In early October, an unusual scene unfolded in a modern part of the capital: hundreds of thousands of Hanoians were queuing up to collect clean water from a tanker.

This wasn’t a throwback to the bad old days when water shortages were common. It was due to a polluted supply of tap water.

Despite knowing that oil waste had been dumped at the source, the supplier – Vinaconex Water Supply Joint Stock Company (Viwasupco) – continued to pump water into family homes. At a press conference, the company’s CEO even said: “Viwasupco was the biggest victim in this case.”

The case has raised questions about who is responsible for checking water quality and ensuring it is safe for use, and whether the participation of the private sector in delivering public goods is as necessary and efficient as expected.

Economists have for a long time pointed out that providing public goods is one of the key roles the State has to play in the development process.

By nature, public goods have certain characteristics that make it difficult to charge for them, and therefore private suppliers generally choose not to provide them. They are non-rival which means consumption by one user does not reduce the supply available for others, and non-excludable meaning users cannot be prevented from consuming the goods.

Clean water, power and infrastructure are among them.

Besides, the market has some imperfections. One of them is the existence of positive and negative externalities, but the externalities are not often captured in the price, so some goods may be underprovided while other overprovided from a social point of view.

Infrastructure projects related to transport, electricity and water supply or public services like education and healthcare normally have greater social returns than private benefits, so tend to be underprovided. Meanwhile, the price of goods often does not cover negative externalities such as environmental pollution caused by production, therefore they are overprovided from a social point of view.

The State needs to find solutions to correct imperfections by curbing negative externalities and promoting positive externalities.

The State also has a critical role to play in protecting the vulnerable and ensuring an equitable distribution of public goods. Growth could be hampered by civil unrest and political instability caused by lingering poverty and inequality.

However, the State also has some failings. Especially in developing countries, corruption, principal-agents and conflicts of interest are just some of the issues that prevent states from performing their functions properly.

Hence, there has been an increasing trend in public goods provision toward contracting out to the private sector and encouraging the form of “public-private partnerships” which is expected to solve both market and state failure. Still, the model is not a nostrum.

Efficiency of private sector

In Viet Nam, there was a period when the State held the monopoly over public utilities such as electricity, water and telecommunications. But facts have shown that direct interference of the State in such markets does not mean efficiency due to a shortage of human and capital resources, and poor performances at State-owned enterprises.

The development of the Vietnamese telecommunications market over the past two decades is clear evidence of the efficiency of the private sector’s participation after the State contracted out the service and promoted competition to improve the delivery of the service. As a result, people are enjoying good quality telecommunications services for reasonable prices.

However, water is a special field as it relates to environmental issues and people’s health.

In principle, competition in a free market should be the motivation for private goods providers to enhance quality. In the case of the water sector in Viet Nam, enterprises only compete when they bid for projects, not for the interest of consumers.

The risky problem lies in that, unlike telecommunications services in which users can change their provider, water consumers have no choice. The areas they live in have only one supplier. Once the water source is polluted, thousands of people suffer and struggle, as the case of Viwasupco shows.

Privatisation of water enterprises started in 2005 and gathered pace in recent years with only a few enterprises remaining State-owned, transforming the water sector from a social to a business focus.

But the Government’s process of privatising water companies “has not yet had the impact that may have been intended”, the Asian Development Bank said in its working paper 2010 on ‘Viet Nam Water and Sanitation Sector Assessment, Strategy and Roadmap’.

“Private ownership of a share of the system assets was not backed up by clearly defined and verifiable performance indicators", and therefore did not lead to efficiency gains or performance improvement, but a loss of management control and no benefit to consumers, the report said.

In the UNDP Global Centre for Public Service Excellence’s publication titled “Is the private sector more efficient? A cautionary tale”, by examining cases of various countries, authors concluded that privatisation is often, but not always, associated with improved efficiency.

The publication showed the findings of a study on the French water supply sector in 2009 that having taken the environmental indicators into account, public management was more efficient than private management.

Another study on Malaysia’s water privatisation in 2012 found there was little overall improvement in terms of water revenue loss through leakage and theft.

Though efficiency is assessed based on different definitions or approaches, the common conclusion drawn in the publication is that the efficiency of public goods provision under all ownership models depends on factors like competition, regulations, autonomy and wider issues of institutional development.

Lesson learnt

From what happened last month and from recommendations made by international organisations, the private sector’s participation in providing public goods, particularly water, would only bring targeted results if there were good regulations and institutions in place.

To resolve market failure and ensure the State performs its functions well, the participation of related agencies and communities is necessary to supervise public goods providers based on criteria like security, health and the environment.

In the water sector, to ensure tap water is safe to use, the State must issue standards and supervise the water supply system, as well as publicising test results on a regular basis.

Public goods have an influence on a large scale, thus any incidents related to their delivery can easily cause a crisis. The State must be active in taking preventive measures and respond to incidents promptly, drastically and responsibly, restoring faith in the people.

Information disclosure, transparency and accountability are factors that create healthy competition among private enterprises. We will not be able to encourage the private sector’s engagement if we let cronyism exist.

Besides encouraging private participation though incentives, the State must have strict penalties for those who violate regulations. That’s the “carrot and stick” principle.

Finally, when more and more public services from building roads to education and healthcare are provided by the private sector, the State should focus its resources on delivering pure public goods that enterprises are not able to, such as ensuring the air is breathable, better social order, safeguarding property rights and guaranteeing the rule of law. VNS

* Vo Tri Thanh is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. The holder of a doctorate in economics from the Australian National University, Thanh mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems.