trust and compromise into planning and into the final project itself. Ultimately, the time spent in a participatory process avoids more costly and protracted disputes and the possibility of community rejection of projects. An integral part of doing participatory research is understanding the unique cultural components of water relations.
     Recently, I was included in a group of researchers from various fields that set out to examine the role of culture, water and power (Donahue and Johnston, 1998). In exploring cultural components of power and water relations, the many lessons learned demonstrated to us that the role of culture in water use patterns, in water conflicts, and even in the designing of projects underscores the need to reevaluate the role of culture.  It cannot be overstated , no matter how many times the statement is repeated, that different cultures and subcultures have different cultural meanings of water.
     For example, Peter Whiteley and Vernon Masayesva (1998) illustrate this example with the Hopi, Navaho, and the Peabody Mining Company  in Northwest Arizona, where the three major players in a water dispute have three different concepts of water, who owns the water, and what constitutes waste and good use of water. The multinational mining company is extracting large quantities of underground water for a coal slurry process. The company has been able to pit the Navaho and Hopi against one another precisely because there are differing concept of water in these two indigenous population and among different sub -groups in these communities. The Navaho in this region have a more pragmatic and progressive attitude toward economic development  and water use while the Hopi are more traditional and spiritual in their attitude toward land and water use. The Hopi are also facing more severe water shortages than the Navaho (see Whiteley and  Masayesva  1998 for more details). The company has succeeded in gaining water rights from the Navaho which the Hopi believe are responsible by lowering the water table and their well levels. In this and many other cases, knowledge of  peoples' cultural attitudes toward water has been used as a weapon against them.  It is also a misconception that there is one universal response or attitude to be found even in indigenous populations.
     There are a myriad of community parameters that influence water use patterns. Age and gender differences of the key water users and players also influence the dynamics of power in and among groups.  Too often gender has been a missing consideration in understanding water crises. Women may have little or no power nor input into the decision making that governs water uses, but are often the most burdened (or overburdened) in the advent of a water crisis. For example, during  floods in Bangladesh, women are burdened with the role of keeping households and foodstuffs together and dry and keeping family and house safe from invading poisonous insects and snakes in the face of rising water. These extra burdens occur while she must still find clean drinking water, cook, clean, and care for children (Hanchett et al. 1998).  It is not simply anecdotal information that Bangladesh has separate words for the normal seasonal monsoon floods  (barsha) and the prolonged and more dangerous floods (banna)  in a country where between 30% and almost 100% of the country may be underwater at a given time (Hanchett et all. 1997). The different types of flooding call for different responses. A flood is never simply a flood to people, even in places that  flood regularly.  In the case of water scarcity and drought, women are burdened in other ways- in carrying water long distances and as students at Michigan State University doing fieldwork in Mexico are discovering, in the ways in which women make decisions about how they ration water for cleaning, cooking, and drinking.  Large scale gender studies in water management are still in their infancy.
     Socio-cultural differences and differences to access to power also influence the distribution of available water supplies. Water scarcity is not always a question of water availability and access, but may also be a product of social systems (see  Donahue and Johnston 1998:2). Social inequities in water distribution can either be the cause or exacerbate water scarcity. The inequities  (for example between the rich and the poor  or between majority versus marginalized groups) are embedded in a cultural matrix which may be difficult to change. Inequalities in water distribution are not always solved by simply building new storage and conveyance structures.
     The philosophy that "if you build it, they will come" (if you provide the water  structure and deliver the water that people will use it)  is still too prevalent in water development projects. It is still inconceivable to many that even in the face of relative water shortages and scarcity, people may reject water for cultural reasons. When the Nookshank River near a 300 year old Northwest Cree village was diverted, the people retained their memories of drinking pristine waters from the river and its tributaries (Greaves 1998: 35-46). The divergence of the river which destroyed their traditional fishing grounds now provides them (for a price), water that meet US drinking water standards.  But many of the Cree feel this water is unsuitable for drinking and cooking (Greaves 1998).  It is bad water not because of  fecal chloroform counts, but because it has a different culturally determined water quality and water value.
     Similarly, even in highly industrialized nations, people can refuse water if it does not meet  their cultural concepts of water quality  -  as is the case with the people of Tucson, Arizona that have repeated rejected water from the Central Arizona Project after 322 miles of water conveyance structures were built to bring it to them (Sheridan 1998:163-18). Cultural concepts of water quality are dynamic in all cultures. The people of Tucson have become accustomed to expect very high standards of drinking water purity, very different  even from  those expectations at the turn of the last century in the United States.
     While it is clear in cases dealing with indigenous peoples that cultural phenomena are important in water and power relations, the culture created by  the project itself is usually not the focus of study.  When a water project is created, the interactions of the political, economic, and governmental agencies creates a "culture of the project" that takes on a life of its own. Projects built and designed externally to local communities, in particular, create  project cultures that seek to survive independently of the communities impacted by the project. Understanding that this "project culture" seeks to survive and perpetuate itself like all cultures, contributes to understanding why certain projects are perpetuated even in the face of obvious problems.  Numerous examples of untenable projects abound-  like the El Cajon Dam in Central America that was not only an engineering failure in producing expected amounts of hydroelectric power, but also a cultural failure in relocation (Loker, 1998). This also explains, in part, many projects in countries of the Global South, as well as in the Tennessee River Valley and the  desert Southwest. In many cases, these projects continued to grow in size and ambition beyond both ecological sound limits and the needs of local people. The desires of the "project culture" exceeded the needs of the local community.
     In high stakes water negotiations, the danger of ignoring culture can result in stop gap solutions that have the potential to breakdown into armed confrontations. In the upcoming "final" round of the peace talks in the Mideast, the fact that the Israelis are most likely to focus on current water use patterns and the Palestinians on historical water use patterns is not only indicative of their relative position of power and political maneuvering, but also of their cultural conditioning (Hassoun, 1998). From my own research, it is apparent that Palestinians and Israelis have differing concepts of land and water, deeply influenced by the paradigms and myths of each people.  In the case the people of the Middle East, the concept of water as a critical component of identity and survival may not be apparent at first glance.  But when  questions are posed which strike at the heart of a people's cultural myths and paradigms are asked, the association between water, identity and cultural survival are more apparent. If the question is posed about what will happen to Israeli culture with its concept of Israel as a safe haven and the deeply held tenet of aliya  or return, if the carrying capacity of the land (limited by water) means they must severely restrict or curb Jewish immigration?  For the Palestinians, the historical facts of colonialism and in the last 50 years of restricted access to water resources already limits their range of development choices (see Hassoun, 1998). The Palestinians are already facing the problem of access to water in terms of their cultural survival.  Around the globe, similarly linked water/ cultural survival and identity crises exist.
     If these situations illustrate the challenges and short comings of current research, how are we to face a future of smaller projects, possibly more frequent and persistent water problems, and limited funding to apply to disputes and development? The increasing prevalence itself of empowerment and participatory projects may be the answer to this question.

