Water Markets, Privatization and Deregulation

Energy Expert 

To bring demand and supply into balance, water markets are necessary. Under a market system, prices are not regulated, but are determined by the free exchange of water rights. In most countries where water is scarce or costly to access, systems of rights for water have emerged either through custom or through laws and regulations. The rights define the amount of water to which the owner is entitled. With rights well defined, water markets allow owners to make better decisions about the water they use. They can decide for themselves whether to use the water or trade the right. The owner of the right may choose to use the water himself when the market price is low. In fact, if the price is low enough the owner may even decide to enter the market and purchase additional water. When prices are high, however, the owner may find it cost effective to conserve water and sell it.

While water right markets are emerging all over the world, they are still in their infancy and face several challenges. Lack of information is one problem common across all water markets. Buyers and sellers have a hard time finding trading partners and when they do, limited market information exists to direct them on prices and terms of trade.

While there have been many successes in service delivery and investment, privatisation of water and waste companies has not been an unalleviated success. Firstly, it often faces political opposition which will mobilise any criticism it can to discredit it. This is a fact of life that investors have to live with and deal with as best they can. However, there have been cases of failures to deliver on contracted terms of concessions. The most frequent criticisms are attempts to increase prices when the company is some way into the concession, on the grounds that returns are not as presented. In some cases these increases have been very high, in one case as much as 400%.

These have inevitably attracted criticism from the anti-privatisation lobby and are presented as cases against the principle of private ownership. It should be pointed out that proponents of public ownership are less likely to criticise the faults in publicly owned companies and are reluctant to acknowledge the many successes of private sector participation.