Organization and Regulation of Local Public Services in
France: The Case of Water and Sanitation Services
International Summer School in Applied Environmental and Regulatory
Economics, Fondazione per l’Ambiente, Torino, 2014
J. C. ELNABOULSI
Université de Franche-Comté, Besançon, France
CRESE
September 2014
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September 2014
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Overview
Introduction.
Water and Sanitation Services (WSS) Characteristics.
The French Water Sector.
Water and wastewater utilities problems.
Delegation of Water and Sanitation Services in France.
WSS Regulation.
Conclusion.
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Introduction (1)
"The notion of public service obligation (or Universal Service
Obligation) has been de…ned in Community legislation as the
permanent and obligatory provision of a range of services easily
accessible to users. Such services may also have to meet
speci…ed quality targets and be available at a¤ordable prices.
Member States have wide discretion in de…ning the detailed
speci…cations relating to these aspects".
European Commission, 2007.
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Introduction (1)
"The notion of public service obligation (or Universal Service
Obligation) has been de…ned in Community legislation as the
permanent and obligatory provision of a range of services easily
accessible to users. Such services may also have to meet
speci…ed quality targets and be available at a¤ordable prices.
Member States have wide discretion in de…ning the detailed
speci…cations relating to these aspects".
European Commission, 2007.
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Introduction (2)
Since early civilization, accessibility to water has been of great
concern to public authorities ! water systems re‡ected the social
aspects of each society. In general, water was often distributed
according to social criteria.
Today, water continues to be viewed as an essential public good.
Public authorities remain responsible for its harvest and distribution
among the population. Large infrastructures continue to be built to
improve the accessibility of WSS for the population.
Statutory responsibilities for water regulation and planning within
France are split amongst a large number of authorities and
agencies, all of whom operate at di¤erent levels (commune,
department, region, state) depending upon the nature of the water
(ground water, surface water, domainial rivers, estuaries and ports),
the use (extraction for human consumption, industry, farming,
leisure) and the type of intervention (…nancial incentives,
catchments planning).
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Introduction (3)
After WWII, the French local municipalities have faced many
problems that are responsible for the poor performance, ine¢ ciency,
and low productivity in managing their WSS.
After the “1982 Decentralization Act” and the “1992 Water Act”,
many municipalities started looking for alternative ways of providing
their WSS more e¢ ciently: delegation contracts.
Attention: delegation is an old tradition in the French history: State
and municipal services have been delegated in France at least since
1270!
The primary goals of the French local municipalities are: (i) to
expand the water and sanitation systems in order to increase
population coverage (especially for sewerage), (ii) to expand sewage
treatment in order to reduce water pollution, (iii) to respect EU and
national standards of e- uent discharges, (iv) to provide better quality
of service, (v) to …nance the system with or without public subsidies,
and (vi) to ensure higher operating e¢ ciency.
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WSS general characteristics
Public services:
) WSS must ful…ll a set of institutional constraints.
) being a public service results in a set of obligations that must be
satis…ed either by a public or by a private operator.
In general, local authorities are responsible for providing WSS under
the oversight of di¤erent national or supra national institutions.
WSS management can be: public or private.
Attention: private participation does not relieve public authorities of
their responsibilities to ensure safe and e¢ cient WSS and to prevent
the abuse of monopoly dominant position.
In any case, contracts specify the nature of expected services and the
pricing issues (including price revision and indexation formula).
Water and wastewater utilities must be …nancially self-su¢ cient.
Standards for pollution and drinking water must be met.
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September 2014
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Economic characteristics of the water industry (1)
A water network includes all facilities from the pumping plant(s) to
the wastewater treatment plant (s). We can distinguish two types of
activities in the water industry:
1
2
Drinking water services: withdrawal and treatment prior use, storage
and transportation, distribution to …nal users;
Wastewater services: transportation and storage of used water,
treatment.
The water and wastewater industries exhibit multiple market failures:
A network infrastructure is a costly long-term investment ! sunk costs
! Natural monopoly (see appendix) ! price regulation.
Since there is little reason to expect a natural monopolistic industry to
provide the optimal level of service, there is tight regulation
(Armstrong et al. 1995; Bös, 1994).
Externalities exist at several stages of the water cycle ! important
environmental damages (pollution, etc.).
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Economic characteristics of the water industry (2)
General competition is neither possible nor desirable. The structure of
the industry explain the regulatory supervision of WSS by
governments in many developed nations.
