Meine Pieter van Dijk, UNESCO-IHE

1. The role of institutions and institutional arrangements in the water sector, with examples of scenarios from Europe Meine Pieter van Dijk, UNESCO-IHE Delft: February 12, 2008

2. Two main streams in economics, neoclassical and institutional economics Institutional economists don’t believe in an invisible hand, but emphasize the importance of rules and regulations, norms and values

4. An institutional analysis: the norms of Confucius living from 551 to 479 B. Christ Transformed Chinese philosophy with belief that the greatest goal in life was pursuit of the Way. Het gaat niet om het doel maar om de weg erheen A search for virtue not as a means to rewards in this world or the next, but as the pinnacle of human existence Confucius (1979) The neo-Confucian work ethics survived the communist periodand contributes to success He used the methods of Socrates: The master said…, Tzun-ch’in asked, etc

5. Four institutional arrangements Nijkamp et al. (2002) stress that it is difficult to define an unambiguous balance between the task and competences of the public vs private sector To reconcile public and private sector interests new institutional arrangements with the private sector have developed and will be analyzed Different institutional and economic arrangements have been introduced in the water sector to increase the effectiveness and efficiency of service providers, often public utilities

6. Institutional arrangement In the tradition of North (1991) and Hodgson (2006) institutions are important and may either be defined as the rules of the game (North), or more sophisticated as “the systems of established and embedded social rules that structure social interaction” Institutional arrangement refers to a detailed arrangement of an existing institution to make it work better. In terms of institutional economics, an institutional arrangement is the result of a reform within an existing institution

7. In the forthcoming IJW we distinguish Completely publicly owned water utilities with very little or no private sector involvement PSI without participation in the investment risks Different types of PPPs with participation in the investment risks Completely private provision of water and sanitation

8. Publicly owned water utilities with no PSI PSI without participation in the investment risks PSI with participation in the investment risks (PPP) Completely private provision of water and sanitation Theory discussed in Schwartz the second paper: Mimicking the private sector Theory discussed in Schouten and Van Dijk: all scenarios show more PSI Theory discussed in Van Dijk below: Why PPPs in basic servicedelivery Theory discussed in Van Dijk: The role of small scale private suppliers Case included: Lusaka, the capital of Zambia Cases included: urban and rural areas in Ghana and in Cartagena (Colombia) Cases included: (Arg) Buenos Aires Cochamba (Bolivia), Indian cities, St Maarten (N.A.) Cases included: Santiago de Chile (Chile) and Non state (small-scale) private water providers

9. PSI is the future in water sector This statement is based on a scenario study Scenarios were prepared for the future development of the European water market Scenarios range from a more explicit role for the government as a provider or as a regulator, to a situation where more would be outsourced to the private sector

10. The scenario study also points to: The existence of at least four water markets Competition or quasi-competition can be introduced to improve performance of the markets After an overview of scenarios for the European water market Schouten continues with a discussion about the necessary reforms concerning the water sector and utilities and What these options mean for PSI in developing countries

11. The transaction framework identifies four main markets: 1. The market for water supply and sanitation services delivered by a provider to consumers in return for payment. Within this market there is a definite possibility to introduce competition in the market. This can include a range of service activities in a range of market segments including: self supply, geographic inset appointments (reflecting non exclusive rights of monopoly provider), retail competition and common carriage. This form of competition is usually restricted to a limited number of market segments e.g. large industrial consumers 2. The market for inputs needed for production by the service provider, which are sold to the provider by a diverse range of suppliers. Within this market the possible type of competition is competition in the market

12. Four main water related markets: 3. The market for the right to abstract water or distract wastewater into the environment. In this case the service provider acquires this right from the holder of the water rights. The possible type of competition in this market is through the establishment of water rights 4. The market for fulfilling the governmental mandate to service a specific service area. In this case the responsible entity buys the services of a provider to conduct on its behalf the service provision. In this case there are two possibilities to introduce competition: i.e. competition for the market, and comparative competition

13. On the basis of a transactions framework, five end-states were identified, as follows: End States End State 1: Delegated Contracts End State 2: Outsourcing End State 3: Regulated Monopoly End State 4: Direct Public Management and End State 5: Community Management

14. Nature of Institutional Framework Scenarios EU Euromarkets project can be equated to alternative institutional arrangements that minimise transaction costs Our scenarios also concern different power relationships between main “actors” and their associated regulators Proposed institutional framework attempts to integrate both transaction cost approach and traditional actor type analyses (re influence/power/alliance) Proposed institutional framework may be studied with more detailed actor analysis based on MASAM software

15. Regulators: • - Environmental Agencies • Water Basin Agencies • Standards Bodies • (eg measurement) • Regulators: • Competition Authorities • Appellate Bodies. • Complaints Bodies • Standards Bodies • (eg Pipes, Fittings) • Suppliers: • Products • - Services • - Finance Supplier Market 2.Outsourcing Water Market • Water-Env. • Resources: • Rivers • Groundwater • Land/Air Operators: 1. Private Enterprise 4.Public Enterprise 5.Social Enterprise • Consumers: • Households • Non Households • Others 1.Delegation Contracts • Lobbyists and • Opinion Formers: • Actor Associations • Voters • Political Parties • Water Users • Media • Scientists • - Ratings Agencies • Think Tanks/Academics • NGOs/Trade Unions • TNCs • Policy makers and • Legislators: • Regional Governments • Member State Governments • Ministries • - EU Bodies (eg CEC) • Courts (case law) • International Bodies (eg WTO) 3. Regulated Monopoly Consumer Market • Regulators: • - Municipalities • Economic Agencies/DGs • Inspectorates (eg DW) • Appellate Bodies • Complaints Bodies • Courts/Tribunals • Ministries Overall Institutional Framework for Water Supply and Sanitation Services

16. Main Key to Institutional Framework Key for Overall Framework Key for Scenario Frameworks Key for Overall/Scenario Frameworks Information Flows Market Regulators (Environmental General and Specific) Major Power Shift Main Transactions Minor Power Shifts Main Trans “actors” Enhanced control/information flows Changing Role Lobbyists/Opinion Formers Policy makers/Legislators Policy Influence and Policy Formation (in setting overall framework) Declining Role Water-Environment Mainly Water/Wastewater flows Regulator Influence (in day to day regulatory decisions within framework) Note: Proximity of trans “actors” equates to convergence of interest Text– Three Main Markets Note: Emboldened lobbyists/policy makers are key to proposed storyline Text – Focus of Five Core Scenarios

17. Key Features of Proposed Institutional Framework • Transaction Cost Economics important in evaluation of institutional alternatives • Proposed Institutional Framework therefore developed from Transaction Framework • More information necessary on various types of actors and their relationships, more focus on individual transactions and information flows, and added in broader policy making/legal context (as the institutional framework foundations) • Policy making foundations important for general storyline development (Transaction Cost Politics) and specific regulatory policy development (Interest Group Theories) • Transaction framework illustrates how actors are re- positioned, how power & information flows change

18. Key Features of Proposed Institutional Framework Three markets studied: Water, Supplier & Consumer Changes in Water-Environment Market similar for all five/six scenarios (based on impact of WFD) Four main “actors”: Regulators (3 main groups, one per main market) Operators (3 main types – public/private/social enterprises) Suppliers (3 main types – products/services/finance) Consumers (3 main types – households, non households and other)

19. Regulators: • Environmental • Agencies Regulators: - Competition Auth. - Standards Bodies • Suppliers: • Products • - Services • - Finance Supplier Market Water Market Water Resources: Operators: Private Enterprise (+ a few Public Enterprises) • Consumers: • Households • Non Households • Others • Policy makers and • Legislators: • Regional Governments • Member State Governments • Ministries • - EU Bodies (ie CEC) • EU Courts (case law) • International (ie WTO) • Lobbyists and • Opinion Formers: • Operator Associations • Voters • Political Parties • Water Users • Scientists • - Media • - Ratings Agencies • Think Tanks/Academics • NGOs/Trade Unions • TNCs Consumer Market • Regulators: • Municipalities • Regulatory Agencies • Courts Institutional Framework for Delegated Contracts (and strong regulation) Scenario

20. Regulators: - Environmental Agencies Regulators: - Competition Auth. - Tech Standards • Suppliers: • Products • - Services • - Finance Supplier Market Water Market Water Resources: Operators: Private Enterprise • Consumers: • Households • Non Households • Others • Policy makers and • Legislators: • Regional Governments • Member States • - EU Bodies (ie CEC) • EU Courts (case law) • International (ie WTO) • Lobbyists and • Opinion Formers: • Operator Associations • Voters • Political Parties • Water Users • Scientists • - Media • - Ratings Agencies • Think Tanks/Academics • NGOs/Trade Unions • TNCs Consumer Market Regulators: - Municipalities Institutional Framework for Delegated Contracts (and extreme competition) Scenario

21. Regulators: • Environmental • Agencies • Water Basin • Agencies Regulators: - Competition Auth. - Tech Standards • Suppliers: • Products • - Services • - Finance Supplier Market Water Market Water Resources Operators: Public Enterprise (+Private Enterprise Social Enterprise) • Consumers: • Households • Non Households • Others • Policy makers and • Legislators: • Regional Governments • Member States • - EU Bodies (CEC) • Courts (case law) • International (WTO) • Lobbyists and • Opinion Formers: • Supplier Associations • Political Parties • Water Users • Media • Scientists • - Ratings Agencies • Think Tanks/Academics • NGOs • Trade Unions • TNCs Consumer Market • Regulators: • - Municipalities • Agencies/DGs Institutional Framework for Outsourcing Scenario

22. Regulators: • - Environmental Ag • Water Basin Ag • Tech Standards • Suppliers: • Products • - Services • - Finance Regulators: - Competition Auth. - Tech Standards Supplier Market Water Market Operators: Private Enterprise Public Enterprise (+Social Enterprise) Water Resources • Consumers: • Households • Non Households • Others • Policy makers and • Legislators: • - Local Authorities • Regional Governments • Member State Governments • Ministries • - EU Bodies (CEC) • Courts (case law) • International (WTO) • Lobbyists and • Opinion Formers: • Consumer/Reg Associations • Voters • Political Parties • Water Users • Scientists • - Media • - Ratings Agencies • Think Tanks/Academics • NGOs/Trade Unions • TNCs Consumer Market • Regulators: • - Municipalities • Regulatory Agencies • Benchmarking • Authorities Institutional Framework for Regulated Monopoly Scenario

23. Regulators: -Basin Authorities • Suppliers: • Products • - Services • - Finance Regulators: - Competition Auth. - Tech Standards Supplier Market Water Market Water Resources Operators: Public Enterprise (direct/delegated) • Consumers: • Households • Non Households • Others • Policy makers and • Legislators: • -Local Authorities • Regional Governments • Member State Governments • Ministries • - EU Bodies (CEC) • Courts (case law) • International (WTO) • Lobbyists and • Opinion Formers: • Consumer/Mun Associations • Voters • Water Users • - Media • - Ratings Agencies • Think Tanks/Academics • NGOs/Civil Society • Trade Unions • TNCs Consumer Market Regulators: Municipalities (committees and boards) Institutional Framework for Direct Public Management Scenario

24. Regulators: • Basin Authorities Regulators: - Competition Auth. - Standards Bodies • Suppliers: • Products • - Services • - Finance Supplier Market Water Market Water Resources Operators: Social Enterprise (mutual, co-op. association) • Consumers: • Households • Non Households • Others Consumer Market • Policy makers and • Legislators: • Regional Governments • Member States • - EU Bodies (CEC) • Courts (case law) • International (WTO) • Lobbyists and • Opinion Formers: • Consumer Associations • Voters • Political Parties • Water Users (Irrigators) • Media • Scientists • - Ratings Agencies • Think Tanks/Academics • NGOs/Trade Unions • TNCs • Regulators: • -Self regulation • - Municipalities • DW Inspectorates Institutional Framework for Community Management Scenario

