On privatization, a non-financial measure of success

Joining the fray...

At the heart of the argument against privatization of public utilities is the fear that profit oriented firms will ration out poor consumers, either by price or simply by failing to provide services to the poor population or regions from which no profits could be made. The proponents of privatization, on the other hand, argue that privatization leads to increased efficiency, and along with it, increase in service quality. The fear that the poor will lose access to high quality services or any service altogether (through price or other mechanism) means that an increase in the profitability should not be the only metric by which we judge the success or failure of the privatization. Quality of services and access to the services are equally important.

That is why a good study on the effects of privatization should go beyond looking at the firm's profitability or other financial indicators. In fact, there is also no reason to stop at studying the coverage or the quality of services. Why not keep on going and look at the real outcomes? For example, what are the effects of privatization on the welfare (pick a measure) of the poor? Let's ask for the sake argument, what are the effects of privatization of water services on health outcome of the population?

Ok, some of you probably know I'm cheating here, because yes, I am going to refer you to the study by Galiani, Gertler and Schargrodsky (Journal of Political Economy, February 2005) on the effects of privatization of water services on child mortality in Argentina. If you haven't seen the paper, take the time to download the paper from JSTOR, or the working paper here , I'll wait.

Done? That was quick. As you see, the authors look at the effects of privatization in the '90s of around 30 percent of water companies in Argentina covering around 60 percent of the population. By exploiting the variation in the timing and locations of the privatization, and looking at what happened to child mortality across time and locations, they were able to tease out the causal effect of the privatization on child mortality. The paper is interesting in a number of ways: it looks at the real outcome of privatization, namely child mortality; it also addresses -with varying success but overall convincing- all sorts of the econometric problems that might bias the results (e.g., selection into privatization, heterogeneity in responses to privatization) .

If you buy their approach, the conclusions were striking:

• network increased significantly in the areas that privatized
• child mortality went down in the areas where privatization took place, and the effect was largest in the poorest areas
• as a robustness check they also test and show that the drop in child mortality was due to the decline of deaths due to infectious and parasitic diseases and not from the decline of deaths due to causes unrelated to water conditions

and here's a kicker:

• while private companies may provide suboptimal services, they did much better job than the public sector or the non-profit cooperative sector

Of course we know better than to generalize too much and think what happened there will happen anywhere. What about institutions, political context, historical background, you might ask. But the point in bringing this up is that while the debate on privatization has been going on so long, rarely have we seen people go beyond the rhetorics and start digging for empirical evidence. It's high time to take the debate to another level.

Updates:
Blogowner, I agree with you, both the scientific community and the mass media have a lot to learn on how to communicate with each other. The burden is on us to make our ideas more accessible.

Rizal, thanks for the reference. There's a new book coming out, Reality Check: The Distributional Impact of Privatization in Developing Countries", edited by Nellis and Birdsall of the CGD . It looks like a case studies book. The chapters are downloadable.