WSS demand is usually price-inelastic and is seasonal reaching its
peak period in summer time when the availability of raw water is at
its lowest level:
) Quality: WSS quality is regulated by minimum standards related
to microbiological, chemical, physical and aesthetic properties.
) Quantity: su¢ cient pressure, etc.
! Capacity problems (Elnaboulsi, 2001).
In general, water services prices involve a two-part tari¤: an access
tari¤ covering …xed costs (consumer’s hook-up) and a linear charge
based on usage (increasing or decreasing).
Domestic wastewater services are priced within a local community
homogeneously. Industrial wastewater services are priced accordingly
to e- uent discharges (strength and quantity).
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Monopoly regulation
Figure 1: Economic regulation of WSS
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The administrative organization
The French model of WSS is deeply rooted in the spatio-political
subdivision of the French territory and the French democracy: over
36500 "communes"!
Local organization: WSS are organized on a municipal basis. Since
1790, the French local communities have been responsible for WSS
! Mayors hold legal responsibility, under the Communal Code, for
the provision of clean drinking water, collecting and treating
wastewater, and the supply of other local public services.
Early 2000’s:
15000 independent water utilities dealing with water
supply and
14500 dealing with wastewater services.
Intercommunal Grouping (Syndicates, Districts or Communautés):
possibility to share sunk costs and to limit the risk of shortage in the
event of drought or under capacity problems.
Water utilities must be …nancially self-su¢ cient ! “M49”
Industrial and Commercial General Accounting Rule (1990’s): water
must pay for water.
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Legal status (1)
WSS belong to a speci…c category of public services called industrial
and commercial public services (SPIC):
Continuity of supply in quantity and quality: 24h a day, 7 days a
week, etc.
Adaptability: ‡exibility, must take into account technology changes,
new standards, environmental restrictions, etc.
Equality: (i) level and quality of the service; (ii) tari¤s; (iii) access to
the service for all consumers.
Local public missions are accomplished under the oversight of the
Interior Ministry in cooperation with the Environment, Public Health,
and Agriculture Ministries.
Standards for pollution and drinking water must be met (EU
Directives).
WSS management can be public or private ! Delegation contracts
di¤ering according to:
the degree of the …rm’s involvement in the service;
the proportion of the risk that the external operator bears.
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Legal status (2)
Water resources management is based on the principle of integrated
river-basin management (six hydro geographic zones).
Water related-activities within a catchments area are performed by a
Water Agency (6 water agencies, 1964 Water Act). It is a public
establishment under State supervision. Missions:
Water resources management and protection: oversee the application
of the Polluter Pay Principle.
Water policy implementation and supervision.
Local actions coordination.
Collecting extraction and pollution taxes.
Allocation of the collected funds between local authorities: subsidize
water resources conservation programs, investments to improve water
resources and to treat e- uents, etc.
Attention: the French water agencies do not carry out projects nor
regulate or supervise water and wastewater utilities!
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Legal status (3)
Local public investments bene…t from large-scale government
subsidies channeled through the Water Agencies or through the
FNDAE.
National Water Supply Development Fund (FNDAE):
National solidarity fund.
Levies a national tax on each distributed m3 ,
Allocates the collected tax between rural communes and ensure that, in
rural areas:
1
2
interests of consumers are protected,
drinking water and sewerage services guaranteed, ensured and well
provided.
The FNDAE disappeared in 2005. A similar tax levied by the 6 Water
Agencies, Tax on Water Consumption, replaced the FNDAE tax.
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Water consumption in France (Ifen, 2005)
Figure 2: Water consumption.
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September 2014
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WSS prices in France (Ifen, 2005)
Figure 3: WSS prices.
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Water prices per commune (size)
Figure 4: Prices per local authority (size)
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Household WSS prices
Figure 5: Price of household WSS in France, Ifen 2007.
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French water companies
Major companies:
VEOLIA Environnement (ex Vivendi, Compagnie Générale des Eaux,
1850’s).
SUEZ Environnement (ex Lyonnaise des Eaux – Suez, 1880’s).
Bouygues, Société d’Aménagement Urbain et Rural (SAUR, 1950’s).
Characteristics:
Provide state-of-the-art in the …eld (national and international level).
Financially strong, market-oriented, vertically and horizontally
integrated.
