Private Enterprise and Financial Markets > Infrastructure and Financial Markets > Infrastructure
Policy Issues for the Water and Sanitation Sectors
By Vivien Foster (03/96, IFM96-101, En)
The key distinguishing characteristics of the water and sanitation sector relative to other public utilities are identified as the low ratio of value to transportation costs making for highly fragmented distribution networks; the virtual absence of any scope for direct competition in the market; and the strong social character of the service as a result of positive social and negative environmental externalities in consumption.
Building on the analysis of the sector's distinguishing characteristics, the key economic issues facing the industry in Latin America are: the degree of centralization of the operations; the extent to which competition for the market can be effectively used to improve sector conditions; and the scope for reform of social policy toward the consumption of water and sanitation services.
As far as the optimal horizontal structure of the industry is concerned, the analysis suggests that this is a multidimensional question, which goes beyond the traditional considerations of operational and managerial efficiency to encompass the wider issues associated with environmental management, private sector participation, investment finance, regulatory control, and social policy.
Analysis of the role of competition for the market suggests that experiments to date have been largely confined to the metropolitan areas of the larger countries in the region, where economic and sectoral conditions are comparatively favorable. As privatization experiments are extended to smaller countries and rural areas, it will be important to evaluate the extent to which privatization can actually bring about sectoral improvements, rather than simply necessitating them as a prerequisite for its successful implementation.
As far as social policy is concerned, the analysis suggests that even those countries which are not being compelled to reconsider their social policy as a result of some privatization initiative would nonetheless benefit from fundamental reforms. Such reforms should be based on the answers to three key questions regarding the objectives of social policy; the sources of funding and the instruments of implementation. There is some empirical evidence to suggest that traditional social policy has focused excessively on the issue of affordability to existing users, at the expense of promoting access to those not yet connected to the network.
Finally, any country contemplating a reform of its water and sanitation sector should bear in mind that structural issues must be settled in advance of ownership issues; privatization measures should be considered as lying on a continuum as opposed to constituting an all-or-nothing choice; and regulation is likely to play a role, even where privatization measures are not considered feasible or desirable.
This publication can be obtained from:
IFM
Publications
Infrastructure and Financial Markets Division
Mail Stop W-0508
Inter-American
Development Bank
1300 New York Avenue, N.W.
Washington, D.C. 20577
E-mail:
sds/ifm@iadb.org
Fax:
202-623-2157
Last updated: 01/29/07