     The obvious solution to the marginalization and exclusion of the cultural components of water management and use is the inclusion of local people and communities in  development projects and water research. Participatory researchers are arming themselves with methodology for encouraging and integrating community dialogue, for conflict resolution and resource management in their research projects. For example, new methods like the Integrated Systems for Knowledge Management (ISKM) being employed in the South Island high country of New Zealand ( see Allen et al. 1995) are putting culture and communities at the heart of research.
     In New Zealand, and elsewhere, sustainability is the focus of many participatory projects and resources. Lifestyles are sustained in communities by culture. Research methods must likewise be sustainable, repeatable, critical, and rigorous. Opportunities for developing future participatory research and grounded theory loom bright on the horizon for the next generation of researchers. This next generation of engineers, scientists and resource managers will need to develop cultural and social proficiencies and "just plain people skills" if they wish to find a place in participatory projects.
     In the area of water policy, policy makers may also need more cultural and social proficiency as communities demand personal accountability from those who make the policies that impact people. Water policy is not made in a cultural vacuum. My first lessons concerning the consequences of water disputes and the complexity of water policy was in South Florida, working with the U.S. Park service in the Everglades. Water management policy in South Florida is a complex maze of federal, state, local, Corps of Engineers, and U.S. Park Service agendas. While I was working in Everglades National Park, local farmers surrounding the park were so enraged by water policy that several pipe bombs were found at water stations inside the park. The water dispute became personal to me when it was my turn to retrieve the data from the water stations.
I have never forgotten the lesson that water policy is always personal to someone.
     Participatory research includes the person and his or her cultural beliefs and concepts- giving a voice to all the parties involved. The giving of a voice to the previously voiceless, of exchanging technology and information with communities, presents a new horizon in academics.
In the final analysis, participatory research also requires academics to come out into communities and to "really get our feet wet". The consequences should be enlightening.
     Ultimately, there will probably not be one single magic technological solution to the global water crisis. Even in the event that some new technique in water extraction radically increases the world's supply of fresh water, there will likely be numerous communities that due to economic or geographic conditions will not be benefactors of the new technology.  The more feasible scenario is that solutions  to water problems will be found community by community - some using high technology and others by hard work and the application of simple appropriate technologies. Many of these community solutions may not be very glamorous, but the collective impact  of these smaller scale projects has the potential of being as great, if not greater, than the large scale dams and huge water projects of the last century. Today and in the future, people to people communication of efficacious solutions is the single most powerful tool available to combat water scarcity and quality problems. New techniques in communication and in the development of human interaction and participatory methodologies hold an important key to solving the problems of the new millennium

