Regulation and the privatisation of water services in developing countries : assessing the impact of the general agreement on trade in services (GATS)

Trade liberalisation of environmental services under the current WTO General Agreement on Trade in Services (GATS) has been widely advocated as a means of increasing private sector participation in the water sector in developing countries. The liberalisation of water services in lower income countries is expected to promote more efficient operation, increase investment and improve service coverage. At the same time, these proposals have been widely criticised, and there has been growing resistance to the liberalisation of water services. This study reviews the evidence on the impact of private sector involvement in the provision of water services in developing countries. A number of reasons why water privatisation may prove problematic in lower-income countries are identified, including transaction costs and possible regulatory weaknesses. Recognising that effective regulation is needed to ensure that the potential gains from private involvement are fully realised, the paper then considers the relationship between national regulatory autonomy and GATS liberalisation. The study concludes that developing countries with limited regulatory resources should adopt a cautious approach to public services liberalisation, by sequencing market liberalisation measures to match the development of their regulatory institutional capacity. The paper also argues for improved clarity in the interpretation of the GATS provisions on the right of members to exercise national regulatory policy. [authors abstract]