Quali…ed personnel.
Well diversi…ed: waste management, property services and
management, heating, cable TV, transportation, and other municipal
furnishing, etc.
The French water companies are often engaged in delivering other
services to the municipalities. This creates potential lock-in e¤ects.
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Private participation in urban services in France
Delegation contracts Public management
Collective transportation
62%
38%
Waste collection
50%
50%
Waste treatment
80%
20%
Catering
70%
30%
Water distribution
80%
20%
Wastewater treatment
60%-70%
30%-40%
Parking
65%
35%
Urban heating systems
75%
25%
Table 1: Private and public management of urban services.
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September 2014
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Main operators in the French water sector
Table 2: Main operators in the French water sector. Source: Conseil de la
Concurrence, avis n. 00-A.12, May 31st 2000.
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Main operators: drinking water
Figure 6: Main operators: drinking water service. Source: BIPE, 2010.
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Main operators: wastewater
Figure 7: Main operators: wastewater services. Source: BIPE, 2010.
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September 2014
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Population served by type of operator in Europe
Figure 8: Ownership and population served in Europe (2006).
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Population served by operator size in Europe
Figure 9: Operator size and population served in Europe (2006).
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The French WSS problems
During the 1970’s, 1980’s and 1990’s, the General Accounting O¢ ce
have mentioned that there is a growing awareness that public
provision of water and sewer services have been inadequate.
Di¤erent reports (1979, 1987, 1989, 1997, 2000, etc.) blamed the
ine¢ ciency of WSS public monopolies and their failure providing safe
drinking water and adequate wastewater collection and treatment to
the entire population.
Di¤erent problems may help explaining the poor performance and low
productivity of most WSS:
Technical and operational: increasing technical and managerial
complexity of the value chain of WSS.
Commercial and …nancial: ine¢ ciency in many publicly-managed WSS.
Human and institutional: government failures.
Environmental: increasing EU environmental regulation.
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Technical and operational
Ine¢ cient public operational practices.
Regular maintenance (especially in small and rural public utilities) is
inadequate or simply absent.
Neither preventive nor curative maintenance actions exist to reduce
physical losses through old pipes (leaks). Networks are not properly
maintained nor replaced in a timely manner (lot of the French water
distribution systems have been built by the end of the 1800’s) ! no
adequate renewing water distribution systems policies!
Technical problems are related to the lack of su¢ cient knowledge
about the state of the installations, the needs for replacement,
rehabilitation and expansion, etc.
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September 2014
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Commercial and …nancial
Commercial and …nancial problems are related to:
Consumption metering: in habitation complexes, consumption is based
on collective meters, this creates distortions in consumer charges and
legitimate consumer protests.
Water demand evaluation: lack of reliable data makes planning di¢ cult
to manage water supply systems and thus wastewater services.
Commercial losses due to the high level of unaccounted water
(municipal uses, poor consumer records, unpaid bills, ine¢ cient billing
and collection practices).
Pricing policies: they are ine¢ cient and are based on average historical
accounting costs rather than the economic costs.
Tari¤ structures: in many cases WSS are under priced and tari¤s
present cross-subsidies (industrial uses are subsidized by domestic uses).
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Human and institutional
Human and institutional are related to:
The excess sta¤ in public managed WSS.
The lack of adequate incentives to attract su¢ cient and e¢ cient
managerial talent.
The lack of discipline of labor force and low quali…ed personnel.
WSS are also a¤ected by excessive political appointments and
interventions ! 1993 Political Transparency Act separates the
management and delegation of WSS from all political appointments
in a step to reduce corruption and eliminate political interventions.
Lack of clear regulatory responsibility and the absence of adaptive
e¢ ciency in WSS organization ! for many years local communities
were the operator and the controller of their actions ! risk of a
potential con‡ict of interest ! The February 2nd 1995 Law.
The absence of legal and institutional framework for long years:
example the accounting rule applied before 1992.
Public funds are insu¢ cient (the French communes are responsible to
manage over 150 public services!).
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Environmental
Di¢ culties to meet EU directives and standards and to catch up with
past under-investments: Drinking Water Quality, UWWTD, WFD.
EU environmental directives imply important and costly investment
programs to achieve compliance with these directives.
! Rapidly increasing water and wastewater charges!
! In 2004, 2008, 2009, the EC has taken legal action against 13
Member States for non-compliance with EU directives (Written
warnings).
