Private versus public provision of water services: does ownership matter for utility efficiency?

Abstract

Property rights theory posits that private firms are more efficiently managed than government enterprises. An important rationale for privatization, these ownership effects are ascribed to the fact that private firms, contrary to government enterprises, face competitive markets for capital and property rights. This article reviews a substantial body of water industry evidence on ownership effects and finds that ownership effects are neither independent nor overwhelming. Private water utilities are not more efficient than their public counterparts. Water utility privatizations sometimes produce efficiency gains but not always. Methodological shortcomings of published empirical work make it difficult to assess why this is so. For policy makers, the tentative conclusion to be drawn from this literature is that a change from public to private management will only yield benefits when accompanied by a comprehensive reform of the utility's external environment.