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date: 26 September 2022

Public Sector Participation in the Water Sector: Opportunities and Pitfallslocked

Public Sector Participation in the Water Sector: Opportunities and Pitfallslocked

  • Sebastian GalianiSebastian GalianiEconomics, University of Maryland at College Park

Summary

Water is one the most indispensable human needs. Although pumped wells, bottled water, or public faucets are used in many parts of the world as means to obtain this crucial good, piped water services are considered the gold standard to ensure wide, regular, and secure access. At first glance, piped water services have all the characteristics of a natural monopoly in which the government is better positioned for provision than the private sector: high sunk costs and economies of scale are present, and the quality of the service is costly to supervise. However, in that first intuition, there is one missing block: government behavior. In countries with low state capacity and accountability, weak checks and balances, and institutional dysfunction, public companies are frequently used to fulfill political goals instead of their stated objectives. In those cases, privatization coupled with the creation of an independent regulatory agency can limit the predatory capacity of the government, displace the service to the sphere of private incentives, and provide the opportunity to extend coverage and improve quality.

There is, nonetheless, a fragile side to this solution. If the same institutional vulnerabilities that create poor public companies’ management persist, incentives for predatory government behavior remain latent and can emerge when circumstances facilitate it. This whole parable was observed with the privatization of Obras Sanitarias de la Nación in Argentina. First, a paralyzed and overstaffed public company was replaced by a dynamic private company. During this period, more than 2 million people gained access to the water service and 1.2 million people gained access to the sewage networks, which substantially improved health outcomes for the newly incorporated groups. Then a big economic crisis hit the contractual relationship between the government and the company, and renationalization took place. This change was paired with a return of previously observed predatory practices such as unsustainable pricing policy and non-meritocratic appointments.

Subjects

  • Health Services Administration/Management

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