! October 2004: EU Court of Justice condemned France over
excessive concentrations of Nitrates in tap water in Brittany.
Attention: local authorities frequently bene…t from large scale
government subsidies channeled through the Water Agencies and the
National Fund for the Development of Water Supply Systems.
Problems related to the ine¢ ciency of wastewater systems: large
quantities of untreated sewage are discharged into rivers or reservoirs
located in the proximity of the commune ! increased public health
hazards.
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Delegation contracts
Delegation is a general term covering four main contractual forms,
which di¤er in some characteristics, but rely on the same principles.
Four types of contracts are used in the delegation of industrial and
commercial public services in France:
Concession.
Lease Contract (A¤ermage).
Management Contract or Gérance.
“Commissioner management contracts” known as Régie Interessée.
A¤ermage and concession are so far the most common delegation
contracts. The Régie intéressée is rarely applied.
Taking into account the present economic climate, concessions have
practically disappeared from delegated management contract: the
need to develop infrastructure no longer in‡uences the choice mode of
management, since investment funds are always guaranteed by local
authorities and government agencies (French Competition Council,
2000).
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Concession (1)
The private …rm …nances and builds utility installations and manages
them: the …rm is responsible for the services including operation,
maintenance, and management as well as capital investments for
rehabilitation and expansion works.
The …rm is remunerated directly by the consumers (through the price
of water de…ned in the contract).
The …xed assets, which remain the property of the commune, are
entrusted to the concessionaire for the duration of the concession
contract and must be returned in the same condition at the end of
the concession period.
Before 1995, Concession contracts ran for long years and no limits of
duration exist (75 or 50 years)! The February 2nd 1995 “Public
Services Delegation” Law (art. 40 and 75) has restricted the time lag
of a concession contract to 20 years and cannot be over the duration
of investments’amortization.
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Concession (2)
Before the 1995 Law, the concessionaires have been asked to pay
important “entry fees1 ” to the local municipality who used these
funds to recover the debt of the central budget of the commune !
WSS users indirectly pay the concessionaire back.
Since 1995 (art. 76), these fees are prohibited by the Law in the
delegation of water and wastewater services.
The details of the price controls and evolution are contained in each
…rm’s contract in which a price revision’s formula is clearly de…ned:
the growth rate follows the price of a basket of the …rm’s costs of
inputs. The price revision’s formula varies across utilities and over
time.
The contract stipulates although penalty …nes if the private …rm fails
to meet the targets for service coverage or the quality of service
speci…ed in the contract.
1 These
practices were also largely used in lease contracts. For example, when water
services have been privatized in Toulouse, The Compagnie Générale des Eaux paid about
500 Million French Francs to the commune as entry fees.
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Lease contracts or A¤ermage (1)
This is the most common form of delegation (over 85% of the French
communes): a private company "rents" all water facilities to the
commune for a period of time.
The private …rm is responsible for operation and maintenance
expenditures (including o¢ ces, overhead costs, etc.), as well as
billing, collecting and …nancing management work.
In general, the commune, which remains the owner of the whole
system, is responsible for capital expenditures for new projects,
replacement of major works, debt service and tari¤s and cost-recovery
policies.
The …rm must pay the commune a rental fee (surtaxes) included in
the price of WSS …xed in the lease contract, billed and collected by
the private company.
The duration of these lease contracts is about 10 to 12 years.
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Lease contracts or A¤ermage (2)
The private …rm is getting paid in the same way as in concession
contract but receive only the part of water prices that covers
management costs ! an incentive policy to provide good services
and establish good billing and collection practices.
WSS prices are provided by the delegation contract, which de…nes the
automatic periodic revisions of the contractor rate using a price index
formula.
Rates re-negotiations and costs index formulas revisions are possible
periodically, and can be based on results achievements.
These contracts are very ‡exible and can be adapted to a variety of
situation and promote a sense of technical and economic
responsibility on the part of the private sector management company.
Risk involvement: very limited. The private company supports a
low-risk option participation in providing WSS unless it assumes a
part of investment capital risk (renewal main networks’expenditures).
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Management Contract or Gérance
The gérance is the simplest and more comprehensive arrangement
form of delegation.
The public authority:
retains control of the installations,
preserves to a greater or lesser extend a share of direct responsibility
related to operation and maintenance of the system,
bears all the commercial risk and …nances …xed assets as well as
working capital.
