Water privatisation in poor countries

An obvious and sad fact about the world is that hundreds of millions of people in poor countries just don't have access to enough clean water. In many countries women and children will walk miles carrying heavy buckets or balancing them on their heads just to bring water back to the house. Carrying water isn't just a pain, it is also expensive. Carrying can cost between five and twenty times more than piped water. Also the water sources are often dirty and carry disease. Hundreds of thousands of children die each year from diarrhea which many contracted from drinking bad water. The extra expense and disease dangers matter when you are living on a few dollars a day.

A radical approach to dealing with this problem has been suggest by Tyler Cowen. He has a piece at Forbes.com arguing for the privatisation of residential water supply in the Third World. Cowen writes

I'd like to suggest a radical idea. The solution for the poorer parts of the Third World is deregulation of the market for piped water, combined with the enforcement of property rights. Yes, I'm saying that Third World governments should consider letting private companies sell water at any price they want. This includes giving them the right to cut off people who don't--or can't--pay their bills.

And no, I don't mean a water concession with a price regulated by the government, I mean true laissez faire in water supply. No price regulation, no rate of return regulation, no government ownership of assets, no political pressure to keep prices low. Water companies should be allowed to maximize their profits, and because supplying water is nearly always a monopoly, they should be allowed to make monopoly profits. I know the idea sounds crazy--to an economist, water supply is a classic "natural" monopoly--but on closer inspection the other alternatives might be worse.

Later he writes

Deregulation would give water companies a stronger monetary incentive to serve these customers. For starters, an unregulated private monopoly would try to bring as many buyers into the system as possible, so as to make as much money as possible.

Of course deregulated monopolies are bad, mostly because monopolies raise market prices and not everyone can afford the higher rates. But for all the problems deregulation can bring, the status quo seems much worse. And it's worth asking what these higher prices are relative to. Carrying water on your head costs much more--in terms of both money and effort--than piped water. If you're a poor person, wouldn't you rather face a private monopolist, selling you water through pipes, than not have any water company at all? Whether we like it or not, those are the real world alternatives.

But Cowen also realises that some people won't like the idea of complete deregulation.

If complete deregulation is too radical for you, consider the interesting compromise proposed by the economist Jeffrey Sachs, currently heading the Earth Institute at Columbia University. He suggests that the private company be allowed to charge high prices, but only under the condition that it allocates a minimum amount of water for everyone, either for free or at a much lower price. Basic water needs would be met, and the company still might make a profit.

That said, I'm less worried about high prices than Sachs. Let's say the new water prices were so high as to capture all the benefits that buyers would receive from the new supply of water. We can expect much lower rates of diarrhea and other diseases, if only because the water supplier can charge more for cleaner and safer water. The resulting decline in disease means that children will die less frequently and adults will be healthier and more energetic. Those long-term social benefits are of enormous help to poor communities, even if high prices take away many of the initial, upfront benefits of the new water supply. In other words, we should consider radical privatization precisely because water is a public good and because clean water is so important for long-run economic growth.

On the issue of privatisation and disease, history is an interesting guide. Troesken (1999) looks at typhoid rates in US waterworks in the period 1880-1920. He writes

Also, a sample of roughly one-third of all water companies operating in 1899 indicates private companies were no less likely than public companies to have invested in water filters. On the contrary, private companies invested in filters at greater rates than public companies. About 20 percent of all private water companies had installed filters by 1899. Only 6 percent of all public companies had installed filters by 1899. Taken together, these results call into question the arguments of Progressive-Era reformers. Public ownership, it appears, did not lead to larger investments in filtration systems or significant reductions in typhoid rates.

There is also information on a more recent privatisation scheme. Galiani, Gertler and Schargrodsky (2005) looks at the effects of water privatisation on child mortality in Argentina. In the 1990s Argentina embarked on one of the largest privatization campaigns in the world, including the privatization of local water companies covering approximately 30 percent of the country's municipalities. Galiani, Gertler and Schargrodsky hypothesized that increased access to the water and sanitation network, and potential changes in service quality, improved health outcomes of young children. Using a combination of methods, they found that child mortality fell by approximately 8 percent in the areas in which water systems were privatised and that the effect was largest (26 percent) in the poorest areas. Many people fear that private operators would fail to take into account the significant health externalities that are present in this industry and therefore underinvest and supply suboptimal service quality. On the contrary, the evidence in the Galiani, Gertler and Schargrodsky paper suggests that the deterioration in performance of water systems in Argentina under public management was so large that it allowed for a privatisation that generated private profits, improved access, expanded service, and reduced child mortality. While the regulated private sector may not be providing first-best services, it seems to be doing a much better job than the public sector. There is also a public perception that privatisation hurts the poor. This perception is driven by the belief that privatised companies raise prices, enforce service payment, and invest only in lucrative high-income areas. In contrast, they find that the poorest population experienced the largest gains from privatisation in terms of reduction in child mortality. Privatisation appears to have had a progressive effect on reducing health inequality.

Cowen also asks But what of those areas where the poor can pay very little?

Even with deregulation, many companies still won't be interested in serving the poorest elements of their societies because they can't charge poor customers a lot of money. They might not be able to charge enough to cover the costs of billing, much less the cost of laying down the pipes. But the more weight that point carries, the weaker the case for doing nothing and weaker still for regulating water prices. We already know that with artificially low, regulated prices the poor get no water; with a private market they at least have a chance. Governments need to be doing everything possible to encourage piped water supply, and that means allowing high prices.

Cowen end his article by pointing out that the real question is

What do we have to lose? Let's try some water deregulation and hope that at least a few million people can take those buckets off their heads and trade them in for the pleasure of paying a monthly water bill.

• Troesken, Werner. (1999). "Typhoid Rates and the Public Acquisition of Private Waterworks, 1880-1925", Journal of Economic History, 59: 927-48.
• Galiani, Sebastian, Paul Gertler and Ernesto Schargrodsky. (2005). "Water for Life: The Impact of the Privatization of Water Services on Child Mortality", Journal of Political Economy, 113(1): 83-120.