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Regulation

In the water and sanitation sector, the overriding goal of the regulatory system is the improvement of water and environmental quality to the beneﬁt of customers. As the related investments and associated operating costs would almost inevitably lead to higher prices, it is appropriate for the Regulator to concentrate on customer protection and the promotion of efﬁciency, whilst enabling the necessary investments.

Regulation is politics as well as economics. Regulators have a different constitutional position from politicians, enriching the separation of powers. They must, however, be constantly aware of political issues and ambitions such as the expansion of the served population or the curbing of CO2 emissions, looking-out for political surprises while keeping their eyes on economic and business issues. Governments should set outcomes, not delve into implementation.

Consistency in regulation is a virtue, but circumstances change and regulators must adapt. They must stay ﬂexible and respond in a timely way. They should, however, try, wherever possible, to act predictably. This implies constant explanation of what they are trying to achieve and why they have taken action. This must be sufﬁciently simple and sufﬁciently succinct to be properly accessible both to top decision makers and to the general public. In addition to regular contact with individual companies, the press is an excellent instrument to raise issues, to indicate options and to promulgate decisions and policies.

Regulation itself will inﬂuence the operating environment; indeed to work well it must exercise a discovery function. Regulators, regulated companies and governments must learn to adapt to the interacting dynamic of change. The regulated company, not the regulator, delivers services to customers. The regulator is only successful when the company is successful, i.e. when it is an efﬁcient business unit providing satisfactory service to customers, measured by achieved performance. Regulators are, however, necessary to protect customers from both monopoly suppliers and from ambitious governments, notably, in the case of water services, in the environmental area.

Practise of Regulation in the water and sanitation sector

All countries regulate the water and sanitation sector, but the width and breadth of regulation varies and in part depends on how service provision is structured. In the case of private operation such as in the UK and Wales, there is often a strong and independent regulator. Where the services are publicly owned and operated, the regulatory function is often less well developed and tends to be in the national ministry rather than an independent agency.

Almost inevitably, the water regulator's mandate covers the areas of finance (price of water), but it may also include tasks in the areas of public health (water quality), environment (discharges from operations) and social justice (service provision to the poor). The latter three areas may also be covered by line ministries such as Health, Environment and Social Affairs.

Over the years, regulators have evolved and so have their activities. Typically, the regulator issues the operating license, ensures the implementation of government policy, sets the water tariff and monitors performance. The UK’s OFFWAT is probably the first and better example of a well-equipped and empowered regulator that has powers to request and ultimately enforce action by the private operators. Other regulators are less well-resourced or have more limited powers or find difficulty exercising their powers, in which case their function is often limited to the issuing of operating licences and the monitoring and comparing of performance of the licensed operators.

Setting up and operating an effective regulating agency is anyway a challenge and the reality is that the regulated operators almost invariably have more resources at their disposal than the regulator has, and that is even more so if the local operator is part of an international conglomerate. In addition to this imbalance in resources, there is the inevitable information asymmetry that plays in the hands of the operator. To be effective despite these imbalances, the regulator needs strong backing from the government and the general public and needs to have the attention of the media. Even then, a less powerful regulator can always play an important role by sharing information on the performance of the water companies with government, the general public and other stakeholders. This information can be about progress by the sector against plan or about the performance of individual operators. With regard to the latter, having multiple water companies operating in the same regulatory (usually national) environment is to the advantage of the regulator. Not only does it allow the regulator to show the performance of the regulated companies against the same set of key performance indicators and even rank them on the basis of this performance, but it also allows the regulator to induce comparative competition and the setting of performance benchmarks.

The table below is based on the latest annual report by WASREB - the Kenyan water regulator - and shows the performance of the group of 87 Kenyan water companies against the national benchmarks for the nine key performance indicators. It shows that the sector is facing significant challenges in 5 key performance areas: water coverage, hours of supply, non-revenue water, personnel expenditure and cost recovery.

Key Performance Indicator	2018/19	Benchmark
Water Coverage, %	59	>90
Drinking Water Quality, %	96	>95
Hours of Supply, hrs/day	14	>17
Non- Revenue Water, %	43	<20
Metering Ratio, %	94	100
Staff Productivity, Staff per 1000 Connections	7	<7
Personnel expenditure as % of O+M Costs, %	50	<30
Revenue Collection Efficiency, %	92	>95
O+M Cost Coverage, %	105	>150