Economic Regulation of Urban Water and Sanitation Services

Abstract

The design of regulation for water supply and sanitation (WSS) services has tended to follow a check-box approach - diagnose the need, prescribe an independent regulator or similar model (often developed in a different sector or country), and hope for the best. This approach has not always worked well. Regulation cannot solve all the problems that confront WSS services, and imported models may not work locally. Regulation must be based on a clear understanding of its capabilities and limits. Its design must reflect not only key principles of regulation, but also local needs, local legal instruments, and local organizations. Economic regulation addresses the problems posed by natural monopolies by compelling service providers to keep costs down, charge fair prices, and provide good service. An effective system also designates an entity to implement and enforce the regulations. Together, these functions remain limited in scope. To complement and reinforce economic regulation, a supportive policy environment and good governance of service providers are required. In short, economic regulation should be designed in tandem with other reform efforts.