Sat, 01 Apr 2000

Privatizing water is more rational, efficient and fair

By Christopher Lingle

SYDNEY (JP): When thinking of how to resolve future needs for water, it might be helpful to think of garbage.

This may seem to be a distasteful analogy.

However, the point is that governments have discovered that allowing the private sector to collect rubbish and take care of waste disposal can reduce costs and increase efficiency.

Many people oppose the notion of privatization. Citizens would be well advised to examine the motives of those who oppose such steps.

Directors, employees and suppliers of state-owned water enterprises may wish to block privatization because of the threats to their personal interests.

For others who would protest to putting water into private hands, they might find it less offensive to think of the process as depoliticizing decisions concerning water provision and distribution.

In all events, what is needed is a new set of incentives to encourage greater efficiency in both production and use of water.

In their current form, public water policies create a number of costly distortions.

According to a World Bank report, costs of poor water management in Jakarta in 1992 ranged from $40 million to $700 million in avoidable health damage every year. Since then, its population has grown at a rate of about 6 percent a year so these costs are even higher.

Besides inflicting avoidable health costs, the inability of governments to provide additional water supplies at current price structures will inhibit growth of new industry.

Public subsidies of water have also encouraged population flows that cause urban congestion when water is made cheap in cities while it is too scarce in rural areas.

In sum, public-sector provision leads to under-funded and inefficient. Over-extraction and waste cause environmental problems because of weak or inappropriate pricing mechanisms.

It might come as a surprise that most of the benefits from water provided by governments do not go to the poor. Indeed, this may be an instance where low-income taxpayers subsidize those who are richer. In developing economies, the poor seldom have access to water mains or sewerage.

The bulk of the total public subsidies of between $30 and $40 billion are received by the agricultural sector. In rich economies, relatively well-off farmers gain most from subsidized water.

Privatization can work if prices are allowed to provide the means to discover the real value of water to a given community. Pricing reveals the real value of any commodity.

There are a variety of approaches to "full cost pricing" that might also include a form of "peak-load" pricing. By reflecting market valuations, it becomes apparent whether inadequate supplies result from true scarcity or if it is due to mismanagement by public-sector officials.

Privatization should not be thought of merely as a method of raising funds for governments. It also helps eliminate inefficiency where state-owned enterprises can be a burden on the economy while offering opportunities for corruption.

The profit motive induces private firms to be more diligent in collecting bills, reducing leakages or thefts and upgrade infrastructure.

This might include a revival of methods of rainwater harvesting as a low cost access to replenishing water supplies that reduces the strain on natural aquifers.

Privatization in India and China is fraught with difficulties due to their corrupt systems (mis)guided by their respective socialist ideals.

Providing zero- or low-priced water led to the predictable consequences of wasteful use and inefficient provision. Any commodity priced below market values, or at zero, will be used in excess.

As it is, cash-strapped governments are finding it increasingly difficult to meet their various infrastructural requirements.

The World Commission on Water, supported by the World Bank and United Nations, estimates that under present conditions, water demand will increase by 40 percent in the coming 20 years. Poor countries will require an additional $100 billion over the coming 25 years to maintain current water flows to their growing populations.

Direct income grants will provide more efficient aid than the current system of subsidized water production. First, cash grants to individuals place the burden of choice upon them to select consumption within their own budget constraint. Second, such grants can be targeted to specific sectors on basis of income or geography.

Objections might be raised against allowing private interests and profit to guide the disbursement of something as necessary to life as water.

There are many instances where privatization has been unpopular or has brought disappointment. However, it should be pointed out that the principal failure has been the method chosen by public officials and not the goal of privatization that was at fault.

However, centuries of experience show that governments are more capable of regulating the behavior of private sector interests than they are of increasing the efficiency of bureaucrats.

In any case, there are many examples of private sector initiatives that supply water to over 360 million people. One is found in Buenos Aires where $1 billion was spent to improve equipment and increase supplies to over 1.5 million people.

In La Paz, local government entered undertook a joint effort with private firms to provide water to the urban poor.

In Jakarta roughly half the population has no access to the municipal water supply while only about 2 percent are connected to a sewerage system. Two private companies, PT PAM Lyonnaise Jaya of France and Thames Water PLC of Britain, have been contracted to provide drinkable water to residents.

When comparing the records of governments and private enterprise, it becomes apparent that privatizing water will be more rational, efficient and equitable. In light of these improvements, opponents of privatization are guided by an uninformed ideology or out of promoting their own self-interest while blocking benefits to the wider community.

The writer is an independent corporate consultant and adjunct scholar of the Centre for Independent Studies in Sydney.