Overview of regulatory frameworks for water services in selected countries

Countries regulate the dimensions of water services (the network, quality, service delivery, pricing etc.) in different ways. One recent trend, the development of dedicated regulatory bodies for drinking water and wastewater services (WWS), stands out as a consistent response to some of the challenges to regulating water services (including the fragmentation of roles and responsibilities in the sector and the difficult political economy of tariff setting). On the whole, however, dedicated water regulators remain at earlier stages of development compared to other utility sectors and a number of countries and territories are still considering whether and how to establish them. This report aims to inform this new development by drawing lessons from the existing experience of established regulatory bodies in the water sector.

The challenges faced in the drinking water and wastewater service sector

The WWS sector is a typical example of a monopolist sector. Water companies constitute natural monopolies since the costs of production are lesser in the case of a single producer for a given spectrum of demand (Marques, 2010). Consequently, the WWS market is characterised by a low level of competition and important restrictions on the entrance of new players. Regulation is justified on the ground that it ought to prevent market power issues arising from a natural monopoly and to protect customers. In the absence of regulation, water operators can be tempted to neglect the quality of services and to apply water tariffs which are unreasonably high compared to the production costs.

The WWS sector also displays important asymmetry of information. The water operators own information which the responsible public authorities and the consumers do not have access to. This asymmetry of information may lead to market abuse by the monopolist operators and cause mistrust amongst consumers with regard to the quality of services provided (Marques, 2010). An easy and transparent access to WWS data can reduce the risks of asymmetric information.

The water sector needs to balance a range of economic, social and environmental interests. Water is essential for the lives, health and social protection of citizens. As a consequence, water services must fulfil a number of requirements such as the principle of universality, continuity, quality of service, equality of access, affordability and transparency. At the same time, the provision of WWS services has a cost – important investments and management and operating costs are involved – that needs to be covered in the most efficient way to ensure its sustainability over time. The management and trade-off across various interests justifies public intervention.

The water sector generates important externalities, in particular in relation to public health, the economy and the environment. The quality of water has strong impacts on public health, which justify the involvement of the ministry of health to define and set the quality standards for drinking water and wastewater treatment. The way wastewater is treated can also impact the environment, and, if ignored or badly managed, generate pollution and negatively impact other productive activities (farming, fishing and tourism). Therefore, in most countries, the ministry of environment is usually responsible for setting the quality standards for wastewater treatment.

WWS are often characterised by a fragmentation of actors. This fragmentation is both horizontal and vertical. At the horizontal level, several line ministries and other governmental agencies are involved in the regulation of water services, including typically ministries of environment (for managing water pollution); ministries of health (for setting and monitoring water quality standards) and, in some cases, the ministries of economics and finance (for investment and tariff regulation). At the vertical level, WWS are characterised by multi-level regulatory governance from supra- to sub-national levels. The EU provides an illustration of supra-national regulatory powers in the water service sector, notably through the EU Water Directive. At sub-national level, municipalities are generally responsible for providing and managing water and wastewater service delivery. In practice, OECD (2011) shows that the multiplicity of actors across ministries and public agencies, between levels of government and at the sub-national level intrinsically raises multi-level governance challenges. With so many participants, a clear definition of roles and responsibilities, as well as the establishment of co-ordination mechanisms, are therefore crucial to manage effectively and efficiently water services.

An overview of regulatory functions for WWS

Market failures and critical features of the water sector justify the establishment of high quality regulatory framework to serve the public interest at least cost for all actors involved. There is a large spectrum of regulatory functions routinely performed in relation to water services. Regulation of water services is not only about tariff regulation, it involves other functions, such as the monitoring of standards for access to and quality of services, the establishment of efficiency incentives, collection of information and monitoring of performance, and the organisation of users' participation. In order to take stock of these various functions and support policy making in this area, the OECD has developed a typology of regulatory functions (Table 1.1). This preliminary typology was tested and used to analyse the WWS regulatory framework in a number of countries (including Mexico, Jordan and Tunisia) (OECD, 2013, 2014b, 2014c) and constituted the basis for the questions on the functions of water regulators in the survey.

Regulatory functions for WWS as identified in the OECD typology (Table 1.1) can be of a different nature, some purely economic, some environmental and others embracing social issues, such as equity, affordability, universal coverage. The regulatory functions do not necessarily have to be in the hands of a single institution responsible for all of them. However, they need to be clearly spelt out and allocated to avoid overlap and incoherence. They also need to be clearly differentiated from the roles of other authorities and bodies, such as the policy roles of government or the role in service provision of utilities (public or private).

The variety of regulatory arrangements across countries

Countries have adopted different types of regulatory frameworks to ensure that the various regulatory functions in relation to water services are performed – the establishment of a dedicated regulatory body is one of several possible organisations for the...