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Policy Series on Essential Services Paper No. 1
Policy Analysis & Research
Putting the Private Sector in its Place Part I Issues and Evidence in the Reform of Water and Electricity Services
Tim Kessler Citizens Network on Essential Services (CNES) Takoma Park, USA November 2002
Table of Contents
I Radicalism as Conventional Wisdom II Evidence in Support of Private Provision of Services III Beyond Theory: Privatized Services in the Real World Annex A End Notes References
I. Radicalism as Conventional Wisdom

The agenda of public sector reform in developing countries is being radically changed within G-7 governments, the multilateral lending institutions they control, and transnational corporations that influence both groups. Disappointment with decades of foreign aid has transformed that agenda into a debate about how rather than whether to privatize1 basic services.
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The purpose of this paper is to present analytical and political reasons for private sector participation (PSP) in services to remain one option among others, rather than a policy goal in itself. Its central premise one often supported by market enthusiasts more in words than in deeds is that policy-makers and the public need to know whether the prerequisites for equitable private provision of services exist before proceeding with reform. A. One Option Private provision of essential services is accelerating throughout the developing world, largely as a result of policy initiatives led by international financial institutions (IFIs) that lend to developing countries. In February 2002, the World Bank adopted a private sector development (PSD) strategy that promotes an unprecedented expansion of PSP in infrastructure and social services in developing countries. (It is worth noting that most of the governments that control that institution still provide such services themselves.) The strategy could make lending to the poorest countries contingent on agreement by borrowing governments to delegate service provision to private firms or non-profit organizations. In March 2002, the World Bank also unveiled its Water Resources Sector Strategy, which makes the privatization of water supply and sanitation, irrigation and dams a cornerstone of its new approach to development. Only a decade ago, multilateral lenders were focused mainly on reforming, rather than replacing public utilities. Since the end of the Cold War, botched or corrupted private provision in transition and developing countries have transferred massive amounts of public assets into a few hands. Yet these same institutions now pronounce as conventional wisdom that PSP in provision is usually the best choice for delivery of infrastructure and social services. The intellectual breakthrough making this change possible is the argument that such essential services are most effectively delivered when driven by economic, as opposed to social principles. Proponents do not deny the social importance of water and electricity, but maintain that market forces will achieve social goals including poverty reduction more effectively than government. Critics have responded that using only economic principles in policies for reforming essential services, especially water and sanitation, may undermine social goals of infrastructure. (Gleick 2002; McCully 2002) That is, efficiency does not automatically (or even usually) promote equity. As argued below, the assertion that PSP is always, or even usually, the best option for achieving universal and affordable access to utility service is not the result of evidence or systematic analysis. Indeed, available research and case studies often suggest the contrary. More importantly, the adoption of PSP has not been the result of democratic processes within developing countries. The multilateral lending institutions that support infrastructure reforms have developed a robust rhetoric about the importance of popular participation in policy-making. Especially in very poor countries eligible for debt reduction, the World Bank has articulated the need to consider viable reform alternatives and include civil society in the debate over balancing
objectives of fiscal discipline, economic efficiency and poverty reduction. However, in practice, the inclusive process implied by this commitment has been largely absent, even in debt relief and poverty reduction operations in which civic participation is formally mandated. Typically, participation has consisted of a few meetings with community leaders who are able to express general concerns and environmental priorities and social welfare. The actual measures taken to address those priorities the reforms themselves are decided in secret between lenders and high level government ministers. The proof is in the policy. In country after country, however, it has become clear that there is really only one option: private provision. Alternatives that can be legitimately debated are often limited to which form of PSP is most appropriate. When the reform decision begins as a fait accompli, the only meaningful selection criteria become governments willingness to pursue the policy change, or the lenders ability to convince the government to privatize. Moreover, the decision to privatize is not regularly subject to public discourse. Indeed, even elected representatives are often unaware of detailed plans to reduce or eliminate the role of government in the provision of basic services. (News and Notices, May 2002) An even more insidious development that undermines democratic governance is social marketing for PSP. As a condition for receiving assistance, the World Bank has forced some governments to pay for advertising and carry out information campaigns that promote the idea of private participation in infrastructure and defuse opposition to such reforms. (News and Notices, May 2002) The practice not only institutionalizes a conflict of interest, but also makes a mockery of the concept of country ownership. Perhaps the most devastating blow to ownership is conditioning loans, grants or debt relief on requirements to privatize. Indeed, there is growing evidence that debt relief operations have been suspended at least in part because of governments refusal to comply with the scope or pace of PSP conditions of the World Bank or IMF. Privatize provision of infrastructure is pushed indirectly by rich countries in their role as major shareholders of the IFIs. It is also being pushed directly through bilateral aid programs, and especially through pressure on developing countries in the WTO to include their utility sectors in the General Agreement on Trade in Services (GATS). In April 2002 a leaked confidential document drafted by the European Commission revealed not only its close cooperation with transnational companies, but also extraordinary efforts to influence poor countries to open up traditionally government-operated sectors such as water, energy and transport. Governments that decide (or are persuaded) to include these sectors in their GATS commitments may limit their ability to pursue developmental or social goals through subsidies, procurement preferences or other instruments that discriminate against international competitors. Solutions for provision of essential services are political choices, not technical imperatives. But when international organizations seek to impose solutions on developing countries, they
circumvent the political system and undermine democratic governance. Making democracy a priority does not negate the importance of technical analysis in any reform decision. Indeed, such work should be a central part of public discourse over alternatives. But when policy reforms are undertaken without the knowledge and consent of citizens, analysis will not generate political legitimacy. This is particularly the case for private provision of public services, which are highly visible and have traditionally been the responsibility of government. B. Moral Case for Private Provision Private provision proponents have a compelling response to their opponents: In low-income countries, poor people have very limited access to modern infrastructure. In particular, where state sponsored systems do not reach many people, the only alternative for poor citizens are private forms of service delivery. (World Bank 2002) Given how badly public sector utilities perform in many countries, what kind of alternative is there? Since most of the poor dont even receive basic utility services like water or electricity, how could reform make anything worse? Doubters are portrayed as so wedded to their ideology that they prefer to let poverty and exclusion continue for the sake of principle. While the analytical case for PSP is the main subject of this paper, the moral case summarized above merits a response up front. In what is become an increasingly polarized debate, it is important to clarify which position is the radical one. In public discourse proponents of private provision vastly overstate the position of skeptics. They have set up straw man all to easy to knock over, characterizing those who question PSP in services as unreconstructed statists. Yet circumspection is not always blanket rejection. Sometimes cautious citizen groups want more evidence that PSP will work in their country. Meanwhile reformers seek to apply unproven solutions in countries lacking the pre-conditions necessary to make private provision effective and equitable. The term preconditions is used deliberately as a means of shifting the burden of proof from those who question radical solutions to those who propose them. This is not an arbitrary debate tactic. Rather, it is based on reasoning that rejects the assertion that existing shortcomings in public provision always or usually justifies private provision. Shifting the burden of proof is appropriate for several reasons. First, virtually all developed countries have had excellent experiences with government-run infrastructure, and in many developing countries the poor do have access to basic utilities provided directly by the state. In addition, innovative approaches to accountability make effective public sector reform more likely. Second, PSP could threaten human welfare. As discussed below, its relatively short record in developing countries is already very replete with failures. Even when the poor are excluded from government-run utilities, private solutions based on profit maximization do not necessarily ensure the inclusion of customers who require extensive investment yet have little money.
Citizens or Customers?
A revealing aspect of the debate over public services is the growing consensus among international donors over the need for utilities to be financially self-sustaining, whether public or private. This is by no means a technical issue. People in virtually every country in the world pay for goods and services through taxes, rather than or in addition to direct fees. Reasonable people may agree that a water or electricity utility should not blow a large hole in the budget deficit. But there are options between fiscal chaos and full cost recovery. An obvious example is public education, a government service that all tax-payers pay for, while only parents of school-age children receive direct benefits. Of course, education is a public good: society in general is better off because its people are well-educated. But, if that is the case for literacy, it is no less the case for access to water or electricity, which are critical for public health and economic productivity.
Third, unlike inequitable public provision of services, impacts of a poorly implemented or failed private provision especially on the poor may be irreversible. From this perspective, the only thing worse than a water utility that has excluded poor people in the past is one that may exclude them far into the future. When governments transfer control over their water system to private companies, the loss of internal skills and expertise may be irreversible, or nearly so. Many contracts are long term for as much as 10 to 20 years. Management expertise, engineering knowledge, and other assets in the public domain may be lost for good. Indeed, while there is growing experience with the transfer of such assets to private hands, there is little or no recent experience with the public sector re-acquiring such assets from the private sector. (Gleick, et. al. 2002: p.v) No matter how poorly government performs, it remains accountable at least potentially to those citizens upon whose support it depends. If those citizens organize to demand affordable access to water and electricity, there is a basis to expect government to take social equity seriously. Private firms, on the other hand, remain accountable to their shareholders and are motivated by profit maximization. If those priorities run counter to the interests of consumers especially poor ones a legally binding contract can ensure that private interest prevails indefinitely.
C. Scope of the Paper The sectoral scope of this paper is limited, focusing on basic utilities that have the most immediate impact on well-being, including potable water, sanitation and energy. While its general approach can be applied to social services, such as health care and education, or other infrastructure areas such as telecom, increased efforts by international organizations and wealthy countries to privatize water and power have made these services priority issues among citizens of the global South. Moreover, the present analysis does not explore important environmental dimensions of utility reform, being confined mainly to social and economic impacts. [TOP] Although PSP is widely prescribed by the IMF and World Bank, those institutions now carefully avoid using the politically sensitive term. Moreover, while the direct sale of assets from the government to for-profit firms has caused the most controversy and social opposition, it is not the only mechanism for private sector participation in essential services. The public-private partnership (PPP), in which government retains or eventually gains control and ownership over public assets, is rapidly emerging as the reform of choice for both multilateral lenders and private firms. According to the National Council for Public-Private Partnerships: A Public-Private Partnership is a contractual agreement between a public agency (federal, state or local) and a for-profit corporation. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility . . . Once a partnership has been established, the public-sector must remain actively involved in the project or program. On-going monitoring of the performance of the partnership is important in assuring its success.2 The last sentence in the quote is critical. While the term partnership evokes ideas of cooperation and mutual interest, PPPs are essentially adversarial relationships in which the states responsibility is shifted from providing services directly to making sure that someone else does. The bottle may be new, but the wine is basically the same. For the purposes of this paper, the distinction between full privatization and PPPs is not significant. Both reform approaches require contracts. Both require government monitoring, regulation and enforcement. And both require specific incentives or public resource allocation mechanisms in order to serve poor people. Whether the reform mechanism is a final sale or a limited transfer of responsibility, this paper focuses on a common set of issues that affect the effectiveness of private sector participation (PSP) in services. The most common forms of PPP include long-term leases and contracting out arrangements, which put private sector entities in charge of various aspects of construction, design, management and direct service delivery. PPPs can be created in many forms. (For a partial list see Annex A.) In
theory, a PPP can be highly circumscribed apply for a one-time or brief transaction. In practice, however, PPPs that the Bretton Woods institutions tend to finance in borrowing countries hand over most or all control of service delivery to private firms for a long period of time. In the area of utilities, which requires very large and lumpy investments, private companies are finding the PPP option increasingly attractive: not only does it help downplay the thorny political issue of privatization, but can also keep much of the financial risk within the public sector.
II. Evidence in Support of Private Provision of Services

Notwithstanding the passion with which reform proponents are pushing private provision of utility services on developing countries, there is remarkably little evidence (outside of telecoms) that this approach is more efficient than public reforms, much less that it serves the poor. Moreover, the evidence presented in support of PSP infrastructure services is tainted by selectivity and bias. A. Can a hundred studies be wrong? Probably not, but they can be irrelevant. The vast majority of research on privatization focuses on firms which produce goods and services for competitive markets, and on countries whose assets and capabilities are generalized for the rest of the world. Yet water and sanitation are typically natural monopolies, making competition a moot point, while Chile the perennial example of success is hardly representative of developing country economies or institutions. Study after study confirms that privatized state-owned enterprises in Latin America, East Asia and the postSoviet countries firms perform better than they did while run by the government. Yet such research does nothing to bolster the position for privatizing utilities. There are several reasons: 1) The main indicator for performance in these studies was either profitability or efficiency. The profitability indicator is an inappropriate measure for utility performance, as it reflects the satisfaction of shareholders, not consumers. The indicator of efficiency, for example a quantity of water or electricity produced per cost unit, is a legitimate consideration but not the only one. Utilities are expected to run efficiently, but also to provide high quality service and reach the poor, goals that may undermine efficiency. For most competitive market goods, the trade-off between efficiency and social equity is a non-issue. 2) The economic logic of utilities is different than for goods in competitive markets. Water and electricity are often natural monopolies, meaning that government regulation is far more important for reducing market failures than consumer behavior. Evidence that firms in competitive sectors (e.g., telecoms) or at least those with low barriers to entry perform better when privatized is hardly surprising, Moreover, that evidence provides no insight into the performance of economic activities that can only be carried out by a single provider, or those that have extremely high barriers to entry.
3) The implications of neglecting the poor are more severe for utilities than for typical state-owned enterprises. The poor are unlikely to be affected by expensive airplane tickets, and are likely to find affordable alternatives for everyday household goods they need. However, basic utilities, especially water, that are either too expensive or not available for the poor have major adverse impacts on quality of life, health and human dignity. B. Relevant research There are, however, preliminary analyses that do focus specifically on the impacts of privatizing public infrastructure. The World Bank widely circulates Philip Grays Private Participation in Infrastructure: A Review of the Evidence (2001) to provide the empirical basis for its Private Sector Development strategy. A review of this analytical cornerstone study is revealing. One would expect that a development strategy supported by the worlds largest development organization would be informed by extensive research and evidence confirming the effectiveness of the approach, especially for the most controversial and socially sensitive sectors. One would also expect a careful analysis of cases in which the strategy has failed, so that lessons for avoiding such problems could be drawn. In the case of PSP in infrastructure, one would be disappointed. A brief content analysis of 29 cited references in Grays paper about the impact of private sector participation in utilities reveals the following:
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Twelve (12) are in the telecoms sector. Only one of these sources comes from the World Bank. Eleven (11) were in the energy sector. Of these, 7 come from World Bank studies, and one comes from the web page of Perus water company. Six (6) are in the water sector, all of which come from World Bank studies. Of all 29 references, 25 show positive impacts. Four acknowledged a neutral impact. There are no references of negative impacts.
Not surprisingly, the most beneficial effects and the most diverse empirical record are found in the telecoms sector. Because of technology improvements, this is the area of infrastructure most characterized by low barriers to entry and robust competition. References for the energy sector are less robust, given that most were produced in-house. Moreover, for both telecoms and energy, the good news comes disproportionately from a few middle income countries, especially Chile and Argentina, which have unusually high levels of development and human capital among Bank borrowers, as well as some developed countries. As for negative impacts, in spite of enormous scandals and political turmoil causes over privatized infrastructure all over the Global South, none are discussed.3 (See following section.) So much for learning from mistakes. In the water sector, references are both minimal and completely dependent on World Bank research as opposed to independent analysis. Moreover, the outcome measured in the water
cases is productivity, not affordability or access for the poor, much less public health.4 Again, it is hardly surprising that private companies can produce water more efficiently than governments. But from a poverty reduction perspective, evidence about who gets that water and at what price is needed. The concluding section on Sectoral Implications might well be the introduction for an advocacy piece on keeping water in public hands. The issues faced in the move to private participation in infrastructure vary from sector to sector, notably in the degree of feasible competition. With a well-designed and enforced interconnection regime, telecommunications shows the greatest promise, and benefits in terms of increasing access and lower prices reflect this. In power, competition in generation and to a lesser extent in supply are increasingly common, although this obviously depends on country circumstances which may limit feasibility, particularly regarding small scale systems . . . Even in water and sanitation, there have been experiments in the UK with trying to increase the degree of competition in the sector. Amazingly, the Bank continues to push PSP in water in weak governance environments when strategies to promote the most critical market dimension of private provision competition are still considered experimental in one of the worlds wealthiest and most institutionally advanced countries. C. Dancing with counterfactuals A mantra commonly heard among enthusiasts of private provision is: When done right, PSP can improve the efficiency, quality and access of basic services. Needless to say, any private provision reform that does not lead to these cheerful outcomes was not done right. Moreover, these failures are typically blamed on the victim, i.e., government, which was discovered, after the fact, to be either unwilling or unable to implement sensible policies that could have helped millions. Such a tautology circular reasoning that has no testable hypothesis is no more convincing than arguments that old guard leftists who insisted that communism, if done right, would lead to utopia. Ironically, it is the deceptive use of the counterfactual the scientific hallmark economics that makes it virtually impossible to falsify the theory underlying support for private provision. On the face of it, the counterfactual poses an entirely reasonable question: what would have happened in the absence of a given intervention? Normal science can use laboratories or clinical experiments to create a control group. Although economics cannot, economists make the case that countries that have not undergone reform represent a self-selected control group. In the case of structural adjustment, disappointing performance has resulted in two standard responses: either adjustment was done wrong (its the governments fault), or things would have been worse without adjustment. The logic driving the market solution in the current debate is that any PSP outcome, no matter how
flawed, will be superior to an inefficient public sector that neglects the poor. This is because the performance of private providers is always judged relative to a counterfactual of inaction. PSP proponents typically assume the absence of public sector reform. The most optimistic forecast for private provision is compared not only to an under performing public sector, but also to its perpetual continuation. Indeed, the underlying premise of the economic counterfactual is the impossibility of reforming the public utility. Evidence for this position is the failure of international development agencies to achieve improvement in government services in the past. The observation belies a certain degree of hubris: if we couldn't pull it off, it simply cant be done and nobody should even try anymore. That arrogance is all the more striking given that the traditional supply-driven, top-down approach to public sector reform has been thoroughly discredited, and largely replaced with a flexible approach incorporating local knowledge and citizen participation (Pritchett and Woolcock 2002).
III. Beyond Theory: Privatized Services in the Real World

Like mainstream economics itself and in the absence of much supporting evidence theories predicting the benefits of privatizing essential services depend on critical assumptions that are rarely valid in the context of developing countries. In this section, we take a closer look at real world constraints that limit positive impacts of private provision, while increasing social and economic vulnerabilities consumers and taxpayers, especially the poor . A. Performance-Based Contracts PSP enthusiasts propose the mainstreaming of output-based aid. This is the development communitys synonym for performance-based contracts (PCBs), which have a long history between firms, as well as between firms and governments in developed countries. While currently pushed through pilot studies in the World Banks Private Sector Development strategy, the U.S. government is seeking to make OBA the dominant mode of aid delivery. (Kessler and Alexander 2002) The logic is simple: You dont get paid until you deliver exactly what we agreed on. This is supposed to shift the risk away from the tax-payer and onto the private provider. Moreover, because private firms compete through bidding to determine who can deliver for the lowest price, the public is assured the best deal as well. The incentives structured through PCBs lay the basis for their superior efficiency, product quality, and even investment in the poor. Notwithstanding the enthusiasm of free market enthusiasts, PCBs are problematic in the real world. As two researchers put it: performance contracts are not self-administering, self-correcting, or selfimproving. Performance contracts do not quickly or automatically solve the problems of vendor performance. (Behn and Kant, p. 471-48) In terms of delivering value to consumers, PCBs have a
number of general weaknesses, including:

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Misaligned incentives. PCBs can create incentives that have nothing to do with customer satisfaction. If the contract stipulates a certain product to be delivered in a certain quantity and nothing more, PBCs can limit experimentation with new methods in service delivery, while encouraging innovation in cost-cutting. Since there is no reward in improving utility quality or reliability beyond what is stipulated in the contract, there is a strong disincentive for tampering with a proven method, even if superior ones are available. However, since the same payment is made regardless of production costs, cost-cutting can significantly increase profitability. Adverse selection. A bidding process which grants contracts on the basis of the lowest bid will not necessarily privilege those firms with the greatest experience or know-how. Indeed, in the absence of an established reputation in the field, PBCs may reward promises not performance . . . And bidders who over promise may be precisely those that have the poorest understanding about how to produce the desired performance. (p. 477) Creaming. Performance-based contracts for concessions encourage firms to serve only those customers that require the lowest cost to satisfy the terms of the contract. Yet the poorest people often live in remote areas, or urban slums which are crowded, physically awkward and difficult or even dangerous to work in. Ensuring that privatized concessions include these consumers in their investment commitments will not only require a high degree of contract specificity. It is also likely to reduce the attractiveness of the concession for potential investors, or significantly raise the cost of the concession.
