SPRINGER BRIEFS IN WATER SCIENCE AND

TECHNOLOGY

Stefano Pozzoli
Loris Landriani
Luigi Lepore
Rossella Romano

Governance and
Performance
of Water Utility
Firms

123
SpringerBriefs in Water Science and Technology

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Stefano Pozzoli Loris Landriani
•

Luigi Lepore Rossella Romano

•

Governance and
Performance of Water
Utility Firms

123
Stefano Pozzoli
Loris Landriani
Luigi Lepore
Rossella Romano
Department of Business Administration
Parthenope University of Naples
Naples
Italy

ISSN 2194-7244 ISSN 2194-7252 (electronic)

ISBN 978-3-319-02644-2 ISBN 978-3-319-02645-9 (eBook)
DOI 10.1007/978-3-319-02645-9
Springer Cham Heidelberg New York Dordrecht London

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Ó The Author(s) 2014

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Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2 Model for Water Governance: Variables and Performance . . . . . . 9

2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 The Literature Debate on Privatization . . . . . . . . . . . . . . . . . . . 10
2.3 A Managerial Focus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.4 Performance and Governance Models of Companies
in the Integrated Water System . . . . . . . . . . . . . . . . . . . . . . . . 16
2.5 A Comparative Analysis Among Different Countries . . . . . . . . . 19
2.6 Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3 The Impact of Governance Model on Performance:

The Case of the Italian Firm of Integrated Water Service . ...... 29
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 29
3.2 Changes in Local Public Services: Regulatory excursus
(Overview) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 30
3.3 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 32
3.4 The Performances of the Water Service Companies. . . . ...... 34
3.5 The Relationship Between Performance and Governance
Models: A Theoretical Model for the Management
of Integrated Water Services . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.6 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.6.1 The Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.6.2 The Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.6.3 The Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.6.4 The Open Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

4 Conclusions and Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

v
Chapter 1
Introduction

The definition of public services varies with the point of view that is chosen for the
analysis. Traditionally, in fact, both legal studies and those business and economic
have emphasized different profiles.
In the business and economic perspective, the focus concerns the nature of the
need which the activity tends to satisfy and, therefore, public service companies
are those which underlie the company’s mission to meet the public needs, which
are widespread, cherished by all citizens of a community.
In the legal sphere, however, the focus is on the nature of the entity that
provides the service and so are the public services operated by public entities,
specifically created by the state in the general interest.
Finally, the economic vision is addressed to the characteristics of the provided
service, linked to the public good, by its nature indivisible, free of unit pricing and
rivalry, which cannot be traded on the market or provide an exclusive consumption
and an individual application. This leads us to different theories on the need for
regulation, most recently revised in light of the general process of deregulation
being put on the field.
The defining aspect does not seem to be a pointless exercise in this case, since
the management and the ‘‘social’’ wealth creation procedures, carried by the
regulations at the head of these companies, depend on the role and nature iden-
tification of the conducted operations.
At the same time we should not underestimate the contingent and historicized
extent of the concept of public service, which, from the beginning of the last
century, has seen more times a configuration change.
So, nowadays, if the law confirms as well the possibility for private companies
to carry out activities geared to the collective, the general economy, instead,
focuses on convenience in service provision, reserving to privates the ones with
the profit possibility and to the state the ones mainly focused on social aims,
deemed essential or which cannot be delegated.
The public services Companies observation, the chosen perspective, is in fact
directed, being bound to the needs, to check how a real transformation of the
operational and management methods, and especially the basic guidelines that
characterize these institutions are related to the evolution of the needs. Therefore,

S. Pozzoli et al., Governance and Performance of Water Utility Firms, 1

SpringerBriefs in Water Science and Technology, DOI: 10.1007/978-3-319-02645-9_1,
 The Author(s) 2014
2 1 Introduction

the conscious choice to promote the transformation of the existing businesses in

SPAs and the setup of new ones in such forms is an important index of the
willingness to increase the level of public transparency in respect of the controlled
firms and so in greater ‘‘respect’’ of the corporate instrument personal purpose,
even by their economic entity.
Consequently, the possibility of setting up joint-stock companies offers a
number of benefits to local authorities which are characterized by a strong plan-
ning and internal-developed organizational and management skills. For the local
government/citizens-users ratio, switching to a plurality of different management
forms has meant more transparency, because it shows the single managements
results, more efficiency, because the administrators must be chosen with the cri-
terion of greater competence, more control, because next to the political control
there will also be the economic and professional one.
Therefore, it seems proper to remember the process of profound renewal of the
public administration, that starts very late in Italy in the 1990s and which is named,
often abusively, the ‘‘corporatization’’. This process has also applied to public
services and has basically appeared as the evolution of legal and managerial forms,
but especially as the efficiency, effectiveness and economy pursuit, through a
constant orientation to the market and to the customer.
Despite these innovations, where the different role that the public entity (state
or local) carries now should not be underestimated, becoming an organizer from a
direct regulator, a coordinator and a controller of public or private companies,
delegated to manage the service, there’s still a maintenance of the social goals, of
promoting economic and social development of the communities, assigned to these
companies by the law. This consideration, on the one hand, makes the public
services role strategic for the growth of a country, on the other hand, broadens the
stakeholders categories and the value judgments which they are subjected to,
making the wealth and value creation processes quite complex, in view of the
economic balance.
This category, which could be called a unifying category of economics and
business, must be properly characterized in the public services and public com-
panies in general, since its composing elements are quite peculiar.
First, apparently, an orientation to the social could be at odds with the cost
effectiveness in the strict sense, undermining the long-term survival and devel-
opment of the company. In this regard, in a nutshell, some basic characteristics of
these realities, which influence the value process are (Borgonovi 2000):
• Operating as a monopoly, which discourages the research for efficiency and
effectiveness;
• The non-profit management orientation;
• The impossibility of an objective measurement of the produced output, profit-
able prices being absent on the market;
• The bureaucracy;
• The finality oriented towards decisions that are not strictly economic-rational
but mostly social or unrelated to the institution.
1 Introduction 3

These features may orient their studies toward a subjective view of the eco-
nomic balance, rather than an objective approach that suits the world of private
enterprises best.
In fact, if the value creation means the ability to add wealth to the resources that
represent the production process input, then it seems obvious that we need a
surrogate measure of the output goods or services (i.e. revenues), provided to the
community. If such an item is normally represented by the market price, but then
there is no in the public context, not only with no competition, but with political
default tariffs instead, which do not usually cover the production costs, then the
calculation of the generated value is rather complex, as well as random. This calls
for other indicators or other concepts and devices to correctly represent the dif-
ference between the consumed resources (expressed by the costs though) and the
carried out ones, just like the efficiency and economy meanings (actually based on
input/output ratios) take on an entirely different sense.
As a result, the performances evaluation of public administration, instead of
measuring it, which, as mentioned, can hardly be objective, seems to focus on the
different public judgment whom it is addressed to, by analyzing the generated
utility for each of them and the degree of the achieved satisfaction. The mea-
surement, therefore, takes a wider, multi-dimensional perspective, as it must take
into account a variety of variables and parties: citizens, workers, the political or the
economic entities, the social parties, businesses, the local community in general,
but also the international one, and so on.
This vision, certainly not simple to manage or control, requiring the use of new
tools and more than objective proxy measures, seems to be consistent, since these
different categories of stakeholders are those who determine not only the exis-
tence, the survival and the very ‘‘raison d’être’’ of public institutions, but also, as
main recipients, the managing decisions.
This logic is found today, mostly, as a result of the processes of legislative
innovation, occurred in the recent decades, particularly marked by devolutionary
federalism and by autonomy, which has approached the government to the com-
munity of reference citizens. Therefore, companies that manage local public ser-
vices mostly assume a new role, because the quality of life is increasingly assessed
and measured as a function of the quality of services, provided by the public
administration. These are the companies, actually closer to citizens, offering them
a range of ongoing, daily and essential services, for their own welfare and for the
development of professional and economic activities.
No wonder then if, quite often, the judgment that citizens are called to express
periodically on the quality of an administration and a mayor’s government, is
mainly influenced by the performances of the local public utilities. Just think that,
nowadays, as a result of the new possibilities offered by the law, local authorities
administrations have effectively outsourced most of their services or activities,
streamlining the financial statements in order to improve and make the manage-
ment in outsourcing less expensive, so, the assessments of the local communities
are turning more and more towards the latter, having no other concrete results.
4 1 Introduction

In this sense, the management of public service companies gets right to the
border between the mainly ‘‘social’’ or institutional guidelines, which emanate
from the public entity, by virtue of the service assignment grant, and the economic
goals of a company, even though managed as a corporation, with all that entails in
terms of the economic balance achievement methods.
To that end, it is stressed that, among the most important innovations of these
companies’ management, there’s the introduction of managerial logic, responsi-
bility levels, decision-making forecasting and performances measurement tools, no
longer based on financial accounting.
These points represent a possible debate landing, that has started in our country
at the beginning of the last century, as a result of an increased demand for public
utilities. The most important steps, very briefly, are primarily represented by the
municipal companies setup, previously a state operational tool, and then a local
authorities’ tool to provide services and then, before the present day, by the
phenomenon of state investments.
Following the crisis of the welfare state and the atavistic lack of resources,
there’s a start of a profound rethinking process about the state’s role in the
economy, towards an evolution to regulator from a direct interventionist. In
essence, there’s a possibility for third parties, not necessarily public, to perform the
same services under conditions of greater economy than the limits that were
beginning to appear in the subsidiaries system. What really matters, therefore, is
how to satisfy, in the best way possible and with the present constraints, the
citizen/user and a customer now, beyond the legal form entailed by this necessity.
Therefore, some reasons, including the need to establish more relationships
with private companies, the search for new ways of financing and management of
municipal companies, the inability to repay continuous operating deficits and the
need to benefit from autonomy forms, as recognition of legal personality and
heritage, combined with the Community framework changing even faster, have led
the government to search for new forms and tools, keeping up with current sce-
narios, capable of delivering better quality services to citizens.
Innovation does not, therefore, only refer to management methods of service
delivery, but also to the guidelines where an assignee company should be oriented
to today. In fact, the first step is represented by the autonomy that the legal public
service companies must have from the local authority; a second point is repre-
sented by the consequent separation of policy responsibilities (pertaining to the
volitional organ) from those associated with the service production (pertaining to
the company); and a third, by the mandatory introduction of public competition
procedures for the selection of a shareholder, a partner or a ‘‘best’’ manager to
entrust, pro tempore, the management of the service.
The basic orientation towards a sector reorganization, guided by corporate
performances, quality and tariffs reduction, appears to be twofold: competition and
regulation.
The competition, which recalls the notions of entrepreneurship and managerial
skills, such as requirements to achieve efficiency and effectiveness, can be
understood in the market and for the market. In the first case, according to
1 Introduction 5

economic theory, the contestability of a market (typical so-called natural

monopolies problem) is a function of three variables: the absence of entry barriers
(of technological nature) and exit barriers (sunk costs), and the price taker con-
dition. In the second case, however, the problem is more precisely the mechanisms
of temporary services assignment to a monopoly, in cases where the presence of
only one company on the market becomes more efficient in the economic sense. In
this case, the possible methods of efficiency get to be: the presence of public
companies in the assets management with sunk costs and of private ones in the
service management, the setting of quality standards in the competition contracts.
The regulation refers instead, in business economy, to the concept of trans-
parency or accountability, which has, in this case, on the one hand, the role of the
economic entity (the controller), on the other, the political, institutional and eco-
nomic objectives and purposes of the public service companies (the controlled).
However, as already noticed, the process is not only slow but more complex
than ever, witnessing the way how every public administration change meets a lot
of resistance.
Recently, in fact, as a result of the legislation introducing the in-house
entrusting, in order to ‘‘avoid’’ the competitions, whose outcome appeared, on the
one hand, uncertain for those who gave the service, potentially failing to keep a
prior knowledge and so, somehow, the reliability of the traditional operator; on the
other, dangerous for the manager himself, that may have invested in specific assets
unlikely to be recovered, there’s basically a step back, as it allows the direct
assignment of the service, provided that public bodies and public capital holders
exercise a control over the company, similar to the one exercised over its own
departments and that the company carries out the essential part of its own activities
with the entity that controls it.
The briefly outlined framework highlights a more strengthened role of the local
authority, which foresees to evolve from a producer to a controller, a manager until
becoming an owner or a shareholder, not surprisingly the idea of a group or a local
holding is taking shape.
If these choices are likely to reconfigure the well-known bureaucracy patho-
logical phenomena, intrusiveness of the political sphere, improper charges, etc.,
then the issue is clearly about the delicate balance between two well-known and
peculiar combinations that preside, the first, over the functioning of these insti-
tutions, over autonomy and responsibility, and the second, over governance and
control, over value creation methods.
If, as in this case, the object of the survey are the water management services,
we can understand that, given the particular weight (political, economic, ideo-
logical, etc.) of this mentioned resource, the discussion becomes even more del-
icate and complex.
The Community legislation emphasizes the character of the water resource
collective heritage, arguing that ‘‘water is not a commercial product like any other
but, rather, a heritage which must be protected, defended and treated as such.’’
Following the character of collective patrimony, there is, on the one hand, the need
to preserve the resource, on the other hand, the need for supplies and access to
6 1 Introduction

