Water Supply: Public or Private? An Approach Based on Cost of Funds, Transaction Costs, Efficiency and Political Costs
Policy and Society, Vol. 27, No. 3, pp. 193-219, February 2009
45 Pages Posted: 13 Feb 2009 Last revised: 3 Mar 2009
Date Written: February 1, 2009
Abstract
Most theories on private sector participation in water infrastructure are based on the sole supposed difference of efficiency between the public and the private sector. The review of 22 empirical tests and 51 case studies shows that private sector participation per se in water supply does not systematically have a significant positive effect on efficiency. Thus, the choice between public and private water delivery is probably not only a question of efficiency.
We developed a complete theory of the choice between public and private water supply based on four components: difference of cost of funds, transaction costs of outsourcing, difference of efficiency and potential political cost of privatizing. Since determinants of the theory fluctuate over the time and depend on the local context, this theory can explain both privatization and municipalization movements as well as why some local governments outsource water supply, while others opt for direct provision.
The tests on 459 US counties in charge of water supply in 45 states provide substantial support for the theory. Significant determinants of the choice of public versus private water delivery include the cost of funds, especially the social cost of taxes, transaction costs, the difference of efficiency and the potential political cost of privatizing.
Moreover, we tested other literature's theories, which suggest employment as a motive of public provision and cost of public wages as a cause of privatization. These two arguments seem to be irrelevant.
We additionally tested the influence of ownership on the number of drinking water environmental violations and found no significance.
Keywords: Private sector participation, privatization, monopoly, water, infrastructure, transaction costs
JEL Classification: L33, L95, L97, L98, H11
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Sector Organization, Governance, and the Inefficiency of African Water Utilities
By Antonio Estache and Eugene Kouassi
-
By Scott Wallsten and Katrina Kosec
-
By Antonio Estache, Sergio Perelman, ...
-
Efficiency Effects of 'Privatization' in Argentina's Water and Sanitation Services
By Antonio Estache and Lourdes Trujillo
-
Using Internal Incentive Contracts to Improve Water Utility Performance: The Case of Uganda's NWSC
By Silver Mugisha, Sanford V. Berg, ...
-
Reforms and Infrastructure Efficiency in Spain's Container Ports
-
Restrictive Labor Practices in Seaports
By Ariel Dinar, Trichur K. Balakrishnan, ...
-
By Geraldo Silva Souza, Ricardo C. Faria, ...
-
Consistency in Performance Rankings: The Peru Water Sector
By Sanford V. Berg and Chen Lin