25. Framework Comparisons • Focus of Scenarios. Supplier Market – Outsourcing. Customer Market – Regulated Monopoly/Direct Public Management. Customer & Supplier Market – Delegated Contracts/Community Management. • Nature of operators Private – Delegated Management Public – Direct Public Management Social – Community Management Public/Social(+Private) – Outsourcing. Public/Private(+Social) – Regulated Monopoly

26. Framework Comparisons Nature of the storylines • Evolutionary with need for efficiency (technical and economic), reflecting changing social opinions and influenced by EU supporting actions – Outsourcing/Regulated Monopoly. • Revolutionary with major political-legal changes, social protests, enterprise failures and enterprise changes – Delegated Contracts/Direct Public Management. • Transformational with major technological change and major shifts in social attitudes – Community Management.

27. Framework Comparisons • Extent of operator fragmentation/concentration. Concentration – Delegated contracts/Regulated monopoly. Fragmentation – Direct Public Management/Community Management. Status Quo – Outsourcing. • Realignment/Closer link of operator to other actors. Operator to Suppliers - Delegated contracts/outsourcing. Operator to Regulators - Regulated monopoly/Direct Public Management. Operator to Customers - Community Management. • Importance of European Policy Makers. Important – Delegated Contracts/Outsourcing. Relevant – Regulated Monopoly/Community Management. Unimportant – Direct Public Management.

28. Structure of Each Scenario Description Following structure followed for each Scenario: • ILO framework: Scenario focus, Central Feature, Major Power Shifts, Minor Power Shifts, Changing Roles, Key Lobbyists, Key Policy Makers, Legal Basis, Other Features. • Status, Role and Dynamics of Actors: Suppliers, Operators, Consumers, Regulators, European policies. • Conflicts: Policy Development and Transactions. • Issues: Major and Minor.

29. Delegated Contracts and Strong Regulation – ILO Framework • Scenario focus: Consumer Market (but with important knock on effects in Supplier Market) • Central Feature: Obligation to tender. Move to Private Enterprise as operator norm. Compulsory introduction of independent regulator to provide ex post regulation during 10-15 year contract. Same mode of competition across EU. Despite introduction of regulator long term contracting remains central feature of scenario. • Major Power Shifts: Private Enterprise and establishment of Independent Regulators. • Minor Power Shifts: Competition Authorities have increased responsibilities (especially during bidding phase). Consumers have increased powers following success of SOS movement. Also supplier of public/private advisory services (eg consultants) to regulators more important. • Changing Roles: Competition in Supplier Market changed by presence of Private Enterprise Operators. Municipality now responsible as contracting authority and will need to work with new independent Regulator. • Key Lobbyists: TNCs and increasingly NGOs/Left wing-Green parties. • Key Policy Makers: European Commission/Parliament (now Left wing dominated following period of Right wing domination ??). • Legal Basis: European Directive (obliging competition for market every 10-15 years and establishment of independent regulator) sets framework. Contract Law (national) provides detailed context. • Other Features: Mainly a Political decision.

30. Framework Comparisons • Water industry institutional structures are relatively stable - once formed difficult to break down. Hence radical nature of some of storylines (EU Directives, Major enterprise failures etc). • Actors involved in major power shifts are generally also the lobbyists that win the ear of the key policy makers/legislators. • Actors involved in major power shifts generally involved in major conflicts as relative positioning changes. • Operators are the central actor in institutional framework. • Scenarios can overlap. Some competition processes (outsourcing and benchmarking) are easier to overlap than others (delegated contracts). • Strong similarities in storylines between outsourcing and regulated monopoly (focus on links either side of operator circle) and between delegated contracts and direct public management (within operator circle).