water resource. So, it is necessary to ensure appropriate forms of water resource

protection and ensure its appropriate management. At this point, however, we
cannot help but notice how the debate on the need for proper water patrimony
conservation, does not seem to suggest any shared directions on how to manage it.
In this context, we want to focus on this last point. At the European level,
there’s a lack of specific guidance on water management, it is up to the Legislator
of the individual Member States to determine the forms of extraction, processing
and water production, as well as the identification of the financing methods of the
whole management. This has given rise to a fragmented picture, with no certain,
common and shared indications.
Historically, public and local management has been preferred to competition
between many and different private operators. The reason lies in the ‘‘state property’’
nature of the resource, which becomes an exclusive property of the State, unalien-
able. However, the local self-sufficiency in water management has risen, over the
years, various problems of information asymmetry among the territorial apparatus,
the central one and the audience, creating difficulties in gathering reliable and shared
data on the management, on which we could place a broader debate to identify the
problems and possible improvement solutions. In addition to the above, there are
some large investments: water facilities are complex works, requiring an ongoing
and expensive maintenance. However, in Italy, the investments remain low and the
infrastructural inefficiency very high, with a consequently high water drop-out rate,
especially in the south of the country.
All these reasons have led the national Legislature to open the water management
to a managerially oriented vision, which includes private capital and corporate
know-how, with the obvious aim to push the system to greater efficiency, making it
competitive again. The regulatory framework seems to have attained a certain degree
of maturity after the enactment of the Art. 23bis of the Decree-Law No. 112/2008 and
subsequent amendments made by the Art.15 of the Decree-Law No. 135. The
aforementioned reform was destined to have a major impact on the sector organi-
zational and managerial assets, both with reference to the characteristics of the
integrated water service providers and to the audience of shareholders.
Basically, the law made operating managers to yield, by a certain date and by
public competition, a majority-share of their capital to privates. That way only, the
latter could have continued to provide the service until the end of the contract.
Intentions, however, were not followed in practice, since the referendum councils
of June 2011 have in fact crystallized the current situation, deciding to abrogate the
Art. 23bis and making unlikely any sector development.
Starting from these premises, the aim of this work is to analyze and think about
water management as a whole, trying to investigate the possible link between
water Companies performance and adopted governance models.
For this purpose, in the first part, the analysis of the management dynamics,
intended as ‘‘in a strict sense’’, was accompanied by the study of the regulatory,
contractual, control and tariff profiles of the water sector, which are important in
understanding the problems inherent in such a management. After a brief theo-
retical focus on privatization and corporate performances debate, the chapter
1 Introduction 7

concludes with a comparative study among the water Companies performances

that operate in the European context (France, Spain, Germany) and those obtained
by the Italian managers. The comparison can allow us to verify the existence of a
best practice and, where applicable, to grasp the usable or at least helpful pecu-
liarities for Italy, to understand the possible dynamics of the whole water
management.
The second part, however, aims to verify the validity of the traditional eco-
nomic corporate structure–behavior–performance paradigm, with reference to
water services companies, through an analysis of the relationship between gov-
ernance models and business performances. To do this, after a brief regulatory
excursus (overview) of the sector and a small literature studies review that focused
on the possible relationship between performance and governance models for
integrated water services companies, a survey has been made on a sample of 39
Italian water operators. The survey, focused on verifying the existence of differ-
ences in performances among water companies which are characterized by a
different governance model, tackles a topic, hardly explored by the existing lit-
erature. The results of the study seem to exclude the presence of a significant
relationship between corporate performances and governance models; on the other
hand, they allow us to affirm that medium to large sized operators are the most
performing, adding a further cue to the debate to come.

Reference

Borgonovi, E. (2000). Principi e sistemi per le amministrazioni pubbliche, seconda ed. Egea.
Chapter 2
Model for Water Governance: Variables
and Performance

2.1 Introduction

In Italy, after two decades of reforms in local public services, the process and its
related political, cultural and economic debate is still ongoing apparently without a
specific strategic aim. It looks like in fact it has a not linear route whose direction
changes on contingencies demand, contrasting with the relevance that local public
utilities firms assumed over the last years in our economy and with the influence
they have on quality life of population.
At the same time, we assist at an almost exclusively ideological and ‘‘mass-
media’’ debate that passing only through legal paths it lacks of focusing on
managerial and economic problems, though these are concrete and still unsolved.
Among these, in example, there is the scarce attention to financial and eco-
nomic performances or to economic equilibrium, against an intense concern to
selection procedures (public competitive bidding, in house, etc.) or to the own-
ership (public, private or mixed) of the providers.
If, in fact, a first guideline of this process seemed to suggest, almost clearly, the
market direction, nowadays, with the present serious financial and economic crisis,
all around the world there are many cases that show a return to the State. Many of
these found their reason in the poor or negative performances related to privati-
zation and in low levels of market competition.
Among the public services, that present many differences—both at geographical
level (north and south of Italy) and sector-based level (telecommunication, energy
and gas on one side and water, waste and transports on the other side)—the
management of water governance seems to suffer of many limitations and problems.
The water sector in Italy, in fact, considering the obvious public attention that
this vital resource attracts and the recent norm aimed at accelerating its privati-
zation (DL 135/09), is involved in a negative process that, from one hand, has to
conciliate economic and social interests and, on the other hand, it is characterized
by scarce investments, obsolete infrastructures and the lowest rate of Europe. This
jeopardizes the economy of local governments and their mission, that is the public
interests and values protection.

S. Pozzoli et al., Governance and Performance of Water Utility Firms, 9

SpringerBriefs in Water Science and Technology, DOI: 10.1007/978-3-319-02645-9_2,
 The Author(s) 2014
10 2 Model for Water Governance: Variables and Performance

Starting from these considerations, we used a mixed methodological approach,

deductive-inductive—typical of business management disciplines—to analyze the
variables that can characterize and influence the ‘‘privatization’’ and contracting
process in the water sector, trying to understand their relation with the perfor-
mances of the private providers and the local government contractor.
About this, Italian and international literature, with the support of transaction
cost economy and Public Choice Theory, since long time have evidenced the
limitations of New Public Management, too much focused on an acritical intro-
duction of private instruments and logics in the public sector.
The water management, more than other services, fits better a relational based
theoretical framework, that takes into consideration apart from the traditional
‘‘efficiency’’ and ‘‘cost effectiveness’’ variables, also equity, democratic partici-
pation and value interest as Public Interest Theory or New Public Service do.
After the analysis of previous literature considerations, we analyze, through the
case study methodology, the different experiences operating in the international
scenario (France, Spain, Germany) operating a performances comparison, in order
to verify existence of best practices and their adaptability to our model well
described.

2.2 The Literature Debate on Privatization

The privatization of public services in the last decades turned into one of the main
arguments of public management studies spreading among public administration
as an instrument for reducing the costs of goods and services traditionally pro-
duced by local governments (Barlow and Röber 1996; Savas 2000; Ferris and
Graddy 1991). At the same time the debate can not be considered successfully
complete, and the term is still not intended at the same manner (Mele 2003).
Although sometimes privatization produces an efficiency increase, it is necessary
to consider that outsourcing not always generates an increase of important
managerial and social effectiveness. The frequent lack of cost reduction, the scarce
quality of services provided, monitoring difficulties and the scarce attention to social
accountability in fact determined the failure of several privatization initiatives.
In short, literature reveals the existence of conflicting results on the efficiency
and effectiveness of contracting out processes in public companies (Boyne 1998b).
Proponents argue that outsourcing is a way to reduce the cost of services
through the higher levels of efficiency related to competition and the economies of
scale (Osborne and Gaebler 1992; Savas 1987). Critics sustain instead that out-
sourcing tends to sacrifice public interest and values (Boyne 1998a; Lavery 1999,
Kakabadse and Kakabadse 2001).
The issue has been addressed over time from multiple perspectives, such as
public choice theory, New Public Management (NPM), transaction costs, the New
Public Service and so on; any of these highlights different aspects and limits of a
phenomenon that still today drew the attention of mass media.
2.2 The Literature Debate on Privatization 11

If on one hand, in fact, the public choice theory sustain that market is a better
mechanism for services delivery because of the efficiency generated by competi-
tion, on the other hand, transaction theory proponents warn the public managers
into contracting out services without a previous accurate analysis and evaluation of
costs associated with outsourcing processes.
The NPM scholars argue that contracting out the public services to private firms
can reduce public sector costs and improve public performance through incentives
and penalties mechanisms to increase the quality of public services thanks to the
higher level of expertise of private sector (Dunleavy and Hood 1994; Hood 1991;
Kettl 1993, Osborne and Gaebler 1992; Savas 1987). On the contrary, Denhardt
and Denhardt (2003) conduce a critical analysis of NPM constructs and define a
long list of values and variables omitted from the famous paradigma and included
in their New Public Service theory.
Regarding economic efficiency, in detail, the proponents are sure that whatever
the government does, the individual may do better. According to this perspective,
economic efficiency can be achieved through free markets and individualism
(laissez-faire) considered as the best solution for public services delivery.
But, higher levels of economic efficiency result, according to some scholars,
from the lower labour costs associated with the private sector than the public
sector, whose employees are over-paid and gain higher benefits. The private sector
also has the flexibility to hire and fire workers.
As for the quality of public services, privatization proponents believe that since
the private operators may not see their contracts renewal they are encouraged to
provide services with high standards efficiently. This is not true for public
monopolies. In a competitive market, if a services provider does not satisfy con-
sumers they may turn to other operators.
Proponents of privatization argue that a moderate and selective use of priv-
atization mechanisms can help the government to be more efficient, passing its
function from direct producer of public services to regulator of a network of
contracts (Osborne 1993, p. 107). If the quality of service can be easily measured
and evaluated, privatization might be appropriate, but when the quality measure-
ment is based on subjective criteria, the cost savings are difficult to quantify and
the government should be more cautious in privatizing.
Skeptics, meanwhile, find that when you evaluate the effectiveness of a priv-
atization process, economic efficiency should be considered along with other
‘‘public values’’ (Donahue 1989, p. 1).
Privatization opponents believes that workers wage, safety and benefits
reductions should be included in privatization costs assessment. These ‘‘benefits
reductions’’ appear to damage more women and minorities that have been
employed in public sector. So even if privatization can reduce the direct costs
related to services, indirect costs are often greater than possible savings (Storrs and
Villarreal 2001).
Privatizing a public service implies also a public competitive bidding, a
selection procedure, the negotiation of contracts and monitoring of performances,
12 2 Model for Water Governance: Variables and Performance

