Water for Life: The Impact of the
Privatization of Water Services on Child Mortality
Sebastian Galiani
Universidad de San Andres
Paul Gertler
University of California at Berkeley and NBER
and
Ernesto Schargrodsky
*
Universidad Torcuato Di Tella
January 6, 2003
Abstract: While most countries are committed to increasing access to safe water and thereby
reducing child mortality, there is little consensus on how to actually improve water services. One
important proposal under discussion is whether to privatize water provision. In the 1990s
Argentina embarked on one of the largest privatization campaigns in the world including the
privatization of local water companies covering approximately 30 percent of the country’s
municipalities. Using the variation in ownership of water provision across time and space
generated by the privatization process, we find that child mortality fell 8 percent in the areas that
privatized their water services; and that the effect was largest (26 percent) in the poorest areas.
We check the robustness of these estimates using cause specific mortality. While privatization is
associated with significant reductions in deaths from infectious and parasitic diseases, it is
uncorrelated with deaths from causes unrelated to water conditions.
JEL: D60, H51, I10, I30, L33, O12
Keywords: privatization, child mortality, water provision, and poverty.
*
Sebastian Galiani, Universidad de San Andres, Vito Dumas 284, (B1644BID) Victoria, Provincia de
Buenos Aires, Argentina, Tel: (54-11) 4746-2608, sgaliani@udesa.edu.ar. Paul Gertler, Haas Business
School, University of California at Berkeley, Berkeley, CA 94720-1900, US, Tel: (510) 642-1418,
gertler@haas.berkeley.edu. Ernesto Schargrodsky, Universidad Torcuato Di Tella, Miñones 2177,
(C1428ATG) Buenos Aires, Argentina, Tel: (54-11) 4784-0080, eschargr@utdt.edu. This paper has
benefited from comments by Joshua Angrist, Alberto Chong, Jonathan Gruber, David Levine, Steve Levitt,
Florencio Lopez-de-Silanes, Sebastian Martinez, Ted Miguel, Rohini Pande, Manisha Shah, Pablo Spiller
and Maximo Torero. We are also grateful to Pablo Cafiero M.D., Liliana Clara M.D., and Enrique Calderon
M.D. who provided expert information on water-related diseases in Argentina, and to Matias Cattaneo and
Juan Pantano who provided excellent research assistance.
1
At the 2000 Millennium Summit, member countries of the United Nations unanimously agreed on
a set of eight goals to reduce poverty by 2015; among which are reducing child mortality by two-
thirds and cutting in half the number of households that do not have access to safe water. These
two goals are interrelated in that clean water is critical to containing the spread of infectious and
parasitic diseases. Indeed, each year more than 3 million children die from preventable water-
related diseases (World Bank, 2002a), and a number of studies have found that access to safe
water is associated with better child health (Merrick, 1985; Behrman and Wolfe, 1987; the Cebu
Team, 1991; Esrey et al, 1991; Lavy et al, 1996; Lee et al, 1997; Jalan and Ravallion, 2002; inter
alia).
While most countries have committed to increasing access to safe water, there is little
consensus on how to actually achieve this goal. One proposal under consideration by many
governments is to turn water provision over to a regulated private sector. Governments who want
to privatize water systems are typically motivated by potential efficiency gains. They hope that
these efficiency gains will be translated into expanded access and enhanced service quality, and
thereby improve health outcomes. While there has been little privatization of water services
(World Bank, 2002a), a number of authors have reported large gains in productivity and
profitability associated with privatization in other sectors (Megginson et al, 1994; Barberis et al,
1996; Frydman et al, 1999; La Porta and Lopez-de-Silanes, 1999; inter alia).
In the water sector, however, it is not clear whether any efficiency gains from
privatization would necessarily be translated into improved health outcomes or help to alleviate
poverty. Indeed, recent public opinion polls and press articles report widespread discontent with
privatization in general in Latin America (Finnegan, 2002; IDB, 2002; McKenzie and Mookerjee,
2002; Tagliabue, 2002). Private water companies may provide sub-optimal service quality levels
because they fail to take into account the significant health externalities that are present in this
industry (Shirley, 2000). In this case, privatization of water services may affect health outcomes
negatively. In addition, privatization may hurt the poor through price increases, service payment
2
enforcement, and investment only in lucrative high-income areas (Estache et al, 2001; Birdsall
and Nellis, 2002). In this case, efficiency gains from privatization might be obtained at the cost of
excluding the poor from access to water services, and thus health outcomes of the poor may
actually deteriorate under privatization.
