Capture and corruption in public utilities: The cases of water and electricity

Abstract: The paper focuses on private provision of public utilities services located in poor countries with a special attention to capture and corruption issues. It confronts Auriol and Picard (2002) optimal policy regarding private sector involvement in public utilities with empirical evidences on water and electricity in SSA. Consistently with the theory participation of private unregulated firms to the supply of services for the middle class and the poor is fairly common in SSA. By contrast service to the rich is achieved by public utilities. Theory suggests that prices should be high so that the public firms make a profit. Yet piped water, and to a lesser extent electricity, are heavily subsidized. This signals a capture problem by the ruling elite. Since the ruling elite also designs and implements privatization programs, there is concern about the optimality of privatization programs. The paper analyzes the social cost of inefficient (corrupted) privatization. It is non-monotone in the opportunity cost of public fund. Because of the fiscal loss it represents, privatizing profit centres of public firms entails huge social costs in very poor countries. There are hence socially good privatizations and socially very bad ones. The good ones are hard to formalize in practice because they are not very lucrative for the private sector. By contrast the bad ones are easier to achieve. This explains that they certainly dominate