Regulation of the private provision of public water-related services

Since the 1970's, the governments of the region have been transferring, in one form or another, public companies and other state institutions to the private sector. Privatization has now extended to all sectors of the economy, including water-related public utilities. Private sector involvement in the provision of water-related goods and services offers potentially significant efficiency gains. It will not, in itself, guarantee lasting welfare improvement unless there is a competitive market. If not, results will depend on the regime of regulation in which the industries operate. The effectiveness of this regime is determined by the ability of governments to find and create adequate institutional and regulatory conditions that oblige supplies of water-related goods and services to be efficient and responsive to the needs of their customers. Monopoly regulation includes structure regulation, which determines which organizations or types of organizations can engage in which activities, and conduct or behavioral regulation, which concerns the permitted behaviour of organizations in their chosen activities. This paper outlines the principles believed to be essential in formulating an adequate regulatory framework for the water sector. Its focus is on the issues to be confronted in developing a regulatory structure for water-related public utilities. It reviews a vast body of recent literature on economic regulation and private sector participation in the provision of water-related goods and services as well as the experience of the countries where privatization and regulatory reforms have advanced most. Emphasis is given to the regulation of prices, product and service quality, investments and quantity. The alternative means of overcoming the problems of asymmetric information between regulator and regulated firms, the limited commitment powers of governments and regulators, conflicts between regulators with different mandates, government failure and regulatory capture are also discussed, as are the possibilities of introducing competition and facilitating regulation through changes in the industrial structure, including horizontal and vertical restructuring.