The role of privatisation in developing countries

By Joshua Kenyon

Privatisation of public services is argued to improve the economic efficiency and performance of firms by creating profit incentives and competition. In contrast, state-owned enterprises (SOE) have been associated with inefficiency and sometimes corruption. Besides that, decreasing the number of SOEs can free up government finances, as some of these enterprises are heavily subsidised. Though privatisation can lead to positive outcomes, the effectiveness of privatisation has been called into question, as some attempts, often spurred by intergovernmental organisations, have led to increased prices and lower quality of services, resulting in protests and occasionally violence. It is essential, therefore, for countries to only implement privatisation under the correct circumstances, and to have a good regulatory framework that ensures citizens continue to have access to essential goods and services post-privatisation.

To privatise or not to privatise?

The public sector can often be better placed to provide an essential service, especially when the health of citizens is dependent on the good being supplied, such as the provision of water. In 1999, the World Bank and the IMF encouraged, through loan conditions, the privatisation of water in many developing countries. In Bolivia, Bechtel, a US company, bought the water supply industry and immediately increased water prices – up to 50% in some areas – in a country where people were already struggling to pay water bills. This gave rise to protests that lasted from January-April 2000, which led to a 17-year-old boy being shot dead by the police. The Bolivian government then reversed the privatisation of the water industry, known as ‘remunicipalisation’. A total of 63 water privatisation projects implemented by the World Bank have failed or are in difficulty. Argentina and Mozambique, for example, remunicipalised due to a lack of infrastructure investment, tariff hikes, and environmental hazards. With 768 million people lacking access to clean water worldwide, these failed projects have led to severe health outcomes in developing countries.

Members of the All-Pakistan WAPDA Hydroelectric Workers’ Union demonstrate against the privatisation of Water and Power Development Authority in Quetta, as part of country-wide protests in 2015. Photo credit: Shutterstock

On the other hand, privatisation has been seen by many as a useful tool for reducing organisational inefficiency, increasing government revenue, and reducing subsidy spending, as well as reducing the impact of corruption within these enterprises. Brazil’s President, Jair Bolsonaro, and his Minister of the Economy, Paulo Guedes, are committed to economic liberalisation and free-market policies. As a result, they have implemented a privatisation programme that aims to revamp the country’s stagnant economy by increasing infrastructure investment. From 2015-16, Brazil suffered from below -3% GDP growth rate, and, in 2017, infrastructure investment was only 1.5% of GDP. Through privatisation, Brazil has gained revenue of around $20bn, with one SOE being sold for $8.7bn. Though the outcome of this privatisation project is still unknown, Brazil is already benefiting from infrastructure investment from funds in countries such as Singapore, Spain, and Japan. Further still, 124 infrastructure projects were completed in the country from 2016-18. This trend is expected to continue, with the government announcing a plan to double infrastructure investment to around $65bn by 2022.

Brazil’s Minister of the Economy, Paulo Guedes, a key orchestrator of the country’s privatisation programme. Photo credit: Shutterstock

Furthermore, in July 2020, Brazil signed a sanitation bill which is expected to attract investment of between $90-$130bn. This bill aims to increase access to both water distribution and sewage collection services to 99% and 90% respectively by 2033. There is some pushback, however, with Léo Heller, UNHCR Special Rapporteur on the human right to safe drinking water, arguing that these measures would be ineffective in expanding access and could increase inequality. To this end, Brazil has sought to ensure clear regulation is present, with strong incentives for companies to follow the benchmark rules laid out by Brazil’s National Water Agency, which includes regulations related to water collection and conservation.

Regulation is key

Though privatisation can be a useful tool to encourage investment and efficiency, its success is dependent on an appropriate regulatory framework. Governments should implement a framework that protects consumer and employee rights, by preventing downsizes and unwarranted price increases. The OECD argues that regulation in this area must promote transparency and efficient markets, as well as to clearly articulate the division of responsibilities among supervisory, regulatory, and enforcement authorities. In Gabon, in 1997, for example, a 20-year concession contract was introduced when water and electricity services were privatised. Not only did the contract include service, quality, and minimum investment requirements, but also an incentive mechanism to encourage service expansion into remote regions. Moreover, it required external experts to ensure that the provider met coverage targets. These regulations facilitated lower prices for both water and electricity services in the country and increased water access from 70% to 84% from 2000 to 2006. The disparity between Bolivia and Gabon’s water privatisation shows that a strong regulatory system is crucial towards ensuring that essential services are provided at a reasonable price and quality to all citizens.

Joshua is an undergraduate at the University of Sheffield studying Economics, and has interests in economic development.

The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.


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