The Economics of Institutional Changes in the Water Sector: Methods, Evidence, and a Call for Systems Thinking

Abstract

As water stress increases globally with population, economic growth, and climate change, investments in institutional or management improvements and infrastructure are becoming more and more essential. Water institutions, especially in lower- and middle-income countries (LMIC), typically struggle with performance, because of inadequate capacity, misaligned incentives, or bad policies, but institutional reforms have traditionally received less focus than technical and engineering inputs. Working from a typology of six different institutional changes, the article reviews existing evidence on the impacts of such reforms, focusing on lower- and middle-income country (LMIC) contexts where institutional problems are especially acute. Most evidence pertains to changing consumer incentives in an attempt to improve cost recovery, especially via tariff reform, as well as changing ownership of utilities through privatization. Results vary widely across contexts and over time, and the details of implementation of reforms are often important, but much of the empirical evidence based on statistical or case study evidence is speculative. A systems dynamic modeling (SDM) approach can be helpful for thinking about this heterogeneity and the complexity of LMIC utility challenges. Water utility systems are a good application for SDMs because they feature complex boundaries, nonlinearities and thresholds, delayed effects, a tendency toward self-organization even if in a low-performance equilibrium, and a high degree of interconnection between a number of performance variables. Indeed, the SDM framework is useful precisely because it requires careful consideration and advances awareness by various stakeholders of the complex social feedback that may exist in water use systems, while conceding that the problems that impede effective water delivery are dynamic and interconnected, and that general optimal solutions to water service provision challenges may be elusive. In the latter portion of the article, the role that SDM can play in clarifying inconsistencies in the literature is explored through a simple illustrative example modelled on a real-world intervention with the Lusaka Water and Sewerage Company in Zambia. This utility suffers from all of the common problems of LMIC utilities, including high nonrevenue water losses, low bill collection, tariffs, poor cost recovery, inadequate maintenance and low investment and therefore poor quality service delivery, and a high dependence on a persistent flow of subsidies to both rehabilitate and extend the water supply and sewer network. The SDM analysis reveals the interdependencies between these variables, and sheds light on the long-term reverberations of external interventions in the system. Nonetheless, the illustrative SDM is relatively simple, and various improvements could be made to add realism on both the utility operations side, and on the water consumer side. Moreover, data limitations preclude a calibration to existing conditions, and there would be additional value in testing the basic framework using richer data and a more engaged stakeholder process.