Have the French shown that water privatization is dead?

Some time ago, @ModeledBehavior has requested comment on this article.  Excerpt:

Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control.

So what’s up?  I see it this way.  For advanced water systems, there is no cost advantage to having a privatized system.  It is a regulated monopoly and over time it acquires skill in manipulating the political process, most of all its regulators.  Why expect lower costs and prices?  A wide variety of studies of this topic, including studies by “market-oriented” economists, find no cost advantage for the private sector in this setting.

For very poor countries, very often water privatization would in principle be a good idea, since the public sector is not supplying much piped water at all.  Monopoly is better than carrying a bucket on your head, and you still can carry the bucket if you wish.  Yet privatization also won’t get very far in many of these cases.  One reason is that there is no way to make people — many of whom are non-registered and lacking in assets — pay their water bills, and not enough legal infrastructure to prevent them from cutting into the pipes or otherwise going rogue.  You shouldn’t “blame” privatization here, but still it may not be a useful option.

Finally, there is a sweet spot in the middle, often for reforming or middle-income countries.  In those cases water privatization can mobilize private capital rapidly and expand water coverage.  It often brings higher quality water, higher quality connections, lower rates of unaccounted-for-water, and higher prices.  Not all cities desire that trade-off, but it is there for the taking.  Some of these privatizations are done fairly well, others are done very poorly, such as in Cochabamba, where the “privatization” gave the company property rights over previously privately held, decentralized water sources of the poor, such as collected rain.

As long as there are countries in this middle income range, water privatization is not dead nor should it be.


Wow. First non-spam comment :)

1) The original quotation is wrong in its emphasis, since it reflects the wishful thinking of anti-private crusaders. One "re-municipalization" corresponds neither to "rapidly moving in the opposite direction" nor a flip in economics. The Paris deal was driven by a political agenda to "take back" water and -- more important -- reduce rates for populist purposes. We shall see if the system gets its necessary maintenance in 20 years -- a period that's conveniently longer than most political careers.

2) Your comments about rich, poor and middle income are MOSTLY correct. Rich: Private firms are better at technology transfer and incentives; regulatory capture can happen, but so does political capture. Poor: There are many working payment mechanisms such the sustainable (centralized/decentralized) delivery models can function. Middle: Remember that Cochabamba was "restored" to the people, resulting in a return to the same corrupt, incompetent public provider.

Forgot the bottom line: No.

Yup, the question is: what is worse, a private company controlling the government to extract rents, or the government handing out rents in exchange for votes.

There's no happy ending here.

A judgment call, to be sure. I only knew a few Cochabambinos so I won't speak for them. In the Chaco, however, where the natural gas fields are, they to a man cited the Cochabamba privitization attempt as cause for the nationalization of their energy industries.
A 100% anecdotal comment, I know, but how often does one get to say Cochabambino and have it be on topic?

Maybe the trick is to switch systems every couple of generations. At first, the new regime (whether private company or government) will have moderizing, reforming zeal, then they will learn how to run the utility efficiently, then they will slowly ossify, then there will be calls for reform, control of the utility can be transferred, and the process will begin anew.

"For very poor countries, very often water privatization would in principle be a good idea, since the public sector is not supplying much piped water at all. . . . One reason is that there is no way to make people — many of whom are non-registered and lacking in assets — pay their water bills, and not enough legal infrastructure to prevent them from cutting into the pipes or otherwise going rogue."

Almost all of the really characteristic differences between first world countries and third world countries involve a failure to deliver services that are commonly provided by local governments in the United States and many first world countries.

Third world countries don't lack for unemployed men and women who can dig ditches to deliver water, detention ponds to store water, and latrines to improve sanitation with shovels, who can guard water systems and wells sufficiently to deter run of the mill water poachers well enough to make the system function, who can listen to parties to local water use disputes and provide authoritative resolution of those disputes, who can make bricks with simple manual tools or cut down trees with axes to make construction materials, who can maintain gravel roads without resort to heavy equipment or power sources other than work animals, who can provide the lion's share of the labor necessary to build a water pipeline, who can build simple and ineffcient but functional windmills with local materials to pump water out of wells or rivers into detention ponds, who can regularly skim or stir detention ponds to prevent mosquitos from breeding there, who can drain swamps that are breeding sites for mosquitos near populated areas, who can collect trash and shovel dirt to cover landfills, and so on and so forth ad nausem.

