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NUMERO 11 - 23/05/2018

 The governance of the integrated water service

When a policy maker tries to regulate the supply of drinkable water, it is faced with many ‘sensitive’ issues. First of all, since access to drinkable water is considered a fundamental human right and a minimum quantity of this essential resource should be guaranteed to every person in an effectively affordable way, the regulation of the water supply should be guided by an approach of solidarity and fairness. This is often not consistent with ‘the law of the market’ and is, instead, imbued with ideological implications: for this reason, many scholars consider water as a common good instead of a commercial product. Secondly, even though water is a non-excludable good, it is rival in consumption, because its presence on earth is limited. In this regard, one may note that the ‘climate change’ phenomenon is making access to water – which is sometimes already very challenging, especially in arid regions – even more difficult: according to a prestigious study, ‘warming is very likely to intensify the water cycle, reinforcing existing patterns of water scarcity and abundance and increasing the risk of droughts and floods’. The environmental implications of the scarcity of water on earth require that its allocation has to be properly regulated, primarily taking into consideration the sensitive balance between the ‘sustainable’ protection of water ecosystems and the survival of present and future generations. Thirdly, the supply of water is a natural monopoly because an expensive infrastructure, which cannot be duplicated, is required to deliver the service. Water services, more than other public services, appear to be basically infeasible using a model of ‘competition in the market’. Fourthly, providing high quality water to end-users implies an ‘efficient’ infrastructure in terms of security of supply, reduction of loss of water during the provision, proper functioning of purification plants, and so on; to ensure the quality of water it is also necessary to implement consumption metering mechanisms and qualitative control procedures for both the distributed water and the information available. However, the implementation of an efficient infrastructure and efficient technologies requires long-term investment and a large amount of initial capital, which is not easy for providers to find through traditional bank funding because this is usually limited to short-term investments and reasonably small amounts of money. The amortization of the infrastructure may be also longer than the duration of the water concession, and this circumstance makes the quantification of the residual value of the infrastructure very difficult to define. The complexity of the water sector generates incomplete contracts of service, since there is a need to make the parties’ commitments flexible and adaptable to the factual and legal changes that may occur during the performance of the contract. As a consequence, frequent and challenging renegotiation of agreements leads to very high transaction costs in the sector. Policy makers have to deal with all the complex and unique aspects briefly described above, which have often justified massive public intervention (even though this was not sufficient on its own) and the development of a ‘special’ legal framework different from the general one being designed for other public services. In addition, there are specific problems in Italy in regulating the public water service… (segue)

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