Strengthening Economic Regulation of Water and Sanitation Services in the Philippines

Annex D. Aggregation – country experiences

France: voluntary market-led aggregation through intercommunal syndicates

France has a long tradition of aggregation. France’s water and sanitation services are the responsibility of about 36 000 communes, creating a highly fragmented landscape. Over more than a century, municipalities have voluntarily aggregated into approximately 18 000 structures through intercommunal syndicates (syndicats intercommunaux), joint boards where municipalities voluntarily pool resources to deliver water and sanitation services or Public establishments for inter-municipal co-operation (EPCI) (World Bank, 2005[1]).

French law provides clear models and rules for aggregation, including governance arrangements, entry and exit rules and tariff-setting mechanisms. While the process is primarily voluntary and driven by local governments, the central government can mandate inclusion of certain towns in exceptional cases

A distinctive feature of the French model is the widespread use of delegated management contracts with private operators (Veolia, Suez, SAUR), who manage operations while asset ownership remains public. Around 61% of the population is served by such delegated services, which cover about 75% of the volume of water distributed (Eggrickx, Camous and Guérin-shneider, 2023[2]). This market-led approach allows municipalities to benefit from private sector expertise and economies of scale without transferring ownership.

As of 2020, nearly 69% of French municipalities had transferred water and sanitation responsibilities to inter-municipal bodies, improving efficiency, professionalisation and service quality, especially for small rural councils lacking resources (Eau France, 2022[3]). The model has enabled investment in infrastructure and technical capacity that would be difficult for small communes to achieve independently.

Despite the benefits, municipalities still face difficulties in overseeing private operators, including limited control over costs, lack of transparency and oligopolistic market structures. Regulatory oversight has improved but remains complex due to the fragmented governance and the technical nature of the sector (Eggrickx, Camous and Guérin-shneider, 2023[2]).

Key lessons and takeaways for the Philippines

France’s experience highlights the role of institutional design and legal clarity in enabling voluntary aggregation over time. First, aggregation does not require full municipal mergers to be effective. France demonstrates how inter-municipal syndicates and joint boards can provide a flexible pathway for municipalities to pool resources, professionalise service delivery and achieve scale, while preserving local ownership. For the Philippines, this supports the use of clustering, joint utilities and shared-service arrangements as pragmatic entry points where full consolidation is politically or administratively difficult.

Second, clear legal frameworks reduce transaction costs. French law standardises governance structures, entry and exit rules and tariff-setting mechanisms, lowering uncertainty for municipalities and operators. This underlines the importance for the Philippines of a nationally defined menu of aggregation models, rather than ad hoc, negotiated arrangements.

Third, private participation can support aggregation, but only with strong oversight. France shows that delegated management can deliver efficiency and technical capacity without asset privatisation but also illustrates the risks of weak cost control and market concentration. For the Philippines, this suggests that private contracts should be embedded within consolidated or clustered arrangements and overseen by a capable regulator, rather than pursued through fragmented, stand-alone municipal contracts.

Portugal: distinct phases of mandated and voluntary aggregation

Portugal’s aggregation of water service providers unfolded in two distinct phases, shaped by EU accession, financing constraints and the limited capacity of small municipalities to meet rising regulatory and investment requirements.

Phase 1: Mandated aggregation of bulk water (1995 – 2000’s)

The first major wave of aggregation began in 1995 and focused on bulk water supply and wastewater treatment. It was driven by the need to comply with EU environmental directives and to mobilise large-scale investment, which fragmented municipal systems were unable to finance or manage individually. National policy promoted the creation of multi-municipal, regional systems, typically through public–public partnerships between municipalities and the state, largely via the Águas de Portugal (AdP) Group (Albuquerque, 2020[4]). Asset ownership remained public, while operations were consolidated at regional scale.

This mandated aggregation enabled economies of scale, unlocked access to EU Cohesion Fund financing and supported rapid infrastructure modernisation. By the late 2000s, most bulk water and wastewater services were provided through a limited number of regional systems (16 bulk systems by 2020, of which 13 were managed through AdP partnerships). These reforms significantly improved water quality, service reliability and regulatory compliance across the country.

This first phase of aggregation was underpinned by a blended financing model that combined EU grants, long-term development lending and utility revenues, substantially reducing the cost and risk of consolidation for participating municipalities. EU Cohesion Policy funding covered a significant share of eligible investment costs and was closely aligned with national sector strategies, enabling project pipelines to be developed at regional scale. Loans from the European Investment Bank and complementary commercial financing supported capital-intensive infrastructure, while aggregated utilities progressively relied on operating revenues to service debt and fund ongoing expenditure. By linking access to finance to regional governance arrangements, the financing framework reinforced aggregation incentives and strengthened the investment case for multi-municipal systems

However, bulk aggregation also revealed governance challenges. Municipalities differed widely in financial capacity, water demand and development priorities, complicating agreement on cost-sharing and tariff structures. Concerns about loss of local autonomy were common, as water services had historically been a core municipal responsibility. Designing equitable mechanisms to allocate investment costs and set tariffs across heterogeneous municipalities proved politically sensitive and administratively complex (Martins and Fortunato, 2016[5]).

