Principal investigator: 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 the intervention: Argentina
Sample size: 165.542 child deaths that occurred from 1990 to 1999
Main theme: Economic Policy and Governance
Primary variable of interest: Infant mortality
Type of Intervention: Privatization of water services
Evaluation method: Difference in Differences
Evaluation Context
In the late 1980s, Argentina was experiencing a period of rising inflation, driven mainly by the printing of currency to cover enormous fiscal deficits, which amounted to around 9% of GDP during the decade. In 1989, the country entered a period of hyperinflation, and the deficits could no longer be covered by issuing money and debt securities, leading the Radical Civic Union (UCR) government to resign six months before the end of its term.
Within this context, in which Argentina embarked on one of the world's largest privatization campaigns under the new Peronist government, an ambitious structural reform plan was launched aimed at reducing deficits and controlling inflation. This plan consisted of decentralizing health and education services, reforming the pension system, emancipating the Central Bank, deregulating economic activities, and privatizing state-owned enterprises.
The privatizations aimed to reduce the budget deficit and reverse a long period of low investment in physical infrastructure, which was generally in a state of serious disrepair. The privatized state-owned companies were mainly large monopolies in sectors such as electricity, oil and natural gas, telecommunications, transportation, postal services, and water systems.
Intervention Details
Historically, in most countries, water services are provided by the public sector, and private sector participation has been limited. However, there is a growing demand for private sector involvement under public regulation to provide this service. Among several reasons, the private sector has the advantage of providing strong incentives for cost reduction and productivity improvement, 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; La Porta and Lopez-de-Silanes, 1999).
Furthermore, the political use of state-owned enterprises and problems such as overemployment, corruption, subsidies, and a lack of managerial incentives result in inefficiency in the service provided by the public sector. All these aspects, combined with underinvestment in infrastructure and indebted governments with scarce financial resources, make the private sector an alternative to address the bottlenecks in the sanitation sector. On the other hand, the fear of a decline in service quality or the exclusion of low-income households due to price increases, or even the negative externalities generated by private companies that disregard social benefits in their decisions, can be genuine when supply conditions are not controlled by regulatory agencies.
In the Argentinian context, from 1870 to 1980, water services were provided by the state. National Sanitary Works (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 the public water companies transferred control to the private sector, which represented approximately 28% of municipalities, covering almost 60% of the population.
Within the broader context of privatizations, the water services sector represented a small part of the new government's response to combating the crisis, and initially only large state-owned companies under federal control were granted to private initiative. 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 companies. Nevertheless, data indicates that when the local government was Peronist, the probability of privatization was higher 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. This method consists of comparing the treatment and control groups before and after privatizations; 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 this group that the counterfactual is constructed, that is, the estimate of what mortality would be in the municipalities that privatized if they had not privatized, as shown in the hypothetical example inspired by the study below.
Regarding the data used, the variable of interest is the infant mortality rate, constructed from information contained in statistical records of the Argentine Ministry of Health. The database includes the 165.542 child deaths that occurred from 1990 to 1999. In addition, 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 findings indicate that the privatization of water services is associated with a 4,5% to 10% reduction in infant mortality rates, specifically 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 test the robustness of the results, the impact of privatization on diseases unrelated to water supply, such as cardiovascular diseases or cancer, was examined. As expected, the results show that privatization only reduced water-related diseases, such as infectious and parasitic diseases, which saw an 18,2% reduction, and perinatal diseases (deaths occurring during the first 28 days of life, regardless of the cause), with a reduction of around 11,5%.
In summary, the results indicate that increased access to water and sanitation networks, facilitated by privatizations, has brought about possible changes in service quality, improving children's health indicators. There are four main factors that lead the authors to believe that the primary 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 privatizations in both municipalities that privatized and those that did not. Third, privatizations only affected water-related diseases. Fourth, the impact was greater in poorer municipalities, since middle- 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 to and improved the quality of water services. Furthermore, in terms of reducing infant mortality, the results indicate that the poorest population experienced the greatest gains from privatizations, contradicting the public perception that privatizations harm low-income populations.
Lessons in Public Policy
Water is crucial to many aspects of life, whether related to health, well-being, or economic development; however, many countries face difficulties in guaranteeing access to water and sewage treatment, especially for the poorest populations. The great contribution to the debate that the study “Water for LifeThe argument is that private investment can serve as an alternative to achieve the sustainable development goals of universal and equitable access to water, whether through privatizations, concessions, or public-private partnerships. It is an important mechanism for policymakers to circumvent budgetary constraints in the public sector, filling the existing gap between the provision and demand for 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, v. 113, no. 1, p. 83-120, 2005.
