Privatization and GATS: A Threat to Development?
Paper resulting from a seminar sponsored by the Council, the Friedrich Ebert Foundation, and in cooperation with the UN Financing for Development Office.
Christian Barry

September 9, 2003

Christian Barry

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Executive Summary

Over a billion people currently lack access to safe water and other basic services. This adversely affects their nations' prospects for higher economic growth, improved health care services, and higher educational levels. But while there is broad agreement about the need to reform the delivery of basic services, there is sharp disagreement over the institutional reforms needed to achieve this goal. Perhaps the most significant point of dispute is over whether basic services should be privatized. Recently, this debate has centered on whether the General Agreement on Trade in Services (GATS) ^* will affect the ability of governments to pursue pressing social and developmental objectives.

The heated rhetoric characterizing the privatization debate makes it difficult to evaluate the arguments of each side objectively. This report aims to provide a rich resource about the costs, risks, and trade-offs of different policy alternatives. The forum on which the report is based provided an opportunity for market skeptics and privatization proponents to exchange views on privatization and development in a constructive way. Reflecting this, the report explores a wide range of approaches to the reform of public services as well as the impact of privatization on development goals.

Part I presents the debate among forum participants about the costs, benefits, and trade-offs of privatization, including theoretical arguments and evidence about the impact of privatization. Part II examines important political and institutional questions surrounding GATS. The authors hope that careful consideration of the broad range of views represented at the forum will stimulate further debate on an important set of questions facing the world's policymakers.

One of the forum's chief findings was that the public and private providers tend to confront similar, if not identical, obstacles. Thus solutions associated with private provision can often be applied to government-provided services, and vice versa. Participants also felt that the issues at the heart of the debate could be addressed more effectively if they were decoupled from the more politically divisive issue of provider competence. For instance:

• Private financing. Adequate financing is essential for providing good services, especially given the large investments required for upgrading infrastructure and technology. Innovations in private capital markets, including municipal bonds, securitization, and loan guarantees can be used to increase capital flow to both private and public sectors. Yet just as public financing does not automatically necessitate public delivery, neither does tapping private financial markets for long-term investment require privatization or contracting-out.
• Subsidies. Most agree that some form of subsidy should be used to ensure that the poor are not excluded from basic services, but there are two well documented problems with this. First, targeted subsidies in particular can be administratively complex and require significant resources to implement. Inaccurate information about users can also lead to exclusion of the poor and inclusion of the nonpoor. Second, subsidies are often designed to benefit the middle class. For example, income levels required to qualify for “lifeline” tariffs for electricity can be set so high that even well-off households fail to reap any benefits.
• Regulation. Both publicly and privately-delivered services require regulation but in many cases, governments may not have either the capacity or political will to regulate any provider, whether public or private. In such circumstances it is important to ask what kind of regulatory capacity can be created in the short term, and how sustainable that regulatory capacity will be over time.
• Corruption. Privatization is notorious for inducing bribery and benefiting politically well-connected elites; but public organizations also engage in rent-seeking behavior that is pernicious and deeply entrenched. No wonder that advocates on both sides of the issue tend to invoke the problem of corruption in justifying their stance. However, there is today a growing consensus that the key to fighting corruption, regardless of the type of service provider, lies in promoting greater transparency and ensuring that citizens play an active role in monitoring the provider.

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