National and municipal governments in many developing countries are turning more and more to the private sector to supply the capital and management needed to expand services and extend infrastructure. These efforts have been more successful in the power, telecommunications, and transportation sectors than in the water and sanitation sector. Roth points out that "of all public services, the provision of piped water is the one with which the private sector is least involved... It may not be a coincidence that water is also the sector that, in many countries, seems to have the greatest problems." One difficulty arises from fact that since water and sanitation are natural monopolies tending to become more efficient as they grow larger, the arguments for economies of scale leave little scope for competition among private suppliers of public services. After all, it is competition that provides the incentive for private companies to maintain quality and minimize costs. Another problem is that governments are reluctant to relinquish day-to-day control of projects deemed vital to public health and welfare. Doing so requires a strong regulatory oversight, a role to which governments may not be accustomed. This report is designed to assist developing governments and international donor agencies in overcoming these and other obstacles to increased private sector participation in the water and sanitation sector. It is intended for policy makers in public sector institutions and their advisers who are contemplating comprehensive and formal arrangements with the private sector. Private sector participation is likely to be viewed as one option in an overall plan to improve the sector's performance. This report outlines the most common forms of private sector participation: service and management contracts; short- and long-term leasing arrangements; and investments in build, operate, and transfer (BOT) projects, or build, operate, and own (BOO) projects. The report also discusses divestiture. Service and management contracts are the simplest to implement. Under a service contract, a private firm agrees to provide such services as meter reading, billing, or collection. Under a management contract, a contractor assumes complete responsibility for operation and maintenance of the system. Under a leasing contract, a private firm rents facilities from a public authority, assumes responsibility for operation and maintenance, and finances the replacement of some capital equipment. Under a BOT arrangement, a private firm finances the construction of a plant or system, operates it for a specific number of years, and then transfers ownership to a public agency. (Author abstract)