which involve high costs. These costs are often not included in the make or buy
analyses, or at least are underestimated.
Regarding social equity, private companies did not provide services in low
populated or low income areas, because it is not profitable. This means that
privatization sometimes can entail the exclusion of some citizens from ‘‘public
services’’ or the elimination of some services if these cannot be conveniently
provided.
Studies conducted over the past decade (Ballard and Warner 2000; Ballard et al.
2003; Hefetz and Warner 2004) show how some of the hypotheses underlying
privatization processes brought to its failure, forcing local authorities to ‘‘contract
back in’’ the services that have been previously contracted out.
Ballard and Warner (2000, p. 1) argues that contracting out is easier than
improving internal management in order to increase internal productivity and to
reduce costs. Furthermore, some authors retain that contracting out a public ser-
vices requires a great attention in order to preserve public interest.
An excessive use of contracting out tool to provide public services may figure
out a condition that literature defined with the term of ‘‘hollow state’’; in this case
the role of the State is reduced to an ‘‘empty’’ structure, where all government
functions have been outsourced in practice, and the only function that remains is
the management of a multitude of contracts, with the risk of losing the control
(Hodge 2000, p. 241).
In the extreme, the government may become a simple extension of the private
sector, with all possible negative implications on public interest. This means also
that government may lose its know-how and core competences, becoming nothing
more a controller and regulator of contracts, and eventually unable to play also
these role effectively.
In summary, although the literature is full of contributions of privatization
sustainers, the empirical studies show contrasting results in terms of cost savings
and/or service quality improving. Instead of the traditional dichotomy pros and
cons, we focused our attention on the different steps that characterize the priv-
atization process and on the identification of governance variables and external
conditions that may ensure better performances.
The study conducted brought us to distinguish three main steps within priv-
atization process:
• ‘‘make or buy’’ analysis;
• the vendors and providers selection process;
• monitoring of contracts and measuring of performances.
Regarding water service, as well as other public utilities (like waste collection,
local transports), Italian local authorities are ‘‘heartly encouraged’’ by legislator to
contract out this service to external providers, in order to theoretically reduce costs
and increase the quality of that service. This induce, as often happens, to under-
estimate some typical costs of this step.
The decision to privatize usually involves a trade-off between the costs and
advantages related to the two alternatives, but this analysis almost always does not
2.2 The Literature Debate on Privatization 13

include the transaction costs related to the ‘‘buy’’ alternative, that according some
studies these can rise until to amount at a quarter of the total cost of contracting out.
Since cost reduction is considered by many authors as the main reason why
governments should contract out public services delivery to private sector, these
mistakes or difficulties involved the failure of many privatization processes in
USA (Hefetz and Warner 2004) and in some European Countries (UK, France,
Holland, etc.)
Some studies on transaction costs argue that the decision to contract out should
be influenced by: the nature of the service, the market structure, the public man-
agement experience in this process and trust relationship with the external provider
(Brown and Potoski 2003, 2005).
In addition to efficiency reasons, however, the local authority should also take
into account ethics and equity value (Stein 1990). After the government decided to
contract out the service, public management have to select the provider.
Regarding the procedure of selection, in Italy the alternatives are two:
• the public competitive bidding with a ‘‘double object’’, the service and the
private provider, whose presence in public sector is encouraged by legislator
(he recently issue a new law (L. 135/09) that define some deadline by which the
local government have reduce their participation in water sector management
and increase the private participation;
• the in-house alternatives that allows to firms avoid the public competitive
bidding procedure for the selection, but it should be considered as a rare
exception to which recur.
The lack of competition in the water sector, however, requires special attention
to the selection process in order to avoid a private monopoly (Donahue 1989;
Kettl 1993).
The lack of competition among providers exposes the government to fraud,
abuse and poor performance, because bodies do not have sufficient monitoring
tools to monitor compliance with contractual terms. The contracting out of a public
service, either through public competitive bidding or in-house procedure requires
the definition of a contract that include defines the roles and obligations of the two
subjects involved.
The contract is one of the main tool through which Local Government play its
role of regulator of public services outsources. The successive monitoring of its
clauses observation is essential for privatization initiative success (Kettl 1993,
Praeger 1994).
‘‘Well monitored vendors are more likely to perform according to contract
specifications, thereby improving returns from contracting. Whereas legal, insti-
tutional, and service-market constraints can increase transaction costs’’ (Brown
and Potoski 2004).
Previous studies show that governments monitor services more when they
contract out, but to be effective the control tools have to be contractually defined
(Swindell and Kelly 2000). Poor detailed contracts in fact is one of the main causes
of failure (Domberger 1998).
14 2 Model for Water Governance: Variables and Performance

The typically tools for monitoring performance base on cost and service quality,
and in general, on contractual terms verification. To define performance indicators
that measure qualitative aspects of a service is difficult (Brown and Potoski 2005,
p. 343).

2.3 A Managerial Focus

A change of perspective, from the several attempts to measure and evaluate

privatization results to a critical observation of its dynamics, may emphasize the
role of research and its methodological approaches, that differ from the simple
ideological debate on public vs private dichotomy.
Both norms and some theoretical and empirical researches that focused on the
nature of provider ownership (public or private) or selection procedure (compet-
itive bidding vs. in-house) in fact showed disappointing results if compared to
expectations, so it could become useful to focus on other variable that can
effectively influence positively the performance of water services companies.
The past reforms that involved Italian public sector were aimed at increase the
autonomy and cost effectiveness of firms, but they lack into define the way:
• autonomy was not associated with a clear responsibility, bringing to myopia,
sub-optimization, corporatism and deregulation;
• a misconception of sociality precluded the costs effectiveness aim, by excluding
the price lever;
• the absence of effective models of planning and control nor adequate support
tools.
In Italy the ‘‘coercive approach’’ to privatization, focused almost exclusively on
the theoretical debate public vs private and sector procedure competitive bidding
vs in-house, did not helped public sector to achieve economic equilibrium
condition.
Other obstacles have been the lack of a cultural change in human resources
working in a labour intensive industry such as water sector and Italian familiar
capitalism, unable to be competitive in highly concentrated industries like utilities
(Pozzoli 2005).
Other variables that have to be considered are:
• separation, or unbundling, between production and distribution infrastructure;
• the lack of definition or application of catchment areas minimal dimension to
contract out, so that economies of scale and density may be favoured;
• the formulation of service contracts based on incentive systems and quality
oriented;
• a clear definition of strategic or political guidelines on services management
(Dezi et al. 2005, p. 33);
• the existence of independent control authority.
2.3 A Managerial Focus 15

Returning to methodological aspects, we retain that rather than insisting upon a

system of rules, usually not applied, that has been demonstrated to be contradictory
or at least only contingent, we can focus more attention on what can ensure higher
levels of performances.
This involves the necessary definition of a governance model.
This means, traditionally, a set of rules and mechanisms, that can balance
different stakeholders interests and expectations, that may potentially be in
conflict.
This model is based on several pillars that can then further be declined in
variables, measures and indicators, as discussed below.
The variables that define the governance model are:
• the ownership structure;
• the characteristics of the service contract;
• the pricing conditions;
• the controls system.
Compared to the first point, according to ‘‘efficiency’’ theories, the most
effective property system is that guarantees lower costs to the companies. In
essence, the ideal owners of public services companies shares are citizens and
consumers, because they have a great incentive to monitor the services delivered
by government or other providers (Hansmann 1988).
For this reason the ideal ownership structure seems to be the public company or
cooperative, that are more rational and less imperfect forms of allocation of
property for the management of public goods.
So we believe that ownership structure, should be considered as another
important variable among the other, like Authorities of regulation or separation
between regulation and management functions, to be defined in privatization
processes.
We hypothesize that the enlargement of ownership structure could reduce
inefficiencies and political influence, achieving higher levels of accountability,
cost effectiveness and sociality.
Another hypothesis is that, as already asserted by literature (Padovani 2004),
performance contracting, rather than regulatory contracting, is able to conciliate
effectiveness and efficiency.
In water sector, generally characterized by long term concession to allow
investments return, it could be interesting the introduction of ‘‘cost standards’’
with the subsidy caps definition.
Finally, another variable that should be considered is the governance model
definition is the nature of the provider and its purposes. Some studies show, in fact,
that non-profit organizations are particularly suitable in contexts where the eco-
nomic equilibrium cannot be reached by firms without public funding. This depend
from the sharing of similar values and interests that avoid opportunistic and
conflicting behaviors. In high competitive markets and for essential services
contracting out to private firms may represent a better solution.
16 2 Model for Water Governance: Variables and Performance

Regarding fee policies, some studies (Ponti 2003; Ramella 2004) show that
financing public services through general taxation is less efficient than full
recovery cost tecnique, especially in a country like Italy with high fiscal evasion.
Apart from the resources allocation inefficiency, there is a high risk of creating
distortions and penalize, paradoxically, the weakest and low income population,
reducing the social equity.
We retain that the full recovery of costs through market price, as already works
in other countries (the USA, for example), could present a range of opportunities:
• an improvement of the economic and financial performance of utility companies
by increasing direct revenue and reducing costs;
• a more conscious use of the services provided and more realistic value attri-
bution though the assessment of the well known ‘‘paradigm’’ cost-price-value
(Bruni 1999);
• higher responsibility of public services companies managers that cannot blame
the state for the scarcity of resources transferred.
Also if full recovery cost pricing for public services may find some obstructions
in its concrete application its relevance should not be underestimated.
Thus, the lack of market and profit orientation of public authorities and the
social relevance of public services cannot justify the low value created or the lack
of cost effectiveness (Borgonovi 2001).
The last but not least of variables to be considered is the control system, that
have to overpass the old bureaucratic vision to move towards a managerial control,
that includes also social (Farneti 1995, p. 209) and relational forms of control, able
to improve performances.
A bottom up control, with a clear definition, communication and sharing of
political priorities, and reporting systems associated with rewards and sanctioning
systems may increase performances. The control of processes rather than exclu-
sively of outcome may be useful especially for services whose output or outcome
is difficult to be measured (Landriani and D’Amore 2009).
The definition of these four variables and of performance measures and indi-
cators may figure out a governance model that, according to the direction towards
the system moves, can pursue sociality rather than cost effectiveness and vice-
versa. In this model equity is considered as a logical extension or as a synthesis of
two visions that are traditionally opposed in the practice sociality and cost
effectiveness. See Fig. (2.1).

2.4 Performance and Governance Models of Companies

in the Integrated Water System

The theme of the evaluation of performance water services companies attracted

particular attention in the last months, especially after the recent norms that push
towards privatization. In this context and for our research purposes, performance
2.4 Performance and Governance Models of Companies 17

Performance
ownership Indicators
Measures

Cost
effectiveness
regulation area
price
Sociality area

Performance
Indicators Performance
Measures Equity area Indicators
Measures

Performance
Philoshopy of
control Indicators
Measures

Fig. 2.1 The governance system model

control and measurement becomes crucial, apart from as a guide for management
and external reporting, in order to verify the ‘‘goodness’’ of governance models
designed by the legislature and adopted by local authorities.
Performance measurement of public sector companies has always been a cru-
cial topic. The evaluation of the PA concerned, in fact, not only the achievement of
some public purposes that are intangible and difficult to measure, with the mini-
mum expenditure of resources, but also the way through which these objectives are
pursued.
The analysis of this particular control requires as first the identification of the
main actors that have to be involved in the water sector governance model as
defined by law. In general, local governments play regulation and purchasing
functions and private, mixed (public and private) or totally public companies
provide water services to population.
Discussing about control and performance in public sector, we refer to the
process by which we measure the efficiency and effectiveness, as well as equity,
use of resources and goals achievement, aimed at pursuing a ‘‘broader economic
equilibrium’’ (defined as the satisfaction of all stakeholders interest) that business
management literature considers as an essential prerequisite of all public actions.
The trend towards liberalization of water sector and the private participation to
public services provision, favorably seen by communitarian and Italian legislator,
make the activity of control and measurement of performances increasingly
important, especially in order to prevent that stakeholders interests may be over
passed by profit pursuing by private providers or by public expenditure reduction.
Since water is a collective interest service, in other words, the priorities of effi-
ciency and cost effectiveness imposed by public debt reduction programs have to
18 2 Model for Water Governance: Variables and Performance