In the aftermath of the Bush Administrations announcement of its Millennium Challenge Account, a US initiative to increase bilateral aid and make it more effective, the provision of grants to corporate and non-profit providers is being touted as a way to overcome such obstacles. Yet such largesse will do nothing to improve longstanding weaknesses of most subsidy targeting mechanisms, and may provide disincentives for private providers to increase efficiency. 1. Obstacles to effective performance contracts Although private provision of government services has not been subject to systematic analysis in developing countries, it has been in the North. Such studies reveal a very mixed record in the developed countries, ranging from much better, to much worse, to about the same performance as the public sector. According to a review of evidence from the US conducted by Elliott Sclar, private providers tend to do a better job than government performing simple, low-skill activities, and a poorer job with more complex activities. Indeed, privatized services often cost government more than when the services were provided in-house. The reason is transaction costs. As services become more complex and as the economic and social outcomes they are supposed to achieve become more difficult to measure with simple indicators the public sector inevitably gets involved. Governments often impose strict requirements on contractors regarding production processes and outputs, as well as information and reporting requirements. These details become part of excruciatingly complex and highly
legalistic contracts, and end up raising the costs of producing the desired services. From a developmental perspective, Sclars study is revealing in two ways. First, it dispels the myth of the superiority of private management of public services by demonstrating just how difficult it can be to adequately specify terms in a performance contract. Even when well-paid lawyers, accountants, bureaucrats and technicians work together to ensure that payment is based on objectively measured outputs, the record has often been disappointing. Second, Sclars study implicitly raises serious questions about the ability of governments in poor countries to even produce, much less enforce, the complex contracts involved in transferring responsibility for public services to profit-motivated agents who are likely to have far more information than the principals. Typical Southern borrowers cannot begin to match the expertise, experience or autonomy of American institutions of public governance. Yet under the World Banks PSD strategy, they are still being pushed to enter into complex contractual relationships with highly capable but not necessarily transparent national or transnational corporations. Research such as Sclars begs the question: Which reform is harder to achieve? Theory and evidence about contracting in developing countries demand that this be explicitly asked in each reform case. Yet the question seems to have been dismissed the universal answer being obvious by PSP proponents. The assumption that the constraints to PSP are always easier to overcome than those to public sector reform makes an ideological agenda apparent. [TOP] In principle, a contract can be tendered to respond to consumers most pressing needs. If poor households are connected to the service, then they will benefit more if tariffs are chosen as the [criterion for winning a bid], while if they are unconnected, then choosing investment commitments as the [criterion] has a higher potential of benefiting the poor. (EG&L, p. 1192) When utility connection is the main obstacle to poverty reduction, the key to any reform is investment in network expansion. If serving more vulnerable households is unprofitable [for private providers], then it may be convenient to specify investment targets in the contract. (EG&L, p. 1191) However, it goes without saying that the greater these commitments, the more the provider is likely to charge, either through connection fees or tariffs, or both. (Of course, the investment may be provided or subsidized by the government or foreign aid, but that approach removes one of the cornerstone arguments for PSP: access to capital.) Even specifying an output such as number of connections is unlikely, by itself, to achieve equitable social outcomes. The reason, as Sclar points out, is uncertainty about what kinds of goods and services are needed where, by whom, and when. A World Bank research note acknowledges this constraint: Even if a [water] contract were bid on basis of perfect information about the current status of the water companys assets and about new investments needed, the future would hold uncertainties that could not be handled by contract. And an initial contract is usually based on highly incomplete information. (Cowen 1997)
In addition to these information asymmetries that economists like to fret about, a more familiar problem is simply corruption. The more influence a corporation has over a countrys political leadership a function of its ability to offer bribes and the willingness of officials to take them the more likely it will be that the winning bid will be predetermined. However, the lesson for policy design is not to evaluate the feasibility of performance contracting on a case-by-case basis, but rather to make sure to do a good job: Careful provision must therefore be made to deal with unexpected events over the life of the contract. (Cowen) Bidding procedures must made transparent and neutral. Such a can-do attitude about contracts stands in marked contrast to attitudes about reforming the public sector. It also defies the logic of performance contracting itself. According to John Donahue, a public sector reform guru who wrote a seminal study on privatization, when outputs cannot be precisely described and measured, the case for the in house option becomes stronger. The relative appeal of employing people, as opposed to contracting with them, increases . . . the more the task at hand is uncertain at the outset and prone to revision. (Donahue, p. 45; emphasis in original) Yet from the perspective of PSP proponents, most challenges to private sector participation can be effectively addressed, while reforming the government itself is increasingly considered a lost cause. The nave optimism infusing the PSD strategy reveals its underlying premise: designing private utility contracts with profit-motivated firms that cover every possible contingency ex ante is not only a viable option everywhere, but also more realistic than making the public sector more efficient and accountable. 2. Experiences with service contracts in the Global South5 The record of privatized infrastructure in developing countries is replete with cases of underperformance, social outrage, and economic disaster. Nor can it be maintained that these cases are merely anecdotal. First, they have occurred in major infrastructure utilities in very large countries and affected millions of people. Second, there have not been so many cases (yet!) of privatized utilities that statistical studies can be conducted. The cases do not prove that PSP is always a bad policy. Rather, they provide lessons about the kinds of problems that can arise in performancebased contracts. The most notable failure of PSP in the global South has been in shifting risk away from taxpayers and onto private companies. Indeed, in case after case, companies have managed to achieve remarkably favorable terms, both before and after contracts have been signed, from governments lacking either the technical capacity or economic strength to negotiate effectively. In energy utility contracts, for example, it is common practice for firms to demand power purchasing agreements which compel the government to buy 100 percent of output, and to pay in hard currency, regardless of fluctuations in domestic demand or the exchange rate. That is, in a country whose electricity consumption drops for example as the result of recession or a switch to more affordable substitutes a PPA could force a government to pay for excess supply that the
country does not need. Worse still, in the event of a major devaluation, PPAs typically require government to continue making payments in international currency, translating directly into higher prices. Moreover, the taxpaying public assumes these risks over the long-term, as PPAs are often 20 years or more. As researchers from Public Services International have argued: The agreements leave the downstream public authority, the electricity distributor, exposed to risks that have proved unsustainable. State-owned utilities have been stretched to the point of collapse under the terms of the PPA where demand and domestic currency value have fallen . . . As the downstream impact on the domestic economy could be catastrophic, governments and electricity utilities attempt to absorb price increases and the result is that these organizations have become effectively bankrupt except that bankruptcy is not an option under the contract terms. (Bayliss, et. al.: 2001) Indeed, the liabilities that governments can incur through PPAs can be far worse than high levels of debt. In relations with creditors, private or multilateral, debt restructuring enables a country to spread out or even reduce its payments. No such recourse exists with private firms who have obtained a signed agreement from government to buy all their output. Disputes over PPAs are not isolated, having occurred in Croatia, Uganda, Pakistan, Indonesia, India, Hungary, Costa Rica, and the Dominican Republic (Bayliss, et. al. 2001) PPAs are not the only means through which risk is shifted from the private sector to consumers. An even more direct way is simply through cost-plus contracting for infrastructure services. The results of guaranteeing a profit margin completely undermines market forces for efficiency, as it removes incentives for the corporation to cut costs. Such perverse contracts can be the result of blatant corruption. But they are also made possible in poor countries characterized by high risk, in which so called auctions consist of a single powerful corporation dictating terms to a government lacking negotiating power. The take it or leave it position of a dominant firm can leave a government with no choice but to offer concessions never contemplated in textbooks on economic theory.
