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Article

Regulating Quality in the Water Sector: A Theoretical Perspective  

Emmanuelle Auriol

Regulating quality is challenging because in public utilities such as water and sanitation, quality is multidimensional, is not always objectively measurable, and can be hard to verify, both ex ante and ex post. It is therefore useful to review the main insights from the New Economics of Regulation theoretical literature on quality provision to guide public policy. Focusing on formal utilities, this normative approach emphasizes the asymmetry of information between a regulator and the regulated companies. The analysis shows that when quality is verifiable, it can be included in a contract exactly like a quantity variable. Its provision, however, will be distorted as a result of regulated quantities also being distorted due to asymmetric information. When quality and quantity are complements, service quality ends up being lower because in the optimal regulatory contract, quantities are distorted downward for rent extraction. If quality is not verifiable but is observable by the users, the operator freely chooses its quality investment. It tends to underprovide quality when an improvement in quality raises the gross consumer surplus more than it increases the gross profit of sales because it does not take into account the nonmonetary benefit generated by its investment. It tends to overprovide quality otherwise. In order to correct these distortions, the regulator has to use a production allocation rule to simultaneously lower the informational rent and boost quality. The regulator has a single instrument to achieve the conflicting goals of rent extraction and quality provision. Quantities can be higher or lower than the first-best optimal levels depending on the correction needed to control quality. Finally, when quality is neither verifiable nor observable by consumers, as is typically the case with credence attributes such as those concerning process of production impacting security or pollution, the optimal level of quality investment from the firm’s perspective is zero. In this case, the easiest solution is often to impose a minimum standard and either rely on certification agencies to ensure that this minimum target is met or directly audit the quality investments made by the regulator. Finally, when improving the quality of water and sanitation services requires the creation of new infrastructure or institution, the high opportunity cost of public funds in developing countries raises the question of whether it is optimal to commit public funds for such investments. The analysis illuminates the trade-off between financing those investments with private funds and protecting consumer surplus.

Article

Changing Open Defecation Behavior  

Mark Radin

Open defecation (OD) remains a persistent problem in many low-income countries. The international community, through the Sustainable Development Goals (SDGs), has committed itself to eliminating OD by 2030. While access to and use of latrines has steadily increased, much is unknown on how to eliminate OD. The history of the elimination of OD in high-income countries offers potential lessons for achieving the sanitation targets of the SDGs. A desk review of sanitation literature revealed a well-documented effort to eliminate OD in the United States, which faced many of the same obstacles as those encountered in low-income countries in the 21st century. One of the important lessons is that eliminating OD takes sustained efforts over decades and substantial resources. The international efforts to eliminate OD have evolved through numerous phases within the global development agenda. To eliminate OD will require continued investment in new and ongoing programs, which are often led by national governments in partnership with international organizations, civil society, and the private sector. Many successful programs have utilized numerous approaches for eliminating OD as the barriers to sanitation use are different across societies and for each individual. Access to sanitation in institutions such as schools and health care facilities as well as public facilities remains a problem in both high- and low-income countries. Finally, the international community will need to deploy more resources and develop effective approaches for ensuring that latrine adoption and use is sustainable.

Article

The Health Impact of Water and Sanitation Utilities Privatization and Regulation in Sub-Saharan Africa  

Lisa Bagnoli, Salvador Bertomeu-Sanchez, and Antonio Estache

As of 2017, the urban access rate to safe water sources in 2017 stood at 84% while rural access was still around 45%. The rates for sanitation were 44% and 22%, respectively. Since the 1980s many high-profile reforms supported by international organizations have been implemented in the region in an attempt to close the access gaps in the water and sanitation sector (WSS). Two recommendations with high international exposure were an increased role for large-scale private sector participation in the management and financing of national or regional utilities and the creation of separate sector regulatory agencies to increase the independence of regulation. Both reforms seemed to contribute to improved water access rates, at least for the urban population, but not enough to catch up with the demands of a fast-growing population; and both failed to deliver on sanitation. The progress these initiatives allowed was correlated with improvements in the average health outcomes for some indicators (i.e., under-five mortality associated to diarrhea) but once again, it was not enough and was not fairly distributed. Indeed, improvements seem to have mostly benefited upper- and middle-income groups. Unfortunately, an evaluation of the health effects of these two reforms have not yet been fully established empirically, which is why it seems prudent to talk about correlations rather than causal effects. Most of the statistically robust evidence on the impact of utilities and regulatory reforms on health is incomplete because details of several dimensions of these reforms and their context are not measured consistently across countries or within countries. In addition, the small amount of econometric evidence available is based on pre-2010 data for SSA. The imperfect data is however solid enough to suggest that without further governance changes in the region, the health risks are likely to increase. This is because due to the high population growth rate of the region, closing the access gaps is likely to get tougher considering current investment levels and technological choices. The necessary changes require improving the match between policy and technological choices, including service delivery technologies that are consistent with the ability to pay and the tariff and subsidy levels adopted to ensure cost recovery without excluding any category of users.

Article

Urban Water Regulation and Health: The Case of Chile  

Michael Hantke-Domas and Ronaldo Bruna

In 50 years, Chile achieved nearly full urban water and sanitation coverage—even higher than some developed countries. Furthermore, in just a decade, the country obtained full urban wastewater treatment, making it probably the only developing country that will successfully meet the Sustainable Development Goals (SDGs) in this matter. These achievements can be attributed to policies oriented towards the incremental or gradual improvement of the water and sanitation sector sustained for more than 50 years. This policy was mainly focused on (a) increasing public investment in expanding coverage levels, both for potable water and sewerage; (b) reducing enteric diseases and infant mortality; (c) improving child nutrition; (d) streamlining public utilities; (e) establishing a legal framework for economic regulation applied by an independent body applicable to all utilities; (f) building efficient institutions; (g) a full cost recovery tariff policy; (h) bringing private capital into the industry; (i) subsidizing those who need it most; and (j) de-politicizing the sector. The Chilean experience is not well documented or, at least, there are few references regarding its success story, which reinforces the motivation to understand its history.