Capture and corruption in public utilities: The cases of water and electricity in Sub-Saharan Africa

Abstract

The paper focuses on public utilities services located in poor countries with a special attention to capture and corruption issues. It confronts the optimal policy of Auriol and Picard [Privatization in Developing Countries and the Government Budget Constraint, Nota di Lavoro 75.2002. Fondazione Eni Enrico Mattei, Milan, Italy] regarding private sector involvement in public utilities with empirical evidence on water and electricity in Sub-Saharan Africa (SSA). As predicted by the theory, the participation of private unregulated firms in the supply of services for the middle class and poor people is fairly common in SSA. By contrast, services for rich people are provided by public utilities. Theory suggests that their prices should be high so that the public firms make a profit. Yet piped water and electricity are subsidized. This suggests that there is a problem of capture by the ruling elite. Since ruling elites design privatization programs, there is concern about their optimality. The paper shows that the social cost of corrupted privatization is non-monotone in the opportunity cost of public funds. Because of the fiscal loss it represents, privatizing profit centers of public firms entails huge social costs in very poor countries.