1. INTRODUCTION

1.1 The water industry context

Public water supply is an essential service for communities, part of the so called "services of general interest", being vital to general welfare, public health and the collective security of populations, as well as to economic activities and environmental preservation.

Such services allow for major scale economies and the installation and production unit costs decrease as demand increases, to a given extent. On the other hand, there is also significant scope for economy, where the production unit costs tend to decrease as similar activities are integrated (e.g., where the water supply and the wastewater treatment and disposal are managed together), due to the synergies in the management of human resources, equipment and facilities.

High value assets, representing an intensive capital sector, also characterise such activities. Additionally, these are long term assets, built up over many decades, designed for peak situations and generating idle capabilities which are not used for long periods. The infrastructures show a high degree of immobilization, as they are intended for a specific purpose and for this reason their transaction is difficult. This market shows a high relationship between the asset values and the revenues generated and low demand-price elasticity, as they are essential structural services.

Different relevant markets can be identified in the water sector. The most important is the transaction market between water undertakings and final users, which is a natural monopoly. Other markets are the transaction market between bulk and retail utilities, which is in genneral a legal monopoly, the transaction market between utilities and services and goods suppliers, which is a competitive market, and the transaction market with owners of water resources, which is a quasi-monopoly.

Such features contribute to limit competition within the sector with regard to the service to the consumer. In practical terms, only the existence of one operator for every served geographic area is feasible, which originates a monopoly, either at a local or regional level, the user in such a context being not able to choose either an operator or the most convenient price-quality ratio. Natural monopolies occur whenever the cost structure is characterised by the falling of the production average marginal costs as the productive system develops, due to the existence of scale economies. In such cases, the whole production cost for a given demand issue is inferior whenever the service supplier is not just one.

Of course such a fact does not induce a continuous incentive to the water undertaking to increase effectiveness and efficiency, and this important weakness of this sector must be minimised as much as possible.

1.2 Current challenges of the water industry

There are some major challenges facing the water supply sector in the years to come: keeping pace with a net population growth; closing the coverage and service gap; ensuring sustainability of existing and new services; improving the quality of services.

Maintaining a truly sustainable system in the water supply sector is as difficult and important as making the initial capital investment. The provision of safe water is a service and requires a service-orientated attitude on the part of the water undertakings involved. Water services may normally be set at an affordable level for the consumers and managed and operated in accordance with the principles of good business practice and with the regulations, which are intended to protect the consumers and the environment.

The form of management will vary according to the local situation, and can be public, private or a partnership between both. In any case the continuous improvement of the quality of service is an essential target to be achieved.

1.3 The need for performance assessment of the water supply services

The use of a sound performance indicator system accepted internationally can play a key role in this process of inducing a continuous incentive to the water undertaking to increase effectiveness and efficiency and improve quality of service.

The assessment of the undertaking's performance with the use of performance indicators can measure the quality of service and the utility's effectiveness and efficiency, make transparent the comparison between the objectives, provide benchmarking between similar undertakings and encourage them to provide an improved service.

The performance assessment of the water supply services seems to be the right tool to help to solve some of the major problems of the sector.

1.4 The potential users of performance assessment of the water supply services

The most important entities or 'stakeholders' in water supply are: * the water undertakings, which can be public, private or combined organisations who manage the water supply systems;

* the consumers or direct users, with whom a water undertaking has a relationship between supplier and customer;

* the indirect stakeholders, who do not have a direct connection to the system but may be affected by it or its impact on the surrounding environment (e.g., the consequences of water mains bursts, the quantitative or qualitative impact of water abstraction, etc.);

* the pro-active stakeholders, such as environmental organisations, consumer protection agencies and other pressure groups;

* the policy-making bodies, at local, regional and national level;

* the regulatory agencies, responsible for economical and quality of service regulation and for setting up and verifying compliance with statutory and other obligations;

* the financing agencies, of particular importance in such a capital-intensive sector as the water industry.

Other interested parties may include international agencies, from humanitarian associations to political organisations and multi-national companies.

Irrespective of their nature (private, public or combined) or geographical extent, it may be presumed that all water supply undertakings share a common purpose and management objectives, which may be stated as: "The achievement of the highest level of consumer satisfaction and service quality in line with the prevailing regulatory...