Corporatization and price setting in the urban water sector under statewide central administration: The Israeli experience

As in many European countries, all water sources in Israel are public property, and are centrally managed by the government. This is to facilitate correction of market failures associated with externalities, natural monopolies and equity considerations. The economic policy instrument (EPI) considered here comprises two aspects of the centralized approach: (1) an institutional reform: local services that were formerly provided by municipal water departments became the responsibility of corporations; (2) a price-scheme reform: urban water prices are set by the regulator subject to the constraint of overall cost-recovery at the national and municipal levels, combined with an egalitarian policy; the latter is realized in identical municipal end-users tariffs. We evaluate the environmental, economic and institutional aspects of these reforms, and point out two main conclusions. First, with respect to EPI implementation from the regulator perspective, the lesson learned can be summarized by the phrase "grasp all, lose all." EPI reformation, in this case the establishment of regional corporations, should take account of unattainable objectives: "sanitizing" the political factors from involvement. The second lesson is associated with the challenge of designing a pricing mechanism that simultaneously achieves several potentially contradicting targets: costs recovery, creation of incentives for efficiency, and equality. Also here the mechanism was distorted by political pressures. According to the social norms as they are reflected by the resultant policy, equality overwhelms efficiency.