A huge proportion of what third world countries lack can be done without very much imported labor and without very many imported materials. And, while the locals may lack money or much moveable property, they generally do not face of collective shortage of able bodied people with time on their hands. The notion that one can't have collective community action without money is of course not true. Community service is the world's oldest form of taxation and many American counties gave property owners the option of paying their property taxes in kind with labor rather than in money until at least the early 20th century. One can sell water in exchange for labor spent in unskilled work building or securing water infrastructure as well.

The pioneers in the U.S. used events like barn raisings when nobody had enough money to build one. My aunt and uncle at one of Tanzania's first private colleges (perhaps the first at all) used the same philosophy that it the motto of my own undergraduate alma mater, "learning and labor". The students there, literally, built almost all of the physical infrastructure of the college right down to manufacturing the bricks, providing probably 95%+ of the labor involved in lieu of tuition, and relying to the fullest extent possible on local materials.

The first order problem in most very poor countries is not so much lack of resources in terms of labor and in terms of materials, it is an inability to organize local communities to mobilize to provide what they need for themselves, a lack of anyone with a clear vision for how to get from where they are to where they could be if they mobilized their labor and local materials to the fullest, and a lack of even a tiny number of people in the community as a whole who can design infrastructure and social institutions that can be accomplished (perhaps not terribly efficiently) with overwhelmingly local labor and materials. Economic issues like trade policy, monetary policy, and monetary tax policy are pretty much irrelevant in these communities until they can be organized and mobilized. Debates over providing services in the public sector v. the private sector are vacuous when the only sectors that exist in any meaningful sense are the family sector, sometimes the local tribe or band sector, the criminal gang sector, the well meaning interloper sector, and the national government in the capital sector. The poorest countries have neither functional and meaningful local government in the sense that a Westerner would understand it - when the desparately need powerful ones, nor civil society consisting of well organized for profit or NGO firms at anything larger than an extended family level (many of which engage in subsistance food production), in much of their territory.

Missionary Christian churches and fundamentalist Islamic religious institutions are so transformative in these places (and while I'm an atheist with a distaste for both, I am the first to acknowledge that in much of Africa and elsewhere in the Third World, these religious institutions are incredibly vibrant and transformative institutions) mostly because the fill a gap in the pre-existing society's to organize and mobilize its own labor resources. Calling the shortfalling that these regions have a "lack of legal infrastructure" is like calling the Grand Canyon a ditch that water runs though. It may be technically true, but it fails to convey the real nature of what is being described. A lack of legal infrastructure implies, by omission, that other aspects of an "organized society" are present, when they really aren't. What really distinguishes undeveloped countries, the "poor" ones, from the ones in the middle and at the top, is that they are disorganized and atomistic, and hence are unable to marshal their resources. These are societies that cannot consistently produce the kind of outcomes that even a fifteen year old boy scout leader supervising a troop of a couple dozen middle schooler with a single middle aged guy to turn to for advice now or then could usually achieve (indeed, in some countries people who were boy scout leaders as kids at that scale are now a decent share of the national political and economic elite). If these communities could figure out how to be as organized as the illiterate Anasazi were in the pre-Columbian 8th century CE in the Four Corners area, in a generation or two they wouldn't be poor and would soon be growing as fast as China is now (and sustained exponential growth is an amazing thing).

To be clear, I'm not saying that the individual people in third world countries are inherently incapable of organizing themselves and mobilizing their resources, or that they are incapable of assimilating and modifying to their own designs a vision of what a functioning local community looks like, or that they are too lazy to roll up their sleeves and work hard to achieve a functioning local community if they had someone to organize then, or that they are incapable of acquiring the knowledge of the rudimentary elements of social organization and engineering necessary to make it all come together. The intelligence and the willingness to work are there. But, the internalized knowledge of how to organize and mobilize a community with very few resources, what achievable ends they could be mobilizing to do that would make life more properous for everybody, some fairly rudimentary knowledge of how to build some basic infrastructure and equipment that they need, and the institutions to spread all of those components of knowledge from one generation to the next, simply aren't there. And, until one crosses that hurdle and has a country full of local communities that are well enough organized and mobilized to carry out basic local government type functions that will provide employment and create value, expecting any higher level governmental or private for profit company to work very well is wishful thinking.

Thinking about third world economic development in terms of private sector v. public sector is missing the point.

