31 Jan 2011

The private-public cycle

It's common to hear that investor-owned companies taking over water systems raise prices to pay for deferred maintenance (and also because they get "automatic" profits from capital spending), as Food and Water Watch will claim to anyone.

It's also common to hear that municipalities taking over water systems lower prices to better serve citizens, thereby reducing funds available for maintenance and capital spending, as happened recently in Paris.

IOUs spend too much on gold-plated systems, until politicians take them over and spend too little, until deferred maintenance and lack of funds forces privatization again. See the pattern?

Bottom Line: Both private and public water providers pursue goals that may not suit customers.


jgmumm said...

Dr. Zetland -
I'd like you to read through my blog articles on privatization. The latest data from USEPA show that public utilities invest more in their systems than private, but also are losing money on average. Meanwhile private utilities are investing somewhat less, but are making a good profit.

It's been my experience recently that IOUs promise the lower prices and show artificial efficiencies that actually go back by way of profit to shareholders rather than reinvestment of retained earnings to the system.

Would you have an interest in studying this topic with me some more? You can see I've written a bit about this myself. Please see the blog.


David Zetland said...

@jgmumm -- interesting point. I agree that both public and private are going to invest based on the "reward formula" that gives them the best return on a given expenditure. Whether or not that serves customers, I don't know.

OTOH, the losing/making $ aspect still supports my "cycle" idea :)

jgmumm said...

I don't disagree that there is a cycle in this. You're right about that and privatization seems to be getting attractive to more public utilities now in this recession (let's make this someone else's problem). I'm wondering if the best and most efficient allocation of economic resources falls on the side of private governance, or public. Lower cost per unit with somewhat higher capital reinvestment seems to favor the public side as having the more efficient solution with "profits" accruing to rate payers by way of lower bills. Do you see an argument for the private side though?

Anonymous said...

Having worked in various water/wastewater utilities for the last 30 years, I think public/private is too much of a simplification. The issue is quite variable and depends on leadership and governance. Long-term infrastructure is inherently hard to manage and existing predictions of useful life have lots of variability in them that cause people to overspend and underspend. PGE's recent underspending on the San Bruno pipe maintenance was an example as much of institutional incompetence as profit-mongering--they wished their plans had been better implemented now. EPA and many agencies are significantly improving their attempts at maintaining infrastructure through improvements in the "asset management" assessment process, and I expect will require every agency to have an effective plan in place. The crucial new step is combining a risk assessment that evaluates both risk of failure and consequence of failure. Each of us struggles with the same issues deciding whether to fix our roof this year or put it off to add insulation or use the money to buy a Prius.

Paul Levy wrote extensively about this issue in Commonwealth magazine last year based on his experience running a public water agency and then a private hospital.

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