Regulation and Private Participation in the Water and Sanitation Sector (TAC Background Papers No.1)

Private sector participation is widely perceived to be the solution to the failure of many publicly owned and managed water utilities to operate efficiently and make the investments required to meet community needs. However, there are no guarantees that privatisation will actually yield the desired performence improvements. Simply converting a public sector monopoly into a private one provides no competitive incentives for the utility to operate efficiently, make appropriate investments or respond to consumer demands. Likewise, privatisation per se need do little to improve sector performance if governments are unwiling or unable to tackle such underlying problems as over-manning, uneconomic water pricing policies, financing the provision of public and merit goods, and restricting over-intrusive political intervention.
 
Given the characteristics of the water and sanitation sector it is inevitable that some form of continued public regulation of the private companies will be necessary. The regulatory burden can be reduced by adopting a competitive form of privatisation, choosing a more competitive sector structure and devising an appropriate regulatory regime. However, it has to be recognised that there will be a trade-off between making a venture attractive to private firms and introducing a notionally ’ideal’ regulatory system. Regulation in practice is a much about creating the conditions under which private firms can operate effectively and efficiently as it is about protecting specific customer and public interests.