often replaced private financing. In other words, regulation adjusted _ex-post_ to the constraints imposed by institutional weaknesses that were underestimated upfront.<sup>8</sup> The main lesson from 25 years of trial and error is that there is a strong case for the up-front explicit internalization of a broad range of institutional constraints and opportunities in the choice of regulatory goals and tools.<sup>9</sup> This _ex-ante_ institutional diagnostic has to identify legal, bureaucratic, cultural, capacity, political, and other bottlenecks or hurdles because they characterize the commitment ability (and hence the credibility) and the technical capacity of regulators.<sup>10</sup> Many of these dimensions have already been documented in the legal and public administration literature, and economists are now starting to factor them in when assessing the best matches between regulatory options and institutional constraints.<sup>11</sup> This includes, for instance, the opportunity to make the most out of “nudges” to “trick” key actors into making the right decisions, and to account for the religious and non-religious motivations for caring about basic public goods or services. The accumulated evidence points to the necessity of accounting for the multi-dimensionality of the hurdles and catalyzers of effective regulation, which had largely been ignored in the 1990s and most of the 2000s.<sup>12</sup> The remaining challenge lies in the willingness to build these insights into policy implementation.

To be able to provide a broad picture of the operational and policy implications of institutional weaknesses in the sector, this paper is organized as follows. Section 2 discusses the main stylized facts which motivate the rejection of a business-as-usual approach to regulation in the sector. Section 3 reviews the main implications of the diagnostic for the regulatory governance of the sector and the design of regulation. It emphasizes the informational and institutional dimensions of regulatory design and its enforcement, and offers suggestions to address the weaknesses. It also highlights the importance of matching regulatory options with institutional and information constraints. Section 4 concludes.

> 8 Many more deals did not go through but there is only anecdotal evidence on the importance of these failures. In most of these cases, the failures to reach deals reflected a negative evaluation of the prospects for sustainable long-term commitments, given the way the regulatory design reflected the various sources of risks, most of them institutional.

> 9 The argument was made over 25 years ago by Ostrom (1990) and recently Edelenbos and Teisman (2011). In practice, it has been partially internalized in toolkits used by international organizations to structure the technical assistance to their clients considering private participation in their sectors (e.g. PPIAF and The World Bank (2006)).

> 10 This is also part of the suggestions made by Kayaga et al. (2013) for general institutional diagnostics of urban water utilities reviewed and Frulong et al. (2016) for a planning perspective.  Berg (2013) raises the issue in the context of state-owned enterprises regulation.

> 11 See Baker (2010) for instance for a useful overview of the various academic approaches to challenges in urban water management.

> 12 See Estache (2016) for a recent survey.

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