be reconciled with effectiveness and equity values. The progressive process

towards privatization in fact may threat or reduce the social control played by
political elections through which citizens express their preferences and reduce the
direct control of local governments on processes involved in public services
provision and delivery. This makes the monitoring and measurement of output and
outcome even more important.
The purpose of this work, maybe ambitious, of trying to relate governance
models with performances achieved, requires us a clear definition of the different
dimensions of public performances (efficiency, effectiveness, cost effectiveness
and economic equilibrium). An ideal model of governance, in fact, is characterized
by the possibility of service provider to satisfactory all dimensions considered,
balancing different stakeholders interests.
An evaluation of efficiency dimension of water services companies and of the
governance model adopted implies first of all an analysis of resources used for
service delivery. For this purpose, it is possible to define and use indicators of
technical efficiency, allocative efficiency and productivity. With regard to this
dimension, a right evaluation may include the measurement of output per unit cost
(e.g. m3 of water supplied), labor productivity and distribution system productivity
indexes (e.g. relationship between m3 of water invoiced and the number of
employees, or between m3 of water invoiced and the length of infrastructures). It is
also possible to calculate the turnover per employee or per km of network, moving
from what is expressed in terms of m3 to monetary values. Another indicator often
considered to evaluate performance is the difference between the water supplied
and the water invoiced (Source: Civicum 2009). The gap between the two values
may be due to the losses due to hydraulic infrastructure breakage or ‘‘apparent’’
losses due to theft, unauthorized withdrawals or failure of the counters.
Effectiveness, instead, can be considered as the ability to achieve objectives
satisfying community needs. It can be internal and external. If you refer to the
internal management processes, you need to consider the objectives as defined
inside the contracts or agreements and compare the results obtained to them. If we
refer instead to the external effectiveness the main object of the evaluation
becomes the effect that public services have on users and community. Of course,
this second type of effectiveness is less easy to control for the difficulty of mea-
suring outcomes and the lack of a direct close correlation between services pro-
vided and user satisfaction and community welfare. To over pass partially this
difficulty, the public management literature (Hatry 2001; Poister 2003) suggests
the construction of specific proxy. Examples of indicators used for this purpose
could be the weighted average maturity and the number of expected and unex-
pected interruptions in water service delivery, the maximum time of activation, the
average waiting time for call centers, average response time to written complaints.
Indirectly, these measures would express a measure on user satisfaction, acces-
sibility to services, continuity, transparency and fairness in establishing and
managing the contractual relationship.
With the regard to cost effectiveness, the evaluation of the governance model
should focus on the ability of local administration to cover production costs (fixed
2.4 Performance and Governance Models of Companies 19

and variable) with revenues obtained by service selling, creating the conditions for
a sustainable economic equilibrium. The cost effectiveness is a necessary condi-
tion for all institutions, either they pursue public or private interests.
For cost effectiveness assessment, it is essential, therefore, the fee or price
established for the public service: higher is the percentage of cost paid by user, as
it is for market services, greater is the level of profitability achieved. A measure of
cost effectiveness water services companies may be the percentage of costs cov-
ered by the fee per m. One of the objectives of Italian legislator is to increase the
level of participation of users to water services cost, establishing a full cost
recovery policies.
Regarding the economic equilibrium, as stated above, it should be considered in
a broad sense, i.e. as the ability to meet all stakeholders demands, rather than the
ability to generate and make profits. In the governance model described (including
the local authority and provider company), in fact, the comparison between costs
and revenues is not so relevant, but it is still important for assess economic
equilibrium reached. There is, therefore, the need to use qualitative measures for
assessing the economic equilibrium and the creation of value.
This concept of economic equilibrium allows to over pass the typical trade-off
between social equity and economic efficiency which oversees the public choices.
In these terms equity in water sector results in the capacity to generate a network
of high quality services throughout the country, reducing the ‘‘socio-economic
disadvantage’’ in society, activating the recovery and promotion of the disad-
vantaged classes, thereby improving the conditions of equality, democratic secu-
rity and protection of stakeholders. This approach clarifies the role of social
relations in the economic equilibrium, clearing it reference to the method of
redistribution of the value created by public institutions. It should be noted
however, that in all situations, not indeed rare in the PA Italian reality, where a
short-sighted approach to prevent independent coverage of social costs determined
negative consequences for the economic equilibrium. Under these conditions it
becomes difficult to ensure efficient and effective services, and the social purpose
risk to damage financial and economic equilibrium and autonomy of providers.
These considerations reveal the necessity of a governance model whose orientation
to sociality do not prevent from economic equilibrium achievement.

2.5 A Comparative Analysis Among Different Countries

For the analysis of the governance variable exposed above, we examined four case
studies (Italy, Spain, France, Germany) emphasizing the ownership structure and
the pricing strategy (full cost recovery vs. partial recovery) (Table 2.1).
Instead of the traditional dichotomy public versus private we consider the
concentration degree of ownership. He associate to multiple shared ownership (as
public companies, multi-utilities, joint ventures) the attraction and satisfaction of
20 2 Model for Water Governance: Variables and Performance

Table 2.1 Comparison of average expense per family in 2007 per 200 m3 per year
Comparison of average expense per family in 2007 per 200 m3 per year
Country Main local Provider Population Annual average Average unitary
government served expense(€) cost (€/m3)
supplied
Germany Berlin Berliner 3,469,000 968.37 4.82
Wasserbetriebe
France Paris Veolia water— 4,155,585 733.66 3.43
SEDIF
Spain Barcelona Sociedad 2,828,235 339.31 1.95
general
De Aguas
de Barcelona
S.A
Italy Milan Metropolitana 1,336,899 110.66 0.55
Milanese s.p.a.
Source Bluebook 2009

several interests and to highly concentrated capital (both public or private) the
influence of to address a single objective.
For the price variable, we identify a continuum to which extremes we find two
categories: social or political price, that is mainly oriented to the containment of
direct costs paid by users rather than from the collectivity through general taxation
and full cost recovery price (Cavalieri 2005), able to cover the costs and eventually
to generate profits, preserving autonomy and economic equilibrium.
In our country, after 16 years since the issue of ‘‘Galli Law’’, through which
started the initial process of modernization and reorganization of the water sector,
many problems are still unsolved.
The institutional reorganization of local authorities in ATO (Optimal Territorial
Area), that it was a crucial point of the reform for the scale economies related, did
not take place in most of underdeveloped areas of our country. Given this situation,
legislator started to issue a series of new norms aimed at increase private partic-
ipation in this industry, but the path toward privatization is still long. The latest
norms issued is the D.L. 135/2009, according to which by the end of 2011
municipalities and provinces that manage water services directly have to contract
out through a public competitive bidding procedure. Instead, the mixed public–
private partnerships where the private party has operational functions have to be
contract out at the expiration date of the contract, and, finally, listed companies
have reduce the public ownership to the 40 % by 30 June 2013 and 30 % by
December 31, 2015.
In Spain, Law 7/1985, August De Bases de Regimen Local, reformed in 2003,
establishes that that the water supply, purification of water and sewer service go
under responsibility of municipalities within the time allowed the law of the State
and Regions in Spain. In particular, Article. 13 of the Act establishes three
principles:
2.5 A Comparative Analysis Among Different Countries 21

• management units, integrated management, fight against waste, devolution,

decentralization, coordination, effectiveness and user participation;
• respect for the unity of the river basin, hydraulic systems and the hydrological
cycle;
• compatibility of the public management of water with land-use, conservation
and environmental protection and the recovery of nature.
The delegation to the private sector is growing and there are examples Lyon-
naise des Eaux that is historically present in Barcelona since 1881 in association
with the local savings bank and the group of SGAB (Aguas de Barcelona), which
distributes water in Barcelona and other cities, as well as manage some highways
and refuse collection. The largest private group in this country, is the de Fomento y
Contratas construciones, FCCSA, a company operating in public service, which
specialized in the field of urban environmental services. Finally, Generale des
Eaux, the French with some English and American Water Company, have joined
forces with Spanish companies to gain the smaller market segments.
However, in Italy as in Spain there is a tendency for the public management of
water supplies. In particular, Fig. 2.2 shows a concentrated ownership, which
means that the expectation for in-house, 48 %, followed by private ownership
(40 %) and that fraction (11 %) only 1 % did not declare their form of ownership.
Unlike our country, concentrated ownership is much higher (more than 10 %
points), as well as the private, the opposite case, however, the fraction differs 9 %
points for Italy.
The Spanish model is characterized by the spread across the country systems of
resource management ‘‘wholesale’’, which consist of a complex and artificial system
designed to control runoff and transfer between river basins. The services focus on
urban water distribution, while the upstream stages of the supply chain are usually
administered on a regional or basin. As in Italy, in Spain the urban water services is
the responsibility of municipalities and when it fails to be totally self-contained
resorts to wholes le supply systems or, alternatively, other territorial entities of the
higher level (Autonomous Communities and hydrographic confederations).

Fig. 2.2 Water management

in spain source: national 90%
survey VIII AEAS, 2002 data 80%
70%
60%
50%
40%
30%
20%
10%
0%
concentraded fractional private
ownership ownership ownership
22 2 Model for Water Governance: Variables and Performance

Fig. 2.3 Water management

in germany source: 90%
estimaciones propias de agua 80%
industry (BDE) y ATV,
70%
Edicion: 2001
60%
50%
40%
30%
20%
10%
0%
concentraded fractioned private
ownership ownership ownership

The same approach of Spain, is also confirmed in Germany, where it notes that
adopted the traditional form of management is ‘‘direct public hall’’, and only since
the late 70s were admitted to alternative models, which provide involvement of the
private sector. Sewerage and sewage services are conceived as sovereign and non-
delegable responsibility by the public entity, which can secure the cooperation of
the private entity but remains fully accountable to higher authority, the power
utility hastraditionally been conceived as a commercial service in which the
monopoly of the municipality is exercised in fact.
The Fig. 2.3 shows a prevalence for concentrated ownership, with a percentage
well above 83 % of our country (34 %) and Spain (48 %), followed by fractional
ownership (9 %) and private (8 %).
In terms of water, the Federal Law of 1957 (Wasserhaushaltsgesetz-WHG)
major powers delegated to the Länder. These monitor the effectiveness of the
management of water services, which is managed by local communities. For
constitutional provisions, the German water service, found its place in the ‘‘citi-
zenship rights’’ (Daseinvorsorge). This concept has the practical effect of the
investing public entity responsible for ensuring this right, therefore, the trans-
parency of related information management is seen as a primary requirement.
Beyond the administration, the German services are characterized often enough
for a joint exploitation of various public services (electricity, gas, heating, etc.)
within the municipal company named ‘‘Stadtwerke’’. This form of group activity
exists mainly in big cities such as how to manage Eigengesellschaft, except for
Berlin, which maintains a mono-utility business model. Italy confirms the orien-
tation of Berlin even if the propensity to specialization model of service is not
confirmed uniformly throughout the country: the center-north, in fact, most
managers are multi-utility (e.g. A2A, Hera, iris, Acea), while the South is the
predominant form monoutility (Arin, Gori, Salerno Systems, Lucan Aqueduct,
Aqueduct Pugliese).
In France, finally, the expectation of the water service is characterized by the
dominance of the private public, in fact, private property represents about 75 % of
2.5 A Comparative Analysis Among Different Countries 23

the forms of management. There are also forms of concentrated ownership but
involving only a small minority of local authorities, essentially rural. The dele-
gation to the private not born of a strong liberal ideology but by the difficulty to
cope with large investments needed for modernization or restructuring of the
network. It obvious that the comparison shows a high prevalence of concentrated
ownership, except for France dominated the private.
Regarding the price, it is contractually defined by the municipalities in all four
countries examined.
In Italy, rates are composed of four items: mains, sewer fees, cleaning fees and
flat fees. They differ from region to region, in fact, for example, we find the highest
average tariffs Tuscany, followed by Apulia, Umbria, Emilia Romagna, Marche,
Basilicata, and finally from Sicily. Clear differences also exist within the same
region, such as in Sicily, Agrigento (most expensive city of Italy with € 445,00)
and Catania, where a detachment of well incurs € 258,00.
In Barcelona and Paris, however, the calculation of the tariff shall be considered
for a fee that affects all water withdrawals within the basin. For domestic purposes
the fee is calculated for each municipality, according to seasonal and permanent
population and the same is paid by the consumer to pay the water bill. For
industrial consumption, however, the rate charged per cubic meter of water taken
is 1.10 times higher.
In Berlin, there is no real price structure (fixed and variable), nor is it estab-
lished whether charging for water services in a unified way (a single fare for the
whole service) or to separate the different components of water supply, sewerage
and drainage. They are only determined on the basis of certain principles.
Moreover, if the operator is public, rates (Wassergebuhren) are controlled by the
respective administrative courts (Verwaltungsgericht) if it is private, however,
supervision of prices (Wasserpreise) have supervisory authority (Kartellbehorde).
The SMAT Torino, under a program of international cooperation between
operators of water services, notes the rates of waterworks, sewerage and sewage
from different countries. The latest survey developed to allow comparison with
expenditure compared with the cost of Italian life in major foreign cities in 2007
for a typical consumption of 200 m3/year.
That said, you may notice that Italy stands as the most ‘‘economical’’ in terms
of expenditure per pupil, and cost. The figure, however, must not mislead as such
political price can not cover the necessary investments for maintenance and
modernization of the networks.
Barcelona, however, apply a semi-remunerative price in the sense that can only
partially cover the financial needs (60 %). Instead, Paris applies a remunerative
price which includes a series of taxes and fees aimed at modernization of sewage
and sewerage. This price not only provides coverage of investment, but also
generates profits. In this system, however, there are no provisions of resources for
anti-pollution policies or against the urban sewage in times of rain.
And Berlin, like Paris, apply a remunerative price, which places it as the most
expensive among the cities examined (Fig. 2.4). Due to the high price is the
attitude of network losses involving continuous renewal of infrastructure, and this
24 2 Model for Water Governance: Variables and Performance