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Hanchett, Suzanne, Jesmin Akhter, and Kazi Rozana Akhter. 1998 Gender and Society in BangledeshÕs Flood Action Plan.  In Water Culture and Power: Local Struggles in a Global Context. John M. Donahue and Barbara Rose Johnston eds. Washington D.C.: Island Press. pp. 209-236.

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    The following paper is a short summary of what could be considered as the main risks that should be addressed by the emerging and developing countries governments to facilitate the private sector participation (PSP) in the development of water infrastructure and, more in general, all infrastructure in their countries.  Many of the consideration here included apply not only to the so called "emerging" or "developing" countries but to the so called "developed" countries as well (e.g. still today Italy has not yet adopted a proper Project Finance legislation, thus substantially hampering the development of PSP in its infrastructure sector).

    While facilitating the intervention of the private sector in critical infrastructure development, risk sharing is also an effective mechanism for the prevention of disputes which often arise in the life of a public-private partnership.

    While, on the one hand, I recognise that the purely entrepreneurial risks are to be taken by the private sector itself, on the other hand, this documents aims at setting a framework for the creation of risk mitigation an sharing mechanisms which would substantially reduce the risks faced by private investors developing infrastructure projects in the host countries and which cannot be covered by the private investors directly.

    Nine areas of risk have been identified and analysed and for each of them factual recommendations on possible risk mitigation measures which could be taken by the host governments have been identified.

    While some of the points here included are already the object of work and efforts by international bodies (e.g. the legislative guides on privately financed infrastructure projects in preparation at the United Nations Commission on International Trade Law) other points could be the subject of further analyses by the governments.
 

1. Political Support / Macro-economic Policy

    Political support is an important prerequisite for giving additional comfort to potential private sector investors.  It could concretise in the formulation of explicit national development policy that clearly commits the host government to promote private sector intervention in infrastructure projects.  Ideally, such statements should be confirmed by all the relevant Ministries and, possibly, by the Parliament.

    Whenever a certain level of decentralisation of political power is practised in the host country, it would add comfort to the investors if such development policies for infrastructures would be "subscribed" by the local governments and/or assemblies as well.

    Naturally a stable macro-economic policy remains a prerequisite to successful private sector participation.  Inter alia, such policy should ensure that public sector deficits are kept under control, subsidies to state enterprises are limited, stability and convertibility of the local currency are actively pursued and efforts to reduce the burden of national debt are implemented.  Particular attention should be given to pursuing active policies of privatisation so as to reduce the amount of subsidies to state enterprises.

