This study analyses whether urbanization and poverty have any importance for private sector participation (PSP) in the water sector, in developing countries. In the beginning of the 1990’s there was a surge in the interest of the private sector to participate in water and sanitation projects, after a long period of public dominance. There is a large need for investments since much of the population in developing countries does not have access to water and sanitation services and the demand is increasing. At the same time the water sector is prone to inefficiencies resulting from externalities and natural monopoly characteristics, and is therefore often highly regulated.

A negative binominal regression model is used for the analysis. The dependent variable is the number of water and sanitation projects with private sector participation in a country. The independent variables are population, GDP/capita, aid, debt, water resources, government effectiveness, degree of urbanization and degree of poverty. The main results are that urbanization is positively significant for PSP in the water sector, while poverty has no significant effect.