Fig. 2.4 Rates compared

(average cost unit) € 5.00
€ 4.50
€ 4.00
€ 3.50
€ 3.00
€ 2.50
€ 2.00
€ 1.50
€ 1.00
€ 0.50
€-
Germany France Spain Italy

is added an excessive technological equipment, which is often cited as an example

of inefficiency.
Coming, finally, control, left Italy to the regions and the municipalities the
responsibility of the same. In particular, there is the National Commission for
supervision of water resources (Co.N.Vi.Ri) who is entrusted with the role of
ensuring compliance with the principles of the law reform of water services, with
particular reference to efficiency, effectiveness and economy of service, regular
determination and regular adjustment of tariffs, and to protect the interests of users.
Other means of control is the Charter of service that sets the principles and criteria
for service delivery and is an addendum to the supply contracts. This tool ensures
the participation of citizens recognizing the right of access to information and
opinion on the work of the manager. In carrying out these tasks the A.T.O.
observes the principles of equality, impartiality, continuity, participation, effi-
ciency and effectiveness, clarity and understandability of the messages. The time
control is also explicitly specified in the Charter of the service where AATO to
verify the quality of service provided, the degree of customer satisfaction, and any
room for improvement, plays with the active involvement of its users periodic
checks on quality and efficiency of services provided.
Paris is not explicitly provided for a provision on the subject of control by the
operator of the field, rather, we see the introduction by the local government,
various financial penalties to which the subject is the fermier if it appears to be
defaulting in submission of annual reports or other information.
In Berlin, however, the regulatory framework for the water system is extremely
rugged due to high public authorities attributed the Laender. In addition, economic
instruments (taxes and levies on discharges), adopted in France, there are in this
country.
Finally, in Barcelona, the monitoring mechanism is guaranteed Catalan Water
Agency (ACA) and the Committee of prices. The first, which has expertise in
environmental manage the operations of non-municipal area and cares about the
allocation of financial resources, the Committee, however, the task of defining the
rates at its discretion.
2.5 A Comparative Analysis Among Different Countries 25

Paris was one of the first in the race for privatization in 1984 by Mayor Jacques
Chirac. The system was largely based on a contractual setting, the main com-
petitive element was represented not by the competition between companies, but
the threat of return to public management or change the type of relationship with
the private scheme.
The current trend is coming to Paris rimunicipalization services, or at least to
greater accountability by public entities.
One of the reasons that led to a rethinking of the existing management is the
systematic increase in prices is not accompanied by an improvement in services,
but by a long series of abuses, inflated prices, corruption and services obsolete.
Therefore, the current mayor has decided not to renew contracts for water distri-
bution and billing to Parisian French multinational Veolia and Suez expires on 31/
12/2009.
In Berlin, as in Germany, the water system is usually praised for the high levels
of performance and the high propensity to invest. In contrast, however, it is
scarcely efficient because of high operating costs due to a continuous renewal of
networks.
In Spain, formerly the EU, the water industry was in serious conditions of
backwardness, with performance levels rather inadequate management mostly
bureaucratic and technically unprepared, levels of cost recovery is perceived. To
date the system is in developmental stage and there is a degree of market con-
centration that allowed it to close, largely, the gap with other countries.
In several cases examined, even with all the limitations of such an analysis, then
do not show a frame of reference ‘‘optimal’’, but, again, the problems related to
different variables in the model of governance outlined: social tariff or price-
reward, information asymmetry between manager and client, direct public inter-
vention or delegated to the private role of monitoring, etc.

2.6 Issues

The objective of this work, as we tried to argue in these pages, was to provide
further discussion of ideas on how firms management of public services, partic-
ularly water services. Appear on two major issues:
• the transition from a vision based on outcomes expected from the privatization
process to a perspective based instead on the process of outsourcing and the
conditions (internal and external) in which it takes place in reality;
• construction of a governance model for the water sector, which exceeds the
conceptually sterile ideological public/private or contradictory regulations on
procedures for the award (race/in-house).
It is therefore to refocus attention on companies (Gilardoni and Antonioli 2008)
and performance measures developed by them, as a pre-condition for the balancing
26 2 Model for Water Governance: Variables and Performance

of potentially conflicting interests that traditionally concern the management of a

vital commodity as water.
It is believed that the complex and delicate balance between cost and equity,
between efficiency and effectiveness, including quality of service, waste reduction
and expansion of access to water, more properly relate directly to business plan
analysis, face the determination of a model of government-oriented economic
balance over time.
In this sense, should be considered some variables that typically characterize
these processes, as they have settled in the years in various local contexts. Some of
them are subjective limitations such as lack of skills or private nature of other
objects, such as regulatory constraints, no-liberalization, the weight of investment,
the rigidity of labor, etc.
We therefore believe that these characteristics arise as real input process out-
sourcing or privatization, determination cascade and affect the outcomes expected.
Therefore an overview of the case could contribute to reduced complexity in
action, returning attention to a single step at a time, place and contradictory
summaries of mainstream practice.
Moreover, this method would allow the construction, also shared a network of
indicators and performance measures, and quantitative, physical or monetary, ana-
lytical or proxy to represent an ideal setting in which to plan and monitor the rela-
tionship between local authority, a company managing the service and other players.
This ‘‘framework’’, probably more stable over time, although dynamic, com-
pared to the mood or legislative turnover in political management, would, more-
over, as for the detection and transfer of best practice management.
Finally, be a land of far more practical comparison between the territorial
authority and the political sphere, can potentially increase understanding of needs
and the ability to identify priorities, to define a clear mission, and to stimulate
greater participation therefore less effective.
All this does not resolve the delicate issues of balance between the various
stakeholders involved, especially in the absence of significant field testing, which
is the main limitation of this work, but then refers to future guidance from
empirical reality.
In this way, i.e. by increasing the knowledge inherent in the typical problems of
autonomy and corporate balance (Cavalieri 2010), it is considered that, especially
from a symbolic resource such as water, also Italy is to move closer to a better
understanding of the subject, as found in other countries surveyed and that, at the
same time, can decrease the risk of water for a few, as feared by the public.

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Chapter 3
The Impact of Governance Model
on Performance: The Case of the Italian
Firm of Integrated Water Service

3.1 Introduction

The aim of this chapter is to make a survey of Italian companies of integrated

water services, by analyzing the possible relationship between governance models
and business performances. The study, unlike the previous ones, is not only using
widely discussed in the existing literature variables for the estimation of the
performances, such as geographical location, the tariff level, but also other,
deemed relevant variables as the percentage of carried out investments compared
to those planned in the catchment area plans, total network losses and the average
response time to complaints.
The results of the case study seem to exclude the presence of a significant
relationship between corporate performance and governance models; on the other
hand, they allow to state that the better performing managers are the ones who
carry out almost all of the planned investments, fulfill a network loss below 20 %
and reply quickly to users’ complaints. Moreover, it was noticed that such per-
forming managers are medium to large-sized. In line with the economic and
business theories, this last conclusion allows us to focus on an aspect neglected by
the legislature for the management of such a service: the size.
For this purpose, in the following paragraph, it was considered appropriate to
conduct a regulatory overview with the intent to define the legislature’s guidelines
that got outlined over time, to analyze the current institutional setup and highlight
the problems still open. In paragraph 3, there will be made a review of empirical
studies, concerning the relationship between governance models and performances
in the water sector. In the fourth paragraph, the focus will shift on the determinants
of performance, proceeding to make a comparison among different studies in the
literature. On the basis of the theoretical premises, in paragraph 5, we will attempt
to locate an ‘‘ideal’’ management model for companies operating in the water
sector. The chapter ends with an empirical analysis, conducted on a sample of 39
mono service water operators, for a total coverage of about 15 million inhabitants
and a delivered water volume of more than 1.5 billion. The survey, focused on

S. Pozzoli et al., Governance and Performance of Water Utility Firms, 29

SpringerBriefs in Water Science and Technology, DOI: 10.1007/978-3-319-02645-9_3,
 The Author(s) 2014
30 3 The Impact of Governance Model on Performance

verifying the existence of differences in the performances among water companies,

characterized by a different level of a different form of management, addresses a
topic which has been poorly explored by the existing literature (Monteduro 2010).

3.2 Changes in Local Public Services: Regulatory excursus

(Overview)

Even though, along the regulatory evolution way, the legislature has never man-
aged to establish a steady legal architecture for local public services in the last
decade, the outlined legal framework seemed to have acquired connotations such
as to catch a glimpse of the achievement of a certain level of maturity, especially
after the enactment of the Art. 23bis of the Decree-Law n. 112/2008 and the
following amendments made by the Art. 15 of the Decree-Law n. 135. The pur-
pose of these measures was to push the sector towards privatization, with the hope
to increase, due to greater competition, transparency, local public services
industrialization, generally, on the one hand, and to reduce difficulties in financing
the investments,1 planned by the banking system, and operating deficits2 on the
other.
But the evolution and application path of the Decree-Law 112/2008, which at
first sight seemed to shoot immediately up, later gave birth to strong criticism
especially while mentioning the extreme rigidities, which the law posed a barrier
around the ordinary entrusting procedure of the local public services management
with, economically relevant: the public competition (invitation to competition). In
particular, in the water sector, the Law of September 25 2009, no. 135, ‘‘Urgent
measures for the international and Community obligations implementation and for
the execution of the Court of Justice of the European Communities judgments’’,
met a great resistance to privatization, due to the particular attention that public
opinion pays on the water resource. The aforementioned reform was bound to have
a major impact on the organization and management structure of the sector, both
with reference to the characteristics of the integrated water service providers, both
with regard to the shareholders audience.
The same, in fact, would redesign the system of credit lines, foreseeing an
expiration date of the service contracts, changing according to the type of credit

1
The banking system has estimated investments of € 64 billion in 30 years, about 2.2 billion a
year, concerning, for more than a half, sewer and water treatment systems. The Blue Book 2010
has highlighted that the authorities of the areas assigned to both in-house ones and mixed ones,
which have had to make strong corrections to the tariff components linked to the investments,
amounting to—50% for depreciation and—40 % for the remuneration of equity , for the first
ones, and—13.2% and 19.6 % for the mixed ones. In this respect see Blue Book (2010).
2
The tariff increase would allow to bridge the incurred costs, effectively reducing the operating
deficits and the general imposition.
3.2 Changes in Local Public Services: Regulatory excursus (Overview) 31

line.3 Therefore, starting from December 31 2011, the integrated water services
managers would have had to get to a juncture: choose to expire, without exception,
on the above date; or to assign, by public competition, a majority of their equity
(Pozzoli 1992) to private individuals and expire on the date set in the service
contract.
But the legislative good resolutions have soon been dispelled by the two ref-
erendums of 12–13 June 2011, which, on the one hand, led to the complete
abrogation of the Art. 23bis about the services of economic importance, on the
other hand, have abolished the Art. 154, c.1 of environmental T.U., which was
foreseeing the costs imputation at a fixed rate referring to ‘‘an adequate return on
invested capital’’4 equal to 7 %, to compensate the costs, required in the facilities
modernization (financial costs of the debt inclusive).
With the quorum achievement, the current managements have been safeguarded
until their expiry date. Therefore, the EU regulation, which replaces the
Fitto-Ronchi reform, enables for the future:
• in-house loans, to companies 100 % owned by the local authorities exclusively;
• loans to private individuals, to mixed or publicly traded Joint-Stock companies,
after a public competition.
Therefore, there is still one matter left, regarding the lawfulness of some listed
companies, which have received the entrusting without a public competition.5 In
that case, we should figure out whether the lack of regulations coverage will have
immediate consequences or will take effect from the next entrusting.
Speaking about the abolition of the return on invested capital, there is now the
question of how to finance the investments, planned for the next 30 years period:
without any private capital and without any help from the banks, the State is the
only lender left.6
The natural consequence is that the chosen publicly traded companies were the
first ones to have suffered a negative impact on their value, which, with the ‘‘yes’’
victory, must look back on their programming.
Following the referendum consultations, therefore, there was a further reform of
local public services of economic importance expected, helping to clarify the
future prospects in our legal system. But, even in this case, the result has failed the

3
See Art. 23bis of the Decree-Law 112/2008, paragraph 8, amended by Art. 15 of the D.L. 135/
2009.
4
Both referendums were implemented respectively with the D.P.R. n. 113 and n. 116 of July 18
2011.
5
Such managements, according to the current laws could no longer exist, as the EU rules do not
allow giving the award without competition to a company which is not wholly owned by a public
entity.
6
Massarutto (2011) claims that our system ‘‘is full of holes’’, holes in the pipes, but mostly holes
‘‘in the financial statements.’’ In order to cope with this problem we should tap into resources that
general tax revenues cannot make available, therefore, the only solution is to resort to the market.
32 3 The Impact of Governance Model on Performance

expectations, the new summer maneuver (D.-L. 138/2011 and subsequent

amendments) has once again proposed many of the provisions of the Art. 23bis.
The integrated water service displacement into the list of excluded sectors leaps
straight to the eye, a list where the distribution of natural gas and electricity, the
railway regional transport and pharmacies were already present.