Unforeseen Circumstances
Soaring price spikes can occur for a number of reasons. The case of Mayniland, the firm that won a concession for delivering water services in Manila, reveals how irrelevant a seemingly solid performance contract can be in the real world. The outrageous price hikes that Mayniland imposed on urban consumers were largely the result of overly optimistic projections about efficiency gains and sales. In economic jargon, this was a problem of adverse selection. Mayniland won the contract because it made the biggest promises, not because it understood the water business. The company, however, blamed all of its problems on the East Asian financial crisis
particularly the effects of the currency devaluation. In response, regulators allowed the company to automatically pass the costs claimed to be derived from exchange rate depreciation on to consumers. The result was not only higher rates, but also a disincentive for the company to economize by switching away from imported inputs (Esguerra 2002).
For consumers, the most damaging result of contracts has been the ability of firms to ratchet up prices for water or electricity far higher than envisioned in prior negotiations or in sophisticated modeling. There is a long and growing list of countries that have experienced social mobilization and political turmoil resulting from price hikes following infrastructure privatization. Price hikes can happen for a number of reasons: ambiguous contracts that fail to specify precisely when price hikes are permitted, weak regulators that fail to enforce contract terms, political discretion, unrealistic predictions underlying a winning bid, or re-negotiation resulting from structural changes (e.g., acts of God). A major reason why price hikes are permitted is the practical difficulty of enforcing contracts. A regulator that keeps prices firm may cause a private provider to go bankrupt. Particularly if no competent replacement is willing and able to take over immediately, the interruption in service (with potentially explosive social and political consequences) may be an unacceptable price for a government to pay for honoring a valid contract. The result is renegotiation of terms far more favorable to the private firm. B. Poverty Reduction For utility reform to result in poverty reduction, the poor must either be able to pay for connections, related hardware and tariffs, or receive a subsidy for them, directly or indirectly. Proponents of private provision argue that only the incentives and competence a properly regulated private sector or alternatively the dedication and selflessness of the NGO sector can adequately serve poor people who have traditionally been excluded from utility services. 1. Priorities and tradeoffs When private provision is conceived primarily as a strategy to improve and expand existing service, there is a greater likelihood that it will be implemented in a manner consistent with poverty reduction goals. However, those consumer issues can also be added as afterthoughts into what is primarily a budgetary measure. It is therefore crucial to determine which country stakeholders are demanding reform and what objectives they seek to achieve. In many countries, privatization transactions are spearheaded by the Ministry of Finance, which tends to view the process in narrow transactional terms, with the focus
on maximizing the fiscal revenues from the asset sale. This is unfortunate because there are some important trade-offs between the sale value of the assets, and the downstream economic and social impacts of the reform. For example, revenue considerations point toward keeping service tariffs high, minimizing rollout obligations, postponing the introduction of competition, and overlooking many of the details of regulation. However, experience shows that these are precisely the strategies that are likely to be most damaging to the poor . . . (EF&W, p. 19) Moreover, privatizing utilities to achieve fiscal objectives can undermine the effectiveness of private provision down the line. As PSI research David Hall has argued, a revenue-raising approach to privatizing water can conflict with the financial needs of the water service itself, because the price that a company is willing to pay to obtain a concession will depend on the profit stream that [it] can expect, which, in turn will be affected by the price it charges to users, and how generous the conditions such as regulation are. (Hall 2001) The more a private provider is expected to serve the interests of poor or excluded users, the less attractive will become the opportunity to invest in the sector. The only way to turn such a disincentive into an incentive is to provide public subsidies to the private provider. However, this approach, which is a pillar of the World Banks PSD Strategy, gives rise to moral hazard, putting the government at a severe disadvantage in a classic principal-agent problem. Subsidies increase the incentive of private providers to exaggerate levels of poverty or the costs of reaching the poor, thereby meriting a greater subsidy, or simply pocketing the public resources without passing the benefits along to poor users. 2. Unprofitable people While it is certainly possible that private providers may be able to outperform government, making utility services available to the poor presents a basic market constraint that any provider must confront. In many countries, the poor represent unprofitable populations, either because they lack cash income needed to pay tariffs, or because they cannot afford to pay the sunk costs of connections (e.g., water pipes, connection to electrical grid) needed to gain access to formal infrastructure. Indeed, because the poor tend to live in outlying urban and remote rural areas, the costs of providing them with utility services may be much higher than for wealthier people living in major cities. Moreover, it is not enough to simply obtain a household (or village) water connection. Sanitation benefits of water require internal plumbing, toilets, drains, sinks, etc. (Electricity can more easily be rigged for specific appliances, but lack of professional household wiring increases the likelihood of accidents and injuries.) Most research suggests that the greatest constraint on the poor is the lump sum payment required for water or electricity connections. However, as a group of World Bank researchers note: When investment is required to connect to the network, privatization may have an adverse impact on the
poor if households are legally required to connect to the network and there are no connection subsidies or credit facilities that reduce the large up-front costs . . . This is a critical issue in the water sector where connection costs can be several hundreds of dollars. (EG&L, p. 1185) Connection costs can also become a problem when contracts provide exclusive rights to service provision for a firm, barring consumers from seeking alternative providers or obtaining the service themselves. The unbundling approach taken in the Banks Private Sector Development (PSD) strategy proposes the separation of profitable customers from unprofitable (poor) ones. The latter are to be served through a special subsidy arrangement, with government resources channeled through the private firm or NGO, which receive the subsidy in exchange for targeting discounts for poor consumers. From a poverty reduction perspective, there are two problems with this solution (the moral hazard dimension is discussed in a later section): (a) Targeted subsidies are difficult to administer in any environment. Lifeline tariffs, designed for small consumers, can punish large poor households or shared dwellings. In other cases the lowest bloc of subsidized consumption may be so high that most of the benefit goes to the non-poor. Even more problematic in very poor countries are targeted subsidies. Whether through discounted rates or voucher schemes, these can have prohibitively expensive administration costs and have serious leakage problems. (EF&W, p. 10-11). (b) Subsidies that are targeted toward current consumers would not reach the unconnected poor, which in some cases can be a substantial proportion of vulnerable households. (EG&L, p, 1189) Yet for political reasons, subsidies are more likely to be channeled toward consumers already included in a utility network than toward those excluded from service. World Bank specialists apparently do not to communicate with each other on key points of policy design. In a paper reviewing evidence for private participation in utilities (see above) Philip Gray hopefully observes: Where tariffs are expected to increase as a result of privatization, governments have a number of options for reducing the impact on the poorest members of society. These include so-called lifeline tariffs that ensure some minimal level of consumption is available at less than full cost recovery levels, more general systems of cross subsidies, and targeted subsidy schemes. (p. 11) Oddly, the assertion is accompanied by a cite from the same author who dismissed lifeline rates and targeted subsidies above. If that wisdom is accepted, this leaves cross-subsidies as the most appropriate way to protect the poor, an assessment that any progressive policy advocate would support. However, the PSD strategy largely discourages the use of cross-subsidies. As the World Bank
