Incentive based, economic regulation of monopoly water and sanitation providers is a powerful tool for improving services. Regulators determine the maximum water price ('price cap ') needed to finance a desired level of outputs. Prices in high -income countries have tended to increase faster than inflation as society demands higher standards. Prices in lower-income economies have usually been significantly lower than costs and also need to rise, particularly to fund service expansion. The total revenue requirement (from which the price cap is derived ) is determined, using the 'building block' approach, by adding anticipated operating expenditure to planned capital expenditure (for capital maintenance as well as for improvements in quality, security of supply, service standards and service extensions), plus an acceptable cost of capital (to service any debt finance for example). Both opex and capex plans need to include efficiency targets derived from comparisons between a number of providers. Water providers are allowed to retain any further efficiency savings achieved within the price cap for a period (five years for example) which is an incentive to achieve even higher efficiency, before the benefits are shared with customers in reduced prices or enhanced standards for the future.
This model has been adapted around the world with varying degrees of success, usually in the context of a Public Private Partnership. Until recently the approach has tended to be reactive rather than proactive regarding early service to the poor. There is now a recognised need for adequate economic regulation of public providers, as well as private companies, in lower-income countries, to deliver similar mechanisms for financeability and efficiency and as a pre-requisite for developing effective pro-poor urban services.
This DFID research project seeks to give water regulators the necessary tools to require the direct providers to work under a Universal Service Obligation, to ensure service to the poorest, even in informal, unplanned and illegal areas, acknowledging the techniques of service and pricing differentiation to meet demand.
Looking to achieve early universal service, the research also considers how the role of small scale, alternative providers can be recognised in the regulatory process. Customer involvement, at an appropriate level, is seen as the third key aspect. The research investigates mechanisms for poor customers, and most importantly potential poor customers, to achieve a valid input to regulatory decision-making to achieve better water and sanitation services within the context of social empowerment and sustainable development.
Included in this report are case studies from the UK, Chile, Argentina, Ghana, Philippines, Bolivia, Jordan, Zambia, Indonesia, India and Uganda.
Center for Water Science, Cranfield University, UK, 190 pp.