The potential of the private sector in combating water scarcity: The economics

•Water scarcity and the need to price water create potential for private sector involvement.•The interaction between the public and private sector in the water sector is complex.•Contract theory to some extent substitute the need for 100% public ownership.•Water Public Private Partnerships allow for a whole range of private sector involvement. Water scarcity is increasing across the globe. We discuss how the private sector and private investment can assist in the fight against water scarcity, especially in advanced and middle-income economies. We first lay out from an economic perspective why local, regional, and national governments have traditionally played an outsized role in providing water security. We next describe a whole set of possible roles for the private sector, ranging from a fully privatized water sector to more limited public–private partnerships (PPPs), corporate social responsibility (CSR), and impact investment that may take place independent of the public sector. The theoretical and empirical underpinnings of an argument for greater private involvement emerge from reassessing the traditional view of the water sector as a natural monopoly with increasing returns to scale, as well as from contract theory that emphasizes how carefully written contracts imply control but do not require public ownership at all times. Rising water scarcity and water infrastructures badly in need of an upgrade in many places point to public institutions and societies not meeting the social and environmental challenge, which opens the door for private initiatives in the form of corporate social responsibility and impact investing.