C6.3 Regulations for water services
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. (See World Bank Toolkits – Selecting an option for Private Sector Involvement.)
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 independence and discretion given to regulators; ensure regulatory accountability and transparency, and ensure that regulators have the capacity to monitor and obtain unbiased performance data.