3.3 Literature Review

Verifying the quality of governance models (Padovani 2004, p. 305), set by the
legislature and adopted by local authorities for the management of integrated water
services, becomes essential in this job in order to monitor and, where necessary,
improve the level of performances, achieved by these companies.
In the water sector, the choice of the management framework is not entirely
free; we must, in fact, consider a few factors, such as the absence of competition,
the difficulty in finding private sources of financing,7 the existence of control
systems much more bureaucratic than managerial, the excessive interference of the
political body.
Numerous studies deal with the problem about the governance model of inte-
grated water services companies.
Bhattacharyya et al. (1995) prove that in industrialized countries, like the
United States, fully public property water companies are more efficient. They
apply a trans log variable cost function on a sample of 221 American water
companies in 1992. Other scholars believe that the public management is better:
water is a public good, a natural monopoly, creates problems involving equity in
the distribution (Weimer and Vining 1998, p. 74).
Shih et al. (2004) verify that public utilities have lower costs than private
utilities. They carry out an analysis on a sample of 1,000 water operators using the
Data Envelopment Analysis (DEA). No significant difference is observed by
Estache and Rossi (2002), who estimate a variable cost function Cobb-Douglas on
a sample consisting of 50 developing and transitional water operators in the Asian
region and the Pacific in 1995. Saal et al. (2007) investigate 10 English private
water companies, using the Stochastic Frontier Analysis with data collected from
1985 to 2000. The obtained results show that if, on the one hand, there have been
some improvements made from the technical point of view, on the other hand, the
efficiency and productivity have not been improved. They also demonstrate that
not only the ownership structure affects the performance of the water companies,
but also does the regulatory regime.
Ruester and Zschille (2010) examine whether the choices of the governance
model affect business performances by conducting an econometric analysis on a

7
Massarutto (2011) claims that the custody patterns should be ‘‘bankable’’, i.e. sufficiently
profitable, at least in relation to the risks to be borne by the investor.
3.3 Literature Review 33

sample of more than 700 German water companies. The authors use endogenous
variables such as the adopted governance model and the pricing, and exogenous
variables like economies of scale, water quality, and finally the existence of forms
of control between the manager and the public sector. The outcomes which are
received are the following:
• the rates are higher when there is a private sector participation;
• managers that make economies of scale apply lower tariffs;
• water quality is inversely proportional to the tariffs, so the higher is the quality,
the lower is the tariff;
• the control affects proportionally the tariffs: the more the public entity controls
the handler, the more tariffs rise. The cause is attributable to higher investments
that the operator performs in accordance with the objectives set by the public
body.
Guerrini, Romano, Campedelli (2011), have conducted an analysis on a sample
of 80 Italian water service companies and have shown that the ownership structure,
the size, the diversification and the geographic location have had an impact on the
water service companies performances, although with different levels of
importance.
Villalonga (2000), however, conducts a review of cross-sectional studies on
public service companies in general, and has surveyed: 104 studies that have
identified a higher performance in private companies than in public ones, 14
studies that have found the opposite result and 35—neutral.
New Public Management scholars approach the issue from another point of
view: in fact, they analyze the differences between public and private enterprises
from the point of view of governance models, management systems, control
mechanisms, accounting systems and reporting, etc. The same ones claim that
private companies are more efficient than public ones and offer a range of solutions
to improve these performances, such as: greater autonomy and discretion to the
public management; greater attention to the user-manager combination; intro-
duction of the institutional assets and managerial techniques from the private
sector, introduction of competitive mechanisms that could approach the compet-
itive forces of the market (Ferlie et al. 1996; Andrisani et al. 2002; Jones et al.
2004). Even the economic-business Italian literature has dedicated a lot of space to
the issue of Public Enterprises (Borgonovi 1979; Cafferata 1993), privatization
(Faraci 2002), local public services reform and forms of management of the latter
(Valotti 1996; Elefanti 2003; Grossi and Mussari 2006; Garlatti 2005; Mele and
Mussari 2009; Monteduro 2010).
Although there are some critical remarks on joint enterprises—especially in
terms of governance assets (Pozzoli 2005)—Italian corporate literature generally
highlights how this solution is preferable, especially in terms of efficiency, to the
publicly-owned company in the public services management (Garlatti 2005). The
reasons would due to a variety of factors such as knowledge and know-how
acquisition, greater managerial autonomy guarantees, greater attention to eco-
nomic performances (Garlatti 2005).
34 3 The Impact of Governance Model on Performance

3.4 The Performances of the Water Service Companies

At this point, one must wonder which variables are able to reflect the company’s
performance in such a complex sector. The aim of individual and collective needs
satisfaction and the promotion of social and economic welfare of the served
community, the multiplicity of interests that revolve around the government, make
the performances measurement an essential factor (Del Bene 2009).
Osborne e Gaebler (1992, pp. 14, 152, 198) say: ‘‘If you don’t measure results,
you can’t tell success from failure (…) if you can’t recognize failure, you can’t
correct it (…) if you can’t see success, you can’t reward it’’; and yet, Hatry (1978,
p. 28), claims that: ‘‘Unless you are keeping score, it is difficult to know whether
you are winning or losing’’.
In fact, while in the private sector, the surrogate measure of output goods and
services (i.e. of revenues) provided to the community (Catturi 1994) is represented
by the market price, this measure is not present in the public sector, where there’s
not only a lack of competition but there’s also a presence of established fares that
do not normally cover the production costs (Landriani 2010).
Therefore, we need other indicators or concepts and adjustments to properly
represent the spread between the consumed resources (measured by the costs) and
the carried out ones.8 Guatri (1997, p. 143) argues that ‘‘the economic-financial
measures of the performances measuring, even when formulated so as to keep at
least indirectly on behalf of all the various categories of stakeholders, inevitably
exclude certain general interest components, social and ethical components, etc.,
which are also relevant life moments of the enterprises, and sometimes are
essential conditions and limits’’.
It would be therefore necessary to clearly identify the underlying system
objectives and translate them into concrete operational plans, introducing mea-
suring parameters to verify the pursuit of the results, in line with the fulfillment of
the individual and collective needs and the promotion of social and economic
welfare of the served community, ensuring at the same time a reward for virtuous
behaviors and discouraging the less constructive ones (Del Bene 2009).
The performance assessment of the water companies has become particularly
topical in the recent years, mainly due to the continuous regulatory changes that
have attempted to push the sector towards privatization (Cerrato 2004; Kikeri and
Kolo 2005; Barucci and Pierobon 2007; Obermann and Bognetti 2008). In fact, up
to that time, public services were provided under a monopoly: limited strategic and
entrepreneurial independence, compliance with specific standards and political
pressure were seen as elements of advantages for a company operating in this
regime.

8
The meaning of efficiency in PAs takes on an entirely different meaning. As part of the PA, the
efficiency can be defined more precisely as the ratio between the services provided and resources
used to achieve them. See Borgonovi 2000.
3.4 The Performances of the Water Service Companies 35

Therefore, the control and the performance measuring become a requirement,

not only for the various stakeholders but also to verify the quality of governance
models drawn by the legislature and adopted by the water operators. An ideal
model of governance should include the ability to allow the company to achieve
satisfactory levels in terms of effectiveness, efficiency and profitability, balancing
the requests of the different stakeholders.
The study of the water companies efficiency implies, first of all, an analysis of
the resources used to deliver the service. An often considered indicator, especially
by research bodies, to assess the efficiency, is the difference between the water
actually fed into the grid and the invoiced one (OFWAT, UK 1989; Civicum,
2009). The greater is the gap between the two values, the lower is efficiency
(Tupper and Resende 2004; Garcia-Sanchez 2006; Renzetti and Dupont 2008).
The difference between the two values may depend on both breakage of hydraulic
lines that do not allow water to reach the delivery points and theft, unauthorized
withdrawals or malfunction of the counters.
Other indicators may also be identified in the measures of the output cost per
unit (e.g. supplied water m3), labor productivity and/or distribution network
indices (e.g. the relationship between billed water m3 and the number of
employees, or between billed water m3 and aqueduct network km). It is also
possible to calculate the turnover per employee or per network km, moving from
quantities expressed in terms of m3 to expressive values of monetary magnitudes.
Finally, to estimate the efficiency, non-parametric models are also being used, such
as the s.c. Data Envelopment Analysis (DEA), the stochastic frontier method
(Stochastic frontier model) and also the original methodology based on MARS
models (Multivariate Adaptive Regression Splines), used to estimate the produc-
tion function on the efficient frontier without, at the same time, clarifying a specific
functional form ex-ante (not considered methods in this work).
Examining the efficiency as an only criterion for strategic choices is an aban-
doned approach, even by private companies, which in fact sacrifice more or less
high degrees of efficiency for the benefit of other variables such as quality, cus-
tomer satisfaction, timeliness, etc. On the basis of this orientation, Lin (2005)
introduces an additional measure of corporate performance: the management
effectiveness.
The latter is seen as an ability to achieve the set objectives, meeting the needs
of the community. The indicator can be measured by comparing the obtained
results with the objectives set by the contracts and the area plans (internal effi-
cacy), or by evaluating the effect that public services have on the community
(Farneti et al. 1996, p. 192). This second type of control (external efficacy),
however, is more complex because of the impossibility of being able to measure
the effects, provided by a public service to the user and the level of general
community welfare. To handle this difficulty, the public management literature
(Hatry 2001; Poister 2003) recommends the construction of a specific proxy,
external effectiveness judgments to be based on.
Some examples of indicators, used for this purpose, could be the response time
to a quote request for the sewer connection, the timing for an aqueduct connection,
36 3 The Impact of Governance Model on Performance

the average waiting time at the call center, the average response time to written
complaints, all variables indicated in the services maps. These measures, in an
indirect way, would make it possible to express an opinion on the user’s satis-
faction, the accessibility to the service, the supply continuity, the transparency and
the fairness while launching and managing the contractual relationship.
As for affordability, we must count the correlation between costs and revenues,
that is, the company must be carried on in a way that the company’s activity
income revenues are big enough to cover the costs of the used production factors.
The economic public body must, therefore, aim to cover its own production and
management costs through the provided services tariff. Therefore, the more it
approaches the incurred cost, the greater the level of achieved economy will be.
Even the foreign literature agrees to consider the tariff as an economy variable of
the integrated water service companies. In particular, Chong et al. (2006) will
count the cost percentage, covered by the tariff per m3.

