Across Latin America, a growing number of people say the privatization of public services, a movement that swept the region in the 1980s and 1990s, has failed. Protests have erupted over the issue in several countries, and some governments are beginning to reverse these policies. Last week Argentina announced it was rescinding its 30-year contract with the French company Suez and reinstating government control of the water supply.
The Washington Post takes a critical look at the state of public utilities in Latin America and the increasingly popular calls for de-privatization – bringing public utilities from the private into the public domain.
In the ideal world, privately-owned firms outperform their state-owned counterparts. The problem, however, is that privatized companies – and it is the case especially with public utilities in developing countries – exist not in the ideal world, but in an environment where their ability to compete is heavily restricted. While ownership is transferred into the private hands, “rules of the game” often do not change, and privately owned firms have to compete within the structure of rules that does not reflect the incentives structures which make markets work.
One example of incomplete privatization is price freezes – governments fearing the rise in prices attempt to regulate them for privatized firms as they do for state-owned companies, ignoring the market purpose of prices (allocation of goods and services to consumers who value them the most). Price freezes distort market incentives and prevent companies from investing into improving the quality of service. The sad thing in all of this, of course, is that citizen’s impression that they are better off with government-owned utility services because they pay a lower price for public utilities is a false. Why? Because a government ultimately subsidizes a lower price and the money itself does not appear out of the air – the money is taken from citizens and firms through taxes and re-allocated from other productive resources. Taking efficiency concerns and opportunity costs into the account, as well as poor quality, it would not be hard for one to conclude that in real terms citizens often pay a lot more than it seems. Governments may be able to keep nominal prices in check by regulating them even in the case of private firms, but in real terms prices tell the full story. Another problem with price controls, of course, is that unlike in the case of state-owned companies, private firms do not have a state bank to back them up and provide subsidies to cover the gap.
I feel for people in many developing countries who often do not see the benefits of privatization, especially in public utilities sector. While promised better quality utilities at lower prices, it is not uncommon for people to face the reality of sporadic service and sub par quality. Yet, the pitfalls are not the fault of the private sector – economic studies have well documented the superior performance of privately-owned utility companies. The problem is incomplete privatization. If we continue to look at privatization as simply a process of transferring ownership rights, we will continue to face disappointments with the state of privatized public utilities in many developing countries, not just in Latin America. Only when we begin looking at privatization as a process of changing the structure of markets and incentives mechanisms privatization will deliver. Incomplete privatizations, however, must be completed, not reversed.
Whether it is the state or a private company, I don’t care,” Guzman said. “All I want is good water. I don’t care who I get it from.”
All Marta Guzman wants is good water. Its all private sector companies want to give to her. They just need to be given a fair chance to do so.
Published Date: March 27, 2006