Privatization As a Political Strategy: Evidence from Brazilian Basic Sanitation
Abstract: Privatization changes incentives and, as such, changes how efficiently a good or service is provided. Privatization may also be used as a political strategy, inasmuch as it restricts the discretion of future incumbents. We claim that political competition is a key variable for explaining the decision to privatize as a public service. This paper tests this hypothesis in the context of the privatization of sanitation services in Brazil (water supply and sewage collection). Based on a panel of municipalities from 1997 to 2007, we found that privatization becomes more likely the higher the political risk (i.e., the likelihood of not remaining in power) to mitigate the discretion of the future incumbent. Privatization is also more likely in municipalities in which mayors do not belong to the coalition parties of their states’ governors, which we also interpret as a strategy to reduce the discretion of political rivals because public provision is sometimes undertaken by state companies. Furthermore, our findings indicate that legislative control is relevant for promoting privatization and that electoral cycles are consistent with the decision to privatize as a strategy to reduce the discretion of future incumbents. Inasmuch as privatization is, by and large, associated with the improved provision of water and sewage services, we submit that political competition leads to better public policy in this case.
