�The EUROMARKET project ��Water Scenarios: an empirical analysis �of the evolution of the water sector in Europe ��� Dr. Jeremy Allouche �Scientific coordinator EUROMARKET��MIR, Management of Network Industries�Ecole Polytechnique Fédérale de Lausanne, Switzerland

Watertime, University of Greenwich, 25th november 2005

• Partners

​

• Project Outline

​

• The water sector today

​

• Evolution of the water sector: identification of scenarios

​

• Implications of scenarios

​

• Conclusions

STRUCTURE OF THE PRESENTATION

PARTNERS

PROJECT OUTLINE

1. Examine explicit and implicit policies of the EU

​

• The European water sector today
• Markets
• Operators
• Legislation / regulation

​

• Identify water liberalisation scenarios

​

• Assess implications of these scenarios
• Economic, ecological, social, legal, institutional, and organisational

​

• Practical recommendations

EU POLICY

• Water Framework Directive
• Single objective: good ecological status of all waters
• Integrated river basin management
• Water supply as a SGI

​

• Fields where existing European policies could have an impact on WSS services:
• Standards in drinking water and sanitation systems
• Management of the natural resource
• Liberalisation and services of general interest

THE WATER SECTOR TODAY

• The responsibility for the provision of water services in most countries lays with municipalities:
• Legal ownership of assets (except in England and Wales)
• Municipalities may delegate or outsource services (most countries)

​

• Diversity of operators and their strategies
• More than 30 000 operators
• Public, private, mixed

​

• Private investments in some countries
• Capital investment projects, equity investments…

THE WATER SECTOR TODAY

• Comparative policy analysis

SCENARIOS

• Coherent and credible stories about alternative futures

​

• Plausible but not necessarily desirable

​

• Scenarios developed along three macro-storylines:
1. Pressure for more competition and PSP
• Scenarios 1 and 2
2. Opposition to liberalisation
• Scenarios 5 and 6
3. Maintenance of the status quo
• Scenarios 3 and 4

​

SCENARIOS

• Drivers of change:
• Modernisation of the management of infrastructures
• E.g., regional structures, management autonomy, cost transparency
• Social pressure against liberalisation
• Pressure by some actors to go from de facto to de jure liberalisation
• Lack of public financing (esp. wastewater)
• Emerging PPPs

​

• Critical events:
• Social protests as a result of crises
• E.g., corruption, environmental, health
• Financial problems

SCENARIOS

• Sc 1: Tendered Market
• Obligation to tender: competition for the market every 5 years
• Least costly bid: obligation to retain the least costly bid
• Competition regulation only

​

• Sc 2: Tendered Market with Strong Regulation
• Obligation to tender: regular opening of competition for the market
• Long-term contracting (10 to 15 years)
• Independent sector regulator

​

• Sc 3: Administrative Regulation
• Benchmarking as the key competition process
• Diversity in the type of operators in Europe

�

SCENARIOS

• Sc 4: Outsourcing
• The majority of operators outsource part of their tasks to external sub-contractors
• Large variety of management models across Europe, ranging from DPM to full divestiture
• Sc 5: Direct Public Management
• No competition apart from traditional procurement arrangements
• Each operator acts as a local monopolist
• The ownership of the operator is exclusively public
• Sc 6: Community Management
• Communities of interest own and manage the infrastructure
• No competition in/for the customer market

Sc 1: Tendered Market

• Behaviour of the private operators is likely determined by the short duration of the contract
• Cost minimisation
• Exit the industry if risk is deemed too high
• Low incentives to invest

​

• Short length of contracts creates incentives to perform

​

• Relative stability of the institutional framework

​

• Transaction costs related to the tendering, negotiating and monitoring processes

IMPLICATION OF SCENARIOS

Major challenges:

​

• Short length of contracts
• Especially in case of important expansion of infrastructure or severe environmental/public health problems
• Competitive bids should be confined to operational responsibilities

​

• Pressure to minimise costs may affect quality

​

• Social policies

​

• Maintain a long-term perspective on the management of infrastructure and water resources

​

• Low level of public participation

IMPLICATION OF SCENARIOS

Sc 2: Tendered Market with Strong Regulation

• The outcome depends on: the contractual and legal framework; the role and effectiveness of the regulator

