Is the private sector more efficient? A cautionary tale

Sumedh Rao
2015

Summary

This review finds no conclusive evidence that one model of ownership (i.e. public, private or mixed) is intrinsically more efficient than the others, irrespective of how efficiency is defined. Instead the literature suggests that the efficiency of service provision is dependent on the type of service (health, education, etc.) and other specific contextual factors (e.g. regulation, market competition).

This summary is not based on a systematic review but on an overview of key evidence in the field. It does not assess the methodological rigour of the studies cited, and it should be noted that different studies using the same data have produced conflicting results. The key challenges to comparing efficiency between public and private ownership models are the range of models (including hybrids), and variations in defining efficiency.

Most literature comparing ownership models looks at specific service sectors:

  • Health: Most of the literature identified in this review is focused on the health sector. In this sector there is no conclusive evidence that either public or private provision is more efficient. This finding is replicated across high-, middle- and low-income countries. However, the literature does highlight a difference between private for-profit and private non-profit providers. While private non-profit providers have similar levels of efficiency to public hospitals, many studies find that private for-profit hospitals have lower levels of efficiency than the other two models
  • Education: In the education sector the evidence suggests a difference between high-income countries and others. In high-income countries the limited research shows conflicting results with different studies finding in favour of alternatively public or private ownership. In low- and middle-income countries, the evidence suggests greater efficiency of private schools. Some studies on public-private partnerships suggest that a combination of public funding with private management can result in greater efficiency than other models
  • Water, sanitation and waste: Studies on water, sanitation and waste present conflicting findings. Country studies find that in some cases private ownership (or private participation) is associated with greater efficiency, and in other cases less efficiency. In these sectors, geographic and other service delivery characteristics are more likely to determine efficiency than ownership.
  • Privatisation of state owned enterprises: Studies which look at the comparative efficiency of enterprises before and after privatisation (i.e. the transfer of ownership from public to private) find that privatisation can lead to improved efficiency, but this is not always the outcome. A significant number of high-income country studies find efficiency improves following privatisation. Evidence from low- and middle-income countries is limited and more mixed. The studies suggest there needs to be additional factors (e.g. a developed stock market) or prior reforms (e.g. national banking reforms) for privatisation to improve efficiency in these contexts.

Source

Rao, S. (2015). Is the private sector more efficient? A cautionary tale (Discussion paper 10). Singapore: UNDP Global Centre for Public Service Excellence.