In this paper, we examine the impact of the privatization of water services on child
mortality in Argentina. Our study focuses on young children because they are particularly
vulnerable to water-related diseases due to weak body defenses, higher susceptibility, and greater
exposure from inadequate knowledge of how to avoid risks (WHO, 2002a). There are two main
disease transmission mechanisms generated by the lack of appropriate water systems: waterborne
diseases that occur by drinking contaminated water, and water-washed diseases that occur when
there is a lack of water and sanitation for household hygiene. Young children worldwide suffer
from several deadly diseases that could easily be prevented through the interruption of these
transmission mechanisms by access to safe and sufficient water supply and provision for the
hygienic removal of sewage (WHO, 2000). For example, diarrhea alone accounts for
approximately 15 percent of all child deaths worldwide (UNICEF, 2001). In Argentina, diarrhea,
septicemia, and gastrointestinal infections are three of the top ten causes of death for children
under five (Ministerio de Salud, 1999).
Our analysis takes advantage of the fact that local governments are responsible for
delivering water services and only some municipalities privatized those services. Between 1991
and 1999, about 30 percent of municipalities covering approximately 60 percent of the population
privatized their water services. This variation in ownership across time and space provides a
potential instrument to identify the causal effect of privatization on child mortality.
A major methodological concern, however, is that local governments choose to privatize
water services, and that choice may not be orthogonal to unobservable factors that also affect
mortality. We address this concern in a number of ways that lead us to believe that the link
between the privatization of water systems and child mortality is causal.
3
In the end, despite the concerns about potential negative health effects, we find that the
privatization of water services is actually associated with a reduction in child mortality of 8
percent. Moreover, we find that most of the reduction in mortality occurred in low-income areas
(26 percent), where the network expansion was greatest. Finally, we check the robustness of
these estimates using cause specific mortality. While privatization is associated with significant
reductions in deaths from infectious and parasitic diseases, it is uncorrelated with deaths from
causes unrelated to water conditions.
1. THE ECONOMICS OF WATER SERVICE DELIVERY
Water systems include both the supply of clean water and the treatment and removal of sewage.
These services are a natural monopoly involving large fixed costs and significant economies of
scale (Noll et al, 2000).
1
There is typically little competition to a well functioning water system
from alternative sources (Foster, 1999; Estache et al, 2001). The main alternative is household
self-provision through pumped wells, rainwater catchments, cesspools, and septic tanks. Self-
provision suffers from low quality and high cost (Abdala and Spiller, 1999). Similarly, the sale of
drinkable water from private vendors is substantially more costly and therefore does not present
serious competition either. Finally, the average asset life of water systems’ physical plant is very
long and therefore impedes any potential dynamic competition.
The water sector is also characterized by the presence of significant externalities. Most
water-related diseases are contagious. This generates positive externalities in the provision of
clean water across society. Similarly, the proper elimination of sanitation residuals and treated
industrial waste prevents negative externalities through the pollution of natural bodies of water
and other natural resources.
1
For example, fixed costs represent more than 80% of water service costs in the United Kingdom
(Armstrong et al, 1994).
4
Another special feature of water supply is that, as human life depends on access to
drinkable water, the demand for water is perfectly price inelastic at survival levels. Of course,
demand exhibits some price elasticity at levels for which water is used for other non-survival
household and productive uses.
These features -natural monopoly, presence of significant externalities, and inelasticity of
demand- have historically justified public intervention in the water sector. Most countries supply
water services through the public sector, and private entry into water provision has been limited.
However, there are growing calls to consider allowing a regulated private sector to deliver water
services (World Bank, 2002a).
Private supply has the advantage of providing strong incentives for cost reductions and
other productivity enhancements. In contrast, these incentives are weak under public ownership,
where typically agents cannot reap the results of their effort and innovation. In fact, empirical
evidence from several sectors strongly suggests that service quality, productivity and profitability
rise significantly following privatization (Megginson et al, 1994; Barberis et al, 1996; Frydman et
al, 1999; La Porta and Lopez-de-Silanes, 1999).
Nonetheless, the weak efficiency incentives in public firms might be tolerable when cost
reductions by private suppliers come at the expense of undesirable quality deterioration or
reductions in access by the poor. In particular, unregulated private providers may undersupply the
socially optimal quality of water in the presence of externalities because they fail to take into
account the marginal social benefits in their decisions. Similarly, private owners may exclude
low-income households from the network by raising prices, strictly enforcing payment, and
concentrating their investments in high-income areas.
However, the fear of quality deterioration or access exclusion can only be genuine when
supply conditions are non-contractible (Shleifer, 1998). In the water industry, information
asymmetries in service quality are relatively unimportant, and regulatory agencies can monitor
