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Water Privatization does not Yield Cost Savings

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Proponents of privatization consistently argue that it saves costs due to competitive
pressures private providers face to be more efficient. Over the last four decades there has
been considerable experimentation with privatization. Results are inconsistent. Some cases
find savings; others do not. To get beyond the “battle of the case studies” my colleagues
and I conducted a meta analysis of all published studies on water distribution. A
comprehensive scientific analysis shows the value of a careful review of theory and
empirical evidence in making policy choices. Our analysis found no empirical support for
cost savings.

“That private production has failed to deliver consistent and sustained cost savings in
these two important sectors offers a useful insight to public managers. Cost savings
crucially depend on the nature of public service markets, the characteristics of the
service itself, the geographical dimension of the market in which the city is located, and
the industrial structure of the sector. City managers should proceed with caution.” (Bel
et al 2010).

What explains differences in study results? Is it due to specific management, location and
context factors? Can differences in study results be explained by type of empirical analysis
or bias among reviewers and publishers? Is it possible to draw some broader conclusions
about whether privatization, in reality, actually leads to cost savings? What does local
government experience with water privatization actually show?

This chapter presents comprehensive research confirming that privatization of water does
not lead to cost savings. It also presents data showing privatization is the least common
approach to water service delivery among US local governments. These empirical results
reflect a careful reading of neoclassical economic theory which predicts water would be a
poor candidate for privatization.