The contract de…nes:
responsibility of both parties,
terms and conditions of remuneration of the private …rm (by the
commune and not by the customers of the service).
The responsibility of the operator is limited to managing its own
personnel and services e¢ ciently: it has the freedom to make
day-to-day management decisions without assuming any commercial
or …nancial risks and has no legal relationship with the consumer.
Payments to the operator are based on a guaranteed lump sum.
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Régie intéressée
Same as the management contract or Gérance.
Di¤erence: payments of the contractor are linked to a work performed
instead of guaranteed payments.
Payments are proportional to some parameters such as improved
e¢ ciency and management.
This productivity bonus payment scheme creates incentives for
increasing productivity.
Note: very few Gérance contracts in France.
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Delegation’main features
Main features
Investments
Op. costs
Ownership
Management
Rel. w/users
Fin. risks
Duration
Rate setting
Payments
Concession
Private
Private
Public
Private
Private
High
20
Contract
Rate payers
Delegation Contracts
A¤ermage
Gérance
Régie interessée
2
Public
Public
Public
Private
Public
Public
Public
Public
Public
Private
Private
Private
Private
Public
Private
Moderate
Low
Low
10-12
Contract
Contract
Contract
Public
Pub. and private
Rate payers Fixed fees
Incentives3
Table 3: Industrial and commercial WSS delegation’main features.
2 Sometimes
the private company is in charge of speci…c investment costs.
fees with incentives. Incentives are bonus based on productivity and
commercial performance.
3 Fixed
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WSS in France
Management Type
Percentage in "communes"
Drinking Water
- "Régie"
37
- Delegation
63
A¤ermage
88
Concession and Others
12
Sewerage
- "Régie"
62
- Delegation
38
A¤ermage
85
Concession and Others
15
Table 4: Management type of WSS in France.
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Why regulation?
Key objectives of regulation in WSS are to:
protect the environment and to establish fair allocation of water
resources between competing users;
ensure compliance with standards in order to preserve the environment
and natural resources;
ensure public access to good quality WSS in order to protect public
health – a universal service obligation;
protect customer interests against monopoly power by establishing
acceptable levels of service and price and e¢ cient operations, for which
they would need to provide incentives for competition (for example in
ensuring competitive tenders are conducted properly);
ensure that there is no undue discrimination between users;
deal with market failures associated with the service provision – such as
monopoly abuses and imperfect information;
create an operation and investment environment that focuses on
customers and operate in a transparent and proportionate manner;
improve e¢ ciency and innovation.
etc.
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Legal regulation
French national legislation has introduced a number of notable
changes a¤ecting private and public water operations.
Until recently, delegation contracts were frequently renewed without
tendering, according to the Cour des Comptes, France’s national
audit body.
It was only in 1993 that the Sapin Law, or anti-corruption law,
provided for private operations to be publicly and "competitively
tendered".
In 1995, the Sapin Law was integrated by the Barnier Law which
limited the maximum duration of delegation contracts at 20 years.
Also passed in 1995, the Mazeaud law on public procurement and
delegation of public service requires operators to submit to delegating
authorities yearly reports containing accounts of all operations and an
analysis of service quality. The operator’s accounts can be subject to
the scrutiny of regional audit bodies.
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Aims
The French law aimed to:
ensuring more transparency than the existing discretionary procedure,
encouraging competition,
limiting entrance barriers,
increasing the frequency of contract renewals.
The delegation procedure is quite complex and fairly uncommon for
the municipalities.
It nevertheless left ample room for negotiations between the
municipality and the applicants.
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Laws
1992 “Water Act”: water resources and the environment as a
national patrimony; “M49” public services general accounting rule;
‡at water rates are prohibited.
1993 “Political Transparency Act”: the principle of delegation
document; a committee for delegation; a transparent bidding; award
process and a publicity.
1995 “Public Services Delegation Act”: duration, contract
modi…cations, operator accounting and service quality report, water
tari¤s and level of service reports, pollution actions, etc.
The most important advantages in publishing of such reports are:
better understanding by customers and more informed public debate;
it would be used as comparative performance indicators; it would be
used as evidence to enforce the statutory conditions with respect to
the present duty to supply and the proposed duty to improve levels of
service.
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Delegation process (1)
Delegation is accomplished under speci…c institutional features and
determines the partial and temporary management of the service.