Why not a truly privatized system? i.e. a competitive system.

Natural monopoly. Hard to compete with those...

That's easy to claim, but difficult to prove. What makes it a natural monopoly? Is the bottled water industry a natural monopoly? Why haven't other privatized essentials been "naturally" monopolized (i.e. agriculture)?

Pipes and pumps and maintenance and the installation costs make it a natural monopoly. Hong Kong has a doubled-up water system, but only because the cost differential between saltwater and freshwater, in a place where freshwater is not naturally occuring, makes the dual infrastructure economical. (The saltwater is used for the toilets.) It's hard to imagine two different private freshwater systems would create enough valuable diversity to justify the double (or triple) infrastructure of competition.

Take agriculture as an example. Even under rapacious or corrupt water systems (Southern California eg.), do you hear of farms trucking in bottled water (or tankers of water) for their crops in order to avoid the water barons? Nope!

Trucking water is inefficient, but if you give private companies organized to transport water the power of eminent domain, there are multiple reasonably practicable ways to get water from point A to point B.

You can use a pond or tank or cistern or water tower at point B to eliminate the need to have the point A to point B water transportation system functioning 24/7/365. As long as the destination is at a lower elevation than the point of diversion and the temperatures aren't below freezing all year long, you can transport the water to point B when the temperatures are above freezing in an above ground pipeline and you only have to use a pump until you have a flow through the pipeline from point A to point B established, after which the laws of hydraulics cause the flow to continue like a siphon without powering the pump. If your source has a strong enough water flow to get enough water moved in a partial year, and an unobstructed path across part of your route has considerable value at least seasonally, you can even dismantle the objectionable part of your pipeline in the off seasons and rely on your storage facility at the destination point.

You also don't have to make an all or nothing choice between government owned or for profit private corporation owned. The most common form of organization is a consumer cooperative where each user owns shares of the company proportionate to his right to consumer the water available to the company, and then has a duty to pay costs of operatioon proportionate to his use of the water.

In agricultural uses in arid areas the key economic issues turns out to be the availability of water to consume, since agricultural users could easily, collectively, use many times the total amount of all of the water that will ever be available if they had access to it and did business the way farmers in less arid areas do, and not the cost of delivery which is trivial relative to the cost of buying the water itself. Most arid region farmers could dramatically increase their agricultural output if they could simply gain access to more water to irrigate their land. Aggregate agricultural production in the arid west is more strongly limited by water availability than by land availability. Land that can only be used for dryland farming is much cheaper than land that can be irrigated because it has water availability. The failure of Eastern politicians to appreciate this produced many of the pathologies associated with the implementation of the Homestead Acts in the West.

The natural monopolies, to the extent that they exist are much more powerful in urban areas where it is impracticable for an individual property owner to have their own water storage system at the point of delivery, pipes have to be underground as a result in places where it gets below freezing some of the year, and the economic value of the dirt occupied by the water pipes is much greater than in agricultural settings. The Hong Kong example is particularly ironic because it has a dual system despite having some of the most expensive dirt in the world.

It's a natural monopoly because the cost of double (or more!) infrastructure is much higher than any potential savings. Having two competing systems will tend to double maintenance-costs too.

"...One reason is that there is no way to make people — many of whom are non-registered and lacking in assets — pay their water bills..."

Pre-paid electricity and water meters already exist and are being used

Politics is not willing enough to allow companies to cut people off to please the companies enough to get them to invest a lot upfront. I agree these solutions sometimes work, note my original wording, but they are hardly slam dunk solutions.

Wisconsin "solves" the problem by placing unpaid utility bills on real property taxes. Utilities do not pursue impolitic collections, because a homeowner will pay along with property tax or lose the property to lien foreclosure, trigger pay-on-demand on the mortgage, or pay upon a sale.

This solution sucks for landlords, who have unpaid tenant utilities appear on property tax bills months after tenants have vacated. The utilities refuse to use their muscle to collect (or even report to credit agencies) and landlords cannot hold security deposits beyond 30 days. Guess how tenants respond to immunity over their last utility bills?

"Monopoly is better than carrying a bucket on your head, and you still can carry the bucket if you wish."

Not necessarily true. Among the poorest regions of Manila, for example, the private monopolies (Suez is one of them) have made it practically impossible — through lowered and qualitatively damaged aquifers as well as through brute force — for locals to draw water from wells that communities had used for generations. In such areas, it's impossible to fill a bucket, let alone carry it on your head.

