European Journal of Law and Economics

, Volume 42, Issue 3, pp 445–469 | Cite as

Innovative regulations, incomplete contracts and ownership structure in the water utilities

  • Michel NakhlaEmail author


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.


Incomplete contracts Public services Water utilities Privatisation Economics of regulated industries 

JEL Classification

K23 Q58 O18 L51 L95 



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.


  1. Aoki, M. (1986). Horizontal vs. vertical information structure of the firm. The American Economic Review, 76(5), 971–983.Google Scholar
  2. Araral, E. (2008). Public provision for urban water: Getting prices and governance right. Governance, 21(4), 527–549.CrossRefGoogle Scholar
  3. Araral, E. (2010). Improving effectiveness and efficiency in the water sector: Institutions, infrastructure and indicators. Water Policy, 12(Suppl 1), 1–7.CrossRefGoogle Scholar
  4. Araral, E. (2013). Water governance 2.0: A review and second generation research agenda. Water Resources Management, 27(11), 3945–3957.CrossRefGoogle Scholar
  5. Blanc, A., & Botton S. (1995). Water services and private sector in developing countries. PPIAF-AFD (Tremolet, S. Chapter 2.1. Private sector participation in Senegal: a successful “home grown” strategy? 131–149). August 2014.
  6. Blanc, A., & Ghesquières, C. (2006). Secteur de l’eau au Sénégal: un partenariat équilibré entre acteurs publics et privés pour servir les plus démunis? AFD, 24, 1–29.Google Scholar
  7. Brocklehurst, C., & Janssens, J. (2004). Innovative contracts, sound relationships: Urban water sector reform in Senegal. Water supply and sanitation sector board discussion paper series. World Bank 1, 51.Google Scholar
  8. Brynjolfsson, E. (1994). Information assets, technology and organization. Management Science, 40(12), 1645–1662.CrossRefGoogle Scholar
  9. Dagdeviren, H. (2011). Political economy of contractual dispute in private water and sanitation: Lessons from Argentina. Annals of Public and Cooperative Economices, 82(1), 25–44.CrossRefGoogle Scholar
  10. Dagdeviren, H., & Robertson, S. A. (2013). A critical assessment of the incomplete contracts theory for private participation in public services: The case of the water sector in Ghana. Cambridge Journal of Economics, 37(5), 1057–1075.CrossRefGoogle Scholar
  11. Desrieux, C. (2008). La gestion contractuelle des services publics. Une critique de l’approche par les droits de Propriété. Revue économique, 59(3), 451–461.CrossRefGoogle Scholar
  12. Desrieux, C. (2014). To allot or not to allot Public Services in Europe? An incomplete contract approach, (avec J. de Brux). European Journal of Law and Economics, 37(3), 455–476.Google Scholar
  13. Dia, M. (2012). Augmentation de l’efficience et affermage de l’eau au Sénégal. July 2014.
  14. Fall, M., Marin, Ph., Locussol, A., Verspyck, R. (2009). Reforming urban water utilities in western and central Africa: Experiences with public-private partnerships. World Bank, PPIAF. August 2014.
  15. Goetz, C. J., & Scott, R. E. (1981). Principles of relational contracts. Virginia Law Review, 67(6), 1089–1150.CrossRefGoogle Scholar
  16. Grossman, S. J., & Hart, O. D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. The Journal of Political Economy, 94(4), 691–719.CrossRefGoogle Scholar
  17. Guérin-Schneider, L., & Nakhla, M. (2012). Emergence of an innovative regulation mode in water utilities in France: Between commission regulation and franchise bidding. European Journal of Law and Economics, 33(1), 23–45.CrossRefGoogle Scholar
  18. Hart, O. (2009). Hold-up, asset ownership, and reference points. The Quarterly Journal of Economics, 124(1), 267–300.CrossRefGoogle Scholar
  19. Hart, O., & Moore, J. (1990). Property rights and the nature of the firm. Journal of Political Economy, 98, 1119–1158.CrossRefGoogle Scholar
  20. Hart, O., & Moore, J. (2008). Contracts as reference points. The Quarterly Journal of Economics, 123(1), 1–48.CrossRefGoogle Scholar
  21. Hart, O., Shleifer, A., & Vishny, R. W. (1997). The proper scope of government: Theory and an application to prisons. The Quarterly Journal of Economics, 112(4), 1127–1161.CrossRefGoogle Scholar
  22. Klein, B., Crawford, R. G., & Alchian, A. (1978). Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics, 21, 297.CrossRefGoogle Scholar
  23. Majone, G. (1997). The new European agencies: Regulation by information. Journal of European Public Policy, 4(2), 262–275.CrossRefGoogle Scholar
  24. Marin, P. (2009). Public-private partnerships for urban water utilities. World Bank. August, 2014.
  25. Marin, P., & Ouibiga, H. (2010). Corporatizing a water utility: A successful case using a performance-based service contract for ONEA in Burkina Faso. July 2014.
  26. Nakhla, M. (2003). Information, coordination and contractual relations in firms. International Review of Law and Economics, 23(1), 101–119.CrossRefGoogle Scholar
  27. Pagano, U., & Rossi, M. A. (2004). Incomplete contracts, intellectual property and institutional complementarities. Working Paper. Italy: University of Siena and Central European University.Google Scholar
  28. Scott, R. E. (1999). Case for formalism in relational contract. Northwestern University Law Review, 94, 847.Google Scholar
  29. Seck, A. (2013). Programme d’investissement horizon 2025 et stratégie. 7ème revue annuelle sectorielle conjointe-SONES. July 2014.
  30. Tremolet, S. (2006). Case study on Senegal’s water and sanitation sector economic regulation. A report to the World Bank. Castalia, Tremolet consulting. August 2014.
  31. Tremolet, S. (2010). Investing in urban water and sanitation. New York: Routledge, Rockefeller Foundation.Google Scholar
  32. Tremolet, S. (2012). Small-scale finance for water and sanitation (pp. 1–70). Stockholm: EU Water Initiative/SHARE, Finance Working Group.Google Scholar
  33. Williamson, O. E. (1971). The vertical integration of production: Market failure considerations. The American Economic Review, 61(2), 112–123.Google Scholar
  34. Williamson, O. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press.Google Scholar
  35. Windsperger, J. (2002). The structure of ownership rights in Franchising: An incomplete contracting view. European Journal of Law and Economics, 13, 129–142.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.CGS-MINES ParisTech UMR I3 CNRS 9217ParisFrance

Personalised recommendations