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The Failure of Water Utilities Privatization: Synthesis of Evidence, Analysis and Implications

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During much of the 1990s, water utilities worldwide experienced a wave of privatization. The rationale for this, much like the rationale for the wave of privatization of state owned enterprises and other government services, is largely based on two hypotheses: the fiscal hypothesis and the efficiency hypothesis (Braadbaart, 2001).The fiscal hypotheses suggests that privatization will relieve governments the burden of investment financing particularly in the context of fiscal pressures faced by many developing countries in the 1980s. The efficiency hypothesis on the other hand suggests that water utilities performance will improve under private ownership because it is ‘obviously’ more efficient than the public sector.

These two hypotheses – widely supported by donors, think tanks and economists – is summarized by Francey (1997) as follows: “private sector participation is seen to increase efficiency and introduce new ideas of finance but above all to require a new emphasis on proactive, performance oriented commercial management that aims to match the demand of its customers with their willingness to pay realistic charges and tariff.”

The purpose of this paper is to examine the validity of these hypotheses based on a meta-analysis of the international experience on water utilities privatization. The extant literature on this subject remains fragmented as most studies either examine the efficiency argument in its various dimensions or some aspects of the fiscal argument. This paper attempts to provide a broad synthesis of these two strands in the literature, explain the outcomes and draw out the key conclusions and policy implications.