Reforming Urban Water Systems in Developing Countries

In most of the world, urban water supply systems are public enterprises, usually part of a local government, and the recent increased interest in privatizing public enterprises has not led to reforms of water systems. Nevertheless, in about 50 cities in the developing world, the water system either has been privatized or franchised to a non-governmental entity for its operation and maintenance. This essay applies economic and political theory to identify the potential problems and advantages of private operation, and evaluates the reform experiences in six large cities – Abidjan, Buenos Aires, Conakry, Lima, Mexico City, and Santiago. The first part of the paper argues that efficient operation of water systems is politically more difficult in cities in which the marginal supply price of water is steeply increasing and in which waste water creates large externalities. The empirical section finds that reform improved performance in all cases, but the improvements were fare greater in cities in which neither of these problems were large. Moreover, it finds that the reform process was able to progress furthest in cities in which both water and safe waste disposal were relatively inexpensive. The paper concludes with suggestions for further research that would extend the analysis both to more cases and take into account more institutional variables.