Decentralization of the Water Industry in the Context of Economies in Transition: On the Example of the Czech Republic From 1992-1998

Decentralization of the Water Industry in the Context of Economies in Transition: On the Example of the Czech Republic From 1992-1998

Michael Fanta (Jan Evangelista Purkyně Universtiy, Czech Republic) and Radek Soběhart (Jan Evangelista Purkyně University, Czech Republic)
DOI: 10.4018/978-1-7998-1196-1.ch021

Abstract

This research focuses on network industries, specifically on the water industry in the context of the Czech economy in transition between 1992-1998, the state of the water industry towards the end of the 1980s, key legislative changes between 1991-92 that touched upon key administrative questions, and the future ownership of the water network and water market. The Czech Republic chose a specific way to approach the transformation of the water industry by gratuitously transferring the ownership of the previously state-owned infrastructural properties to individual cities and municipalities. The next part outlines the effectiveness of such (de)regulation process based on development of key industry indicators. Very slow development of industry indicators and lack of state financial support for capital investment in water infrastructure led to the subsequent privatization of water companies, which can be considered as a completely rational outcome of unsustainable market developments.
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Decentralization Of Water Industry:Three Models

At the start of the 1990s, there was a general consensus that it is necessary to decentralize state-managed economy, including the so-called network branches – such as e.g. the water industry. Foreign models were researched, examining how privatization and transformation of water infrastructure worked. In general, there are three fundamental models – the British, American, and French (Lipka, 2003).

The British model – based on the experiences in England and Wales where British government at the end of the 1980s decided to change the previous constellation of local water industry since local public administration was no longer capable of financing the water industry from its own sources due to the dynamically growing costs caused by the necessity of complying to the environmental directive of the European Union. The model is based on private investors being allowed to enter the market who does then not only own the actual water networks but also operates them, however only in a certain geographic location which was previously defined by the state. The state fulfils its regulative role via a licencing procedure at two regulative offices. The new subject had to acquire a licence not only from the main regulative office – the Office of Water Services (OFWAT) – but also from the Regional Water Authority, from whom the private investor acquires the licence to draw water from local water sources. In principle, it is a state-guaranteed local monopole since it is not free competition and the key obstructions happen during market entry. This specific approach to privatization generated ten large private enterprises that provide complex water services. A new enterprise could gain a licence for 25 years if it met the following three fundamental requirements: a) it was willing to provide services in an area where there was no other enterprise already operating; b) the previous holder of licence agreed with the market entry; c) it was able to provide services to customers whose minimal water consumption was at least 25,000 m3. The previously stated clearly shows that state regulators supported the inception of large water enterprises that would have enough capital to maintain and develop the entire water infrastructure. Competitiveness was supported on the customer side who could choose any enterprise with a licence, even if it was not based in the customer’s location (Cave, Wright, 2010; Abbott, Cohen, 2009).

Key Terms in this Chapter

Industry Fragmentation: A high-level of industry fragmentation and distribution of market share among many market players.

Deetatization: Process with the goal of transforming state-owned enterprises into private or mixed enterprises with partial ownership by the public sector. The objective usually is to set market conditions and increasing the effectivenss of economy of previously state-owned enterprises.

Eastern Bloc: The term for the Soviet Union (USSR) and its political satelites. Although the countries that were part of the Bloc were officialy independent, there were actually significantly dependent on the Soviet Union’s politics. These countries were Albania, Bulgaria, Czechslovakia, Hungary, Poland, Romania, Soviet Union, and East Germany.

Water and Sewage Infrastructure: Water and sewage pipes that provide drinking water and collect waste water. This infrastructure also includes waste-water treatment plants.

Golden Share: A share that grants its owner the veto right when shareholders vote at the general meeting. It enables its owner to rule a limited liability company even with a minority property share.

Transformation: Fundamental change of functioning of basic market mechanisms in society. Most commonly, this term is used in connection with the transition from a centrally-planned economy to market economy.

Privatization: Change of public (state) ownership into private; usually, this term is used for the transfer of state-owned property to private property. The opposite process is the purchase of private property by the state or its nationalization.

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