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Water and Sanitation Services in Europe. Do Legal Frameworks provide for “Good Governance”? - Mónica García Quesada - IHP-HELP Centre for Water Law, Policy and Science,under the auspices of UNESCO, University of Dundee, Scotland, [June 2011]

Water and Sanitation Services in Europe. Do Legal Frameworks provide for “Good Governance”? - Mónica García Quesada - IHP-HELP Centre for Water Law, Policy and Science,under the auspices of UNESCO, University of Dundee, Scotland, [June 2011]

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05/14/2014

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Concession

Government lets a long-term contract, usually over 25 years, to a private company, which is
responsible for all capital investment, operation and maintenance.

Lease

Long-term contract (usually 10-20 years). Private sector responsible for operation and
maintenance and sometimes for asset renewals. Assets remain in public sector and major
capital investment is a public responsibility.

BOT (Build-Operate-Transfer)/ BOO (Build, Operate and Own)

Contracts are issued for the construction of specific items of infrastructure such as a bulk
supply reservoir or treatment plant. Normally the private sector is responsible for all capital
investment and owns the assets until transferred to the public sector, but in BOO schemes,
private ownership is retained.

Management contract

Short-term contracts, typically five years. Private firm only responsible for operations and
maintenance.

Service contract

Single function contracts to perform a specific service for a fee, e.g. install meters.

A responsible body, such as a local authority, may decide to delegate a service

to a third party for many reasons. First, delegating water service provision has

the advantage of introducing expertise and specialisation in the running of a

service. Governments may choose to rely on water companies to expand or

51 Rees, "Regulation and Private Participation in the Water and Sanitation Sector."

Water and Sanitation Services in Europe: Do legal frameworks provide for Good Governance?

30

renew the network, to run the service and to introduce new technology, for

which specialised technical knowledge might be required. Delegating the

service to a specialised operator may help to provide a better and more

efficient service. More generally, removing water services functions from the

government is seen to ensure that water services provision is carried out away

from short-term political intervention and according to technical criteria and

specialisation.

In addition, delegating a service to a water operator has been claimed to

generate efficiency gains and cost savings.52 According to supporters, potential

costs savings can derive from scale economies of the water provider. Indeed,

large-scale water companies may be able to purchase products and materials at

lower prices, as well as access to more advantageous financial products. Also,

water companies may also derive higher savings from differences in labour

practices – such as requiring more work from employees, use the least

qualified personnel able to perform each task, and less social protection than

employees of the public sector. Finally, competition for contracts generates

‚competition for the market‛.53 Bidding for contracts provides water

companies with incentives to streamline operating and capital expenditure,

which may also revert in greater costs savings. In this sense, rivalry amongst

competitors for the right to be a monopoly may help to bring costs down and

to achieve better standards.54

52 Philip Keefer, "Contracting Out: An Opportunity for Public Sector Reform and Private
Sector Development in Transition Economies," (Washington: The World Bank, 1998), 3,
James Ferris and Elizabeth Graddy, "Contracting Out: For What? With Whom?," Public
Administration Review
July/August (1986).
53 Harold Demsetz, "Why Regulate Utilities?," Journal of Law and Economics 11, no. 1 (1968).

54 Christopher Hood, "The 'New Public Management' in the 1980s: Variations on a Theme,"
Accounting, organisations and society 20, no. 2/3 (1995).

Water and Sanitation Services in Europe: Do legal frameworks provide for Good Governance?

31

Delegating a service may also respond to a non-economic rationale. Certain

communities may opt for private delivery because it reflects their view on the

role of government. From this perspective, supporters of contracting out may

prefer to reduce the responsibilities of the government for ideological reasons,

and not necessarily for economic gains. A government with fewer functions

may be considered best for society, regardless the economic impact of

transferring traditional state functions to private entities55. In addition,

delegating a service may be politically attractive to a relevant authority as it

allows the development of a ‚blame shifting‛ strategy if any problem with

service provision arises.56 By contracting out a service, the service provider,

and not the relevant authority, might be made responsible for any deficiency in

the provision of a water service.

Although the water operator does not own the water assets, a delegation

period (which, in case of the concession is usually 20 to 30 years) gives water

operators significant time to exercise exclusive powers over those water assets.

Providers operating in a monopolistic environment and facing no threat of

competition may have incentives to increase their profits at the expense of

consumers, by increasing water tariffs or reducing water service quality. In the

absence of these enforcement mechanisms, delegation to private parties may

tend to benefit the water operators’ shareholders over the public interest.57

55 Germa Bel and Mildred Warner, "Does Privatization of Solid Waste and Water Services
Reduce Costs? A Review of Empirical Studies," Resources, conservation and reclycing 52
(2008).
56 Hood, "The 'New Public Management' in the 1980s: Variations on a Theme."

57 For a discussion on the mixed evidence over costs and efficiency of delegation to third
party water operators, see Bel and Warner, "Does Privatization of Solid Waste and Water
Services Reduce Costs? A Review of Empirical Studies."

Water and Sanitation Services in Europe: Do legal frameworks provide for Good Governance?

32

To deter water operators from abusing their monopolistic powers, various

regulatory mechanisms have been envisaged. Certain countries such as

Scotland and England have opted for an economic regulation of the water

utilities, in order to monitor their operations and to discipline them if they fail

to provide appropriate service at the agreed prices. In other cases, the contract

of delegation has been the main regulatory mechanism. The contract of

delegation may establish performance targets, price limits and other service

requirements that the water utility needs to fulfil. The relevant authority is

directly in charge of ensuring that the contract is honoured throughout the

delegation period – and to monitor and issue penalties if it is not. In this sense,

to make delegation work, it is necessary to have efficient contract enforcement

mechanisms, so to ensure that the water operator carries out its mandate

within the limits established by the responsible authority.

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