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Comparing institutional forms for urban water supply

Urban water supply

More than one billion people in the world today lack access to safe drinking water.

The United Nations Millennium Development Goals’ initiative aims to cut this figure in half by 2015. Major infrastructure developments, specifically in urban areas, are needed to make this vision a reality.

The development and operation of urban water supply (UWS) systems, and infrastructure in general, has largely been the responsibility of the public sector in both developing and developed countries alike. In many countries, service provision has been hampered by public sector financial and capacity constraints.

To address this, governments have moved toward arrangements involving differing degrees of private participation in financing, developing and managing of water systems, and infrastructure assets in general. These kinds of contractual arrangements, termed Public Private Partnerships (PPPs), entail government and private companies assuming shared responsibilities for delivering infrastructure services.

The merits of Public and PPP provision of urban water have been explored thoroughly in the literature. In contrast, the presence of non-profit providers in certain niche markets of water supply has received much less attention. No clear consensus has emerged in the applicability of each of these forms.

If the global challenge of increasing access to safe drinking water is to be addressed, a greater understanding of this confusing mix of institutional forms in UWS is needed. This document aims to help in the comprehension of how the various types of organisation may have arisen, what their relative strengths are, and which conditions make one form preferable over another.

An image of a damWater supply economics

Water is generally viewed as a ‘public good’ (ie, everyone has equal right of access to it). In urban contexts however, supply is invariably piped, potentially making it a ‘private good’, as it is both possible to exclude certain customers (e.g. non-payers) and charge for different levels of consumption.

UWS may be affected by large market-failures, which significantly complicate the choice of organisation and have historically been used to justify public provision.

These include:

• Monopolistic tendencies

Foremost is the fact that many UWS systems are natural monopolies: they require large capital investments and have significant economies of scale, making rival supply very difficult. Community wells or trucked and bottled water are less susceptible to this monopolistic tendency. But even in the case of community wells, the large upfront capital requirements lead to sufficient entry barriers to limit rivalry in poor areas. This large capital requirement means that a stable institutional environment is needed if private investment is induced for piped water supply systems.

• Externalities

Water supply also involves both positive and negative externalities. Those connected to UWS can be grouped into extraction, use, and disposal externalities. In terms of extraction, we can identify those that include the competition for limited resources (the opportunity cost of water), and the sustainability of water source extraction. Water use externalities include: improved health (connected to both improved water quality and quantity); time savings (from the collection of water); expenditure savings (piped water is generally cheaper than bottled or trucked water); well-being (improved water supply reduces pressure on communities); education benefits (time saving can lead to increased school attendance); productivity and income (water supply can increase economic activity, also related to time savings); investment (savings on water can increase investment in other activities); and food security and nutrition (through backyard irrigation and livestock supply) (Moriarty, et al. 2004)).

The main externality in terms of disposal is the environmental impact. This is especially relevant if improved water supply is not married with improved drainage and sanitation.

UWS externalities are usually large enough that they justify charging for water, even in cases where the metering and billing costs overshadow the direct supply costs. A major reason for this is due to the fact that metering and charging for water creates incentives for conservation. Unfortunately, these externalities are historically hard to measure and therefore are commonly ignored when water tariffs are calculated.

• Water as a ’merit good’

In addition to the above, recent debates of “water as a human right” have prompted some to see water supply as a ’merit good’. In this context, merit goods can be identified as goods to which everybody should have access regardless of their ability to pay the market price. In terms of UWS, the underlying sentiment is that equity in consumption of water across income groups is important to society in general.

The above is compounded by the fact that water resources are predominantly publicly owned and, therefore, charging users for supply creates the impression that a public good has been converted into a private good.

Hands holding waterInstitutional forms for water delivery

We can identify three broad forms of supply of urban water: Public, Private For-Profit, and Nonprofit. Public systems entail a formal public authority (local, regional or national) being directly responsible for the full process of direct provision while retaining full ownership of the water supply assets.

Private For-profit (Private FP) systems involve arrangements where the responsibility for delivery rests with a private entity (could include or exclude private asset ownership), and where the systems are operated with a profit motive.

Private (for-profit) provision takes two broad forms:

  1. Small-scale private provision, and
  2. PPPs. Nonprofit UWS organisations are distinguished from fully private systems in that they do not have direct owners and do not distribute profits.

Non-profit UWS can be further separated into two groups:

  1. Small-scale non-profits, and
  2. large non-profits.

A brief definition of each is provided below:

• Private For-profit (Private FP) systems

Small-scale private provision: Here, the term ’small scale for-profits’ is used because these fully private water providers are mostly confined to either point sources or mobile water vendors. Point source vendors either sell water sourced from a private well, borehole, or standpipe, or they sell bottled water in shops. Mobile water vendors transport water in containers to users, and sell the water drawn from tanker trucks, water carts, or small containers (carried on foot by vendors).

