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Privatizing Waterworks: Learning from the French Experience *
Author(s) -
Hanke Steve H.,
Walters Stephen J.K.
Publication year - 2011
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2011.00338.x
Subject(s) - natural monopoly , bidding , monopoly , economics , water supply , public ownership , scale (ratio) , water industry , service (business) , business , market economy , industrial organization , microeconomics , economy , physics , quantum mechanics , environmental engineering , engineering
In this pair of articles, the first of which was published almost 25 years ago, two distinguished economists make and then revisit the case for privatizing the water supply. While agreeing with the general assessment that waterworks are “natural monopolies,” the authors show that privatization of such enterprises need not lead to the standard monopoly outcomes of above‐competitive prices, reduced output, or inferior service. As evidence, the authors cite the French experiment with water privatization that began in 1782 with the Perrier brothers' 15‐year contract to provide water for Parisians. Today, an estimated 80% of the French water supply is managed by private firms. And, as the French experience demonstrates, the benefits of large‐scale, single‐firm operations can be obtained at competitive prices by means of a system of franchise bidding in which ownership and/or management rights are awarded to the firm that offers the public the best terms—along with a credible commitment to make good on them.