I don't think the "lowered and qualitatively damaged aquifers" were because of Suez though. In a lot of densely populated third world places there just isn't enough "easy" water to fill buckets from wells any more. Suez or no Suez.

Key quote: "We also promise that prices would be stable."

My experience with municipalities is they undercharge for services whether it be water or parking. This hurts them in the long run, but they place political concerns over financial ones.

I spent many years, as an environmental engineer, working on privatized systems for public infrastructure, such as water, wastewater and solid waste. These systems can bring significant efficiencies but it's not because the private sector is inherently better than the public sector. Indeed, the private sector is generally burdened with paying taxes and the need to earn a profit, neither of which the public sector has to worry about.

How then can privatization save money? By bringing competition to an area that has generally been thought of to be a natural monopoly. It can be remarkable to see the changes that suddenly become possible when government workers realize that they actually could lose their jobs and therefore have to compete.

Of course the private contractors will immediately try to capture the system. In order for this sort of thing to succeed you must have strong governance to keep the contractors in line. In the US this can and does work. In LDCs I am not so sure.

In general, government-owned utilities face two pressures: price minimization and employment/wage maximization.

Water and sewer are important to all households. As a result, governments face pressures to keep rates low, which is achieved essentially by gutting capex budgets. And with a water or sewer system, this can be done for quite a while. In addition, public workers tend to be able to compel politicians to provide them higher wages, large pensions and secure employment. We have many, many examples of this in the US, Vallejo, Ca., being just one of them. So sewer and water operating expenses can really creep up over time.

So, after a while (a few decades or so), the municipality finds its must support sewer or water operations, possibly from general tax revenues. Further, it lacks the funds to make needed investments to maintain or improve the system. That's when the infrastructure tends to be privatized.

Importantly, this may not reduce rates to the consumer at all. In Hungary, I worked on this issue for the Budapest sewer system. I recommended a tripling of rates, which was in fact enacted. Water use (also from water, and not just sewer, charges) fell by a third.

On the plus side, these rate adjustments funded investments in water treatment which greatly reduced the amount of raw sewage discharged from Budapest directly into the Danube.

This reminds me of a funny story from my sister in law. She is a civil engineer and has been involved in Engineers Without Borders in a small village in Guatemala for the past few years. In their current situation, the village only gets water maybe a few hours a day, and so everyone leaves their taps open all the time to get whatever water they need. EWB is involved with the government to put in a new water system, but as part of the deal they want to bill the users some small nominal fee, really just so people don't leave their taps open and waste water - and the system does not have the capacity to deliver to all customers simultaneously, nor do the ones in the US. However this new project is stalled in its tracks because the village will not agree to water fees because "Its not fair that the poor families (the ones with the most kids, and hence the ones that use the most water) will have to pay more than the rich families (the ones with fewer kids)".

BTW the fee really is almost nothing, the entire system is being donated - they just need a way for people to not waste water.

Dan, A pricing option would be to give a "chit" or credit to all families for x amount of water based on family size, and charge for the marginal consumption over the "chit" as a way to appease the locals. You get to the same result, because the chit is not really free, and the marginal pricing above the chit reaches high volume indifferent consumers. She could also have a hook up fee, where people could pay the hook up fee over time and have it assessed to the value of the house so it could be recaptured upon sale if the person did not pay.

So much of pricing is just illusion and packaging.

Could they put in the new water system, but just operate it at certain hours of the day, making sure it is shut down for the same hours the old system couldn't function?

Then there is no worries about wasting water due to families leaving the faucets on all the time to capture the water during the limited period the system is functioning, because the new system will function during limited periods as well.

Of course, the new system will give the capacity of operating around the clock, or close to it, so once the users have enough confidence in the system to agree to pay fees for water usage, or at least not leave the faucets on all the time, then the new system can be switched on for longer periods.

Taxes and profit are a burden for the public sector utilities too. Freeing the public utility from them means a subsidy, and then the taxes, interests and managerial costs have to be taxed from elsewhere.

One reason is that there is no way to make people — many of whom are non-registered and lacking in assets — pay their water bills, and not enough legal infrastructure to prevent them from cutting into the pipes or otherwise going rogue.

In large swathes of India this "privatization" has already occurred but not via pipes, road-tankers.


Would you extend these same generalizations to electric and gas utilities? Why or why not?

The privatization of oil was a similar error. The proper concept of a utility is that it works much better in the long run.

Every situation is different as Tyler acknowledged.

The real trade-off depends on what's the objective of the water system: 1) Serve the ones who can pay, 2) Serve the whole population in a city (full coverage). It really does not matter if the water system is public or private. Most decisions are based on this big question.

There is a difference between privatization and liberalization. Without the latter, the former is not of much use and can indeed be harmful. There are ways to introduce more competition into the sector with the help of adequate regulation. Due to the character of the local pipe infrastructure as a monopolistic bottleneck, regulation will probably always be needed to prevent exploitation of the consumers. However, while keeping fees for using the local pipe system low, regulation can also lower the cost of the product transported through the pipes by mandating nondiscriminatory access of willing water-suppliers to the local pipe system. Further space for more competition can be created by allowing neighboring pipe-infrastructures to make inroads into each other's territories by laying pipes.

David is right. The water system is a political football. SOEs traditionally hire too much labour, charge too low a price, and are otherwise used to achieve political objectives.

Only a portion of water supply is a natural monopoly. Like energy, provision can be divided among component systems. Collection and purification can be private. Transmission can be public or a private company with a monopoly franchise. Distribution can be segmented into numerous monopoly franchises by local area.

FWIW, France does a lot of what would be done via a government owned and operated county clerk and recorder's office, or a state government owned and operated secretary of state's office in the United States (e.g. keeping of official real estate, business entity, loan collateral and probate proceeding records) via notaries public which are privately owned for profit ventures (with utility regulated fee schedules) typically with several competiting monopoly franchises in any given notary public district that are bought and sold a bit like seats on the stock exchange (although only licensed notaries, who have an educational background similar to a U.S. transactional lawyer) are allowed to bid.

As far as natural rights and natural monopolies in water, particularly in regard to the right to collect it from rivers, wells and rainfall, it would be fair to say that any regime (be it riparian rights, appropriation time, 100% state ownership, etc.) are particularly unnatural, no matter what regime is adopted, and that much the same can be said for mineral rights (including oil and gas), air space rights, radio frequency rights, land use regulation, and intellectual property. Even within the U.S., as a result of federalism and changing legal regimes, the laws regarding property rights in these natural resources is a somewhat arbitrary mix of competing regimes of artificial rules, none of which is natural or universal.

There is a very solid argument that ceding permanent property rights, as opposed to leaseholds for terms certain in resources like water, minerals, radio frequencies is a bad idea that leads to inefficient uses of this property due to the difficulties involved in creating efficient markets in these rights.

The process of facilitating oil and gas exploitation, for example, actually works more smoothly in places where the government reserved the mineral rights when the surface rights were transferred to private ownership than in places where both surface and mineral rights were transferred to private ownership in the initial conveyance of land owned by the sovereign since there is much more fractionated ownership increasing negotiation and title establishment costs. Most governments that saw how this worked out in the U.S. deliberated avoided the U.S. example and nationalized their nation's mineral rights instead. We already, in theory, at least, provide only temporary rights patents and copyrights (the limitation in time piece is actually part of the U.S. Constitution, although the lack of any more guidance has rendered that wording a de facto nullity).

In the arid U.S. West, while creating private property rights in water resources has created a number of good results, the reality is that farmers who use 90% or so of the water, in fact, put their water to ends that have far less economic value to the farmer, than alternative recreational and municipal users who could appropriate it if the farmers who are currently using it would be willing to sell it, would be willing to pay for it. The non-economic considerations and transaction costs in a system with highly fractionated and complex water right entitlements produce very different outcomes than one would see in a system where all water rights were put out to bid every year by a government agency that owned all of the water rights, Coase be damned.

Finally, there is a sweet spot in the middle, often for reforming or middle-income countries. In those cases water privatization can mobilize private capital rapidly and expand water coverage.
I'm a bit confused about the "mobilize private capital" claim. If I'm not mistaken, either a public or a private operator will borrow to fund infrastructure improvement, with repayment coming from its increased income from the improvements. But either one will be accessing private capital.

In the U.S., municipal water utilities have an edge over private ones because they can issue federal income tax free municipal bonds to private investors (and usually state income tax free to in state investors) so their cost of capital is lower (municipal bonds typically have interest rates roughly equal to the after tax return at the top applicable income tax rates relative to comparably risky private sector bonds).

Municipal bond IPOs are also less heavily regulated than SEC regulated private bond issues (although the differences are smaller than you would think - the due diligence and assignment of credit rating process which accounts for much of the IPO cost is actually pretty similar).

While most municipalities have some bonds backed by the full faith and credit of the taxing authority (that usually get the best credit ratings) called general obligation bonds, there are also what are called "revenue bonds" out there that are backed only by whatever revenue stream is generated by a particular activity (sometimes a separate entity, sometimes a mere division for accounting purposes within a municipal corporation) (a municipality can also issue "private activity bonds" that will be paid solely by a private business with the consent and cooperation of the municipality via some very complicated rules, some of which would allow private companies with long term contracts with municipalities to benefit to some extent).

So yes, almost all major infrastructure capital public and private is financed by private investors, more often than not predominantly with new issues of bonds rather than equity investments or secured lending (it is hard to repossess a water system and municipal bond holders actually have many fewer collection rights than private lenders, with a payment plan negotiated by a bond trustee, receivership sought in court by a bond trustee, or municipal bankruptcy under Chapter 9 of the bankruptcy code governing most of the default cases).

I'm not sure that France's infrastructure funding institutions for municipalities work that way. In general, France does a meaningful share of the financing that would be handled by bond offerings in the U.S. via bank loans from large government owned (think the Fed or the Import-Export Bank in the U.S.) or government chartered banks (compare to Fannie and Freddie).

In France, one factor in the shift from private operators to a government operator may be protectionism. The E.U. requires that private bidders from any E.U. company be placed on an equal footing with domestic bidders; but doesn't forbid governments from providing services historically provided by private companies in house with government employees where the senior managers are far less likely to be foreigners. French municipalities that may have been comfortable with the political implications of having water delivered by a local privately owned company under a long term contract that limits abuse but also allows for some feather bedding by the water delivery company as a form of de facto workfare via a gentleman's agreement which may actually make sense because it reduce's the municipality's welfare obligation (regardless of which level of government actually pays, political parties in France are much more vertifically integrated at different levels of government than they are in the U.S.). A German or British firm that gets the contract when it comes up for bid again may feel no such obligation to honor any gentleman's agreement, may have foreigners replace local top managers of the system who are shoe ins to be hired by the government locally (and may not end up paying local taxes), and may be hard to refuse if they can be the lowest price as a result of not doing so. And, putting some other country's firm in charge of your water delivery system is in general bad politics even in the E.U. where the supreme constitution of the entire region (and beyond with EFTA) mandates free trade.

In arid places, like my own beloved Denver where I receive water that I buy at the tap from a municipally owned corporation called, unimaginatively, "Denver Water", it is important to distinguish between two concepts that are conflated in the original post in sentences like this one: "For advanced water systems, there is no cost advantage to having a privatized system." The term "water systems" blurs the distinction between water ownership and water delivery system ownership.

In Colorado, like most states in the Western United States, "water rights" which are the right to take and use water (i.e. appropriate it) from a flowing stream or rainfall in a certain amount to the extent that it is available after higher priority water right owners have done so (a system operated on a day to day basis by the pseudo-elected water engineer for the river basin in question and adjudicated by the water court judge assigned to the river basin in question), are transferrable property that were assigned in the first instance on a first in time, first in right rule from the first proveable date of appropriation of a given amount of water from the basin for the beneficial use of the water users predecessor in interest (most of the water rights useful in anything but the wettest years were first put to beneficial use sometime in the 1800s although there are nuances and special priorities that complicate all of this and keep water lawyers busy).

There is a market for these water rights which are transferrable. For example, the City of Pueblo recently bought a lot of water rights from downstream farmers in the state in the same river basin, because they could afford to pay more for those rights than the farmers could make from their water rights by farming.

Thus, at the level of ownership of the water, there is a statewide market based property rights system in place.

