29 Apr 2009

Water for Sale -- The Review

Fredrik Segerfeldt originally wrote Water for Sale (2005) in Swedish. The CATO Institute has published an English-language version. So, what does a Swede have to say about the private companies selling water to the world's poor? Privatization is a good idea. [Also see this post for Tyler Cowen's opinion that water can be sold in a laissez-faire market. I disagree with him.]

Anyone who works on water policy should read this book. Segerfeldt argues sensibly, with examples, statistics and documentation. His arguments echo and reflect recurring themes (equity, poverty, development, capitalism and corruption) in water policy, and this book will be useful (barring miracles in the water sector) for the next 15-20 years. The book is short (118pp plus 25 pp of notes and references) but complete. The prose is clear, with few redundancies, inconsistencies or errors. The book's biggest strength is Segerfeldt's logical foundation (defend the poor). Its biggest weakness is the omission of the bigger picture (how does one do anything well when the government is corrupt?), but we all fail that test at some point.

Segerfeldt's brutally-effective condemnation of water policy in the developing world is as dispassionate and rational as one can be when discussing how “every minute of every day, 22 people die because they cannot get enough safe water” (p. 8). Children suffer the most -- accounting for one-quarter of the 12 million annual deaths from water shortage.

His main point -- and a good one -- is that the private provision of water by companies seeking profits can hardly make the poor worse off, since “ninety-seven percent of all water distribution in poor countries is managed by public suppliers, who are responsible for more than a billion people being without water” (p. 1).

Can we blame Nature for water shortages? No -- the wettest place on earth (Cherrapunji, India) has water shortages due to poor water policies. Although shortages are strongly correlated with a lack of economic development, development is happening too slowly to save lives. Instead, Segerfeldt suggests improving the governance of water supply, and he recommends importing good governance, via private enterprise.

Private companies don't just have the advantage of outside cash. They have the advantage of management experience and specialization, the advantage of competitive pressures, and the advantage of the profit motive. Public bureaucracies have none of these advantages. Every locality learns by doing (often repeating mistakes "learned" elsewhere), facing no competition, and catering to political whim. The worst problem is that public bureaucracies suffer no penalty when they deliver poor results. Bureaucratic rewards accrue to those who spend their budgets -- not to those who serve more people. Political forces favor rich urbanites and big farmers, not poor slum dwellers or small farmers.

Further, Segerfeldt notes that water is too cheap. Because prices are low, demand exceeds supply and shortages result. Why are prices low? Subsidies of $45 billion per year mean that water prices cover -- on average -- 30 percent of the cost of water service. What's the result? Deferred maintenance (leaky pipes, poor quality) and small service areas. While the rich get piped water, the poor pay 10 to 80 times more to get water from “pirate” vendors. (Pirate in the unregulated sense; they are providing a valuable service to grateful customers.)

What are the barriers to change? “Anti-privatization activists... are driven by an ideologically inspired aversion to enterprise, coupled with fear on the part of vested interests of losing their privileges.” He points out the cost of such ideology -- a failure to serve the supposed beneficiaries of their interest, i.e., “it would be not just a pity but quite outrageous if millions of people were to starve, fall ill, and die through water shortages brought about by the strident propaganda of vested interests and powerfully ideological movements with quite different ends in view” (pp. 4-5).

The rich and middle classes also dislike privatization because they are likely to face higher water bills. First, because private companies want to collect their money, Second, because private water companies are likely to expand service to truly poor customers who are going to use less water (thus making is hard for wealthier customers to claim that they cannot do with less). Third, because government policies designed for the “poor” are more likely to end up serving the poor.

Public sector unions want to protect their jobs, of course, but the worse perpetrators of the status quo are the politicians who use water utilities for selfish gain -- hiring relatives and cronies, diverting cash flow, and contracting with “friendly” firms. (The mayor of Cochabamba, Bolvia would not allow the city's water supply to be privatized until a dam was included in the deal. Conveniently, his friends were in charge of building that dam. The infamous failure of the Cochabamba privatization can be partially blamed on that dam.) Even more common than politicians-cum-thieves are politicians who fail to monitor public water managers. Where, after all, would fines for bad performance go, except from one pocket to the other?

What are his solutions? Private trade in water rights. After Chile “introduced private ownership of water in the 1980s... water supply has grown faster than in any other country. Thirty years ago, only 27 percent of Chileans in rural areas and 63 percent of urban communities had steady access to safe water. Today's figures are 94 and 99 percent, respectively -- the highest for all the world's medium-income countries” (p. 31). Even better, the incentives to sell conserved water increased agricultural efficiency and -- through competition -- lowered the price of water. Farmers did not suffer -- despite the lack of major infrastructure investments, the shift to higher-value crops and greater efficiency resulted in six percent annual productivity growth between 1975 and 1990. Oh, and don't forget those bureaucrats. The lack of “capricious pricing” and quotas on water use left farmers alone to do what they do best -- raise food and make money.

At the retail/urban level, Segerfeldt recommends that contracts for operation be awarded to companies through a competitive tender. He then gives several examples of privatizations that failed and succeeded, noting what went wrong and why. Disturbingly (for anti-privatization activists), it seems that many failures resulted from political failures and corruption -- not greedy capitalists. His main recommendations to avoid failure are that contracts reflect local conditions, annual price increases be capped, and alternative providers be allowed to continue operations (competition!). These common-sense ideas would deflect most concerns about privatization. (Remember that breach of contract can be remedied by re-municipalization!)

Further, Segerfeldt recommends that equity issues (“the poor will suffer with market prices”) be directly addressed through income supports or vouchers. “Cheap water” policies not only subsidize the middle class and rich, but sometimes they only subsidize those classes -- like when the poor don't even have piped water!

Bottom Line: “Keeping water distribution in the public sphere is often identified as more democratic... Using food as an analogy, we can observe that food is also essential to life. Yet in countries where food has been produced “democratically” -- that is, by the government -- there has often been neither sufficient food nor democracy. In this regard water is no different... the question that naturally comes to mind is why anti-privatization activists do not expend as much energy on accusing governments of violating the rights of the 1.1 billion people who do not have access to water as they do on trying to stop its commercialization.” (pp. 113-114).