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Country Water Actions

Country water actions are stories that showcase water reforms undertaken by individuals, communities, organizations, and governments in Asia-Pacific countries and elsewhere.

Asia: Credible Regulatory Bodies Managing Water Interests

August 2005

Over the past decade, more and more countries have recognized the value of regulation. It is a basic practice of good governance, especially in those sectors where the private sector tends to be involved-telecommunications, electricity and water. WHY REGULATION IS NEEDED Two major dangers threaten the water supply and sanitation sub-sector. First, provision of water supply and sanitation is often a natural monopoly in a city. This could lead companies to exploit their control with high tariffs and inequitable service delivery. On the other hand, governments pose a second threat by keeping water charges too low for political gain. The majority of water tariffs throughout Asia are too low, not even covering basic operations and maintenance, let alone expansion of services to non-serviced areas, which tend to be where the poor are concentrated. In Asia, only a few cities have these watchdog bodies in place, a reason for some of the disappointing performances in the sector. THE OBJECTIVES OF REGULATION Regulation should assure all parties that their interests are being looked after, but never at the expense of the overall efficiency and fairness of the sector. Regulation secures the sector by: Protecting consumers against monopolistic abuse Protecting operators against government intervention and the political climate Promoting competition through performance benchmarks Promoting efficiency through service targets that aim for high coverage, 24-hour supply, good water pressure, and appropriate tariffs TYPES OF REGULATION There are two types of regulation. Resource regulation looks after the allocation of water resources and water quality. Operators are particularly concerned about the activities of upstream water and land users, wanting regulations against excessive use and pollution. Economic regulation controls the level of water tariffs and overall service delivery. Operators need to be able to charge sustainable tariffs to maintain and expand their systems. They expect regulations to reflect the need for development.

ELEMENTS OF GOOD REGULATION Sound regulation is often seen as a precondition to making publicprivate partnerships effective. Often overlooked is the fact that regulation is also necessary for public utilities. Whether for public utilities or private operators, regulation should always include the following good elements: Clarity of roles and objectives. The regulator should have a clear mandate of its functions and objectives. It should likewise have a clear role vis--vis the other government agencies involved in the sector. Autonomy/Credibility. A regulator should be free from political influence and commercial intervention, be well-funded and have fixed tenure for the regulatory board members. Participation. Key stakeholders should be consulted and involved. Transparency. The regulator should follow clear rules and guidelines, and explain to stakeholders how and why decisions were made. Those decisions should also be published. Accountability. Decisions should be written and accessible. Regulators should be open to appeals courts and international arbitration to resolve disputes, and be subject to independent audits. Predictability. Operators need to be able to invest confidently, assured that "rules of the game" will not suddenly change, putting their investments and serviceability at risk. Capability. Regulators should be staffed by competent and well-trained professionals, who receive continuous training and human resource development. POWERS OF REGULATORS Regulators should have the following powers for acheiving objectives: Set standards for water quality, environmental conditions, customer service levels and delivery quotas, such as 24-hour availability, water pressure, service coverage and the ration of staff per service connection.

Set tariffs to allow for full cost recovery or a rationale subsidy policy, which means subsidies, if any, will truly benefit the poor and permit the sustainability of service Gather information to monitor the operator's performance. Enforcement and sanctions by imposing fines and penalties for non-compliance. Arbitration to settle disputes between consumers and operators and between the operators and government. REGULATORY FRAMEWORK Regulation exists within a framework that is structured around: Regulatory rules: The body of laws, regulations, guidelines, licenses and contracts that define expectations and acceptable conduct; tent with a basic standard of living, with an emphasis on the poor. Regulatory bodies: Those institutions responsible for administering these rules. Regulatory processes: The procedures a regulator body must follow to carry out the rules and their responsibilities. WATER REGULATION IN ASIA Today in Asia, the public utilities operate most water supply and sanitation services and are selfregulated. The only regulators in existence are where private sector participation exists-operational in Manila and Jakarta, imminent in Colombo and Kathmandu, and planned for Chengdu, Delhi, Dhaka, Phnom Penh, Seoul and Vientiane. The Asian Development Bank (ADB) and other international development organizations are helping governments establish regulatory frameworks in order to motivate private sector participation, which is necessary to finance the badly needed investments in water supply, sanitation and wastewater treatment. The regulatory frameworks also contribute to overall reforms of the water sector. In Indonesia, ADB assisted the Government with a grant to formulate a regulatory framework for its water supply and sanitation sectors. Regional governments have been acting as owner, operator and regulator of the services, creating an obvious conflict of interest. In the Philippines, ADB also helped, through a grant, to develop the skills of the Regulatory Office of the Metropolitan Waterworks and Sewerage System (MWSS), which was preparing to enter into private public partnerships with its smaller water utilities.

REGULATION AND REFORMS It is misleading to believe that regulations alone will lead to improvements in the entire water sector. Regulation is only one part of more comprehensive reforms that must take place in the overall water sector. The following reform issues must be resolved for regulation to be effectively implemented: An agreed water supply and wastewater sector policy that provides for regulations and a credible regulatory board A market structure that defines service provision and the role of private sector participation Clearly defined roles of the central and regional governments in implementing regulations Continuous growth in experience and knowledge of regulations and the role it plays in supporting infrastructure development LESSONS LEARNED Experiences across Asia with water sector reforms, establishing regulatory frameworks and private sector participation provide the following lessons: There is a need for competent and credible regulators throughout Asia; A regulatory framework and independent regulator may limit political interference; There is a high correspondence between tariff levels and service levels; you get what you pay for; Government subsidies must be rational to ensure that it benefits only those who need it - the poor; Operators should not be expected to bear the cost of subsidies; Contracts should not be static because situations change; Timely interventions by regulators is crucial to the sustainability of operations. RELATED LINK Read more about private sector participation.

_______________________________ *This article was first published online at ADB's Water for All website in August 2005: The Country Water Action series was developed to showcase reforms and good practices in the water sector undertaken by ADBs member countries. It offers a mix of experience and insights from projects funded by ADB and those undertaken directly by civil society, local governments, the private sector, media, and the academe. The Country Water Actions are regularly featured in ADBs Water for All News, which covers water sector developments in the Asia and Pacific region.