PPPs: PPPs entail government and private companies assuming shared responsibilities for delivering water supply services, exclusively through network supply systems. These arrangements therefore attempt to balance the strengths and weaknesses of both the public and private sectors for the benefit of both. The extent of the share of public-private responsibility can range from mostly public (in arrangements such as service contracts) to mostly private (as in full privatisations or divestitures), See Davis (2005) for more details.

• Non-profit UWS organisations

  • Small-scale non-profit: The first type of non-profit organisation in UWS is small scale providers in niche markets of both developing and developed countries. These organisations include cooperatives, neighbourhood associations, community groups, and societies. They emerge in response to unmet water supply needs in areas not adequately served by public networks and generally take the shape of more formal organisations distributing water through small networks.
  • Large non-profits: A more recent development in UWS has been the emergence of large non-profit providers, predominantly in the United Kingdom. These organisations can be classified as commercial non-profits in that they rely almost exclusively on user fees, rather than donations and grants, while altruism and voluntary labour play at most a limited role (Bennett, et al. 2003).

 As discussed earlier, these large non-profits have emerged in response to exploitation by privatised water companies, and aim to rebalance the power between public and private players in PPPs.

Comparison of institutional forms

The following table compares the five identified types of organisation on the following aspects: why each form might emerge, what their respective strengths and weaknesses are, and under what conditions each could successfully be applied.. (A copy of this table can be downloaded from the Download module located on the right hand column).

Table comparing institutional forms for urban water supply.

An image of a tapObservations

In response to why each institutional form may have arisen, the diversity of forms clearly has its roots in both the historic trends of infrastructure provision, and the economic, sociological and political fundamentals behind water supply.

The preference of one form over another is specifically relevant if we are to address the global challenge of access to safe drinking water. This review offers a number of insights to this question: 

  • Public sector supply remains central to UWS in many countries, but this requires high levels of public sector performance (both in terms of capacity and efficiency), political will to charge cost-recovering tariffs, and sufficient access to financial resources. 
  • The role of the public sector is increasingly moving towards that of regulator or ’conductor’. The success of this role is vital in determining the success of PPPs or large scale non-profits as it ensures the protection of consumers’ interests, guides the equitable distribution of access, and, generally confers legitimacy on the private provider. 
  • Small scale service providers serve as fillers where the previous three forms do not adequately address urban demand. Small scale non-profits emerge in areas with strong communal action, and where water sources are easily accessible (such as through ground water wells). As mentioned earlier, their success depends on the extent to which they are able to adjust to changing regulations and can successfully raise the financial capital needed. In areas where small scale nonprofit providers are not feasible, for-profit distributors step in to supply water through vendor markets. The effectiveness of this last form of supply overwhelmingly depends on the distribution costs involved, and the availability of water of acceptable quality. 

Although the above answers are helpful in making sense of the UWS market, a number of questions remain. Firstly, more work is needed on how governments can balance the conflicting objectives of attracting high levels of private investment, while still ensuring that consumers’ interests are protected. This is specifically troublesome in areas with historic subsidisation of water supply.

As large scale non-profits have only recently appeared on the UWS scene, they have not received sufficient scholarly attention. It remains unclear as to what their actual impact is on service delivery, political legitimacy, and tariff levels. In addition, more research is needed on the conditions under which these arrangements might evolve, and how managerial performance incentives should be structured.

Lastly, there is also scope for more work on the conditions under which both for-profit and nonprofit small scale providers arise, and the legal and regulatory framework needed to support their success.

It is evident from this review that no single institutional form will be sufficient to address all UWS requirements globally. Rather, the challenges of UWS will have to be addressed through a network of cooperating actors. In particular, it would be necessary to balance the risks and commercial drivers in any new venture. This would include the following issues:

  • Sufficient revenue (be it from consumers or alternative sources) would need to be available to cover the life cycle costs of delivering the service, while taking into account the cost of capital.
  • The different risks involved in providing this service need to be allocated to those parties who can control it, and they need to be remunerated for such risks. This would ensure that the regulatory and legal environment should be defined in such a way as to minimise risks as far as possible by ensure that those parties who can control it remain responsible for such risks.
  • There needs to be sufficient drivers in the contractual arrangements to ensure that the services are provided in the most efficient manner, while considering the long term sustainability of the service. This consideration needs to include the assets, the institutional arrangements, as well as affordability.

It is clear that these parameters would differ dramatically from one context to the next. However, the dwindling level of skilled resources, the pressing need for improved services, and the scarcity of water compels every government to explore options for improving service delivery to it consumers and constituents

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