team put it, Even when the [production] costs go down as a result of greater productive efficiency, improved technology or more effective uses of scale economies [by private providers], direct subsidies or cross-subsidies tend to disappear, either as an explicit government decision for resource allocation reasons or as a natural consequence of market forces acting in a liberalized market. (EG&L, p. 1180) Given that unbundled subsidies are at the very heart of the PSD strategy, it is remarkable that an entire paper dedicated to making the case for private participation in utilities addresses this issue in a brief, awkwardly cited paragraph. The larger point is not that subsidies should never be attempted, but rather that there is nothing intrinsic in PSP that overcomes the limitations on using them to address the needs of the poor, especially in countries with weak administrative capacity. Indeed, to the extent that subsidies are channeled through a private provider, monitoring and regulatory oversight may impose additional costs. C. Governance and accountability A well-established literature from institutional economics addresses the importance of tailoring infrastructure reform to country conditions, especially those related to governance and private sector behavior. Notwithstanding that body of knowledge, PSP in basic services is being promoted among countries with disparate levels of development, market structure, and institutional capacity. The most important insights from research about contextual factors that influence the outcomes of PSP are: (1) government regulation and competition are essential for effective private sector reform; and (2) government itself plays a critical role in creating and maintaining a competitive environment. Although the two factors are thus inextricably linked, they are discussed separately in this section. 1. Regulation One issue on which all sides of the reform debate agree is the role of governance in delivering public services. Whether the utility service provider is a government, a private firm or a non-profit, monitoring and enforcement are essential for success. The providers actions and outputs must be transparent, and there must be institutions through which it can be held accountable by the people who rely on its services. An immediate lesson from this agreement is that prior to adopting private provision, the viability of public regulation should be firmly established. Given the capacity and behavior of a countrys (or municipalitys) existing governance institutions, it is essential to determine which reform option is most likely to ensure that utility services are transparent and accountable. Yet blanket support for PSP in services anywhere carries with it an implicit and peculiar argument: the same government that lacks the competence or incentive to provide basic infrastructure services to its citizens, despite decades of trying, is expected to regulate private providers who have greater expertise and information, and often political influence over country officials in a
very short time frame. In an ideal auction, private bidders win concessions based on promises over tariff levels, investments in network expansion, and service quality. Making sure those promises are kept becomes the responsibility of government (as well as service users) the day the firm opens for business. As an applied economics researcher states, Given the high stakes involved in resetting prices, which transfer rents from one side of the market to the other, a satisfactory dispute resolution procedure is required and needs to be specified clearly in advance of privatization. (Newberry, p. 19; emphasis added) The World Bank echoes this advice for investment commitment. Connection targets should be carefully monitored and enforced with financial penalties. Day-to-day disputes over service provision reliability, quality, over-charging clearly require an independent authority to hear and arbitrate complaints. When firms provide or manage utility services, the government must enforce commitments about prices, investment and quality. According the World Bank, for a management contract to work two requirements are essential: clear and indisputable performance indicators and a monitoring agency or official with the skills and budget to do the job, and the strength, integrity and autonomy to do it independently. (Cowen 1997) Regulation of wholly owned concessions will be an even greater challenge. What is striking is how frequently the Bank supports private solutions in utilities, and how rarely borrowing governments have monitoring agencies that come even close to satisfying the criteria described above. The Banks response to the lack of home-grown governance is to contract regulatory functions themselves to private firms. Such an approach largely untested in the developing world. More seriously, it makes a mockery of the World Banks stated objective to strengthen governance capacity of the state. Indeed, this remarkable advice is simply to privatize governance itself. As the Bank itself acknowledges, No regulatory rule for private participation, no matter how precisely written, can remove all discretion from regulatory decisions, and the exercise of this discretion cannot be contracted out. (Cowen 1997). However, the exercise of discretion requires access to information and expertise precisely the capabilities lacking in many developing country governments, and likely to whither still more after they lose basic regulatory responsibilities In addition to monitoring and ensuring compliance with performance standards, regulators must also enforce rules governing environmental protection and consumer safety. As Philip Gray argues in his review of private participation in infrastructure, [U]nlike their public sector counterparts, private operators have stronger incentives to comply with quality standards and other regulatory obligations, as failure to do so is more likely to result in fines or other penalties. (p. 4). Not surprisingly, the author does not produce even a World Bank reference to support such a remarkable statement. Companies confronting the U.S. Environmental Protection Agency, an institution with immeasurably greater resources than those found in developing countries and a
massive judicial system to back it up, have violated regulations for decades. Faced with costs of upgrading equipment or changing production processes, private companies operating in a weak governance environment have strong incentives to ignore or bribe regulators. In the absence of a capable, trusted and autonomous regulator, only empowered consumers are capable of achieving accountability. A new question emerges: under what circumstances are consumers, especially marginalized citizens, likely to have influence over providers? Governments are notorious for neglecting poor people, but in the end they are political institutions that respond to organized action and mobilization. That means that accountability can be achieved, where freedoms of speech and association are respected, if citizens work together. Firms also neglect social goals but they were not created pursue such goals. In the end, they are accountable to shareholders, and without public authority to discipline their actions, they can hardly be expected to respond to civic action. According to a management professor in Columbia Universitys School of International and Public Affairs, where accountability is a critical value in the execution of a program, that program tends to be best implemented directly by the government. (Cohen, p. 434) 2. Market Imperfections The intellectual core of the entire PSP agenda is the salutary effect of competition, which should provide consumers with the best service at the lowest price. Especially when part of a utility is a natural (or de facto) monopoly, or when barriers to entry are high, private provision requires that government and the contracts they approve address imperfect markets. As the World Banks Private Sector Development strategy states, In noncompetitive markets, case by case decisions are required to assess whether public or private provision may be preferable depending, in particular, on whether more risks for commercial performance can be shifted effectively to the private sector. (World Bank 2002) However, rather than help policymakers actually do this make case by case distinctions the PSD strategy simply argues that PSP is usually the optimal policy. Even when appropriate conditions are clearly lacking, proponents search for ways to justify private provision, not rethink the strategy. For example, two PSP specialists from the International Finance Corporation who now lead the PSD strategy argue that contracts can address this issue even within problematic economic environments. Even when competition in the market is not feasible, some of its benefits can be achieved by introducing competition for the market. Under this approach, time-bound monopoly franchises are awarded by competitive bidding and periodically re-bid. This helps to ensure [that] countries get the best deal available from private firms, including the terms of investment commitments, and provides incentives for firms to perform well to retain the franchise. (Klein and Roger, p. 7)