The territorial administration of the State (Prefecture) is in charge of:
the control of the legality of public procurements and of all activities of
local communities;
the compliance with technical standards
The local authority, as the organizer of WSS, must de…ne the general
principles governing these service:
monitor the prices,
control the …rm operating in the market,
organize the competition,
ensure that WSS are well executed, etc.
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Delegation process (2)
Mainly, delegation of WSS is governed by the "Sapin Law", January
23 1993 and 1995 “Public Services Delegation Act".
Preparation of the principle of delegation document:
obligation of advertising and calls for tender;
announcements must be done in the o¢ cial press (Journal O¢ ciel);
Preparation of the bidding process: in general restricted calls for
tender based on pre-quali…cation criteria.
Bidding process and the choice of the future operator: the awarding
of contracts is based on the principle of intuitu personae:
negotiations of the contract are conducted freely on condition that
the Sapin law of 1993 is respected.
! intuitu personae principle: negotiation and mutual agreement.
Control of the procedure: duration, access fees, tari¤s, etc.
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Price setting mechanisms (1)
The weakness of competitive pressures in the French water sector
creates a need for some economic regulation: since competition in the
market is not possible, regulation is necessary.
Delegation of WSS is characterized by deep imbalances: on the one
hand, the three big groups in possession of strong technical and
…nancial capacities and, on the other hand, the French municipalities
with a weaker negotiating and controlling capacity.
In its 1997 report, the French national audit court identi…ed a lack of
competition, frequent re-negotiations of initial contractual terms, a
tendency to extend existing contracts without subjecting them to
tender and the existence of bribery and corruption (Grenoble).
There is no independent price regulatory body in France. The prices
are generally negotiated between private operator and municipality in
the course of the tendering process.
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Price setting mechanisms (2)
A fundamental principle of water management in France is "l’eau paye
l’eau" (i.e. full-cost recovery), meaning that water prices should come
up for all involved cost of operation and investment requirements.
WSS for the …rst delegation year is computed from …nancial forecasts.
For the following years, a rate revision rule.
The price formula is based on costs’parameters like investments,
salary costs, and other costs that can not be veri…ed and monitored by
the local municipality and can be easily manipulated ) rent seeking.
WFD recommends using volumetric charges to re‡ect and recover
…nancial, environmental and resources costs (the sustainability of
water resources).
Non-respect of pricing rules or a disagreement on the price level can
lead to non-renewal of the delegation contract (Neufchâteau, Le
Monde Diplomatique, 2005) or going back to public management
which is not an easy task!
Problem: asymmetry and availability of information, loss of technical
skills, administrative di¢ culties!
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Competition for the market (1)
The economic literature is unanimous in recognizing the limited scope
for competition in the market ! competition for the market via
competitive tendering.
Competition for the market can improve e¢ ciency under some
conditions:
Contract completeness.
Transactions costs.
Information asymmetries among parties.
Adequate number of operators.
etc.
But, long-term contractual relations imply in general oppotunistic
behavior (quasi-rents, capture regulatory decisions, etc.). This
requires very complex adaptation and sophisticated contractual
arrangements.
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Competition for the market (2)
Only since the competition laws of the 1990’s the situation has
slightly improved, however, due to the extremely low number of
potential bidders the competitive moment of auctions is rather low !
competition that exists between operators is often oligopolistic
pseudo-competition either there exists an understanding or market
sharing between them!
Joint ventures between the major players and collusion further limit
competition.
Facing information asymmetry and high market concentration, some
municipalities have found it necessary, in recent years, to go back to
direct management of water and/or wastewater treatment (Paris,
2010).
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New Economics of Regulation
Regulation essentially means control under incomplete information.
Need of an independent regulatory authority.
Bidding process: determine the regulated economic variables (prices,
rate of return, etc.).
Bidding must be competitive (problems of collusion in a highly
concentrated market).
The public authority sets the rules for competition and enforces the
terms of the agreement (contract speci…cation and enforcement,
price-revision formula, contract duration, etc.).
Optimal contract: sharing of risks and rewards between operator and
the regulator. Financial rewards or penalties are based on some
measure of utility’s performance.
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Conclusion (1)
Private sector involvement have had signi…cant bene…cial outcomes
on the economy in general.
However, in the network industry, this point is questionable: market
failures need to be carefully considered and outcomes deserve a
careful consideration.
