Does privatization of solid waste and water services reduce costs? A review of empirical studies

Cost reduction was the key benefit claimed by privatization. We conduct a review of all published econometric studies of water and waste production since 1970. Little support is found for a link between privatization and cost savings. Cost savings are not found in water delivery and are not systematic in waste. Reviewed studies build from public choice, property rights, transaction costs and industrial organization theories. We conclude public choice theory is too focused on competition, which is typically not present in quasi-markets. Property rights theory gives attention to ownership and service quality, but absent competition, ownership makes little difference on costs borne by municipalities. Transaction costs argue privatization is best when contracts are complete—a rare situation in public service markets. We find the industrial organization approach most useful in explaining results because it directly addresses incentives, sector structure and regulatory framework. Overall, the empirical results show the importance of market structure, industrial organization of the service sector, and government management, oversight and regulation. Because there is no systematic optimal choice between public and private delivery, managers should approach the issue in a pragmatic way.