Can privatization of the basic sanitation sector help combat child mortality?

Responsible researcher: Silvio da Rosa Paula

Article title: WATER FOR LIFE: THE IMPACT OF THE PRIVATIZATION OF WATER SERVICES ON CHILD MORTALITY

Article authors: Sebastian Galiani; Paul Gertler; Ernesto Schargrodsky

Location of intervention: Argentina

Sample size: 165,542 child deaths that occurred from 1990 to 1999

Major theme: Economic Policy and Governance

Variable of main interest: Infant mortality

Type of Intervention: Privatization of water services

Assessment method: Difference in Differences

Assessment Context

At the end of the 1980s, Argentina was experiencing a period of growing inflation driven mainly by the issuance of currency to cover huge fiscal deficits of around 9% of GDP during the decade. In 1989 the country entered a period of hyperinflation and deficits could no longer be covered by issuing money and debt securities, which led the Radical Civic Union (UCR) government to resign six months before the end of its administration.

Within this context, in which Argentina is embarking on one of the largest privatization campaigns in the world, under the command of the new Peronist government, an ambitious structural reform plan was launched aimed at reducing deficits and controlling inflation, which consisted of decentralization health and education services, pension reform, emancipation of the Central Bank, deregulation of economic activities and privatization of state-owned companies.

The privatizations aimed to reduce the budget deficit and reverse a long period of little investment in physical infrastructure, which was generally seriously depreciated. The privatized state-owned companies were mainly large monopolies in sectors such as: electricity, oil and natural gas, telecommunications, transportation, postal service, and water systems.

Intervention Details

Historically, in most countries, the provision of water services has been provided by the public sector and private input has been limited. However, there is a growing call for the private sector to enter under public regulation to provide the service. Among several reasons, the private sector has the advantage of providing strong incentives to reduce costs and improve productivity, where empirical evidence suggests that service quality, productivity and profitability increase significantly after privatization (Megginson et al, 1994; Barberis et al, 1996; Frydman et al, 1999;

Furthermore, the political use of state-owned companies and problems such as excessive employment, corruption, subsidies and lack of managerial incentives result in inefficiency in the service provided by the public sector. All these aspects mentioned, added to underinvestment in infrastructure and indebted governments with a lack of financial resources, make the private sector an alternative to overcome bottlenecks in the sanitation sector. On the other hand, the fear of a drop in service quality or the exclusion of low-income households due to rising prices, or even negative externalities generated by private companies that disregard social benefits in their decisions, which can be genuine when supply conditions are not controlled by regulatory agencies.

In the Argentine context, from 1870 to 1980, water services were provided by the state entity Obras Sanitarias de la Nación (OSN) and several non-profit cooperatives. In 1990, before privatization, two-thirds of water services were provided by state-owned companies, while the remainder was provided by non-profit cooperatives. Between 1991 and 1999, half of public water companies passed control to the private sector, which represented approximately 28% of municipalities covering almost 60% of the population.

Within the general scope of privatizations, the water services sector represented a small part of the new government's response to combating the crisis, and at first only large state-owned companies under federal command were granted to the private sector. Only after the government's re-election in 1995 did the privatization process accelerate, however, the federal government did not pressure municipal governments to sell their state-owned water services. However, the data indicate that when the local government was Peronist, the probability of privatization was greater than when the local government was in opposition.

Methodology Details

To measure the effect of privatizations on infant mortality rates in municipalities that had their water supply system privatized, the Difference in Differences method was used, which consists of comparing before and after privatizations, between the treated and control groups, that is, between the group of municipalities that privatized water services and those that did not, respectively. In this method, the control group plays a fundamental role, as it is based on it that the counterfactual is constructed, that is, the estimate of what mortality would be like in the municipalities that privatized if they had not privatized, as shown below in the hypothetical example inspired by study.          

Regarding the data used, the variable of interest is the infant mortality rate constructed from information contained in statistical records from the Argentine Ministry of Health. The database includes 165,542 child deaths that occurred from 1990 to 1999. Furthermore, municipal information on access to water services was used, as well as characteristics related to unemployment, public spending and GDP per capita.

Result

The main results found indicate that the privatization of water services is associated with a reduction of 4.5% to 10% in infant mortality rates, precisely in the mortality of children under 5 years of age. Furthermore, the results indicate that the reduction in mortality rates is greater in the poorest areas, reducing infant mortality by 26%.

To strengthen the results found, the impact of privatizations on diseases that are not related to water supply, such as cardiovascular diseases or cancer, was tested. As expected, the results show that privatizations only reduced water-related diseases, such as infectious and parasitic diseases that had a reduction of 18.2% and perinatal diseases (deaths occurring during the first 28 days of life, regardless of the cause) a reduction in around 11.5%.

In short, the results indicate that increased access to the water and sanitation network, provided by privatizations, brought possible changes in the quality of the service, improving children's health indicators. There are four main factors that lead the authors to believe that the main cause of the reduction in mortality is associated with the privatization of water services. First, the results showed that the factors that led municipalities to privatize do not affect infant mortality rates. Second, mortality trends were similar before privatization in both municipalities that privatized and those that did not privatize water services. Third, privatizations only affected water-related diseases. Fourth, the impact was greater in the poorest municipalities, since medium and high-income municipalities already had high rates of access to the water network before privatizations.

Finally, although many private operators ignore the health externalities caused by the sanitation sector, evidence suggests that privatizations have increased access and improved the quality of water services. Furthermore, in terms of reducing infant mortality, the results indicate that the poorest population was the one that experienced the greatest gains from privatizations, going against the public perception that privatizations harm the low-income population.

Public Policy Lessons

Water has a crucial importance in many aspects of life, whether linked to health, well-being or economic development, however, many countries face difficulties in guaranteeing access to water and sewage treatment, especially for the neediest population. The great contribution to the debate made by the “ Water for Life ” study is that private investment can serve as an alternative to achieving the sustainable development goals of universalizing equitable access to water, whether through privatization, concessions or public-private partnerships, being an important mechanism for policymakers to overcome problems of public sector budget restrictions, filling the existing gap between the supply and demand of basic sanitation services, which mainly affects regions with low-income populations.

References

GALIANI, Sebastian; GERTLER, Paul; SCHARGRODSKY, Ernesto. Water for life: The impact of the privatization of water services on child mortality. Journal of political economy , vol. 113, no. 1, p. 83-120, 2005.