Such optimism would be more convincing if it were accompanied by compelling and representative examples of this having happened, especially in developing countries. The constraints on making such a time-bound contract work in the real world are considerable. Some of the more obvious ones include:
q
Politics. Private providers, especially large corporations, are likely to have important allies in the political establishment. Their social connections to elites, bribes or economic prestige can make it extremely difficult for political leaders to actually deny such companies continued control over service provision. Legal. Especially in the case of concessions that are not renewed, there will be thorny legal issues about compensation for lost investment. Firms that lose to newcomers can be expected to demand (and exaggerate the level of) reimbursement for everything from routine maintenance to sunk costs. If the contract stipulates that no such compensation will be forthcoming if a company loses the re-bid, there will be a heavy incentive to under-invest. Technical. After a lengthy tenure by a private monopolist, the local knowledge and technical capacity of other firms to take its place may be lacking. Given the lack of employment alternatives, those with the infrastructure know-how will either have long been absorbed by the original monopoly, or have sought employment elsewhere.
Not surprisingly, effective competition requires a conducive market structure as well as an effective regulatory authority. An independent empirical assessment of electricity generation and supply reveals that the introduction of competition has worked well: when there is adequate capacity for generation, sufficiently numerous independent generating companies, and sufficient transmission capacity to ensure that each generator faces many competitors at all times. These conditions are very demanding, and may not be easily sustainable. As time passes, if prices remain low because of sufficiently strong competition, entry will be unattractive and capacity will become scarce. In addition, incumbents are likely to wish to merge to increase their market power, and to act to deter entry by various means. One should therefore be rather cautious about the applicability of this solution. It may be sustainable where there is sophisticated regulation of competition, and where regulators can find a way if ensuring over-investment in transmission . . . (Newberry, p. 11) To sum up, competition is most likely to be enforced where private providers are plentiful and public regulators are highly capable, hardly common characteristics of typical developing countries.
Annex A Types of Pubic-Private Partnerships 6

Build/Operate/Transfer (BOT) or Build/Transfer/Operate (BTO): The private partner builds a facility to the specifications agreed to by the public agency, operates the facility for a specified time period under a contract or franchise agreement with the agency, and then transfers the facility to the agency at the end of the specified period of time. In most cases, the private partner will also provide some, or all, of the financing for the facility, so the length of the contract or franchise must be sufficient to enable the private partner to realize a reasonable return on its investment through user charges. At the end of the franchise period, the public partner can assume operating responsibility for the facility, contract the operations to the original franchise holder, or award a new contract or franchise to a new private partner. The BTO model is similar to the BOT model except that the transfer to the public owner takes place at the time that construction is completed, rather than at the end of the franchise period. Build-Own-Operate (BOO): The contractor constructs and operates a facility without transferring ownership to the public sector. Legal title to the facility remains in the private sector, and there is no obligation for the public sector to purchase the facility or take title. A BOO transaction may qualify for tax-exempt status as a service contract if all Internal Revenue Code requirements are satisfied. Buy-Build-Operate (BBO): A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing facility. The government sells the asset to the private sector entity, which then makes the improvements necessary to operate the facility in a profitable manner. Contract Services: A public partner (federal, state, or local government agency or authority) contracts with a private partner to operate, maintain, and manage a facility or system proving a service. Under this contract option, the public partner retains ownership of the public facility or system, but the private party may invest its own capital in the facility or system. Any private investment is carefully calculated in relation to its contributions to operational efficiencies and savings over the term of the contract. Generally, the longer the contract term, the greater the opportunity for increased private investment because there is more time available in which to recoup any investment and earn a reasonable return. Many local governments use this contractual partnership to provide wastewater treatment services. Design-Build (DB): A DB is when the private partner provides both design and construction of a project to the public agency. This type of partnership can reduce time, save money, provide stronger guarantees and allocate additional project risk to the private sector. It also reduces conflict by having a single entity responsible to the public owner for the design and construction. The public sector partner owns the assets and has the responsibility for the operation and maintenance. Design-Build-Maintain (DBM): A DBM is similar to a DB except the maintenance of the facility for some period of time becomes the responsibility of the private sector partner. The benefits are
similar to the DB with maintenance risk being allocated to the private sector partner and the guarantee expanded to include maintenance. The public sector partner owns and operates the assets. Design-Build-Operate (DBO): A single contract is awarded for the design, construction, and operation of a capital improvement. Title to the facility remains with the public sector unless the project is a design/build/operate/transfer or design/build/own/operate project. The DBO method of contracting is contrary to the separated and sequential approach ordinarily used in the United States by both the public and private sectors. This method involves one contract for design with an architect or engineer, followed by a different contract with a builder for project construction, followed by the owner's taking over the project and operating it. A simple design-build approach creates a single point of responsibility for design and construction and can speed project completion by facilitating the overlap of the design and construction phases of the project. On a public project, the operations phase is normally handled by the public sector under a separate operations and maintenance agreement. Combining all three passes into a DBO approach maintains the continuity of private sector involvement and can facilitate private-sector financing of public projects supported by user fees generated during the operations phase. Design-Build-Operate (DBO): A single contract is awarded for the design, construction, and operation of a capital improvement. Title to the facility remains with the public sector unless the project is a design/build/operate/transfer or design/build/own/operate project. The DBO method of contracting is contrary to the separated and sequential approach ordinarily used in the United States by both the public and private sectors. This method involves one contract for design with an architect or engineer, followed by a different contract with a builder for project construction, followed by the owner's taking over the project and operating it. A simple design-build approach creates a single point of responsibility for design and construction and can speed project completion by facilitating the overlap of the design and construction phases of the project. On a public project, the operations phase is normally handled by the public sector under a separate operations and maintenance agreement. Combining all three passes into a DBO approach maintains the continuity of private sector involvement and can facilitate private-sector financing of public projects supported by user fees generated during the operations phase. Developer Finance: The private party finances the construction or expansion of a public facility in exchange for the right to build residential housing, commercial stores, and/or industrial facilities at the site. The private developer contributes capital and may operate the facility under the oversight of the government. The developer gains the right to use the facility and may receive future income from user fees. While developers may in rare cases build a facility, more typically they are charged a fee or required to purchase capacity in an existing facility. This payment is used to expand or upgrade the facility. Developer financing arrangements are often called capacity credits, impact fees, or extractions. Developer financing may be voluntary or involuntary depending on the specific local circumstances.