Possible Recommendations

1.     Whenever possible, national governments should make official their support to the development of a particular infrastructure area through the approval, at governmental level and possibly parliamentary level, of a development policy for that specific area.

2.     Ensure that an optimal co-ordination of the national infrastructure development plans and regional / municipal development plans is achieved and that the guidelines developed at national level percolate also at the lower levels of the administration.
 

2.Municipal/Local Governments vs. National Government

    As many infrastructure projects are developed and implemented at the local government level (municipal or regional), it is essential that, for such projects, clear principles be adopted regarding the sharing of responsibilities and competencies between the local governments and the national government.

    This is particularly important in projects and sectors where the private sector involvement would take place only if certain elements of support are provided by the national government.  In particular, the availability of certain national government guarantees is often a prerequisite for the private investor to be able to raise the necessary funds for project financing.

    Questions that the private investors often raise concern the supremacy of the national legislation over local legislation, ability to implement tariffs adjustment and scope of manoeuvre of the local government, procurement responsibilities and future potential interference of the higher government in the choices made by the local government, etc..

    At the national level, the definition of clear "rules of the games" for the delegation / decentralisation of certain activities and/or powers and the creation of a co-ordinating body, which would ensure the implementation of such rules and provide guidance to the private investor, would facilitate PSP in the development of infrastructure.
 

Possible Recommendations

1.     Ensure that each country defines the rules for the sharing of responsibilities and the level of autonomy between national and local governments (e.g. up to which level tariff increases can be decided and implemented by the local governments and when such tariff increases need higher level approval).

2.     Define guidelines that indicate the conditions under which national support (e.g. in the form of guarantees provided to financiers) may be made available for regional projects.

3.     Consider the constitution of an adequately staffed office at the national level, which could guide potential foreign investors in understanding the level of delegation / decentralisation between local and national governments and clarify the level of autonomy of local governments.
 
 

3. Procurement / Administrative

    The uncertainties in this area relate mainly to two elements.
On the one hand the independence of the body managing the selection process and awarding the contracts and on the other hand the administrative procedures necessary to implement and put a project into operation.

    On the first point, the creation of an independent agency with autonomous decision making powers and the delegation to the same of the procurement activities for infrastructure projects would increase the confidence of investors.  Most importantly, the consistency in time of the principles applied in the procurement activities and the establishment of a sound reputation of such agency on the international markets would strongly enhance the interest of the private investors in the infrastructure sector.

    The administrative aspects have also to be underlined. Obtaining all the necessary permits and authorisations (both at local as well as national level) to start construction and successively the operations of the project facilities is often an area of risk for the private investor and for the project financiers. Steps to harmonise and reduce the number and type of permits necessary and the simplification of the procedures for their obtaining would reduce the aleas to the private investor.
 

Possible Recommendations

1.     Pursue a clear policy of simplification and reduction of the type and number of permits and authorisation required, in particular, avoiding doubling the efforts of the investors among the permits and authorisations required at the local and national levels.

2.     Ensure that, during bid preparation, all relevant information on the type and number of permits required is publicly available to the potential private investors.
 
 

4. Legislation

    The weakness of the enabling legislation and rules for private sector involvement are often mentioned as transitional constraints to the successful PSP in the development of infrastructure.

    Besides the legislative areas which are important to all business activities in the host countries such as Business Law, Foreign Investment Law, Contractual certainty and enforceability, one needs to single out three legislative areas whose development in the host country is particularly important to PSP in the infrastructure sector.

i.         BOT/ Concession Law.  Besides making clear who has the authority to award the contract such law should also define the scope of the authority with respect to the logistical support (e.g. acquisition of land, transfer of public assets to the project, etc.).

ii.         Step-in-Rights.  Either in the BOT/ Concession Law or in other legislation the possibility of step-in-rights should be included so as to provide sufficient comfort to the project financiers in predefined cases of default of the operator.

iii.         Secured Transactions Law.  Such legislation would provide sufficient comfort to the project lenders in terms of security taking on both moveables and immovable.  Inter alia, it should address pledge of shares, registration of security, ranking of secured charges and rapid and effective remedies. Furthermore, governments should endeavour to ensure that the creation, maintenance and enforcement of security are provided at a low cost.
 