3.5 The Relationship Between Performance

and Governance Models: A Theoretical Model
for the Management of Integrated Water Services

Considered as a theoretical basis, as described in the previous paragraphs, the

relationship between governance model and integrated water services companies
performances has been analyzed, considering the following variables: the own-
ership, on the one hand, and the price level, the size, the % of the network losses,
the economies of scale, the % of investments actually made out of the ones
planned and the average response time to written users’ complaints, on the other.
In particular, the ownership structure has been identified in relation to the
capital ownership, so we will have (Ballance and Taylor 2005): the Direct public
management, a management model that is totally public, as opposed to the Private
management model, where the management is carried out by a private owner, and
the Delegated management, where there is an equity participation of both the
private and the public (so-called public–private partnerships).
For the tariff level estimation, as recommended in the public management
literature (Hatry 2001; Poister 2003), special proxies were built, so the revenue per
unit was calculated by dividing the sales revenues and the services9 revenues of
2010 and the supplied volumes of the same year; on the other hand, the unit costs
were calculated by dividing the production costs (item B of the Income Statement)
of 2010 and the supplied volumes.

9
The ‘‘revenues from sales and services’’ correspond to the item A.1. of the Income Statement
for 2007. The choice to consider this year has been made for reasons of homogeneity with the
other considered variables.
3.5 The Relationship Between Performance and Governance Models 37

The result is, therefore, a ‘‘fair tariff’’, that is able to cover all the management
costs (per unit) with the unit revenues (C = R), a ‘‘remunerative tariff’’ (Cavalieri
2005), which is able to ‘‘pay back’’ all the demands of the various stakeholders,
while preserving the corporate autonomy (C \ R) and a ‘‘policy tariff’’, that is
unable to cover the operating costs (C [ R). The variables ‘‘% of the network
losses’’, ‘‘economies of scale’’ and ‘‘size’’ were considered to estimate the effi-
ciency of the service, while the ‘‘% of investments made out of those planned’’ and
the ‘‘average response time to written users’ complaints’’ have been used to
estimate the effectiveness.
The intensity of the identified variables draws a model of governance that we
call ‘‘hybrid’’ (hybrid model), that is able to deliver the service to the whole
community without making any profits nor obtaining losses. The result is a service
that has to be based on the principles of equity and efficiency.
In this vision, the performance variables are used to define the direction where
managers tend (profitability, social, economy and equity) and, therefore, to assume
the adopted governance model and a possible relationship between the latter and
the variables (Fig. 3.1).

Fig. 3.1 A model for the integrated water services companies

38 3 The Impact of Governance Model on Performance

3.6 Case Study

The carried out case study intends to verify the existence of differences in the
performances between water companies, characterized by a different governance
model. The case study was conducted on a sample of 39 mono-service Italian
water operators, compared to a presence of about 115 foster water companies on
the territory (Conviri-Report on the water services situation—2011).10 Starting
from the previously conducted literature review, the performances were measured
through the identification of six variables, three of efficiency, two of efficacy and
one of economy. More precisely:

Efficiency Efficacy Economy

variables variables variables
Percentage of the network Percentage of investments made out of the Tariff level
losses ones planned (internal effectiveness)
Economies of scale Average response time to users (external efficacy)
Size

Each variable has been then quantitatively evaluated by assigning a score,

evenly set among the different indicators and assigned on the basis of best/worst
achieved performances. That way, the identification of performing companies has
been based on the highest score.
No score has been assigned to the variables ‘‘size’’ and ‘‘tariff level’’, which
were considered as control variables.
The performances analysis of the performance was then integrated with the case
study of the governance model, adopted by the managers. So, as in the Williamson
classic model (1986), hybrid forms of water services supply organization have
been identified between the two extremes (Saltman and Van Otter 1995; Ballance
and Taylor 2005; Massarutto 2011):
• direct public management;
• delegated management;
• private management.

3.6.1 The Sample

The research considers a sample of 39 water companies, with a total served

population of more than 15 million inhabitants and a volume of delivered water of
1.5 billion. The sample was, at first, divided into three groups (large, medium and

10
Foster water companies are defined as companies that have obtained an entrusting (direct or
by competition) from an ATO.
3.6 Case Study 39

Table 3.1 Composition of the analyzed panel

Cluster Size classes Operators
(Revenues from sales and services)
Big [38 Mln € 13
Medium 12Mln € \ Medium \= 38 Mln € 13
Small \=12 Mln € 13
Sample Total 33
Source Our elaboration

Table 3.2 Cluster by Geographical area Cluster

geographical area
North 15
Centre 11
South 13
Sample Total 39
Source Our elaboration

small), based on the amount of revenues from sales and services (Table 3.1),11
then, by geographical area (Table 3.2) and, finally, by the type of the adopted
governance model (Table 3.3).12

3.6.2 The Methodology

The analysis has required the study of financial statements for the years
2007–2010, financial statements which should represent the real expression of the
economic and financial events, deriving only from the water service management .
The methodological tool, used for data collection, is represented by a ques-
tionnaire sent via email, containing questions about the local context (e.g., served
area, delivered volumes), the company characteristics (e.g., income/assets type
data), the governance (e.g., type of custody), the activated control mechanisms and

Table 3.3 Governance models

Cluster Direct public management Delegated management Private management
Big 7 6
Medium 6 3 4
Small 7 3 3
Sample Total 20 12 7
Source Our elaboration

11
The subdivision of the size classes was resumed from the setting in the Blue Book 2011.
12
The concept of capital concentration / dispersion is understood as a ‘‘custody’’ mode proxy:
the ‘‘concentrated capital’’ is expressed by the in-house credit lines and totally private ones; the
‘‘lost capital’’, however, is expressed by other forms of management (mixed, listed, etc. ..).
40 3 The Impact of Governance Model on Performance

the future development prospects. Where information has been found to be little or
inexistent, and only for those operators where the tracking was possible, a tele-
phone/personal contact has taken place (in 5 cases only), by making semi-
structured interviews to administrative leaders.
With reference to the variables of efficiency, the estimation of the ‘‘network loss
percentage’’ was obtained by dividing the sales volume with the volume injected into
the network. The carried out case study was made by consulting managing entities
directly, or, in cases where this was not possible, the information was obtained from
the annual reports on the water services situation of the National Commission for the
Supervision of Water Resources (Co.N.Vi.Ri). The detection objects were the main
data on the injected volumes, lost in distribution and recorded in the considered
years. Three tranches of percentages13 were set for inquiry simplicity:
• % of loss \ 20 %;
• 20 % \ % of loss \ 60 %;
• % of loss [ 60 %.

In the ‘‘economies of scale’’ case, however, the percentages were calculated by

comparing the incurred costs in 2008 with those of 2009 weighed with the supplied
volumes, and the incurred costs in 2009 with those incurred in 2010. The purpose
of the indicator is to assess the management efficiency of the operators: where the
operator detects a decrease in production costs, and so the economies of scale
increase, the index has been interpreted as a synonymous of efficiency. In this case,
the operator should increase the disbursement level; a contrary observation is
reached where the economies of scale are decreasing.
The indicator of internal efficiency, i.e. the ‘‘percentage of made investments
out of those planned’’, was extrapolated from 2009 and 2010 reports on water
services, carried out by Co.N.Vi.Ri. The indicator is calculated by dividing the
percentage of actually made investments by the ones planned in the Catchment
Area Plans. Please note that due to methodological innovation, introduced in 2009
with the collection through the information system SIVIRI, the Commission has
found errors in the data entry by the Local Water Boards (ATOs) and in their
processing. In addition, the different planning that characterizes some ATOs, and
some operators’ (e.g. mergers) extraordinary transactions start has caused a degree
of overlap among the data. A further problematic, has, in addition, involved the
data processing. The main problem is that the different date when the Catchment
Area Plans got into effect, that is the difference among the basis years when the
investments are estimated, has not been taken into account. Therefore, the data
supplied by the Commission, regarding the 2009 annuity only, has not been able to
inflate the annual amounts in a coherent manner, in order to bring them all to a
common value of currency. As a result, the extrapolated totals and averages reflect
amounts which are expressed in different values of currency, undermining the
reliability of aggregated data.

13
According to the D.M. 99/97, the indicator should not exceed 15–20%.
3.6 Case Study 41

Finally, regarding external effectiveness, the ‘‘average response time to users’’

indicator, taken from the services papers, has been divided into the following
intervals:
• within 15 days;
• from 16 to 30 days;
• more than 31 days.

The shorter was the waiting time for complaints and interventions for main-
tenance requested by the users, the better was deemed the operator’s performance.
Such measures, in an indirect way, would allow to express an opinion about the
user’s satisfaction, about accessibility to the service, supply continuity, transpar-
ency and fairness of the contractual relationship setting up and management.
Each performance variable was then weighted with a score ranging from a
minimum of 1 to a maximum of 3, assigned on the basis of best/worst outcomes.
The most efficient manager, then, appears to be the company that reaches the
higher ‘‘score’’, obtained, in fact, by summing the individual scores of the per-
formance measures (Table 3.4).

3.6.3 The Results

As a matter of sensitivity of the collected data, it was decided to preserve the

anonymity of the studied managers. In the graphic representation of the considered

Table 3.4 The Score for the performance calculation

Variables Score
% Network loss
% loss \ 20 % 3
20 % \ % loss \ 60 % 2
% loss [ 60 % 1
D % Economies of scale 2008/2009–2009/2010
D Economies of scale \ 30 % 1
30 % \ D Economies of scale \ 60 % 2
D Economies of scale [ 60 % 3
% Net of pfc investments
% Net of pfc investments \ 30 % 1
30 % \ % Net of pfc investments \ 60 % 2
% Net of pfc investments [ 60 % 3
Average response time to written complaints from users
Within 15 days 3
From 16 to 30 days 2
More than 31 days 1
Source Our elaboration
42 3 The Impact of Governance Model on Performance

variables, it was decided to highlight the highest scores in bold, identified per each
cluster, according to the geographical area and size.14
The greatest performances were established on the basis of the highest score,
considering that a company average performance reaches a minimum score of 8
points (at least 2 points for each considered variable). Figure 3.2 shows the scores,
respectively achieved by the examined Operators.15

Score
Water utility firm 39
Water utility firm 38
Water utility firm 37
Water utility firm 36
Water utility firm 35
Water utility firm 34
Water utility firm 33
Water utility firm 32
Water utility firm 31
Water utility firm 30
Water utility firm 29
Water utility firm 28
Water utility firm 27
Water utility firm 26
Water utility firm 25
Water utility firm 24
Water utility firm 23
Water utility firm 22
Water utility firm 21
Water utility firm 20
Water utility firm 19
Water utility firm 18
Water utility firm 17
Water utility firm 16
Water utility firm 15
Water utility firm 14
Water utility firm 13
Water utility firm 12
Water utility firm 11
Water utility firm 10
Water utility firm 9
Water utility firm 8
Water utility firm 7
Water utility firm 6
Water utility firm 5
Water utility firm 4
Water utility firm 3
Water utility firm 2
Water utility firm 1

0 5 10 15 20

Fig. 3.2 The sample score (Source Our elaboration)

14
The panel division according to the size becomes essential to obtain a true and correct
comparison. Otherwise, we would compare a non-homogeneous sample, due to strong structural
differences.
15
If it has not been possible to obtain the data, neither through the questionnaire administration,
nor through telephone contact or by other documented sources, we used the acronym ‘‘not
available’’ (n.a.).
3.6 Case Study 43

Fig. 3.3 Performing water

companies size % (Source
Our elaboration)

Figure 3.2 shows that about 69 % (27) of the managers appear to be quite
performing. Ten performing managers have achieved a score between 15 and 17,
nine between 10 and 14, the remaining between 8 and 9. More than 70 % of the
highly performing operators have medium to large sizes. The writer’s opinion is
that the latter figure seems to be quite relevant, since the starting sample, con-
sisting of 39 managers, has been evenly divided among the different size classes
(13 large–13 medium and 13 small).
Even the different geographical location seems to play an important role in the
performances: 13 performing operators appear to be located in the Northern Italy,
10 in the Centre and 4 in the South (Figs. 3.3, 3.4).
The analysis has also showed that the performing operators carry out almost all
of the planned investments (almost 80 %) in contrast to the non-performing
managers, that carry out about 40 % of the investments, going down to a per-
centage of 5 % in the South (Sicily). However, the indication of the ‘‘% of the

Fig. 3.4 Geographical

location of the performing
water companies (Source Our
elaboration)
44 3 The Impact of Governance Model on Performance

