In a recent research heavy Al Jazeera article the discussion of privatization of water offers many critiques of the idea in terms of its associated cost and benefits. Below is an excerpt from the article.
Independent water advocates, from CAI to Anand’s group in India and others including the Focus on the Global South
network, point to India today as evidence that privatized systems lead
to underfunded infrastructure and unpredictable, often high prices. The
IFC defends the private sector by claiming that these companies offer efficiency gains
(PDF). But those gains come at the expense of lower-income households,
advocates such as Naficy point out, as companies increase rates to
subsidize their own profitability. There’s a growing backlash against these projects. In 2000, headlines around the globe
documented protests in Bolivia’s third-largest city in response to the
privatization of the city’s municipal water supply and against the
multinational water giant Bechtel, eventually pushing the company out of
the country. The IFC’s own complaint mechanism reports that 40 percent
of all global cases from last year were about water, even though water
projects are only a small fraction of what the IFC funds. In 2013, CAI
and 70 advocates from around the globe released an open letter
(PDF) to the World Bank Group calling for “an end of all support for
private water, beginning with IFC divestment from all equity positions
in water corporations.”
“Corporations don’t have a social or development mission,” Naficy
told me. “Right now we’re funding development to prop up private
projects, instead of putting the decisions for funding in the hands of
governments that are accountable to people.”
Clean and affordable water is the basis of life. Skyrocketing water
prices, unsafe supply, failing infrastructure — these problems fall
disproportionately on the most vulnerable among us. This is why public
institutions, not private corporations, must lead the development of
water systems and delivery. The World Bank Group is uniquely positioned
to increase access to clean water for the billions who need it. Instead
of using its position to line the pockets of water companies, it should
support what is most needed: affordable and clean — and public — water
for all.
Does it make sense to privatize water, a scarce natural resource? Why or why not?
I believe the privatization of water is a very good thing because contrary to the article, history has shown that private ownership of water sources have led to less droughts and more efficient distribution of water. Many private water projects have led to safer drinking conditions and more reliable supply. Many droughts that have occurred were caused by artificially low prices set by the public agency, which led to an over-exploitation of the resource, leading to droughts.
ReplyDeleteHowever, privatization of water supplies cannot be successful without a strong rule of law. That is why some private water projects in underdeveloped and developing countries with an ineffective legal system have failed, whereas private water projects in developed countries have been more successful. Therefore, I believe the bigger issue regarding water is the legal system of the countries that struggle to find a reliable supply of water.
I'm skeptical that a privatization of water supplies would lead to more efficient social outcomes. It's an incompatibility of incentives: private firms have incentive to make as much profit as possible on providing water utilities to the public, regardless of how that profit may be derived (higher prices or price discrimination, cheap shoddy infrastructure, etc...). The public, on the other hand, desires affordable access to clean water--and most would say access to clean water is a basic right (a right to life).
ReplyDeleteThe market **might** be effective if there was true competition, but most often in the case of water and other utilities, there are natural monopolies. I.e. monopolies that naturally occur due to high entry barriers, but **still** have all the negative aspects of a monopoly. This is why the governments of basically every developed world either has highly regulated utility markets or has simply created public corporations. I see monopolistic outcomes in the water markets of these countries, not simply because of poor rule of law, but because of the natural state of this market type.
That is true that a monopoly could form from privatization of water supplies but natural monopolies tend to be more successful in achieving a higher social benefit compared to public companies. Private monopolies have the desire the maintain a sustainable exploitation of water supplies because if they don't, they are out of business, whereas government agencies don't necessarily have the same incentives. The actions of public utilities in California have contributed to the droughts the state continues to experience. On the other hand, UK privatized various water supplies under Margaret Thatcher, which led to cleaner and more reliable supplies. In theory, privatization of water supplies may seem bad, but in practice, it's a different story.
ReplyDeleteI think the commodity divisions of banks provide a pretty good example of how bad it can be if banks and financial interests are allowed to regulate supply of natural resources. I remember over the summer that Goldman Sachs was accused of essentially hoarding aluminum and constricting its supply, simply to make a profit at the expense of the consumer. They add absolutely no value to society by doing this, do not make the market more efficient, and in my opinion are morally bankrupt in their actions. The commodity divisions of banks are infamous for these sorts of moral issues and in fact some banks have started winding down these divisions as a result. I agree with Rasheed on this one - privatization of water will likely not lead to a socially optimal outcome.
ReplyDeleteHere's the article about Goldman Sachs. It's pretty upsetting.
http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?_r=0
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ReplyDeleteTheoretically, if water is privatized, there would be more competition, efficiency, and innovation, but this will only occur under an efficient market. With natural monopolies, economies of scale can be utilized to provide water at a lower cost. However, I think a government can run a natural monopoly better because they don't need to set a monopoly price and quantity and will thus be able to serve the public better. Privatized water will also create conflicts of interest; private firms will have an economic incentive to raise profits, obtain monopoly power, raise prices, collude, etc. All of these thing will reduce efficiency and consumer surplus. This will not happen with public water because the only responsibility the government has is to serve the public.
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