Water nationalisation: Network access, quality, and health outcomes

Fernando Borraz, Nicolás González-Pampillón, Marcelo Olarreaga, 16 July 2011

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In an interview by Newsweek in 1995, Ismail Serageldin, Vice-President for Environmental and Socially Sustainable Development at the World Bank, highlighted the rising importance of water in international disputes: “Many of the wars of this century were about oil, but those of the next century will be over water”. Part of the problem is attributed to the mismanagement and waste of water resources. The poor performance and corruption of publicly-owned water monopolies has left more than one billion people in developing countries without any access to clean and safe water, and 40% of the world's population without access to safe and clean sanitation services (Segerfledt 2005).

Rectifying this was seen as a top development priority and a solution promoted by many international financial institutions in the 1990s was the privatisation of water services (World Bank 2004). Throughout the 1990s many countries engaged in the privatisation of water services in Eastern Europe, Latin American and, to a lesser extent, in Asia and Sub-Saharan Africa (Hall et al. 2010).

But the involvement of the private sector in the provision of water is controversial. For many, water is seen as an issue of national sovereignty, where private provision by foreign multinationals is in itself problematic. Moreover, the privatisation of water did not always deliver on its promises. Large price hikes by private firms, and episodes of coloured water coming out of the tap led to popular unrest and a backlash to water privatisation in many Latin American countries in the early 2000s.1

Uruguay is an example of this backlash. An amendment to the Uruguayan constitution was passed in 2004 declaring water "part of the public domain". The private provision of water was made illegal.2 This amendment to the Uruguayan constitution led to the nationalisation of two water and sewage suppliers in the Department of Maldonado, which had been privatised in the 1990s. The private water companies that operated in the Department of Canelones since the 1940s also came under the control of the public monopoly.

The reasons for Uruguay's nationalisation of water were no different from the ones observed in other Latin American countries over the last decade (including Bolivia, Brazil, and Argentina). A series of highly publicised occurrences of low-quality water supplied by Uragua and Aguas de la Costa (subsidiaries of the Spanish water companies Aguas de Barcelona and Aquas de Bilbao) led, as early as 2003, (in the middle of a financial crisis) to a well publicised request by the Minister of Finance for Uragua to leave the country

In recent research (Borraz et al. 2011), we study the consequences of this decision on the quality of water, the access to sanitation networks, as well as on an important health outcome, i.e. child mortality.

The study of Uruguay's private-public provision of water is interesting for at least two reasons.

  • First, it is the first study to focus on an episode of nationalisation rather than privatisation. This helps us avoid the inherent selection bias associated with cherry-picking when looking at privatisation. Indeed, nationalisation affected all previously private companies as private provision was made illegal. Thus, as long as the determinants of the decision to privatise are not serially correlated we would have a reliable identification strategy.
  • Second, household access to piped sewerage networks is particularly low in Uruguay compared to countries at similar levels of development. With an access rate below 50%, Uruguay compares badly with other Latin American countries such as Chile or Colombia. So the impact of ownership on access may be more important than in other countries.

The existing empirical evidence on the impact of privatisation on water quality, access, and child mortality tends to suggest a positive impact.3 Galiani et al. (2005) provide convincing evidence that in Argentinean municipalities where water services were privatised, the incidence of child mortality from water-related diseases declined significantly (whereas the incidence of child mortality for other reasons remained stagnant). They therefore provide indirect evidence of improvements in water quality and access.

The empirical methodology we follow is similar to the one in Galiani et al. (2005). Using panel data around the nationalisation episode, we identify differences in sanitation rates, water quality indicators and water-related child mortality between regions that first privatised their water suppliers, and later nationalised them and those that were always under public ownership.

