Reform and risk management in the urban water sector : the role of regulation

Traditionally, urban water services were characterised by local monopolies, where the incumbent was publicly-owned. This was explained by safety, health, economic, and technological reasons related to the sector's specificities. However, in spite of this, the sector has undergone important reforms in recent years, triggered by efficiency, underinvestment, and environmental problems. The most important features of reform are competitive pressures, private sector participation, and more autonomous operators. These reforms have created a new environment for urban water management and regulation. The objective of this thesis is to analyse the role of regulation in the management of the risks created by the sector's reform. The theoretical analysis is developed along two lines. Firstly, we present an extensive literature review of the theories of economic and social regulation, with the aim of clarifying the interactions between regulation and reform better. We conclude that regulation matters, even after reform. Secondly, we use contract theories as a framework for presenting the vulnerability analysis of the main elements at risk because of reform, namely capital investments and the provision of the service of general interest. At the same time, risk-sharing regimes are identified for the most common institutional arrangement in the sector. The empirical analysis focuses on risk-sharing patterns and the vulnerability of the elements at risk. It is based on a questionnaire targeting management entities, five case-studies illustrating different institutional arrangements, and a study on operator's strategies in a context of reform. In the new context, asset specificity and informational hazards are the most important factors increasing the vulnerability of capital investments. The lack of funding sources is also highlighted, specifically in developing countries. It also became clear that non-provision of the service may result from non-capacity of the system or to non-affordability of the service. Along these lines, we propose regulatory governance mechanisms that tackle the problems highlighted in each institutional arrangement, involving different actors, for every step of the reform risk management process.