Possible Recommendations

1.     Follow on the work and recommendations being developed by other agencies (e.g. United Nations on "Privately Financed Infrastructure Projects") and ensure that such recommendations are reflected in the national legislation.

2.     Develop, making profit of the efforts deployed by other agencies (e.g. EBRD), a secured transaction law, which provides sufficient security to potential lenders thus decreasing their level of risk in a project.

3.     Ensure that step-in-rights are accepted and enforceable at the national and local government level when so required by the financiers under the project agreements.  Define rules delimiting the requirement of national or local governmental authorisation for the enforcement of such rights.
 

5. Regulatory / Re-negotiation

    The presence of an established regulatory function with characters of independence from the political factions and sufficient power to operate is an important risk mitigation factor.  It is essential that the regulators be independent and function as guarantors of the correct implementation of the PSP in the relevant infrastructure sector. The regulatory functions and the relevant bodies should be put into place by national legislation and should have power at national and local level.

    Whilst it is important that the regulatory functions be established by law it is also essential that a competent regulatory body be created to implement the relevant legislation. The ability of such body to effectively ensure the correct implementation of the contracts will also be dependent on the quality and nature of the staff appointed to such role.

    This is an area where international co-operation and the exchange of experiences and know-how between countries with established and recognised regulatory bodies and countries that wish to establish a regulatory framework could bring substantial benefits. The building of a strong reputation and history of the regulatory body on the international markets will be an essential element of comfort to the private investors and financiers.

    The establishment of a strong and independent regulatory function will also substantially reduce the risk of re-negotiations that the private operators face during the life of their contracts.
 

Possible Recommendations

1.     Define the regulatory functions via the enactment of relevant legislation in a manner that leaves sufficient flexibility to the regulator and the private operators to find the correct equilibrium (e.g. ensuring that the national legislation be not over-encompassing and leaves the definition of the modus-operandi and non key aspects to by-laws and lower level legal acts).

2.     Create regulatory bodies which are adequately staffed and trained and provide that they operate in an environment that ensures the autonomous decision making of senior management of such bodies.

3.     Promote exchange programmes between personnel of regulatory bodies in different countries, so as to share experience and improve training.

4.     Consider the creation of a Court of Arbitration for Infrastructure Regulatory Issues at the international level.  Each country could voluntarily become a member of such court.  Operators and national authorities could refer to such Court for dispute resolutions over regulatory issues.  Such Court could also define common principles of regulatory functions and provide training and exchange of knowledge on regulatory issues.
 
 
6. Judicial

    The establishment of an efficient and independent judicial system is also important to PSP.  In addition to the important character of independence the judicial body should be composed of skilled and efficient staff.

    It is also key that the administrative support to the judicial system be adequate to allow rapid and effective enforcement of the judicial decisions.  Without adequate enforcement mechanism, the private investors and financiers will continue to consider the judicial risk to be high.  Inter alia, this risk is particularly evident in the case of the enforcement of the step-in-rights mentioned in paragraph 4 above.

    Fostering the acceptance of extra-judicial dispute resolution is also an important ground for further work.  In particular, enlarging the acceptance of international arbitration in dispute resolutions at national and local government level would reduce the judicial risk perception by both investors and financiers.
 

Possible Recommendations

1.     Foster the acceptance of international extra-judicial dispute resolution mechanism at the national and local level and ensure the enforcement of the decisions taken in such manner.
 
 
7. Financial Markets

    It has often been stressed that the depth of the local financial markets is key to PSP in the infrastructure sector.  In particular, the availability of long term funding in local currencies will be a key factor in the development of PSP.

    The deepening of such markets will also depend on the establishment and fostering of proper financial market mechanisms.  Efforts should therefore be made at government level and, in some cases, at local level to ensure that proper financial market regulations are enacted and that the bodies to enforce them are adequately staffed and personnel trained.

