Assessing The Risks In The Private Provision Of Essential Services

The paper argues that private provision of water and electricity services requires a higher burden of proof than policies reforming existing state services. These utilities are public goods that must be universally affordable and accessible in order to achieve the Millennium Development Goals. In addition to considering productivity, policy-makers should assess social and "off-budget" fiscal impacts, as well as the feasibility of implementation in weak institutional environments. Benefits of better performance are often outweighed by risks in these other areas. The paper assesses four common rationales for private provision: Balancing budgets. Poor people need subsidies regardless of the provider, while incentives for attracting private investment can create off-budget fiscal liabilities. Investing capital. Private investment in utilities has been falling in developing countries, and is often contingent on contractual terms that guarantee profits or shift financial risk onto taxpayers. Improving performance. Private provision often fails to improve services because governments with limited resources cannot design and enforce contracts. Making reform irreversible. Policy-makers lack the information to anticipate the impacts of policies that cannot be reversed, such as commitments made under GATS.