Lease/Develop/Operate (LDO) or Build/Develop/Operate (BDO): Under these partnerships arrangements, the private party leases or buys an existing facility from a public agency; invests its own capital to renovate, modernize, and/or expand the facility; and then operates it under a contract with the public agency. A number of different types of municipal transit facilities have been leased and developed under LDO and BDO arrangements. Lease/Purchase: A lease/purchase is an installment-purchase contract. Under this model, the private sector finances and builds a new facility, which it then leases to a public agency. The public agency makes scheduled lease payments to the private party. The public agency accrues equity in the facility with each payment. At the end of the lease term, the public agency owns the facility or purchases it at the cost of any remaining unpaid balance in the lease. Under this arrangement, the facility may be operated by either the public agency or the private developer during the term of the lease. Lease/purchase arrangements have been used by the General Services Administration for building federal office buildings and by a number of states to build prisons and other correctional facilities. Tax-Exempt Lease: A public partner finances capital assets or facilities by borrowing funds from a private investor or financial institution. The private partner generally acquires title to the asset, but then transfers it to the public partner either at the beginning or end of the lease term. The portion of the lease payment used to pay interest on the capital investment is tax exempt under state and federal laws. Tax-exempt leases have been used to finance a wide variety of capital assets, ranging from computers to telecommunication systems and municipal vehicle fleets.
References
Bayliss, Kate, David Hall and Violeta Corral. 2001. FDI Linkages and Infrastructure: Some Problem Cases in Water and Energy. Public Services International Research Unit. Behn, Robert and Peter Kant. 1999. Strategies for Avoiding the Pitfalls of Performance Contracting, Public Productivity & Management Review, vol. 22(4). Cohen, Steven. 2001. A Strategic Framework for Devolving Responsibility and Functions from Government to the Private Sector, Public Administration Review, vol. 61(4). Cowen, Penelope Brook. 1997. Getting the Private Sector Involved in Water What to Do in the Poorest of Countries? Public Policy for the Private Sector. Private Sector Development Department, World Bank. Esguerra, Jude. 2002. A Critical Assessment of the Manila Water Concessions Institute for Popular Democracy. Quezon City, Philippines. Estache, Antonio, Vivien Foster and Quentin Wodon. 2001. Making Infrastructure Reform Work
For the Poor: Policy Options based on Latin American Experience LAC Regional Studies Program. WBI Studies in Development. FPSI. World Bank. Estcahe, Antonio, Andres Gomez-Lobo and Danny Leipziger. 2001. Utilities Privatization and the Poor: Lessons and Evidence from Latin America, World Development, vol. 29(7). Gleick, Peter. H, Gary Wolff, Elizabeth L. Chalecki, Rachel Reyes. 2001. The New Economy of Water: The Risks and Benefits of Globalization and Privatization of Fresh Water. Pacific Institute for Studies in Development, Environment, and Security. Oakland, CA. Gray, Philip. 2001. Private Participation in Infrastructure: A Review of the Evidence. Private Provision of Public Services Group, Private Sector Advisory Services. Hall, David. 2001. Water in Public Hands: A Necessary Option. Public Services International Research Unit. PSI. Kessler, Tim and Nancy Alexander. Alexander and Kessler. 2002. Corporate Welfare with a Human Face? Grant-Giving through the U.S. Millennium Challenge Account and World Bank. Citizens Network on Essential Services McCully, Patrick. 2002. Avoiding Solutions, Worsening Problems: A Critique of World Bank Water Resources Sector Strategy: Strategic Directions for World Bank Engagement. International Rivers Network, Berkeley, CA. Newberry, David. 2001. Issues and Options for Restructuring the ESI. Department of Applied Economics, Cambridge. Pritchett, Lant and Michael Woolcock. The Solution When the Solution is the Problem. Working Draft subject to revision. Sclar, Elliott. 2000. You Dont Always Get What You Pay For: The Economics of Privatization. Ithaca. Cornell University Press. World Bank. 2002. Private Sector Development Strategy: Directions for the World Bank Group.
End Notes
1) Throughout this paper the term privatize applies to both direct private ownership and private management over public assets. See Section C below. 2) See http://ncppp.org/howpart/ppptypes.html 3) The World Banks Water Resources Sector Strategy also avoids any discussion of water privatization failures that could serve as the basis for lessons. (McCully 2002) 4) The single exception is La Paz/El Alto, Bolivia, where a concession awarded on the basis of new connections increased the connection rate by 66 percent. The concession utilized simple condominial water technology, which reduces costs through consumers labor. However, there have been serious problems in maintaining profitability in poor areas. 5) For an extensive review of empirical studies, see Hall (2001). 6) This partial list consists of excerpts from Public-Private Partnerships: Terms Related to Building and Facility Partnerships, United States Government Accounting Office, April 1999.

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http://www.servicesforall.org/html/tools/Policy_Analysis_Series_1_print.

Policy Series on Essential Services Paper No. 1

Policy Analysis & Research

I. Radicalism as Conventional Wisdom

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II. Evidence in Support of Private Provision of Services

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III. Beyond Theory: Privatized Services in the Real World

number of general weaknesses, including:

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Annex A Types of Pubic-Private Partnerships 6

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