The Theory of Water and Utility Pricing - Global Drinking Water Management and Conservation - page 78

discharged and the fines were returned to the polluters. The overall enforcement and

monitoring were uncoordinated and inadequate because the regulatory functions
were diffused among different agencies and the 36,500 geographic levels of juris-
dictions. In addition, management contracts between local communes and private
companies were not monitored by any agency with the appropriate technical and
economic resources. For example, contracts were not properly tendered and costs
were in ated to justify higher prices. Moreover, the privately run companies

charged higher prices for water than the publicly managed utilities, on average
40 percent higher. Thus it seems clear that the French water model lacked the
proper machinery for economic regulation.
To conclude, although water quality improvements were associated with priv-
atization, there is no demonstrable evidence that privatization resulted in lower
prices. In fact, the evidence in both countries indicates higher prices because of
privatization. It should be noted that the experience in both countries is similar to
the privatization of local hydro utilities in the Province of Ontario, Canada, where
costs increased signi

cantly due to a similar private sector tenet of maximizing
shareholder value. It seems that the regulatory system in England and France did
not work satisfactorily for many years after privatization. With natural monopolies
in water, private production requires adequate regulation. In the two countries
examined, it is not possible to

find that the private sector demonstrated absolute

efficiency advantage.
Nevertheless it should be noted that new water technology has always been
developed by the private sector and not by the public sector, which typically is not
allowed to do any innovation or R&D. The new technology is developed by a
manufacturing sector not connected with the provision of water. With ef cient

markets, the private sector that develops new technologies should have been able to
sell these technologies to the public sector. Once the central state had reneged on its
responsibilities for

financing water infrastructure, the main local government failure
of the public sector (before privatization) was the failure to anticipate the revenue
requirements that would no longer be forthcoming from the central state, and that
therefore they would have to charge prices for water services in order to plan and
budget for investments in new infrastructure. Under these conditions, it is not at all
clear that in the UK and France the only solution to this problem was privatization.
Nevertheless it is possible that private sector management contracts could
manage some utilities better by implementing cost control and reducing waste and
duplication, or reducing redundant labor. Thus it is the quality of management that
counts, not whether the utility is in the public sector or in the private sector.

5.5 Second-Best (Ramsey) Pricing

In economic theory, Marginal Cost Pricing is identi solution

that maximizes welfare. However, given the hierarchical jurisdiction of public
utilities, and the requirement of self-

ed as the “ rst-best ”

nancing, this first-best solution may not be