Water is different from other commodities for several reasons: it has both the properties of public and private goods. Its mobility makes it difficult to be treated like other normal commodities.

The supply and replenishment rate varies in time and space, its transportation and storage costs are more expensive than other utilities (such as oil, gas and electricity). Prices often reflect physical supply costs rather than scarcity, and water is the most “essential” compared with any other commodity ever sold in the market.

The unbundling of the network industries has been quite successful in some countries, creating competition in the generation and distribution segments, such as electricity, and a well-developed upstream and downstream market in oil and gas.

However in the water sector, the industry structure is heavily vertically integrated. Researches indicate that competition in the abstraction, treatment and distribution had not been feasible due to water quality and pressure problems.

Water utilities have the characteristics of  “natural local monopolies” which render network duplication in one locality uneconomic.

This means that in any given city, it is generally preferable to be served by only one water company. Hence, if governments opt for privatization, there is a caveat. Because of the “natural local monopoly”, competition in the market is not feasible; the invisible hand does not work in this sector.

A comparison with the clothing market can illustrate the above. Consumers in the clothes market have an option, they can say they do not like the clothing and buy from another seller.

The seller has to compete in the market in order to be able to deliver higher quality goods with cheaper prices otherwise he will have to close his shop.

But water is different. Having no competitors, water utility companies then have the incentive to underproduce (in terms of quality and quantity) for there is always a buyer.

The water consumer has no option but to buy water from the only water company in their city. This is what justifies water utility being highly regulated: Prices are capped or rate of return is decided, investment measures are scrutinized and quality is legally determined.

In order to be able to regulate water utility, governments require plenty of information. Government needs to know the actual cost to bring water to the consumer’s tap: how much does it cost to buy new pipes; how much is the CEO’s salary; is it true that the price for chlorine in the chemicals market has increased? Is the water company financially healthy, or is it on the brink of bankruptcy?

One thing certain for any government is that a bankrupt water company is not a good option. Thirst can provoke riots.

The first rule in regulating water utility is that the company must provide the government with any relevant information requested.

But companies have the incentive to either give misleading information, retain information, delay information or disclose only a part of the information, in order to secure their interests for investing in the sector: Profit.

Economists have agreed that in every regulatory case, governments can never attain the same level of information as the company.

Companies always know more about their own situation compared with the governments that regulates them.

The danger with this information asymmetry is that companies may inflate their actual costs and pass it on to consumers to pay. They may choose to deal with particular suppliers related to them (possibly a subsidiary of their parent company) rather than other suppliers offering lower prices.

They may refuse to expand their network to slums or scarcely populated areas citing the reason of lack of capacity, although they actually can. Or, companies may conflate the number of leakages to add to the cost component.

As a result, governments must then be very well-equipped to be able to regulate water companies effectively; they must have all the technical, financial and legal auditing capability to discern and decipher information about water utility. The problem in most developing countries is that governments lack these regulatory capacities both in terms of human resources, technology and budget.

One way to mitigate this problem is by introducing transparency to the sector. Stakeholders can complain if they know that the company prefers to strike a water supply deal with real estate developers rather than invest in poor areas.

Potential suppliers can complain that they have been discriminated against, despite their ability to supply with cheaper costs. With transparency, governments can have help in interpreting information from other water companies, creditors, suppliers, consumers, NGOs, academia, the press or other interested parties.

However, it is difficult to make water utility companies agree to transparency. This response is natural as it is always better for them to conceal information than to be transparent.

Companies protect their information through confidentiality clauses in contracts and through trade secret laws. Freedom of Information laws typically do not work as they provide a blanket exception to disclosure when it comes to commercial confidentiality.

The writer is a PhD student at the UNESCO Centre for Water Law, Policy and Science at the University of Dundee, UK.

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