Does Private Sector Participation Improve Performance in Electricity and Water Distribution?

Does private sector participation improve performance in electricity and water distribution? This question has proven deceptively difficult to answer in the context of utilities in developing economies. The authors examine the question of private versus public performance in a natural monopoly setting. They address the shortfalls of earlier research and arrive at fact-based conclusions that are robust globally. Using a data set of more than 1,200 utilities in 71 developing and transition economies - the largest know data set in the area - this study finds that privately operated utilities convincingly outperform state-run ones in operational performance and labor productivity. This book compares the change over time in performance measures for the two groups of utilities and isolates the effect of private sector participation (PSP) from time trends and firm-specific characteristics. It accounts for ex-ante difference between state-owned enterprises that were selected for PSP and those that were not, and corrects for possible bias in the estimations induced by such differences. It distinguishes between full divestitures, partial divestitures, concessions, and lease and management contracts. The study finds no robust evidence of an increase in investment by either the public or private sectors, even if PSP leads to an increase in operational efficiency. Nor is there robust evidence of a change in average residential prices as a result of PSP. Given the well-documented underpricing of utility services in many developing countries, this result may reflect the economic and political difficulties of aligning tariffs with the costs of service provision. This book will be of interest to people involved in sector reform and infrastructure service delivery, in particular in developing countries.