30 August 2010

Privatization update

Novato (Marin Co, N. Cal) voters approved a contract with Veolia, with 50.6 percent in favor, and Indianapolis voted to privatize its water operations, in exchange for $1.9 billion. I predict more of these deals.

To wit, the City of San Jose is thinking of selling its water system. The obvious candidate is the San Jose Water Company, an investor owned utility (IOU) that operates next door. The deal hinges on price.

What about the bad companies? A student won an award for a paper [PDF] that uses stock market data to predict which IOUs will fail. It's good news is that they can fail; municipal water utilities can't, and their customers suffer. Why?

Here's one reason:
In Kenya, for example, there are 20 million mobile phone connections, but just 12 million Kenyans have access to piped water (and this access is delivered via fewer than 500,000 utility connections). Most strikingly, Kenyans spend on average 16.7% of their personal income on mobile telephony, compared to around 1% for water services.

There are other reasons for this discrepancy: the mobile phone companies have hungry capitalists behind them, whereas the water sector is ruled by politicians and NGOs.
But are there exceptions?

Parisians praise themselves for re-municipalizing their water supply from IOUs. Good news -- they can reinvest "wasted" profits. Bad news -- they are reinvesting them in "solidarity" projects with struggling water agencies in other parts of the world. I agree that the IOUs may have inflated costs by subcontracting to expensive sister companies, but I disagree that re-municipalization is the only solution for this practice. I'm MORE interested in the long-term performance of this system, where operators/regulator/owners pledge no price increases for five years (underinvestment, anyone?) and have lots of ways of investing "for the public."

Bottom Line: Privatization will advance when companies provide the same (or better) service at a lower cost.

Hattips to RB, JG and BP

2 comments:

Francois C said...

Everyone has been discussing for the past decade of privatisation vs public, which has made everyone focus on the wrong matter when the important thing is to increase the nb of people connected to water supply and sanitation. Water services that are managed privately only represent 10% of all the people connected to such service so there is no real take over of the private sector. Also it has been shown in France that the price of water from privately managed water services is the same as for public.

TragerWaterReport.wordpress.com said...

Great news! Privatize it. Privatize it all.