Here is my piece for Forbes.com on the privatization of residential water supply in the Third World. Excerpt:
And no, I don’t mean a water
concession with a price regulated by the government, I mean true
laissez faire in water supply. No price regulation, no rate of return
regulation, no government ownership of assets, no political pressure to
keep prices low. Water companies should be allowed to maximize their
profits, and because supplying water is nearly always a monopoly, they
should be allowed to make monopoly profits. I know the idea sounds
crazy–to an economist, water supply is a classic "natural"
monopoly–but on closer inspection the other alternatives might be
worse.
And more:
If complete deregulation
is too radical for you, consider the interesting compromise proposed by
the economist Jeffrey Sachs, currently heading the Earth Institute at Columbia University.
He suggests that the private company be allowed to charge high prices,
but only under the condition that it allocates a minimum amount of
water for everyone, either for free or at a much lower price. Basic
water needs would be met, and the company still might make a profit.That said, I’m less worried about high prices than Sachs. Let’s say
the new water prices were so high as to capture all the benefits that
buyers would receive from the new supply of water. We can expect much
lower rates of diarrhea and other diseases, if only because the water
supplier can charge more for cleaner and safer water. The resulting
decline in disease means that children will die less frequently and
adults will be healthier and more energetic. Those long-term social
benefits are of enormous help to poor communities, even if high prices
take away many of the initial, upfront benefits of the new water
supply. In other words, we should consider radical privatization
precisely because water is a public good and because clean water is so
important for long-run economic growth.
Read the whole thing.
What I don’t get here is this. What incentive does a water monopoly have to increase water quality, or coverage for that matter? There is the experience at Cochabamba, after all. The poor people get fed up with poor monopolized service and chuck the company out, even if it brings down the government.
Would you advocate this for rich or middle-income countries? I don’t think my own local water service would improve if it was supplied by an unregulated monopoly. So is this only in places where there’s no piped water?
And why is it preferable simply to reducing regulation, and raising price ceilings?
I’m sure mine would improve — here in Atlanta, we have regular problems with old water mains breaking and interrupting service, washing out roads, sometimes flooding houses, etc. yes, the govt is trying to “do something”, but a private company with liability risk would never have reached this point, and it would have an easier time raising prices than the government is having raising taxes.
This is only an example of a nongovernmental entity given the ability to control life and death.
The body does not take well to being told “long term”. It dies, presuming that the privatization is not stopped on a permanent basis.
Nice piece, Tyler.
A Tyhkyy asks: “PS: why charge more for cleaner and safer water, if you can charge more for the same, or worse, water? Stumps me.”
Because the amount someone is willing to pay depends on quality. The higher the quality, the higher the demand price. Take the demand curve that you think exists for a given lousy quality. Now raise the quality. The demand price–the price the person is willing to pay for that unit–rises.
Regarding the ability to charge more for cleaner water:
A monopoly controls the supply of a good, not the value or demand of a good. A profit maximizing monopoly would always want to add more value to a good if that value is greater than cost of adding the value (if they can capture that value). The water monopolist would have every incentive to increase the water quality and increase their profits.
This example is very similar to the I.O. example where a monopolist who can perfectly price discriminate chooses the socially efficient level of production, they just capture all the surplus value.
Please note:
When I say they can’t control the value of a good I mean the value as perceived by the consumer.
On that note, why shouldn’t an unregulated private water company use its excess profits instead to buy the local electrical utlity, and monopolize that as well. And why not use the excess profit to lobby the government to do away with regulation in electricity as well? Before long, it will have bought everything and monopolized everything. With any luck, it will offer bundled discounts to suffering consumers.
It’s a neat argument, but I feel I must be missing something. I can certainly see how it could lead to more water availability (and the Portugese pricing system sounds great for places with water scarcity), but I can’t see how the market would encourage higher water quality. Here’s the two things that are bothering me (please excuse my misuse / abuse of terms; I’m no economist):
1. Just to be able to survive, everyone needs at least enough water to drink. It’s not as if anybody would be in a position to choose not be a water customer if they thought the price was too steep or the quality to poor.
2. Then there’s the extra water we use for non-essentials – like the water we use to have a flushing toilet, or to water our flowers. These uses don’t require the water to be all that clean. So shouldn’t low prices push up demand for water way more than higher quality water would? In fact, shouldn’t higher quality (more expensive) reduce demand? And wouldn’t that mean it would be in the water company’s interest to sell cheap and nasty water?
Am I missing something, or is the point that ‘cheap and nasty’ water would at least be better than the current situation?
David: that’s assuming that the demand still exists at the higher price, which is the sticking point here. You or I could afford paying twice as much for 50% cleaner water (say), but third-world poor people can’t.
But….but….but….the only thing that matters is the bottom 1%! What about the bottom 1%????
As A Tykhyy pointed out, why would the private water monopoly give cleaner water? After all, wouldn’t it be more profitable to hand out the same dirty water to more people (and charge higher prices to boot)?
After all, the demand curve for water is perfectly inelastic. Its not as if there are substitutes, and we certainly can’t go without if prices rise too high.
This is incredibly misguided.
Why wouldn’t the private monopoly simply put its money into advertising, spend a decent sum on pushing it’s already-available water as “The cleanest, most pure water around,” and skip all that expensive investment in finding new water sources and purifying the water it has? Then, once it’s sucked all the money it can from the populace, the owners can run away and let the public take over the ravaged infrastructure, with years of deferred maintenance.
If I was running a private monopoly, maximizing profits, that’s what I’d do.
The alternative, of course, is massive amounts of regulations, price-fixing, and stuff like that – which results in a private enterprise indistinguishable from a public utility.
