ToolBox

Characteristics

Water service providers should be subject to the general quality and quantity regulations outlined in C6.1 and C6.2. In addition, governments will be concerned to ensure that providers deliver services in an efficient and cost-effective manner and at appropriate service standards. Service providers typically enjoy significant monopoly power; their output levels, service standards and investments all tend to be lower than under competitive conditions, while their prices tend to be higher. Performance regulation has often been seen as only necessary when the private sector is involved but public monopoly providers also need to be put under regulatory pressure to improve their performance (B1.6).  Effectively monitored performance targets, possibly employing benchmarking and the publishing of performance league tables, can play a critical role in public sector institutional reform.

The regulation of private sector providers will depend upon the Private Sector Participation (PSP) option chosen (B1.7) and the amount of competition which is allowed in the sector. Regulation is typically least onerous for service and management contracts, but realistic specification of performance targets, good output delivery data and monitoring capacity are essential. The regulatory burden for concessions and divestiture is considerable. Contracts or operating licences will need to establish mechanisms for tariff adjustments, service standard specification, investment requirements, complaint resolution, dispute arbitration and the imposition of sanctions for delivery failures. Price regulation (and preventing hidden price rises through reduced standards of service) is a critical regulatory task, as is ensuring that companies make efficient investment decisions.

In designing a regulatory system for public and private service providers, governments need to: - clearly specify the regulatory duties, decide how decentralised regulation should be; consider the level of discretion given to and the independence of regulators; ensure regulatory accountability and transparency and ensure that the regulators have the capacity to monitor and obtain unbiased performance data.

Lessons learned

• The monopolistic character of most service providers means that self-regulation is typically inappropriate. Regulation should be separated from provision.
• The regulatory burden can be reduced by allowing comparative (yardstick) competition and benchmarking.
• Regulation of decentralised service providers should normally occur at a higher tier of government to avoid capture and facilitate benchmarking.
• Good independent information on asset conditions, performance standards, operating costs and investment efficiency is an essential prerequisite for effective regulation.
• To be effective regulators must operate independently from both short term political pressures and the regulated companies.
• Regulation is likely to be most effective if it employs incentives as well as sanctions.
• Regulation should be transparent, with maximum use of published performance targets and achievement levels.