Abstract
Using an incomplete contract framework, we analyse new forms of regulation and private participation in public services. This paper explains contractual efficiency in the absence of financially guaranteed investments in public private partnerships. The example of a number of African countries underlines how a series of national, normative law reforms can give rise to innovations in approaches to regulation. This new hybrid form of regulation, inspired by a French regulation approach combining commission regulation and franchise bidding, could be more effective than previous approaches to regulation, in the sense of being more stable and more closely aligned with stakeholder expectations. This approach to regulation would appear to be more efficient economically, while integrating the objectives of solidarity tariffs and social water access connections. Based on these analyses, our results show (1) the impact on the robustness of new lease contracts on financing constraints, and (2) the advantages of Asset Owner Companies that reconcile explicit commitments and special purposes. We demonstrate that this achieves optimum efficiency by encouraging parties to determine jointly the optimal level of costs and investment. In addition, the mechanism fosters discussion about the possibility of institutionalizing Asset Owner Companies by predetermining the distribution of risk in lease contracts.
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Notes
This concerns a natural monopoly context.
No allowance has been made for discounting. We have adopted the standard hypotheses regarding the convexity and monotonicity of v(e, φ), c(e, φ) and w(i, φ).
(v, φ)(0) = 0, (v′, φ) ≥ 0, (v″, φ) ≥ 0
(c, φ)(0) = 0, (c′, φ) > 0, (c′, φ)(0) = ∞, (c′, φ)(∞) = 0, (c″, φ) < 0
(w, φ)(0) = 0, (w′, φ) > 0, (w′, φ)(0) = ∞, (w′, φ)(∞) = 0, (w″, φ) < 0
(c′, φ) − (v′, φ) ≥ 0.
In 2006, the World Bank defined “affermage” as follow: a contract in which the operator receives a fee per volume of water sold (retains revenue from the customer) and returns the difference between tariff revenues and its remuneration to the owner of the asset, which can be the contracting authority or an asset-holding company. This amount can be adjusted over the years for inflation. In an “affermage contract”, the private operator earns the same remuneration per cubic metre sold, irrespective of whether water was sold at the social tariff or the industrial tariff.
Thus, if λ = 1, the public manager becomes entirely unreplaceable. It can then negotiate with the public authority with a view to guaranteeing itself half the profits on additional investments deriving from the surplus on investment. On the other hand, if λ = 0, the identity of the public manager is of no consequence in terms of the realization of those investments. In such a case, the public manager is unable to benefit from any of the surplus deriving from additional investments.
The illustration of this model is based on SONES (Senegal), and ONA (Burkina Faso).
ρo(i) depends of investments i, to improve service quality and operational efficiency, 0 ≤ ρo(i) ≤ 1. ρo(i) = (1 − network yield rate) × payment recovery rate.
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I wish to thank an anonymous referee and the editors for their valuable comments and seminar participants at the 2014 IAPW Conference at Mines ParisTech in Paris.
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Nakhla, M. Innovative regulations, incomplete contracts and ownership structure in the water utilities. Eur J Law Econ 42, 445–469 (2016). https://doi.org/10.1007/s10657-015-9480-5
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DOI: https://doi.org/10.1007/s10657-015-9480-5