contracts. But this is easier said than done because these plans are usually linked to cost information controlled by the WSS operators, whether public or private. Operators have good reasons to be reluctant to share the information needed to assess whether annual investments and maintenance costs are efficient. Information will not be forthcoming if the possible regulatory tricks available to force better information sharing are not implemented.

But the investment challenge is not only a technical one, it is also a political one. The need to improve regulation to reduce the extent to which the level of investment and output do not meet demand touches upon a number of politically-sensitive issues. Investment is not just about ensuring fair access. It is also about fair returns to private or public providers and minimizing the burden on taxpayers if subsidies are needed. If regulation is ineffective, the sole supplier (i.e. the monopolist) will always have an incentive to run the business to maximize its returns rather than the service level in the public interest.<sup>18</sup> This politically-sensitive observation is predictable from theory but also well validated in practice.<sup>19</sup> For the typical cost structure characterizing a monopolist (i.e. average declining costs), the return is maximized with an output (and often a quality) level lower than the level that ensures the best use of resources to match demand and with a targeting of investment plans and quality management that caters to commercially or politically important users.<sup>20</sup> It should not be a surprise that, in WSS, poor regulation is matched by coverage levels below what they should be, and prices higher than they need to be. Indeed, the existence of scale economies in the water sector generally lead to lower average costs and hence lower average prices as output increases to increase coverage levels. Indeed, this is what has been observed in many developing and some developed countries. The MDGs helped reduce the gap between supply and demand, but failed to eliminate it. But targets are indeed hard to enforce when institutions are too weak to push the operators’ incentives in the right direction.

For instance, a detailed empirical study has demonstrated that during the 4 years that a private company operated the Malian Water company in the 1990s, investment delivered were well below the contractual commitments. Operational costs were reduced during that period but very little of the

> 18 The rent is essentially the return to its investment over and above a socially acceptable return to capital in the case of a private monopoly, and a wide range of political and similar payoffs in the case of a public monopoly, ranging from the ability to overstaff the service, to pad costs to finance political activities or simply increase the bank accounts of corrupt politicians.

> 19 According to Bank of America/Merril Lynch (2014), investors are increasingly looking at water as a long-term investment theme because it offers steady inflation-protected returns less linked to economic growth than other infrastructure investments, and acts as an alternative to low bond yields and volatile equity markets. The S&P Global Water index (SPGYAQD) - of 50 global companies involved in water related businesses - has consistently outperformed a range of sample benchmark indices with a 5 year annualized return of close to 20%.

> 20 This is why many studies of the efficiency of water providers find that many do not minimize costs. See Bel et al (2010) and Carvalho et al (2012) for recent surveys.

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