Development Aspects Impressum Editors

Endogenous factors

The main conclusion that can be drawn from this analysis, as well as from other experiences on both the local and international level, is that problems of efficien- cy, transparency and infringement of the rights of actual and potential users are largely common to both public and private water utilities. This conclusion leads to the main recommendation which is the need for a specific legal framework to regulate service providers, as well as an institutional set-up that includes a special- ized oversight body endowed with a certain degree of independence. The principal objectives of the regulation and control of service provision should be:

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  To ensure that the service is socially, environmentally, technically and financially
  

sustainable

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  To establish appropriate incentives for efficient service provision, understood as
  

minimization of long-term service costs

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  To ensure that efficiency gains are justified in terms of social equity goals, mak- ing sure that the savings generated will be passed on to the community through lower tariffs, improved service quality and greater access for populations not covered by the service previously
  
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  To establish incentives and make the service provider and its management ac- countable for the fulfilment of agreed goals and objectives, in accordance with the principles of due diligence, good faith and the duty of efficiency
  
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  To offer incentives for rational service use.
  

Within this general framework, it is important to consider those problems and les- sons learned for the control and regulation of private, state-owned or mixed water supply and sanitation companies. The problems involved in conducting economic activities under a monopoly are widely recognized in economic theory. Attempts to mitigate these problems through a competitive bidding process designed to attain water tariffs that reflect efficient costs are quickly diluted once the contract is un- der way and the whole process is reduced to a bilateral relationship with opportun- istic behaviour by firms and weaknesses on the part of political and concessioning authorities and regulatory and oversight bodies, when these exist at all.

The “principal–agent” approach focuses on this bilateral relationship, in which the principal delegates the task of service provision to an agent and sets the re- quired objectives and mechanisms, but in a context where the agent is better in-

formed about the business being managed. Here theory and practice coincide: the theory warns of information asymmetries, the possible capture of the principal by the agent and difficulties in creating incentives for efficient service provision; the practice shows that the principal concessioning or regulatory body does in- deed lack sufficient information to regulate the service provider’s conduct, as well as the institutional capacity and strength to stand up to a large monopoly, and that regulatory instruments are insufficient to induce service providers to conduct themselves in a socially desirable manner.

Interestingly enough, both theory and practice agree that the bilateral relation- ship of principal–agent and its problems, mainly inefficiency and capture, are also detrimental to users when the agent or water supply and sanitation company is state-owned. The challenge for sectoral public policies, then, is to create ex ante mechanisms (regulatory framework) or ex post, in the case of a contract or operat- ing licence, to mitigate the problems inherent in a monopolistic market or a princi- pal–agent relationship in which the principal is, usually, in the weaker position. The following are the main recommendations, by topic.

1.