In contrast, there is a wide mix of ownership patterns related to the delivery of water which is an entirely different matter. Many ranchers and farmers deliver water they have a right to directly from a river or well to themselves or maintain a cistern (wells and cisterns and even gray water system, all of which reduce the availability of water to those downstream, are subject to the water right priority system). Other ranchers and farmers formed private sector (usually non-profit or cooperative) ditch companies, often with transferrable ditch company shares that are worth a lot (e.g. I am in the tail end of litigation over the misappropriation of $500,000 of shares in a ditch company which was a decidely minority interest in the entire company; the tap fee to get water service to a lot in a new subdivision can be $10,000 to $100,000 per city lot in many municipalities in arid Colorado because that means the water provider must buy new water rights, even though the cost of installing the new addition to the existing municipal water delivery system is modest). The City and County of Denver owns Denver Water which is an active participant in the business of buying and selling water rights which it sells back at cost (as mandated by its charter) to Denver residents. Denver Water sells excess water rights to most (but not all) of the surrounding municipalities at profit at rates negotiated individually with the particular suburban municipality that vary from city to city - municipal customers served by Aurora and Arvada won't necessarily pay the same price for the water that they buy from Denver Water, and municipal customers in both suburbs will pay more per gallon than Denver residents do.

Denver Water does not have a monopoly strictly speaking, outside Denver or for that matter, strictly speaking, although it is the dominant provider of water in the metropolitan area, has a utility-like obligation to serve all Denver residents subject to certain limitations, and has a natural monopoly of owning almost all of the water infrastructure currently in place and quite a bit of the larger South Platte River basin water infrastructure generally including things like pipelines and dams at a great distance from the City and County of Denver, inside Denver. Some public and private users within both Denver and municipalities in the Denver metro area, have water rights in the South Platte River basin of their own that they find their own way to deliver (no so far for a factory along the river, harder for a residential home owner miles from the river).

Bottom line: Denver Water acts very much like a privately held for profit company (or better) that is a savvy market participant and cost and efficiency conscious entity that delivers a very high quality product (in terms of water quality and reliability), in an arid place where none of this is easy to do, because operating its Denver delivery system more efficiently allows Denver Water to subsidize rates for its Denver customers by selling more to the suburbs and farmers, and also reduces the costs it must pay to buy new water rights from people like farmers and build new infrastructure like dams and pipelines that divert water from other river basins, as the metro area grows. Also, the people who appoint its board of directors monitor their performance much more closely than shareholders in a publicly held company do and the system has been set up to give them a very clear purpose that is only rarely amended.

You could call Denver water a government utility, but that would vastly understate the extent to which it operates as a business firm in a competitive market where there is an underlying property rights system and an absence of a monopoly imposed by fiat and active regulatory enforcement of anything other than property rights by the state.

Under any sensible governing regime, the US would have connected most if not all of its parts with a water grid similar to the electric grid, thus enabling the alleviation of both most droughts and most floods. The reasons this has not been done are political -- state, regional, and local governments demand exclusive control of "their" water, while the feds don't dare allow a free market lest the average consumer realize that he's now paying 100 times as much for his water as favored farmers do. Thus we've gotten to the requirement that meters be installed on every residence in the country, while farmers are not made to reduce their waste (and of course planning boards which resist the construction of dams and aqueducts, in the vain hope that not building them will prevent people from moving in, also have the effect of creating needless scarcity).

A free market in water would end this insanity, and make people living in places that it's expensive to bring water into (for instance Los Angeles) pay the cost of that choice. There's no excuse for this not to have happened long since.

Farmers do pay less. But, the name "favored farmers" has another form which someone with a screen name like Galt might favor: "Property owners."

This (old-ish) article from the economist on the differences in the experiences of water supply in England and Wales (where water was privatised), and Scotland (where it was not) suggest a different story.

Bottom line - bills rose rapidly initially after privatisation. But in the long term (5-10 years+) more investment and focus on cost control means that the English and Welsh system is cheaper and more efficient.

Look at the table for the differences in the cost of water for English+Welsh vs Scottish businesses if you want a really amazing statistic:


England and Wales are a great case study for full privatization of assets -- and importance of smart, (generally) light handed regulation.

I predict the Parisians will be drinking privately provide water within 10 years. Water is becoming increasingly scarce and consequently its real economic value is increasing -- raising the opportunity cost of relying on present ownership arrangements, which are less likely to leverage competition, technology, and innovative marketing and pricing structures, that will ensure the resource is efficiently consumed and supplied.

FYI -- I made these arguments in a Journal of Applied Corporate Finance article, "A Fresh Look at U.S. Water and Wastewater Infrastructure: The Commercial and Environmentally Sustainable Path Forward," last year.
Available here - http://www.slideshare.net/David4321/jacf-summer2011-water-infrastructure-d-haarmeyer

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