Innovation and regulatory outcomes: Evidence from the public-private contracts for water supply in France

Innovation and regulatory outcomes: Evidence from the public-private contracts for water supply in France
Freddy Huet (Université de la Réunion) and Simon Porcher (IAE Paris)
Abstract: One of the most important pitfalls associated with public-private partnership schemes (PPPs) conducted in natural monopoly industries is the difficulty of replacing the winning firm after a contract has been signed.
Hence regulatory outcomes would depend on the balance between the opportunistic and reputational behavior of the incumbent firm. The aim of this chapter is to investigate whether investment in innovative leak detection technologies tilt the balance in favour of reputational behaviour by water companies involved in PPP schemes in French municipalities. Using a database of more than 4,000 observations collected in the French water industry in 2004 and 2008 and probit regression, we report that the threat of competition (measured by the percentage of municipalities in the department that chose in-house provision, the concentration of private operators in the department or by the time left to the end of the contract) induces firms to behave opportunistically – i.e., it reduces the probability of the firm provision of vital information on the state of the network. However, we also report that investment in costly and innovative leak detection technology (proxied by the existence of geo-referring information system to localize leaks) increases the probability of providing network information.