Does ownership determine the success of Water utilities?

Should water utilities be public or private? Research has investigated the impacts of private sector participation on the performance of utilities, but the conclusions are diverse. For example, some empirical studies have found that private sector participation improves utility performance across a range of indicators, such as quality of services, productivity, and labour management[1]. In contrast, other studies have found that government-owned utilities (GOUs) are superior with higher technical efficiency, are in better financial shape, and incentivise greater investment. Finally, another collection of empirical studies has found little correlation between ownership and water utility efficiency.

Ownership structure per se, therefore, does not necessarily determine the successes of utilities. Rather, the question is whether the operator, private or public, can hold the right qualities for the utility to succeed. By the right qualities, we mean internal factors such as corporate governance, as well as financial and operational management that can achieve efficiency, fiscal prudence, and credible commitment.

We investigate these issues under the lens of regulation, which is used to denote some form of governance, or efforts by the government to steer the economy. Market-orientation under a regulatory state aims to capture efficiencies and build a service (or consumer-oriented) culture that addresses consumer demands in the provision of services. With the right set of regulations, GOUs can mimic the operational actions of a private sector environment. As such, GOUs can obtain efficiency and attract more private sector players participating in public affairs to fill in the knowledge gaps of the public sector.

Market-oriented efforts by GOUs under a regulatory state: with or without a regulator

We use Sydney and Singapore's cases to see how market-oriented measures work out in their GOUs: Sydney Water and Singapore's PUB, respectively. In both cities, water is mainly provided by GOUs. In Sydney, there is an independent regulator the Independent Pricing & Regulatory Tribunal of NSW (IPART), whereas, in Singapore, the PUB is a statutory board without a regulator.

We find that both provide good quality of service and exhibit comparable operating efficiency, regardless of the existence of a regulator (see Table 1). Sydney Water's leakage rate is around 7.3%, higher than that of PUB, but both GOUs reflect best worldwide practices in water loss management. PUB exhibited greater capital efficiencies than Sydney Water in 20082009, but Sydney Water gained greater capital efficiencies in 20132014. Comparatively, the performance of PUB has been consistent over the observed period, but the performance of Sydney Water has improved significantly under the pressure of meeting the requirements of its operating license, reflecting in the increase of its capital efficiency and customer satisfaction.

Table 1. Comparison of PUB and Sydney Water.

With regards to attracting private sector players, Sydney and Singapore use different approaches. In Sydney, the regulator has been facilitating developing a more active market for water business. With high statutory independence, IPART serves as an operating license administrator for both Sydney Water and its competitors in the private sector. Strict licensing rules are set out to ensure that the utilities recognize customers' rights, and deliver all services in a reliable and safe manner with minimal environmental impact. Also, IPART has the rights to regulate water pricing of both public and private utilities. Singapore could potentially benefit from an increase in choices of water suppliers, but this could come at the cost of lower capital efficiency. Meanwhile, given its relatively smaller, but higher density of population, what it gains in freedom of choice and competition may be lost by way of economies of scale. Instead, PUB has recently started engaging private companies using contracts. For example, PUB outsourced some of its water infrastructure projects through Public-Private-Partnerships, as seen in the development of NEWater.

Lastly, it seems that PUB is less successful in pursuing its commitment to consumer's voice. Singapore announced a rise in tariff by 30 percent starting from 1 July 2017, without much public consultation. The response was public discontent. In contrast, Sydney has had more success with raising water prices after the regulator was introduced. Here, the regulator played a vital role in ensuring the financial viability of Sydney Water and slowly changing citizen perceptions about pricing water. The active customer representation in determining water charges in the country can be considered as a success of the regulator in communicating the trade-offs between quality of service and water prices to the consumer and delineating their priorities on regulation. As a policy recommendation, therefore, it may be useful for Singapore to consider instituting some form of customer representation in service and decision-making processes such as Sydney Water's Customer Council.

Concluding remarks

Overall, our study addresses the regulation and market-orientation of GOUs. We argue that the success of utilities has less to do with their ownership structures. Rather, it relies on more specific factors, such as internal operational practices and commitment to consumers. Whereas Sydney and Singapore's government-owned water utilities both seek to capture efficiencies through market-orientation, Sydney has an independent regulator which plays a significant role in involving the private sector players and maintaining good consumer satisfaction.

[1]The drinking water quality (%) indicator shows how well drinking water supplied by the utilities meets the drinking water standards. For Sydney Water, it needs to supply drinking water that complies with the Australian Drinking Water Guidelines and NSW Health requirements. For PUB, it needs to supply drinking water that complies with the 2008 Environmental Public Health Regulations, which made the drinking water standards based on the World Health Organization Guidelines for Drinking-water Quality.

This piece was first published in WaterPolicy.online on 4 October 2017.