Water Sector Ownership and Operation: An evolving international debate with relevance to proposals for nationalisation in Italy

Perhaps the key economic feature of the water sector is its reliance on a long-lived fixed infrastructure that is too costly to duplicate which implies that those parts of the water supply chain are a natural monopoly, with limited potential scope for direct competition. The condition of this infrastructure is fundamental in determining the ability of the water system to deliver on society’s objectives and a central question is how to ensure an optimal quantity of infrastructure investment occurs.
This report compares in general terms the different incentives on water operators in the public and private sectors that affect investment decisions and efforts to drive cost efficiency. For example, while decisions in the private sector are driven by the profit motive (subject to regulatory requirements on water quality, etc.), government’s goals are likely to be multi-dimensional. While a common argument in favour of public ownership of the water sector is that the cost of borrowing to fund investment is lower for the public rather than private sector.

The review of the international evidence (both from Europe and further afield) on the impact of private sector involvement on water operator efficiency reveals a mixed set of results regarding whether efficiency is increased or not. This mixed overall picture is likely explained by the role of local circumstance and the importance of the nature of regulation governing operator behaviour.