Watertime, University of Greenwich, 25th november 2005

1. The EUROMARKET project Water Scenarios: an empirical analysis of the evolution of the water sector in Europe Dr. Jeremy AlloucheScientific coordinator EUROMARKETMIR, Management of Network IndustriesEcole Polytechnique Fédérale de Lausanne, Switzerland Watertime, University of Greenwich, 25th november 2005

2. STRUCTURE OF THE PRESENTATION • Partners • Project Outline • The water sector today • Evolution of the water sector: identification of scenarios • Implications of scenarios • Conclusions

3. PARTNERS

4. PROJECT OUTLINE • Examine explicit and implicit policies of the EU • The European water sector today • Markets • Operators • Legislation / regulation • Identify water liberalisation scenarios • Assess implications of these scenarios • Economic, ecological, social, legal, institutional, and organisational • Practical recommendations

5. EU POLICY • Water Framework Directive • Single objective: good ecological status of all waters • Integrated river basin management • Water supply as a SGI • Fields where existing European policies could have an impact on WSS services: • Standards in drinking water and sanitation systems • Management of the natural resource • Liberalisation and services of general interest

6. THE WATER SECTOR TODAY • The responsibility for the provision of water services in most countries lays with municipalities: • Legal ownership of assets (except in England and Wales) • Municipalities may delegate or outsource services (most countries) • Diversity of operators and their strategies • More than 30 000 operators • Public, private, mixed • Private investments in some countries • Capital investment projects, equity investments…

7. THE WATER SECTOR TODAY • Comparative policy analysis

8. SCENARIOS • Coherent and credible stories about alternative futures • Plausible but not necessarily desirable • Scenarios developed along three macro-storylines: • Pressure for more competition and PSP • Scenarios 1 and 2 • Opposition to liberalisation • Scenarios 5 and 6 • Maintenance of the status quo • Scenarios 3 and 4

9. SCENARIOS • Drivers of change: • Modernisation of the management of infrastructures • E.g., regional structures, management autonomy, cost transparency • Social pressure against liberalisation • Pressure by some actors to go from de facto to de jure liberalisation • Lack of public financing (esp. wastewater) • Emerging PPPs • Critical events: • Social protests as a result of crises • E.g., corruption, environmental, health • Financial problems

10. SCENARIOS • Sc 1: Tendered Market • Obligation to tender: competition for the market every 5 years • Least costly bid: obligation to retain the least costly bid • Competition regulation only • Sc 2: Tendered Market with Strong Regulation • Obligation to tender: regular opening of competition for the market • Long-term contracting (10 to 15 years) • Independent sector regulator • Sc 3: Administrative Regulation • Benchmarking as the key competition process • Diversity in the type of operators in Europe

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

12. IMPLICATION OF SCENARIOS Sc 1: Tendered Market • Behaviour of the private operators is likely determined by the short duration of the contract • Cost minimisation • Exit the industry if risk is deemed too high • Low incentives to invest • Short length of contracts createsincentives to perform • Relative stability of the institutional framework • Transaction costs related to the tendering, negotiating and monitoring processes

13. IMPLICATION OF SCENARIOS Major challenges: • Short length of contracts • Especially in case of important expansion of infrastructure or severe environmental/public health problems • Competitive bids should be confined to operational responsibilities • Pressure to minimise costs may affect quality • Social policies • Maintain a long-term perspective on the management of infrastructure and water resources • Low level of public participation

14. IMPLICATION OF SCENARIOS Sc 2: Tendered Market with Strong Regulation • The outcome depends on: the contractual and legal framework; the role and effectiveness of the regulator • Need to maintain and develop an adequate knowledge base (technology and market structure) • Incentives to perform (regular tendering processes and regulation) • In institutional terms, there are high levels of stability: • coherence in terms of the allocation of institutional functions • existence of conflict resolution mechanism

15. IMPLICATION OF SCENARIOS Major challenges: • Contract length may create problems for concessions if investments cannot be fully depreciated • Problems of strategic behaviour, asymmetry of information and regulatory capture can arise • Potential incoherencies arising from the overlap of responsibilities between the public authority and the regulatory entity • High number of actors involved in the framework may raise TC • Competition for the market does not grant per se adequate balance between stakeholders or different objectives • Need to clarification of public policies

16. IMPLICATION OF SCENARIOS Sc 3: Administrative Regulation • Time horizon provides adequate incentives to invest • Strong regulatory authority: • Regulation authority has to ensure an adequate level of investment • Benchmarking activities lead to high quality of service • Great openness and participation • information available to the public Note: multiple configurations (e.g., diversity of types of operators) limit the assessment of the scenario

17. IMPLICATION OF SCENARIOS Major challenges: • Independence of the benchmarking agencies • Problems of asymmetry of information between regulator and operator • The monopolistic feature of the operators encourages rent-seeking behaviour • TC associated to the setting up of the regulatory authority • Improvement of citizen’s involvement beyond information dissemination

18. IMPLICATION OF SCENARIOS Sc 4: Outsourcing • Outcomes in terms of different objectives depend on: • Type of activities outsourced • Operators’ ability to monitor sub-contractors’ performance • Reduced levels of risk to the operator • Not need to invest in specialised assets • Improvements in processes, products, services through specialisation • Relatively stable institutional framework • clear definition of functions and roles Note: the conclusions are mainly related to the supplier market and cannot be extrapolated to the entire institutional framework.

19. IMPLICATION OF SCENARIOS Major challenges: • Limitation of competition in the supplier market due to oligopoly trends among outsourced firms • Loss of internal competencies of the operator • Unemployment may increase unless operator’s employees can be re-located to the sub-contractors, which in turn might reduce the bargaining power of trade unions • Potentially high TC and risk of problems of coordination may outweigh efficiency gains

20. IMPLICATION OF SCENARIOS Sc 5: Direct Public Management • Long run viability is assured provided that public funds are available • Local public authority should have a strong incentive to protect the water resource, since it is responsible for the WSS provision over an indefinite period • Efficiency is not necessarily an objective • E.g., services of best quality, resource protection, equal access to water • Strong legitimacy • suppliers are accountable to local authorities • dominant position of the local authorities which control the supplier and are accountable to the voters/customers

21. IMPLICATION OF SCENARIOS Major challenges: • Local authority scale may not coincide with environmental effects • Lack of strategy to curb down costs (O&M and capital) and invest in innovation • Outsourcing and input tendering may be a solution • The balance of powers might be weakened by the operators' monopoly on technical expertise

22. IMPLICATION OF SCENARIOS Sc 6: Community Management • Consumers, who are the owners of the infrastructure, bear the economic and financial risk and must cover the O&M and capital costs • The quality of service depends on the ability of the institutional design to overcome institutional conflicts and to contract out services and purchases • High levels of legitimacy of the institutional framework • However, they decrease with the scale Note: multiple forms of the social enterprise (e.g., cooperative, mutual)limit the assessment of the scenario

23. IMPLICATION OF SCENARIOS Major challenges: • The desire to keep water tariffs low could impact on infrastructure maintenance • To incorporate advanced technologies • As the scale increase, the managers’ objectives can diverge from the ones of the members • Members’ participation can slow the decision-making process and decrease adaptability to change • For individual small social enterprises stability may be undermined by the exit of active members

24. CONFERENCE

25. Watertime, University of Greenwich , 25th november 2005 Thank you!jeremy.allouche@epfl.ch http://www.epfl.ch/mir/euromarket