Markets involve companies losing contracts

By Alex Singleton | 25 May 2005

The hard-Left World Development Movement believes that the ending of a City Water Services's contract in the city of Dar es Salaam is proof that water privatization doesn't work. Government officials say the contract is being ended because the company has failed to fulfill key provisions of its 10-year contract.

Actually, it is proof that contracting out has considerable merit. State-provision of water in developing countries has been a complete failure, riddled with corruption and inequality. When private companies bid in an open, competitive process and they don't deliver, it's easy to get rid of them. When state provision fails (which in Africa is pretty much everywhere) there is no obvious mechanism to change supplier. The fact that companies can and do lose contracts is a central part of the market economy. This process makes the market work.

As we have pointed out previously, water privatization is overwhelming good for equality and living standards. In Argentina, the government enacted the privatization of local water companies covering approximately 30% of the country's municipalities. Sebastian Galiani of the Universidad de San Andres and Paul Gertler of the University of California, Berkeley and National Bureau of Economic Research, found that child mortality fell 8% in the areas that privatized their water services and that the effect was largest (26%) in the poorest areas. They found that privatization was associated with significant reductions in deaths from infectious and parasitic diseases.