5 May 2014

Takes two to screw (customers)

DG sent me this short video report on privatizing water utilities in Spain. It seems that municipalities are selling "public" water systems* to private investors.

Customers worry that privatization will lead to higher charges and lower quality service.

That outcome will NOT happen if investors use better management to reduce costs and improve services (a win-win outcome), but it WILL happen if municipalities allow investors to raise rates and lower service quality.

Why would the municipality do that? Because the municipality, which "cannot afford to pay for maintenance" needs to find someone who will pay for upgrades. What's the cost of borrowing money from the bankers? Future repayments. And larger future repayments mean more money for the municipality or more system investment.**

This logic CAN result in terrible outcomes if promised future cash flows result from higher prices, lower service and a lack of investment, but it will NOT if the city writes a tight contract and maintains strong regulations on performance.

The report concludes that "large corporations are in the lead when it comes to the fight for water," but that's not true. Companies cannot buy systems that are not for sale. The summary should be "politicians who want money now can get it by raising prices to customers or selling their systems to companies that will raise prices in the future." There's no magic trick or evil corporate conspiracy here. There's only the need to pay the costs of past financial mistakes. That money can come from citizens or bankers, but it has to come from somewhere.

Bottom Line: Politicians can sell municipal utilities to investors as a means of improving service and smoothing cash flows over a few decades, or they can sell for short term cash without regard for their citizen-customers. City hall decides whether citizens are served or screwed.

* "Public" has two meanings. Owned by the public (municipal) and serving the public (equal access).

** A corrupt government would cash out (this happened in Stockton awhile back); a decent one would make sure the money is invested. Pay attention to that ratio to find out which matters more.