Phase 2: voluntary aggregation of direct service provision (2015 onward)

From around 2015, aggregation efforts shifted towards retail services, including water distribution to end users and local wastewater collection. Unlike bulk services, this phase relied primarily on voluntary participation, supported by financial incentives and access to EU and national funding. Aggregation took multiple institutional forms, including inter-municipal companies, public–public partnerships and some vertical integration linking bulk and retail services, often with continued technical involvement from AdP (Lopes, 2021[6]).

Retail aggregation aimed to professionalise service delivery, improve operational efficiency and enhance resilience, particularly for smaller municipalities struggling to meet regulatory and financial requirements independently. By 2020, 234 municipalities were participating in retail aggregation arrangements, with notable examples such as Águas do Ribatejo and Águas do Norte (Macedo Vitorino, 2023[7]).

Progress was slower and more uneven than in the bulk phase, reflecting the political sensitivity of customer-facing services. Municipal resistance remained significant, particularly where tariff harmonisation implied higher prices for households or cross-subsidisation across municipalities. Governance arrangements were often complex, requiring new legal entities and decision-making structures to balance representation and accountability. Ongoing adjustments to legal and institutional frameworks have been necessary to support diverse aggregation models while maintaining efficiency, affordability and local legitimacy (Lopes, 2021[6]).

Key lessons

Portugal’s experience demonstrates that mandated aggregation was effective for capital-intensive bulk services requiring large-scale investment and regulatory compliance. While there was slower progress on retail aggregation, the Portuguese experience highlights the important use of sustained incentives, flexible institutional design and careful management of political and distributional impacts.

Portugal’s experience suggests three practical takeaways for the Philippines’ consolidation agenda. Portugal’s most decisive gains came from early consolidation of capital-intensive bulk functions where scale economies and compliance requirements are strongest. For the Philippines, this points to prioritising integration where fragmented providers face binding constraints, such as bulk water sourcing, treatment, shared laboratories, non-revenue water reduction capability and wastewater infrastructure planning, before attempting politically sensitive full retail mergers. However, Portugal also illustrates a potential drawback of separating upstream aggregation from downstream service delivery: when retail services remain fragmented, tariff-setting, accountability and cost-sharing can become more contested and incentives for full integration may weaken. This suggests that where politically feasible, bundled approaches, linking upstream and retail reforms within a coherent mandate, financing framework and regulatory pathway, may reduce later coordination frictions.

Second, finance can play and important role, if tied to governance. Portugal used a blended model in which grant and loan finance implicitly favoured entities able to plan and invest at regional scale. For the Philippines, this supports using national programmes and concessional finance to incentivise aggregation through eligibility rules (e.g. access to capital support, performance-based grants, credit enhancements), while requiring credible governance arrangements (ring-fencing, service standards, reporting and enforceable investment plans) as a condition of support.

Third, voluntary retail aggregation requires careful political design. Portugal’s retail phase progressed more slowly because it touched tariffs, local identity, staffing and customer accountability. For the Philippines, this reinforces the need for phased tariff alignment, shared services and transitional governance models within a clear national regulatory framework, so consolidation can proceed without triggering immediate social or political backlash.

Brazil: incentivised aggregation and state companies

Brazil’s experience with aggregation reflects long-standing challenges of extreme municipal fragmentation, large regional inequalities and uneven technical and financial capacity across service providers.

Incentivised aggregation under PLANASA (1970s–1990s)

Brazil’s first major aggregation effort was launched in 1971 through the National Water Supply and Sanitation Plan (PLANASA). The federal government incentivised municipalities to delegate service provision to newly created state-owned water and sanitation companies (CESBs), primarily by linking access to federal financing from the FGTS (Workers’ Severance Pay Fund) to participation. This effectively aggregated service provision at the state level through long-term concession contracts.

The model enabled rapid expansion of urban water services and cross-subsidisation between wealthier and poorer municipalities. Between 1970 and 1990, urban water coverage increased from 45% to 95%, while sanitation coverage rose from 24% to 42% (World Bank, 2005[1]). Aggregation also supported professionalisation and infrastructure development at scale.

However, PLANASA’s top-down design weakened municipal ownership and prioritised water supply over sanitation. Rural areas and poorer regions, particularly in the North and Northeast, continued to experience major service gaps (Stepping, 2016[8]). Fragmented and weak regulatory arrangements further undermined performance: standards, tariffs and oversight varied widely, conflicts of interest were common and fewer than half of municipalities had effective regulatory entities or sanitation plans (Carvalho and van Tulder, 2022[9]). The decline of federal funding and the return to democracy in the late 1980s led to decentralisation, legal uncertainty and a patchwork of service delivery models (Smiderle et al., 2020[10]).