Some possibilities to introduce competition exist even if WSS remain
for a large part a natural monopoly ! competition for the market (at
least for some part of the activity) ! competitive auction and no
“beauty contests”
New institutional regime: greater degree of transparency, higher
capacity to avoid collusion and corruption, new legal rules of
contracting schemes.
Economic regulation: linear mechanism rule
Reinforce or replace the existing juridical contracts.
Outcome is signi…cantly complex.
Some improvement: e¢ ciency and performance.
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Conclusion (2)
There is no “best” nor optimal regulation model.
Regulation depends on:
the
the
the
the
the
the
type of the market failure,
type of relationships between politicians and bureaucracy,
quality and independence of public administration,
public service obligations,
sectorial and geographical situation,
technological development of a speci…c sector
Regulation must be seen as a dynamic process and needs: a stable
political environment, an absence of corruption and e¤ective
competition in the private sector.
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References (1)
Abbott, M. and Cohen, B., (2009): “Productivity and E¢ ciency in
the Water Industry,” Utilities Policy, 17, 233-244.
Armstrong, M., Cowan, S., and Vickers, J. (1994). Regulatory
Reform: Economic Analysis and British Experience, The MIT Press:
Cambridge, Massachusetts.
Ballance, T. and Taylor, A. (2005). Competition and Economic
Regulation in Water: The Future of the European Water Industry,
IWA Publishing: London, UK.
Bauby, P. (2009), The French system of water services, CIRIEC WP,
N 2009/03.
Bös, D. (1994): “Pricing and price regulation : an economic theory
for public enterprises and public utilities”, Advanced Textbooks in
Economics, n 34, edited by Bliss C.J. and Intriligator M.D., Elsevier,
NH, 453 pages.
J.C. Elnaboulsi (CRESE)
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References (2)
Brown, S. J. and Sibley, D. S. (1986). The theory of public utility
pricing, Cambridge University Press, 252 pages.
Brown, Ashley C., Jon Stern, and Bernard Tenenbaum, with Defne
Gencer. (2006). Handbook for Evaluating Infrastructure Regulatory
Systems. Washington, D.C.: World Bank.
Elnaboulsi J. (2001): “Organization, management and delegation in
the French water industry”, Annals of Public and Co-operative
Economy, 72, 4, pp. 507 – 547.
Elnaboulsi J. (2001): “Non-linear pricing and capacity planning for
water and wastewater services”, Water Resources Management, 15, 1,
pp. 55 – 69.
J.C. Elnaboulsi (CRESE)
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References (3)
Kessides, I.N. (2004). Reforming Infrastructure: Privatization,
Regulation, and Competition, World Bank and Oxford University
Press: Washington DC.
OECD (2009), Managing Water for All: an OECD Perspective on
Pricing and Financing, OECD Publishing, 151 pages.
Panzar, J. (1989): “Technological Determinants of Firm and Industry
Structure,” in Handbook of Industrial Organization, vol. II, edited by
R. Schmalensee and R. D. Willig, Amsterdam, Elsevier Science
Publishers.
Walter, M., Cullmann, A., von Hirschhausen, Ch., Wand, R. and
Zschille, M. (2009): “Quo Vadis E¢ ciency Analysis of Water
Distribution? A Comparative Literature Review,” Utilities Policy, 17,
225-232.
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Water and wastewater supply chains (1)
Water supply chains comprise the following key activities:
source of water supply: dams to capture and store surface water runo¤,
groundwater reservoirs, etc.;
treatment plants: to remove natural and other pollutants, and to treat
raw water to a usable (potable or non-potable) standard;
distribution infrastructure: including large/trunk pipelines before and
after treatment plants, and reticulation networks (medium and small
pipelines), pumping stations and local reservoirs, to transport water
from its source to treatment plants and then from treatment plants
onto customers;
customer service activities, often referred to as retailing: including
billing, meter reading, and responding to complaints or service failures.
Water and wastewater utilities also have activities or assets that
support these supply chain elements: for example, accounting, …nance
and general administration activities and assets (i.e., corporate
overheads).
