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Will a “Concession” Become the Savior of the Crisis in Water Services?

Tetsuzo Yamamoto
Professor, Faculty of Commerce, Waseda University

I have been studying privatization and regulatory reform for nearly 30 years. What triggered me to do so was the privatization plan for water services in England. Honestly, this came as a shock to me. Among public services, water supply services are directly related to the life, health and public hygiene of a nation’s citizens, and I had been thinking that privatization could not be done because of its strong public nature.

The break-up and privatization plan in England that could overturn the concept of public goods had become a serious political issue due to expectations that European and U.S. investors, especially French companies, would enter the market, which also led to increased nationalism. I went to England and France to investigate and announced the results after following the sequence of events(Note 1). Ever since, water services in England have attained business stability by diversifying strategies, and consumers have also obtained certain benefits by developing the water system and reviewing its regulation, including the use of price cap regulation, which encourages investment.

However, after studying in Cambridge in the 1990s, my research interests turned to the theories forming the background of policies. For example, privatization theory (micro application) by John Vickers and George Yarrow, privatization theory (macro application) by Dieter Bös, optimal regulation theory by Kenneth E. Train, access price regulation theory by W. J. Baumol and regulatory impact assessment (RIA). Therefore, I have moved away from policy analysis.

Recently, however, I have started to facing issues of reforms in the public utility services squarely once again by bypassing research in bidding and auction theories. Needless to say, the principle of privatization and regulatory reforms is to implement market functions in the public sector and to improve social welfare by introducing and promoting competition. The reforms had brought about many theories such as the contestability theory and the incentive regulation theory, but what I found most interesting was franchise bidding raised by Harold Demsetz. He advocated that public services where competition cannot be introduced due to its natural monopoly nature should introduce competition at the beginning and suggested that the management rights of a service should be entrusted with a service operator offering the most effective management at the bidding. This franchise bidding was introduced in some states in the U.S. but was not widely used. However, it has given rise to some heated arguments because of the criticism that new institutional economists such as Oliver Eaton Williamson have made. What was most important was that this idea of introducing auctions to the public services spread into various sectors in the 1990s, as can be seen in the frequency of auctions in mobile communication, electric power procurements, emission rights trading market and airport landing slots. Of course, what was behind it was that there had been rapid developments in the incomplete competition game theory and in the auction theory based on the probability theory (Note 2), which has resulted in accelerating the development of concessions, called “another type of privatization.” This concession has caused me to shift my attention to the reforms in public services once again.

A concession refers to a form of public private partnership (PPP) in a broad sense, such as lease and private finance initiative (PFI), but in general, it means transferring the management and administration rights of a service to the private sector. Bidding plays an important role when selecting service operators in a concession. A concession is an important policy measure in developing and reconstructing public services, such as water and airport services, in advanced nations, developing nations and emerging nations since the 1990s, and it can be also considered to become an important policy option in our country going forward.

In Japan, concessions have been introduced in airport projects in advance, but it is regarded as a promising method in utilizing for the future water services. The water services in our country are in a critical situation due to: (a) a decrease in the population due to declining birth rates, (b) aging facilities and equipment in pipelines and water purification plants, (c) defects in the legal system, such as top-to-bottom sectioning of the water and the sewage systems and (d) delays in regulatory reforms, such as the public management principles of municipalities and the vague price regulation. In a situation where local finance has no spare capacity, the decrease in population puts downward pressure on water revenues, and the aging facilities and equipment increase the demand for upgrading them. The nature of this crisis is extremely serious. This is because the situation is hardly visible even if the services are in the red. The deterioration in profitability does not come to the surface because funds are transferred from the general account and subsidies are provided from the national government. Even if real deficit continues, the structure allows covering such deficit by raising water prices, and if the situation is left as is, there will be a rapid increase in prices in the near future, which can burden local residents with increased taxes.

A revised water supply law is expected to be passed in the parliament this autumn, and the key word there will be “expansion and concession.” Administration has expanded through the great municipal mergers in the Heisei era, but water services have not gone through substantial restructuring, including networks, facilities and equipment, and the services have been managed without changes. To accept having wide-area operators and have private companies join there, and to make efforts to achieve curbing prices and improving water quality based on efficient services could be a useful policy measure. In order to contribute to water reform, I am planning to launch a research institute on water circulation systems within the university in October 2017.

  • ^ Publication, Market or Government, Nihon Keizai Hyouronsha Ltd., 1994.
  • ^ Publication, Economics of Regulatory Reform, Bunshindo Publishing Corporation, 2004. Vijay Krishna Auction Theory, Translation, Forthcoming Publication, Chuokeizai-sha, Inc.

Tetsuzo Yamamoto
Professor, Faculty of Commerce, Waseda University

Professor Yamamoto was born in 1947 in Kanagawa Prefecture. He graduated from the School of Commerce, Waseda University in 1970. He assumed his present post after having studied in the doctoral program at Hokkaido University Graduate School of Economics and Business until 1974 and in the Social Science Course at University of Tsukuba as a researcher. During this period, he was a visiting scholar at University of Cambridge and served as a consultant at Organisation for Economic Co-operation and Development. He also served as member of various committees and study groups, such as: Railroad Tariffs Steering Committee of the Ministry of Land, Infrastructure, Transport and Tourism, Information Technology Competition Commission of the Ministry of International Affairs and Communications, Price Stability Policy Committee of the Cabinet Office, Market-Opening Committee of the Cabinet Office, and Competition Policy Study Group of the Japan Fair Trade Commission.
His major publications include: Frontier of Public Policy (author and editor, Seibundoh, 2017), Regulatory Reform 30 Lecture Courses (author and editor, Chuokeizai-sha, 2013), Growth Strategies of Japan (co-author and co-editor, Chuokeizai-sha, 2012), Regulatory Impact Analysis: Institutions, Theories, and Cases (author and editor, NTT Publishing Co., Ltd., 2009), Sustainability of Growth, Japanese Economy in 2015 (co-author and co-editor, Toyo Keizai Inc., 2005), Economics of Regulatory Reform – Incentive Regulation, Structural Regulation, Franchise Bidding (Bunshindo Publishing Corporation, 2003), Economic Theory of M&A, (Chuokeizai-sha, 1997).