Tyler,
An article in today’s East Valley Tribune reports that the City of Scottsdale is considering taking over Arizona American Water Company after the company found very high levels of (possibly carcinogenic) TCE in the drinking water. The twist in the story is that the City privatized the water supply in the first place because of similar violations it committed ten years ago.
There’s the usual “profit before safety” rhetoric from local politicos. Here’s the URL:
http://www.eastvalleytribune.com/story/118938
Anyway, this is the sort of thing you will have to address in discussions of water privatization here and in other developed countries.
Sorry, I don’t know how that happened! Guess I don’t have enough experience posting.
The above comment references “human rights” in areas where none are granted/enforced/whatever you want to call it.
This is silly. It is a nonsuggestion.
It is in essence the following: “water is a human right, therefore we shall pass a law guaranteeing it.” Moralistic or legislative demands don’t generate goods, public or private.
If you’re not willing to entertain a plan, shut up and stop mewling.
FS,
That’s one of the conceptual downsides of privatization. Realistically though, it can’t get any worse than the absolute zero service level currently provided, can it?
Tyler’s argument is predicated on a monopoly finding profitability. If one can’t, privatization cannot rescue this failed system.
MK: yes it can get worse, when the water company either closes access to the now private water sources, or simply extracts enough water that too little remains for those who aren’t its clients. A water company doesn’t *produce* water, after all (excepting desalination).
I’d really like to buy Tyler’s argument, but, what gets me, is that his argument is all based on theory. Where are the successful occurrences of water privatization? The American Prospect has an article by Wenonah Hauter in the June issue which discusses six examples of water privatization being a failure. Where are the success stories?
Why not just give the water away to residential users (whose use falls below a certain threshhold), and charge farmers and industry a higher rate? As I understand the current water situation, residential use constitutes but a tiny fraction of water use and agricultural users pay a way-below market rate …
Why is water provision a natural monopoly??
I agree with water privatization. I just don’t see any need for monopoly franchise and I also don’t believe water provision is a natural monopoly
Time for all of you Sci-Fi buffs to re-read the Dune Chronicles of Frank Herbert (1920-1986) or at least “Dune” and “The Chapterhouse of Dune,” certainly the latter.
What a load of horse-crap Tyler’s article is.
He says: “The solution for the poorer parts of the Third World is deregulation of the market for piped water, combined with the enforcement of property rights.” (emphasis added)
This is easily interpreted as follows:
- They currently have access to bad but free of charge water
- For the monopoly to work, the bad but free of charge water becomes the property of the monopolist.
- Incentive for the monopolist to improve the quality of the water? Zero. Zilch. Nada.
Of course, Tyler will argue that that is not what he meant. But in the absence of any qualifications to the statement in the article, it’s too late for that.
I see a lot of comments from people looking at this issue through an economical lens. The problem is that we are talking about people. Put yourself in the shoes of the mother of a family of 4, living on less than a couple of dollars a day to supply food, send kids to school – which are already fee based in most developing countries – keep their house intact and then to be charged to live. Water is an essential part of life. If you charge people who can’t afford it – no matter how you argue – you are telling them they must pay to live. Families would far rather drink dirty water, which despite a few peoples arguments to the contrary they do not all know it is unsafe, then have to pay for clean water. Sure the poor are going to steal it, they will cut off the measuring mechanism, or cut off the pump completely. We would all do the same thing. It is easy for people to comment on economics because they don’t have to live with the consequences. If you are arguing about economics then you have likely either received a high school education or more than likely gone on to university making you part of the top 1% of the global population. You probably live in the western world, are able to afford 3 square meals a day, a roof over your head, etc. You can judge and argue all you want for water to be privatized because to you it will make little difference. But it will mean a great many people will die, more than from those who suffer from diarhea or cholera, or even dengue. So go ahead and buy your stocks in Suez or Veolia and become just another complicit part of the problem. OR start arguing about why it should be a basic human right to have access to free and clean water. Stop coming up with solution for why not and start arguing why.
I agree with Russel here. The economic ignorance of this comments thread is astounding, the worst I’ve seen on MR. You can yell that clean water is a “right” from the rooftops, but the poor will still have no access to it under government-run systems in Africa. You may feel it’s wrong to profit from providing a basic human right, but people still working much harder when earning something for providing a service. The benevolence of the butcher still does not put meat on our tables.
And finally you may assume that the corporation providing the water, being that its called a corporation, is inherently evil. it would obviously do everything in its power to even intimidate people from taking water from their current source. There are two problems with this, though. One, law enforcement exists to stop such intimidation. Second, this scenario assumes the corporation would have no scruples about old-fashioned coercion. Such a corporation just might see better results with just pointing at gun at somebody for their money. That method is far easier than running an honest business just to intimidate somebody down the line.
I would, however, provide a modification to Tyler’s plan. For true natural monopolies of infrastructure, I would instead have the water suppliers bid on a project in terms of number of years of monopoly, after which government would take over control of the infrastructure. In a competitive bid, the monopoly profit would then equal the construction costs.
There’s much confusion in this thread with regards to what one understands as ‘privatization’.
Tyler’s assumption is that there is no service and the people drink water out of puddles or whatever. So you allow private companies to ENTER the market, INVEST into proper infrastructure and privide water at any price the want to set.
What the commenters understand when they hear ‘privatization’ are all the real life cases when the government decided to SELL an EXISTING municipal water company to some foreign company (Cochabamba/Bechtel). The obvious result was that prices have risen but the quality of service has not and no serious investment was made.
Tyler should understand that the outrage is legitimate: In effect the government in those cases has sold Affermage to traitants.
So what is necessary to get Tyler’s proposal working is only the basic enforcement of rights (nobody is allowed to damage my pipes and I can cut anyone of my network if they don’t pay).
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