Private Sector Participation and Performance of Urban Water Utilities in China

In the early 1990s, China began opening its urban water sector to nonstate capital to meet increasing urban water demand. By 2007, more than 30% of large and medium urban water utilities had attracted private sector participation (PSP), of which two thirds have a majority of nonstate shareholders. To understand the factors that drive PSP in urban water supply and to answer the key policy question of how PSP has affected water utility performance, we assemble and analyze a unique data set consisting of 208 urban water utilities servicing more than 300 million urban residents from 1998 to 2007. We find that a utility's profitability and liability level and a host city's road infrastructure in the prior year play important roles in driving private investors both to enter and to withdraw from the sector. It is further found that PSP utilities, and mainly those with majority nonstate shareholders, have made substantial cost savings through employment downsizing and cutting managerial expenses, which leads to a remarkable profit increase. Other estimates, although statistically insignificant, show that PSP increases a utility's investment and efficiency, and PSP cities have lower total and domestic water supply but more domestic water users.