​

• Need to maintain and develop an adequate knowledge base (technology and market structure)

​

• Incentives to perform (regular tendering processes and regulation)

​

• In institutional terms, there are high levels of stability:
• coherence in terms of the allocation of institutional functions
• existence of conflict resolution mechanism

IMPLICATION OF SCENARIOS

Major challenges:

​

• Contract length may create problems for concessions if investments cannot be fully depreciated

​

• Problems of strategic behaviour, asymmetry of information and regulatory capture can arise

​

• Potential incoherencies arising from the overlap of responsibilities between the public authority and the regulatory entity

​

• High number of actors involved in the framework may raise TC

​

• Competition for the market does not grant per se adequate balance between stakeholders or different objectives
• Need to clarification of public policies

IMPLICATION OF SCENARIOS

Sc 3: Administrative Regulation

• Time horizon provides adequate incentives to invest

​

• Strong regulatory authority:
• Regulation authority has to ensure an adequate level of investment

• Benchmarking activities lead to high quality of service

​

• Great openness and participation
• information available to the public

​

Note: multiple configurations (e.g., diversity of types of operators) limit the assessment of the scenario

IMPLICATION OF SCENARIOS

Major challenges:

​

• Independence of the benchmarking agencies

​

• Problems of asymmetry of information between regulator and operator

​

• The monopolistic feature of the operators encourages rent-seeking behaviour

​

• TC associated to the setting up of the regulatory authority

​

• Improvement of citizen’s involvement beyond information dissemination

IMPLICATION OF SCENARIOS

Sc 4: Outsourcing

• Outcomes in terms of different objectives depend on:
• Type of activities outsourced
• Operators’ ability to monitor sub-contractors’ performance

​

• Reduced levels of risk to the operator
• Not need to invest in specialised assets

​

• Improvements in processes, products, services through specialisation

​

• Relatively stable institutional framework
• clear definition of functions and roles

​

Note: the conclusions are mainly related to the supplier market and cannot be extrapolated to the entire institutional framework.

IMPLICATION OF SCENARIOS

Major challenges:

​

• Limitation of competition in the supplier market due to oligopoly trends among outsourced firms

​

• Loss of internal competencies of the operator

​

• Unemployment may increase unless operator’s employees can be re-located to the sub-contractors, which in turn might reduce the bargaining power of trade unions

​

• Potentially high TC and risk of problems of coordination may outweigh efficiency gains

IMPLICATION OF SCENARIOS

Sc 5: Direct Public Management

• Long run viability is assured provided that public funds are available

​

• Local public authority should have a strong incentive to protect the water resource, since it is responsible for the WSS provision over an indefinite period

​

• Efficiency is not necessarily an objective
• E.g., services of best quality, resource protection, equal access to water

​

• Strong legitimacy
• suppliers are accountable to local authorities
• dominant position of the local authorities which control the supplier and are accountable to the voters/customers

​

IMPLICATION OF SCENARIOS

Major challenges:

​

• Local authority scale may not coincide with environmental effects

​

• Lack of strategy to curb down costs (O&M and capital) and invest in innovation
• Outsourcing and input tendering may be a solution

• The balance of powers might be weakened by the operators' monopoly on technical expertise

​

IMPLICATION OF SCENARIOS

Sc 6: Community Management

• Consumers, who are the owners of the infrastructure, bear the economic and financial risk and must cover the O&M and capital costs

​

• The quality of service depends on the ability of the institutional design to overcome institutional conflicts and to contract out services and purchases

​

• High levels of legitimacy of the institutional framework
• However, they decrease with the scale

​

Note: multiple forms of the social enterprise (e.g., cooperative, mutual) limit the assessment of the scenario

IMPLICATION OF SCENARIOS

Major challenges:

​

• The desire to keep water tariffs low could impact on infrastructure maintenance

​

• To incorporate advanced technologies

​

• As the scale increase, the managers’ objectives can diverge from the ones of the members

​

• Members’ participation can slow the decision-making process and decrease adaptability to change

​

• For individual small social enterprises stability may be undermined by the exit of active members

IMPLICATION OF SCENARIOS

CONFERENCE

Thank you!������jeremy.allouche@epfl.ch ��http://www.epfl.ch/mir/euromarket

Watertime, University of Greenwich , 25th november 2005