3 Apr 2012

Kurtz on Public vs. Private ownership

A guest post that underlines my post on the public-private cycle from a year ago.
Having just spent the better part of two days in Sacramento at the Water Education Foundation Executive Briefing, I left with a new perspective on the public/private debate on ownership of water systems. Several speakers were from large municipal water agencies, and they pointed out the present scary level of infrastructure neglect that most people ignore. This neglect not only wastes water through leaks and such; it could have serious economic and health consequences in a catastrophic failure. There is no money, and no promise of money, to address many of these things. Unlike the Feds, cities can not conjure currency out of thin air. Bonds still have to be repaid, out of something.

It seems to me that governments are very good at building systems (provided they have access to finance), but very bad at owning them. Democratically elected officials, with the powers of condemnation and the ability to tap the municipal bond market, are probably the right ones to develop a water and sewer system. But they never run them well. What local Pericles, faced with the choice of spending millions on two choices:
  1. ensure that their city’s sewer system will last for 80 years instead of 40 years or

  2. provision free yoga mats with his picture on them for the entire population
will choose (1)? Of course, there are more serious and immediate issues, like the economic obsolescence of a key industry, that force city governments to deal with acute problems, and ignore the chronic ones. I don’t mean to smear them all.

To me the answer is for municipalities to sell the developed infrastructure to private institutional investors (like pension funds, life insurers, pools of money for very wealthy people). Especially in this time of zero interest rates, when trillions sit on the sidelines with nothing to do, there is a great opportunity. Long term returns of 5% looks fabulous. The buyers get an asset, an immobile customer base and income stream, and some measure of inflation protection. The cities get money, and one less headache. A long term institutional owner will fund long term maintenance, because they aim to stay in business for a very long time. Obviously this presupposes that the private utility will be subject to the same oversight as any other natural monopoly granted in the interests of public convenience and utility. Rate payers will still provide the bulk of the income, but the enterprise will no longer see itself as a charity. An investor will question silly policies like using drinking water to wash sidewalks and fight fires. Leaks will cost him money. From what I have seen of the many municipal water utility employees I have met, they are neither overpaid nor underworked. Most of those folks should just be moved right into their new old job.

There are cultural obstacles, of course. I wonder if there are financial ones as well.


craig said...

I thought that i was the only one who strongly believed that many of these public companies should be operated through private ownership, especially when it relates to utilities.

Leaking is a major problem that wastes a lot of water.

From my observation, the private water companies in my country operates much better than the public company. When i say operate i mean conserve and quality of water at a reasonable price while making a profit.

From personal experience public ownership shows very little care. They are only good at starting but extremely bad on operating and meeting high standards.

I think in the future we will see a major shift to private companies.

Anonymous said...

In certain states, private utilities are approved and regulated by public service commissions, while public utilities are regulated by requirements in statute. While it is true that publicly owned utilities face the issue of raising revenue because of the ignorance of human beings used to water being underpriced and the fact that they have to suffer the consequences...private utilities in said state are notorious for charging low rates and neglecting their infrastructure, then utilizing political strength or environmental issues they created to force sale to public utilities then tasked with operating and upgrading the system. So no, private utilities are not the answer unless they are subject to strict regulation, pricing structures that allow limited profit while guaranteeing upgrades to infrastructure, etc. I should note that utilities are granted service areas and own the infrastructure, so it is not like a ratepayer can "vote with their feet" and choose to buy water from another entity.

I should also note that in riparian states, utilities can procure service areas without having customers to serve or infrastructure in place, thereby creating a fledgling system of "water banking" where they can maintain agricultural uses on the land while sitting on their permitted uses (originally for agriculture) until such point that they "sell" that water to utilities as development occurs.

Mr. Kurtz said...

Good points, Anonymous; one place where strict regulation absolutely makes sense is in granting of rights to a "natural" monopoly, such as a sewer line. Would that the gutless pols applied such rules to TV cable companies, who by my lights should own nothing but the wires and the switches; the programming should be owned (or at least sold) by others.
California is a hybrid of riparian and appropriative water rights, and most ag water companies or districts sell water now, (if they can) although not always in the most sensible way. I don't think there are any more riparian rights lying out there that someone has not perfected, or at least litigated.

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