Mandated and incentivised regionalisation under the 2020 New Sanitation Legal Framework

The 2020 New Sanitation Law marked a structural shift towards mandated and incentivised regionalisation. The law requires municipalities to join regional service blocks designed to pool resources, enable cross-subsidisation and attract investment. Access to federal funding is conditional on participation and new service contracts are typically awarded through competitive bidding, including public-private partnerships. The reform aims to achieve near-universal access by 2033, supported by clearer targets and strengthened regulatory oversight (Smiderle et al., 2020[10]).

Early evidence suggests that the framework has accelerated the formation of regional consortia and stimulated private investment commitments. At the same time, implementation challenges persist, including tariff harmonisation across heterogeneous municipalities, high levels of water losses, persistent regional inequalities and the need for robust regulatory capacity to ensure that expanded investment translates into equitable and sustainable service improvements (Government of Brazil, 2022[11]).

Key lessons

Brazil’s experience highlights the importance of linking aggregation to strong regulatory frameworks and accountability mechanisms. While aggregation can mobilise investment and scale rapidly, its long-term effectiveness depends on balancing efficiency gains with municipal buy-in, equitable service provision and sustained regulatory oversight.

Brazil’s experience highlights three lessons of direct relevance to the Philippines’ efforts to consolidate water and sanitation services.

First, regionalisation needs a clear legal default. Brazil’s earlier reliance on voluntary delegation under PLANASA delivered rapid expansion but entrenched fragmentation and uneven accountability. The 2020 reform demonstrates the importance of making regional service provision the default option, with clear criteria and limited exemptions. For the Philippines, this supports establishing a strong national framework that sets regional or clustered provision as the norm, while allowing opt-outs only for providers that demonstrably meet performance and financial standards.

Second, aggregation must be anchored in an empowered national regulator. Weak and fragmented regulation under PLANASA undermined tariff setting, cost recovery and service quality. Brazil’s recent reforms strengthened the role of the national regulator in standard-setting and contract oversight. This underscores the value for the Philippines of a credible, independent regulator to harmonise service standards, oversee tariffs and manage diverse provider models across regions.

Third, private participation depends on scale and regulatory clarity. Brazil’s regional blocks have improved the investment case for private and blended finance, but only where contracts, tariffs and regulatory oversight are predictable. For the Philippines, this suggests that consolidation and regulatory strengthening should precede large-scale private participation, rather than the reverse.

References

[4] Albuquerque, A. (2020), Portuguese experience on the aggregation of water supply, sanitation and solid waste utilities, Smart Water Magazine, Lisbon.

[9] Carvalho, D. and R. van Tulder (2022), “Water and Sanitation as a Wicked Governance Problem in Brazil: An Institutional Approach”, Frontiers in Water, Vol. 4, https://doi.org/10.3389/frwa.2022.781638.

[3] Eau France (2022), Observatory on public water and sanitation services in France : overview of the services and of their performances, Eau France, SISPEA, https://economie.eaufrance.fr/sites/default/files/2023-02/synthese_eaufrance_sispea_2020_anglais_vf.pdf (accessed on 12 June 2025).

[2] Eggrickx, A., B. Camous and L. Guérin-shneider (2023), “Service public d’eau en régie : vers une gouvernance plus effective ?”, Gestion et management public, Vol. Volume 10 / N° 4/4, pp. 9-27, https://doi.org/10.3917/gmp.104.0009.

[11] Government of Brazil (2022), New legislation facilitates private investments in basic sanitation in Brazil, Latest News.

[6] Lopes, S. (2021), “Aggregation in the Portuguese Water Industry: The Case of Retail Service Operators”, Notas Economicas, Vol. 53, pp. 123-142, https://doi.org/10.14195/2183-203X_53_8.

[7] Macedo Vitorino (2023), The Portuguese Water Market, Macedo Vitorino, https://www.macedovitorino.com/xms/files/2023/20231206-The_Portuguese_Water_Market.pdf (accessed on 12 June 2025).

[5] Martins, R. and A. Fortunato (2016), “Critical analysis of the Portuguese Water Industry Restructuring Plan”, Utilities Policy, Vol. 43, pp. 131-139, https://doi.org/10.1016/j.jup.2016.06.014.

[10] Smiderle, J. et al. (2020), The Governance of Water and Wastewater Provision in Brazil: Are There Clear Goals?, https://www.researchgate.net/publication/340133194.

[8] Stepping, K. (2016), Urban sewage in Brazil : drivers of and obstacles to wastewater treatment and reuse : governing the water-energy-food nexus series, Deutsches Institut für Entwicklungspolitik gGmbH.

[1] World Bank (2005), “Models of Aggregation for Water and Sanitation Provision”, Water Supply & Sanitaiton Working Notes, https://ppp.worldbank.org/sites/default/files/2024-09/WSSWorkingNote1aggregation.pdf.