Water Institutions, Incentives, and Markets

Abstract

Because of its importance and the perceived inability of the private sector to supply water, many countries have relied on the public sector to provide water services. This heavy emphasis on public provision of water has resulted in many inefficient public water projects and in inadequate supplies of good quality water, especially for the poor. The unbundling of water service activities has helped make private incentive-based management a realistic option for providing water services. The same entity does not have to provide all elements of a water system from the capital to build reservoirs to the management that delivers the water services. Successful management models include water utilities that are financially autonomous and not subject to political pressure, management under service contracts that are made in a transparent contracting processes with a number of firms involved in the bidding, and water user associations that are given adequate responsibility and authority. Water markets also improve water use efficiency and provide a mechanism for reallocating water once tradable water rights are established and the management and infrastructure are in place to implement the trades.