Fig. 3.5 Performing companies: % of network losses and % of carried out investments (Source
Our elaboration)

network losses’’ index shows that we are still observing very high loss levels
(about 40 %).
According to Fig. 3.5, it gets clear that the percentage of the carried out
investments is greater for the medium–large size cluster (+10 % compared to the
small ones): the network losses index shows the very same trend, although with
more contained oscillations (+0.2 % compared to the small ones).
The average response time to complaints has been about 17 days for the per-
forming managers, compared to over 95 days for the non-performing ones. About
67 % of the performing managers charge a fair fee, proving that the orientation
towards the remuneration does not necessarily indicate a better performance. More
than that, when the tariff is oriented to equity, then effectiveness, efficiency and
economy is achieved through greater attention to the costs and to better economies
of scale achievement. This last aspect is also confirmed by the size (medium–
large) of the performing water companies.
After the study of the performances, we carried on by identifying the adopted
management model for each manager. Fig. 3.6 shows that 63 % of the performing
sample (27) adopts the ‘‘Direct public management’’ model. This statement,
however, does not allow to confirm that the above model is better than the other
two forms of management, because performing companies do exist both in the
‘‘Delegated management’’ model quadrant (9) and, although insignificant in the
‘‘Private management’’ model (1), and because the result could be influenced by
the starting panel composition (39), made for 51 % (20) of companies that use the
public management form.
3.6 Case Study 45

Fig. 3.6 The governance models of the Italian water companies (Source Our elaboration)

Judging by the analysis, it becomes clear that the size is a common element of
all the performing companies. A medium–large manager can make a better use of
economies of scale and, consequently, may charge closer to equity. This statement
can be translated into a manager’s choice to fix a tariff, which, divided among
various users, enables him to fully cover the incurred costs. Obviously, it goes with
the provision of a quality service and a better relationship with the customers, and
an increase of the investments level in plants and facilities. Another important
element is the geographical area. Most of the performing companies (23) are
located in the North and the Centre. In fact, a poor service quality has emerged
from the initially analyzed sample, with an average response time to written
complaints of about 90 days and with carried out investments below 30 %. The
only common to the whole investigated panel data is the indicator of ‘‘% of
network losses’’: even today, as shown by the investigations of Conviri (2011), this
index is very high, being the reason why it is not actually considered a useful
variable to express the level of business performance.
Therefore, in the writer’s opinion, the best management practice in the water
sector should possess the following characteristics:
• medium to large size;
• adopt a fair tariff;
• be able to exploit economies of scale in order to ensure the realization of at least
80 % of the made investments/planned investments ratio (net of straight grants);
• pay attention to the community by responding to complaints or failures reported
by the users within a maximum of 15 days.

To this end, there’s the hope that the National Independent Authority on water
resources, established by the D.L. n. 70/2011 converted into Law no. 106/2011,
46 3 The Impact of Governance Model on Performance

might, on the one hand, regulate the sector, but on the other hand, guide the
operator to most suitable choices, based on its operating context, its size and its
specific features.

3.6.4 The Open Issues

The results of the case study show that, in the water sector, there is no real
relationship between governance models and business performances. In fact,
although the biggest part of the best practices is totally made of public capital
(63 %), there is also a significant percentage (33 %) of participated companies,
owned by privates, and an insignificant one, completely private (0.03 %).
Therefore, considering the case study progress, it is not definitively possible to
conclude that the absence of privates causes better performances. In fact, it is good
to say that the results may have been also influenced by the composition of the
starting cluster, which includes a higher number of in-house companies than of
mixed public–private and totally private ones.
The results suggest further observations. In line with the economic theories
(Blair 1942, Bain 1954), the firm size appears to be a significant variable to
achieve performances: the larger is the size, the better are the obtained perfor-
mances. In fact, the analysis shows that the performing managers make a turnover
exceeding 12 million euro. Moreover, using economies of scale, managers can use
a greater discretion in the tariff composition.
More precisely, the costs reduction may be offset by a corresponding tariff
reduction or by an investment reshaping. Anyway, whatever the strategic choice is,
the most efficient managers appear to be the ones who are able to cope with the
service costs, by requiring the tariff only. The foregoing is confirmed by the results
of the case study, which highlights, in most of the cases, the application of a ‘‘fair
tariff’’. The latter, often a synonymous of an income which is unable to cover the
operating costs, is actually the fee that, if distributed among the various users,
allows the manager to fully cover the incurred costs. In fact, if the operator applied
a tariff (i.e. policy), unable to cover the incurred costs (C [ R), then he has not
resulted performing (8 managers were detected in our case study). Finally, another
relevant component came out to be the geographical location. It can be seen that
the intervention of the legislator should take into due consideration the territorial
specificity, very heterogeneous from region to region.
However, this study has some limits. The information scarcity about some
managers has made, in some cases, the comparison marginal. The full disclosure,
however, would have determined a further reduction of the sample size, but it
seemed more significant to opt for the number preservation of the panel here.
Another problem occurs in reference to the use of outdated data. The infor-
mation system SIVIRI is still under review so data are updated to 2008.
Nevertheless, a possible indication to the legislature in force that comes from
this case study is that, regardless of the form of management, a medium to large
3.6 Case Study 47

sized water company would seem more performing than the small ones. Moreover,
in addition to the size, a synonymous of performance would also seem the
application of a fair tariff. This statement opens the way to some reflections: in the
in-house companies, the application of the ‘‘fair tariff’’ is more compatible with the
electoral support than with efficiency, so, a costs reduction corresponds to a tariffs
reduction, which is often even below the latter; in mixed public–private companies
or in totally private ones, the ‘‘fair tariff’’ could lead to the opposite result: instead
of lowering the tariff, the manager could be encouraged to increase the investments
by directing his choices towards more efficiency and the facilities improvements
rather than towards the social consensus.

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Chapter 4
Conclusions and Limits

The overall public sector and the utilities in particular find themselves in a period
of great transition, characterized by the shift from a monopolistic-bureaucratic
logic to a competitive-corporate one.
The difficulties and the contradictions of such a process cannot be bypassed,
which has been sought to be identified in the importance assumed by these
companies in modern societies, at the heart of many interests and judgments.
In fact, as a result of the difficulties of sustaining financial and economic standards
of the welfare state, in order to ensure, especially, greater efficiency in the use of
scarce public resources, greater effectiveness in meeting the evolved and changing
needs of the referenced and system effectiveness local and regional communities, the
local public companies, also supported by new regulatory systems, have outsourced
activities related to the services by determining, on the one hand, ‘‘lighter’’ budgets,
on the other, the interposition of a subject between administration and citizens.
Over time, this arrangement has effectively shifted the interest, that is the
quality of life expectations, towards public utilities, imposing in the local gov-
ernment the need to structure the governance and control mechanisms, as well as
the appropriate support tools, inside the system or the setting up group.
The new institutional assets have then rediscovered the interest of local
authorities to the business methods, imposed by the legislature in order to guar-
antee the performance in the services management and so, the generated degree of
consensus towards local government depends essentially on how the contributions
are provided to citizens by the latter.
Therefore, the presence of corporate purposes in the public services does not
seem to have been properly supported by the legislative intentions and by the
granted-negotiated-earned by local government autonomy, leading to a limitation
of the ability to create local utility value.
In this regard, the risen apparent dichotomy concerns, recalling the corporate
doctrine, the institutional and the company objectives.
If, as seen and consistent to literature, on a theoretical level, there’s a proposal
of a convergence towards the company value, as a ‘‘container’’ of social value, the
orientation made on the operational side is not consistent. In fact, mainly in the
transport sector, the aims of protecting the society’s interests (however a vague

S. Pozzoli et al., Governance and Performance of Water Utility Firms, 51

SpringerBriefs in Water Science and Technology, DOI: 10.1007/978-3-319-02645-9_4,
 The Author(s) 2014
52 4 Conclusions and Limits

term, as seen) have only focused on the tariffs containment, generating, as a

waterfall, a series of negative consequences for the company, the management, the
public, the image of public transport, until the ‘‘technical’’ failure of some of them
and their transfer to private parties, as discussed in the previous pages.
Stating that there’s no need to assign a negative value judgment to privatization,
moreover, it is considered one of the most effective (but not saving) rehabilitations,
also cultural, of public utilities, there is only the idea that these strategies damage,
after all, the most disadvantaged social groups that local government arises, or
should arise, among its privileged interlocutors.
However, it is believed that the satisfaction of the multiple needs of different
stakeholders, even if carried out in efficiency conditions in the management of
resources and effectiveness conditions in objectives negotiation, that is the pos-
sibility of creating value, should lie in the orientation towards costs economy and
economic balance to be worth over time.
At the same time, the circular nature of the business purposes requires a fair
settlement of all public business categories, in a systemic and durable perspective.
As a result, it seems that the business value, generated by the public utilities, is
a function of the variables that make up this reasoning and that could be brought,
on a theoretical level, towards the governance of the local public system, and on
the real one, towards the combination of autonomy/control in the relationship
between APL and the service company.
On the latter aspect, the forms of realization of such a combination do not appear
neutral, which are contained in at least three considerations that may qualify:
• the regulatory aspects;
• the company size;
• the relational approach.
Compared to the first point, we mainly use the procedures for the service entrust
that can be, shortly, direct (in-house) or by competition. However the legal-formal
issue is not the one that seems relevant to us, since both models have their
advantages and limitations but, as always, it is the economic-substance, where
there’s the will to understand the margins, the space for autonomy, given to the
company, granted to manage the service. In fact, the developed hypothesis con-
cerns the directly proportional relationship between autonomy and value.
With reference to the size of the company, we believe that the trends go
diversifying the national framework in at least three scenarios: the national giants,
the achievements of large regional centers and small local utilities, classified
according to the catchment area and to productive processes. Even so, a positive
value is ideally assigned to business growth (just think about the performances of
listed companies, more oriented to the market then), seen as a greater indepen-
dence from the reference local government.
Finally, the last point, beyond the legal technicality of service contracts, although
relevant in the different examined articulations, qualifies the management conditions
of the service and, most of all, the methods of control exerted by local government.
This issue, thus, raises not a secondary problem, but variously analyzed in the
4 Conclusions and Limits 53

literature one, of the convergence between the aims of ownership and management.
The peculiarity of public service companies also adds that this potential conflict may
also affect the public/private contrast, being actually more and more present.
There is, we think, a following framework where the value creation is oriented
to a broad, enlarged vision, which, instead of observing the economic-financial
performances (quantity outputs), a complex and limited in the public service
procedure, turns to other multi-dimensional and qualitative (outcome) indicators.
This observation is fully shared not only by business literature but also by
international literature, with reference to the evolution of management thinking in
public administration, related to the NPM before and to the Public Governance
more recently.
The Italian reform processes in public administration have mostly focused on
how to assign services (competition, in-house, etc.) and on capital ownership
(public, private, mixed) ignoring, instead, the issues related to the economic-
financial performances or the economic balance research. For this reason, rather
than insisting on the system of rules, which holds (or should hold) the public
activity, which proved to be contrasting or at least only contingent, in this case
study, it seemed profitable to focus on the companies, on institutions that are
deemed useful tools to restore efficiency and effectiveness in the local public
services sector, considering the lack of resources and ideas besetting the public
sector at the end of the 1980s, when, even in Italy, those measures, generically
defined ‘‘corporatization’’ measures, were setting off.
The focus on the companies and on the performance measures, developed by
the latter, is a pre-condition for the balancing of interests concerning the man-
agement of a vital resource like water.
The evidences of Chap. 1 show that performing water companies are charac-
terized by some peculiarities, such as: the interpenetration of more interests (both
public and private), the application of a profitable tariff, which is able to fully
cover the incurred operating costs, the existence of a managerial control, which is
able to reward or punish more or less virtuous behaviors, and the definition of
contracts, based on standard costs with a subsidy cap (performance contract). The
most akin to that model water management has found to be the German one.
In Chap. 2, however, the survey shows that there is no real relationship between
performance and governance models. These, in fact, rather than being influenced
by the management form (public, private or mixed), appear to be influenced by the
geographical location and the size. In our opinion, this conclusion allows to
provide further useful guidance to the legislator in the process of identification of
the (ideal) manager in the water sector. Therefore, rather than only focusing on the
capital ownership or on the entrusting procedures, future regulations should take
into account the needs of the local context and the company size. When it comes to
the first variable, we are facing territorial disparities in Italy, both at regional and
interregional levels, that is why ad hoc interventions are requested for each con-
text; a medium-large size, instead, not only allows managers to make a better use
of economies of scale but also allows to overcome the problem of management
fragmentation, which has always characterized this sector.