General Conditions for Private Sector Participation (PSP) in the Water Sector in the Middle East, Opportunities and Constraints Claudia Arce, German Technical Cooperation. Abstract The Middle East and North Africa (MENA), one of the driest and most water-scarce regions in the world, is experiencing fast population growth, thus leading to diminishing regional water availability. Existing shortages are also compounded by deteriorating quality. The allocation among irrigated agriculture and urban water supply leads to water conflicts between different user groups in many countries of the region. Water supply in most of the cities in the region is sustainable neither in technical nor in economic terms. With regard to sanitation the situation is even worse. The needs of the poor population are not yet met. This situation leads to deteriorating networks, jeopardizes the ecosystems and increases the health risks. Private sector participation (PSP) can be a solution to improve performance in some aspects. PSP does not mean that governments should not continue to manage water as a social good. But private participation could increase efficiency of operation and maintenance and billing, support know-how transfer and help to mobilise private capital. Because of varying framework conditions in the MENA region, different PSP models are in principle suitable. Which model to chose depends on the wider economic, legal, social and cultural context of the country. Service and management contracts are a good point of entry to get familiar with the specific local political and social framework. Private investors must be aware, however, that the project profile of water investments is characterized by high ‘sunk costs’ and long payback periods. Risk sharing in PSP projects is therefore a major issue for both investors/operators and partner countries. Under the KfW financial cooperation window, the water sector is a major area of intervention in the MENA, both in urban and rural areas. KfW concentrates on the financing of water loss reduction programs, water networks, treatment facilities and sewerage. Further, studies, training and to some extent management fees are funded. Nevertheless, this form of investment contains a risk of unsatisfactory results in situations of inappropriate legal systems, unsustainable pricing and the role of the public sector, which remains unclear.