In this video, I want to look at some of the empirical evidence on the performance on public-private partnerships on the water and sanitation sector. The findings come from a 2009 World Bank Report by Katharina Gassner entitled, Does Private Sector Participation Improve Performance? Evidence from Global Data. You might reasonably wonder whether report from the World Bank is likely to become unbias, because the World Bank has been a strong proponent of the private sector involvement in the water sector. You can judge the objectivity of the report for yourself, it's in your readings for the course. But personally, I find the report a high quality professional analysis. And without telling you now what the findings were, let me just say, the results were not all supportive of the pro-privatization position. The research strategy was to collect a global dataset of all utilities with some form of private participation prior to 2003. So the data reflect the experience with privatization during the early days of the global push or privatization of the 1990s and do not Include more recent experiences. This was a complete enumeration of utilities with some private sector involvement, not a sample. However, a sample was compiled of corporate ties state-owned enterprises. These state-owned enterprises were used to create a counterfactual so that the utilities with private sector participation could be systematically compared with utilities without private participation. The final sample of water utilities had 141 with private sector participation and 837 state-owned enterprises without private sector participation, for a total of 978 utilities. There are several things I like about this study's research design. First, the global scope helps us avoid generalizing from just a few case studies. Second, it compares utilities with private sector involvement with utilities that are most like them but without private sector involvement. Third, the dataset distinguishes between different types of private sector contracts. It is important to be clear about the outcome measures that were used to asses performance. The success of utilities was measured in terms of the following indicators. Number of connections to the piped network, the quantity of water produced, the quality of services in terms of hours water was delivered, and operational indicators of the utility, such as bill collection and distribution losses. Labor productivity of utility employees, the prices charged, and new infrastructure investment. Note that this are largely measures of physical outcomes. What the researcher does not attempt to do is to compare the economic cause and benefits of the policy intervention to involve private sector operators in the water and sanitation and sector. Before I show you the results, let's look at the geographic distribution of the 978 utilities on the sample. As shown in this figure, the majority of water utilities in the sample are in Latin America and Eastern Europe. This is especially true of the utilities that have private sector participation. 94 of the 141 utilities with private sector participation were in Latin America or the Caribbean. This is because at the time this dataset was compiled, there were only a few examples of private sector deals with water utilities in East Asia and Sub-Saharan Africa, and none in South Asia. So these results are largely a Latin America and Eastern Europe story. Remember, water problems and solutions are local. I'll be cautious about generalizing these results to other regions. Let's next look at the distribution of the types of private sector deal structures and the sample utilities. As shown in this figure, two-thirds of the deal structures were concessions. Remember that a concession is a long-term contract with the private operator, and it's one of the most controversial deal structures. The water utility retains ownership of its assets, and the private firm is responsible for investments and receives the revenue stream from customers. The second largest type of deal structure was a management contract with 21% of the sample. Recall that a management contract involves the water utility pang the private firm a fee to operate a set of services. So the findings from the research will largely reflect the performance of concessions and management contracts. Now, let's look at the results. Involving a private sector operator lead to numerous improvements in utility performance. Residential connections increase 12% more in utilities with private sector involvement compared to the state-owned enterprises. Residential coverage for sanitation increased even more, 19% compared to the state-owned enterprises. And the hours of daily water service was 41% higher in utilities with private sector involvement and state-owned enterprises. Let's look at some other indicators. Average employment in utilities with private sector involvement fell by 22% compared to state-owned enterprises. This led to more efficient utility operations. There was a 54% increase in residential connections per worker for water utilities with private sector involvement and an 18% increase in water sold per worker. Residential connections per worker and water sold per worker are crude measures of labor efficiency, so these increases indicate better utility performance. For political and social reasons, many publicly managed utilities simply had more employees than were really needed, and the entry of a private sector management team often results in more efficient labor utilization. But some people lost their jobs, and this may have had other negative side effects that state and utility operators would need to address. In fact, the World Bank finance you for some of the early privatization deals that was used to provide early retirement benefits for such redundant employees. From my perspective, two of the most important findings were that there were no statistically significant differences in the water tariffs or in the levels of investment between utilities, with and without private sector involvement. Critics of privatization often argue that it will lead to higher water prices. This does not seem to be the case, but there's an important caveat. In some cases, the state raised tariffs before the privatization deal was consummated precisely to avoid the charge that it was the private operator who raised prices. The fact that capital investments were not higher in utilities with private sector involvement that in state-owned enterprises raises question about one of the main arguments in support of privatization. That is that the private sector will provide the additional capital investment needed to fill the financing gap. In summary, this study gives us much to think about. If you don't care whether the cat is white or black and just whether it catches mice, it looks like involving the private sector makes sense. But this interpretation is too simple. These results are average treatment effects. In some places, the increases in performance are much better, in some places much worse. Just because the average results of private sector involvement are impressive doesn't mean that this policy will work in a specific location or at a particular point in history. On the other hand, it is simply incorrect to argue that private sector initiatives have been a failure everywhere and should never be considered again. The finding that private sector involvement does not increase investment is specially important. My own interpretation of this finding is that private operators will in fact finance capital investments out of increase cash flow, which may result from gains and operation efficiency. But it is politically too risky, especially for foreign companies, to invest large amounts of borrowed or outside capital. If this interpretation is correct and capital investments depend on increased cash flow, not outside capital infusions, one implication is that it will take time for privatization efforts to fulfill their potential. One may find quick returns and gains of efficiency, especially from reduced leakage in bill collection. And households connections may increase quickly if the pipe network is largely in place and households can be connected with relatively modest network extensions. But large scale new infrastructure investments require financing and is unlikely to begin in the short-term, unless of course the state supplies the financing.
