ABSTRACT
Privatization is argued to provide better incentives and monitoring through the clear designation of property rights, while also reducing damaging state interventions. Improved efficiency as a result is then seen to encourage the private owner or operator to undertake much-needed capital investment. However, privatization does not necessarily lead to the clear designation of property rights, reduce state intervention or enhance the private financing of capital investment. This is because the private sector is often unable or unwilling on its own to meet the high cost of capital investment associated with typical privatizations (e.g. sewerage and water services). This is especially so in developing countries where there is in addition a shortage of entrepreneurial capacity. Furthermore, the ability of the private sector to meet capital investment targets will in part also depend on projected revenues based on cost-covering tariffs. However, cost-covering tariffs are usually politically unfeasible for many critical services. High capital costs and the inability of tariffs to cover high operational costs will then require state subsidies which in turn dilute incentives associated with private ownership unless they are combined with additional and credible incentives and sanctions.