At first glance the evidence in Figures 1 to 3 suggests that water providers tended to perform better after nationalisation in terms of access, quality of water, and reductions in child mortality. Average sanitation rates seemed to have been increasing faster before nationalisation by those providers that were later nationalised, but the trend accelerates at the time of nationalisation. Abnormal levels of microbiological or organolpectic substances in water seemed to become relatively rarer in nationalised water providers. Similarly water-related child mortality seems to decline faster in regions that were nationalised. However, all of these could be driven by another factor, such as changes in household income.

Figure 1. Average sanitation rate in treatment and control cities

Source : Borraz, González-Pampillón and Olarreaga (2011). The treatment group (nationalised firms) are given by the continuous line, and the control group (always under the control of the public company OSE) are given by the dashed-line.

Figure 2. Average count of abnormal levels of substances in treatment and control cities

 

Source : Borraz, González-Pampillón and Olarreaga (2011). The treatment group (nationalised firms) are given by the continuous line, and the control group (always under the control of the public company OSE) are given by the dashed-line.

Figure 3. Child mortality by water related diseases per 1,000 births by treatment and control cities

 

Source : Borraz, González-Pampillón and Olarreaga (2011). The treatment group (nationalised firms) are given by the continuous line, and the control group (always under the control of the public company OSE) are given by the dashed-line.

In order to correct for this and other unobservables, we use a differences-in-differences estimator, as well as time and region varying control variables, such as average income per capita, rainfalls, and average household education. Our results suggest that the nationalisation of water services had a positive and statistically significant impact on access to the sanitation network, in particular among the poorest households. At the top of the income distribution, only households in Maldonado seemed to experience an increase in access to the sanitation network. But even in Maldonado the impact of nationalisation is clearly pro-poor with a larger impact on poor households.

Nationalisation seemed to have led to higher quality of water as well. Indeed, the impact of nationalisation on the detection of abnormal levels in microbiological and inorganic water tests is always negative and has a relatively large coefficient, suggesting that nationalisation led to an improvement in water quality.

Finally, our different specifications tend to suggest that water nationalisation had little impact on child mortality, even when we disentangle water and non-water related diseases. Indeed, in most cases, even though the coefficient on public provision of water has a negative coefficient, suggesting that nationalisation was accompanied by a reduction in child mortality, this effect is not statistically different from zero.

To summarise, it seems that in Uruguay the public operator provided a service of equal, if not better, quality than the one previously provided by private firms. This seems to suggest that on the debate over provision of water services, or other natural monopolies, the focus on public versus private ownership may be misleading.

References

Borraz, F, Nicolas González-Pampillón, and Marcelo Olarreaga (2011). “Water Nationalization: network access, water quality and health outcomes”, CEPR Discussion Paper 8415.
Galiani, S, P Gertler, and E Schargrodsky (2005), “Water for Life: The Impact of the Privatization of Water Services on Child Mortality”, Journal of Political Economy, 113(1):83-120.
Hall, D, E Lobina, and V Corral (2010), “Replacing failed private water contracts”, PSIRU (Public Services International Research Unit), University of Greenwich, London.
Segerfeldt, F (2005), “Water for Sale: How Business and The Market Can Resolve the World’s Water Crisis”, Cato Institute, June.
World Bank (2004). Reforming Infrastructure: privatization, regulation and competition. Oxford University Press.

1 Among the earliest and most well-known are the 2000 Cochabamba protests in Bolivia.

2 In 2004 the private provision of drinking water was also made illegal in the Netherlands.  

3 Although there a few studies suggesting otherwise. Barrera-Osorio et al (2009) showed that even though privatisation of water services in Colombia improved water quality in cities, it reduced in rural areas.

 

Topics: Development, Environment, Health economics
Tags: development, nationalisation, privatisation, utilities, water

Fernando Borraz
Senior Researcher, Banco Central del Uruguay and Universidad de la República del Uruguay
Nicolás González-Pampillón
Research and Teaching Assistant, University of Montevideo
Marcelo Olarreaga
Professor of Economics, University of Geneva; and Research Fellow, CEPR

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