Conceptual and Practical Aspects of Water Regulation in Developing Countries
Authors: Berg Sanford V. 
Published: February 2021

Organizations regulating the water sector have major impacts on public health and the sustainability of supply to households, industry, power generation, agriculture, and the environment. Access to affordable water is a human right, but it is costly to produce, as is wastewater treatment. Capital investments required for water supply and sanitation are substantial, and operating costs are significant as well. That means that there are trade-offs among access, affordability, and cost recovery. Political leaders prioritize goals and implement policy through a number of organizations: government ministries, municipalities, sector regulators, health agencies, and environmental regulators.

The economic regulators of the water sector set targets and quality standards for water operators and determine prices that promote the financial sustainability of those operators. Their decisions affect drinking water safety and sanitation. In developing countries with large rural populations, centralized water networks may not be feasible. Sector regulators often oversee how local organizations ensure water supply to citizens and address wastewater transport, treatment, and disposal, including non-networked sanitation systems. Both rural and urban situations present challenges for sector regulators.

The theoretical rationale for water-sector regulation address operator monopoly power (restricting output) and transparency, so customers have information regarding service quality and operator efficiency. Externalities (like pollution) are especially problematic in the water sector. In addition, water and sanitation enhance community health and personal dignity: they promote cohesion within a community. Regulatory systems attempt to address those issues. Of course, government intervention can actually be problematic if short-term political objectives dominate public policy or rules are established to benefit politically powerful groups. In such situations, the fair and efficient provision of water and sanitation services is not given priority.

Note that the governance of economic regulators (their organizational design, values or principles, functions, and processes) creates incentives (and disincentives) for operators to improve performance. Related ministries that provide oversight of the environment, health and safety, urban and housing issues, and water resource management also influence the long-term sustainability of the water sector and associated health impacts. Ministries formulate public policy for those areas under their jurisdiction and monitor its implementation by designated authorities. Ideally, water-sector regulators are somewhat insulated from day-to-day political pressures and have the expertise (and authority) to implement public policy and address emerging sector issues.

Many health issues related to water are caused or aggravated by lack of clean water supply or lack of effective sanitation. These problems can be attributed to lack of access or to lack of quality supplied if there is access. The economic regulation of utilities has an effect on public health through the setting of quality standards for water supply and sanitation, the incentives provided for productive efficiency (encouraging least-cost provision of quality services), setting tariffs to provide cash flows to fund supply and network expansion, and providing incentives and monitoring so that investments translate into system expansion and better quality service. Thus, although water-sector regulators tend not to focus directly on health outcomes, their regulatory decisions determine access to safe water and sanitation.