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Water and wastewater supply chains (2)
Wastewater service systems are typically made up of the following
activities:
wastewater collection and transmission infrastructure: to transport
wastewater from customers to treatment plants (reticulation pipelines
and associated …ttings to transport wastewater from source to trunk
network, trunk pipelines to transport wastewater from the collection
network to treatment plants, pump stations and over‡ow structures);
treatment and disposal facilities: comprise treatment plants to remove
the sludge or biosolids from the wastewater, treat the wastewater to
varying levels (e.g., primary or tertiary treatment, depending on the
receiving environment and prevailing environmental standards), and
then dispose of the wastewater via emissions to rivers or the ocean or
by providing it for recycled water generation;
residuals management: involves removing sludge or biosolids from the
wastewater, and then incinerating them, dumping them at sea or using
them as fertilizer on farm land;
customer service activities: including billing, meter reading, and
responding to customer issues.
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Key Activities
Figure 10: Water and wastewater key activities.
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The water industry is a network (1)
De…nition (1)
A network is a set of points or nodes, connection links built in order to
transport some energy ‡ows (electricity, heat, etc.), some information
‡ows (sounds, data, images, etc.) or some materials ‡ows (water and
wastewater, freight, passengers, etc.). From an economic point of view, a
network is an intermediation platform between one or several producers
and one or several consumers.
De…nition (2)
A node can be:
- a departure node from which a ‡ow is emitted;
- a …nal node receiving a ‡ow;
- an intermediate node conceived for transmission, storage, coordination,
dispatching, etc.
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The water industry is a network (2)
De…nition (3)
An e¢ cient network allows to minimize all the production costs.
Network System
Air Transportation
Manufacturing
and Logistics
Communication
Energy
Nodes
Links
Airports
Airline Routes
Distribution
Routes
Points
Computers
Cables
Pumping Stations
Pipelines
and Plants
Table 5: Some classical network systems.
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Organization and Regulation of WSS
Flows
Planes
Parts/
Products
Messages
Oil, Gas,
Water
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Natural Monopoly (1)
Activity quali…ed as natural monopoly : sunk costs/increasing return
to scale ! General competition is not possible nor desirable.
Let’s consider the monoproduct case and assume that the total cost
function is given by C (q ) = CF + CV (q ), with CF representing the
…xed costs, CV (q ) the variable costs. q is the production level and
(q1 , . . . , qn ) denote fractions of the total production q such as
∑ni=1 qi = q.
De…nition (4)
The cost function is strictly subadditive if:
n
∑ C (qi ) > C (q ) , 8q, i with q =
i =1
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∑ qi
i =1
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Natural Monopoly (2)
It is less costly to jointly produce the bundle (q1 , . . . , qn ) through a
single …rm than to divide the production across two or more separated
…rms (or production units) ! De…nition of a natural monopoly.
Remark: Subadditivity can be de…ned locally. A cost function is
subadditive at q 0 if
n
∑ C ( qi ) > C
i =1
q 0 , 8i with q 0 =
n
∑ qi
i =1
The natural monopoly character of the water industry is so strong
that structural unbundling is rare, making vertical integration of
utilities dominant even in industrial countries:
transportation and distribution involve important …xed costs;
it is very di¢ cult to duplicate a water network which represent an entry
barrier ! water industry = non-contestable monopoly;
a lot of assets are speci…c: irreversibility of investment.
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Economies of Scale
De…nition (5)
Economies of scale characterize a production process in which an increase
in the scale of the …rm causes a decrease in the long run average cost.
C (q )
There are scale economies if the average cost q is decreasing 8q.
Remark: Similarly there are local scale economies at q 0 if the average cost
C (q )
is decreasing at q = q 0 .
q
De…nition (6)
We measure the degree of scale economies (S ) using the cost elasticity,
µC , which is equal to the ratio of the marginal cost (MC ) to the average
cost (AC ) :
AC
1
S=
=
µC
MC
There are scale economies iif S > 1.
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Relationship between subadditivity and scale economies
Lemma (1)
Locally, scale economies are su¢ cient, but not necessarily, to have a
decreasing average cost function. Decreasing marginal costs imply
decreasing average costs which imply subadditivity but reciprocal false.
Proof.
See Panzar, 1989, p. 8, 25-27.
If multiproduct …rm ! economies of scope. Consider q a vector of goods
chosen among n (i = 1, . . . , n ) possible goods.
De…nition (7)
There exist scope economies if it is less costly to jointly produce several
products (q1 , . . . , qn ) than to produce separately these goods
n
∑ C (0, . . . 0, qi , 0, . . . , 0) > C (q1 , . . . , qn )
i =1
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