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Public Water Services

Public water services encompass the provision of collective services to a given community, typically an urban center. Water supply entails the abstraction of raw water from a natural source, such as surface water (e.g., rivers and lakes) or groundwater (i.e., aquifers); its treatment to make it fit for human consumption; and, finally, its distribution to households and commercial users via an underground pipeline network. This entry discusses public water services as a natural monopoly, the history of public water service organizations in Organisation for Economic Co-operation and Development (OECD) countries, public water services in developing countries, global trends concerning the public versus private provision of water services, the restructuring of public water operations, and the principles underlying successful public sector reform.

A Natural Monopoly

The technical characteristics of water supply and sanitation services affect their organization and regulation. Because, at current technology levels, it is excessively expensive to set up more than one pipeline network to allow more operators to compete with each other, water supply is regarded as a typical natural monopoly. This implies that only one operator, whether public or private, is allowed to operate in a given operation area (e.g., in a municipality). If the water supply operator is a public undertaking, it is often appointed without competition for an unlimited duration and is subject to the scrutiny of public authorities. In recent years, the international practice in case of appointment of a private company as water supply operator is that this is subject to competition for the market, in the form of competitive bidding whereby the successful bidder enters into a long-term contract (typically up to 30 years).

Regulation is intended to be a substitute for or at least a complement of competition, whose introduction in the water sector is limited. Throughout the duration of the contract, the private operator is often subject to the scrutiny of local authorities or regulation by a specialized agency to try to prevent it from abusing its monopolistic position at the expense of consumers and the environment (e.g., by overcharging consumers or underinvesting in the system). If the introduction of competition is limited due to the technical characteristics of the sector, regulation is also problematic due to the asymmetry of information between the regulator and the regulated undertaking. In fact, the operator usually knows more about the state of the system and the conduct of operations than the regulatory agency, and it is thus able to exploit this advantage to pursue its interests (e.g., profit maximization in the case of a private operator) to the detriment of consumers, the environment, or the local community. It is thus important to identify governance mechanisms that will result in aligning the interests of the operator with those of the community.

Public Water service organization in OECD Countries

In Europe, urban water systems began developing in the 17th or 18th centuries as a limited service to affluent customers and as a public assistance for fire control. As cities grew in the 19th and 20th centuries, the demand for water consumption grew, and public health issues became more acute. While the initial systems were usually started by private companies, during the 19th century, the utilities were fairly soon taken over by municipalities in nearly all European countries.

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