    The development of a local currency long term market (both for securities and lending) will substantially reduce the financial risks linked to the raising of foreign currency debt to finance infrastructure projects.  Conversely, it will also reduce the pressure on national governments to include indexation provisions in the contracts that will link the tariff adjustments to the indexation of the national currency to the foreign currency in which the debt has been raised.

    The absence of stable, long-term securities on the market hampers the broadening and deepening of securities markets.  In fact, infrastructure projects developed by private investors may be one effective way to foster the creation of a deeper financial market.  Private sector infrastructure projects could issue stable, long term private securities thus fostering the development of a market for such securities.

    In view of the growing number of private sector projects in infrastructure developed by municipalities or local governments, one should also mention the importance that the rating of the relevant municipality (or region) by the international rating agencies would have on the development of the local financial markets and raising of long term funds.

    A related element, where efforts should be made by the national governments and which would help in assessing municipal and regional risk, is the adoption of clearer accounting and auditing rules for the understanding of municipal and regional budgets.  The use of internationally acceptable accounting practices is also instrumental to the marketability of securities issued by project companies on the international markets.  Furthermore, the use of international accounting practices is also essential for carrying out audits of the project companies, which may be required for the application of tariffs structures and verification of compliance by the regulatory bodies.
 

Possible Recommendations

1.     Consider the constitution of a unit at the international level that would:

i.         Foster the obtaining of international ratings by municipalities;

ii.         Provide assistance to municipalities seeking such ratings;

iii.        Foster the exchange of experiences and knowledge on the subject within the region.

2.     Consider the constitution of a unit that would foster the knowledge and application of internationally accepted accounting standards within each country at national and municipal level.

3. Foster the creation of mechanism that will mobilise the savings into long term financial instruments thus increasing the depth and liquidity of such markets, e.g. enacting relevant legislation on the control of the modus operandi of the market players on the financial markets and ensuring the enforcement of such rules.
 
 
8. Tax

    Tax risk is an important element taken into account by the private investors when considering PSP in infrastructure.  In particular, the private investors wish to see the risk of changes in the tax legislation reduced as much as possible.  This is particularly true when we consider that the "change of law" risk is not taken by the financiers who charge it back to the project company.

    Selectively, special tax treatment can also be used as a positive incentive to foster PSP, e.g. import or custom duty exemptions or tax holidays during the first years of the life of a contract.

    In any case, the stability of the tax environment will be key to successfully attracting PSP.

 
Possible Recommendations

1.     Foster the application of "shielding mechanisms" against tax law volatility in favour of infrastructure projects with P.S.P (e.g. provide sufficient comfort to private investors that eventual changes in tax legislation shall not apply to the specific project or, if applied, ensure that the tariffs structure allows the recovery of such additional tax costs).
 
 
9. Project Preparation

Last but not least, project preparation, while not being a risk in itself is a key element to facilitate PSP in infrastructure.  It has often been underlined that it is not the lack of funds but the lack of good projects that hampers the development of PSP in infrastructure.  Therefore, it is key to ensure that the national and local governments are prepared to develop well-prepared and bankable projects.

Inter alia, good project preparation should produce the following positive effects:

i.         Provide the premises for a better allocation of funds to the better-prepared and structured projects;
 
ii.         Better identify different risks, risk mitigating factors and parties best suited to take charge of those risks;
 
iii.         In project sponsored by local governments, define a priori the level of involvement of the national government versus the local governments;
 
iv.         Ensure better understanding of the risk-return profiles of the different projects and ensure that the right level of support and incentives are provided to the potential private investors.
 
v.         reduce the cost of project development by the private investors via a better definition of the components of the project and its technical specifications;

    In particular, the recent financial market crisis has showed us that, while commercial banks and investment companies should be "good risk evaluators" and project screeners, this is not always the case and investment that should not be funded obtain the necessary funds for development.  One element, which would contribute to the avoidance of similar situations in the future, should be the enforcement of stricter credit rules and project evaluation rules.
 

Possible Recommendations

1.     Foster the creation at national, and if necessary municipal level, of units which would assist national and local governments to prepare and structure projects in a sound manner and provide guidelines for screening from the offset the projects which do not have the basic characters of economic and technical soundness.

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