TCS Daily


Capitalism for Water Day

By Tim Worstall - March 22, 2006 12:00 AM

In the time it takes you to read this paragraph at least one child will die from an easily preventable disease. Two million a year, fifty-five hundred a day, some four a minute or one every 15 seconds are killed by diarrhea, something which the availability of simple clean water will almost certainly prevent from happening. That there are one billion of our fellow humans who do not have this basic necessity of life, that there are a further billion or more without sewage or sanitation services, well, don't you think that's an indictment of the modern world?

Today is World Water Day and it would seem an appropriate time to actually consider what we should do about this situation. Even if you take the line that all aid is inevitably stolen by corrupt functionaries (which does indeed often happen), think that the rise from this horrendous poverty will largely be determined by the institutions and activities within those poor countries (which I do) perhaps we could at least think through the problem and at the very least not make it worse.

My former colleagues at the Globalization Institute in London have released a report on the differences between the private and public provision of water around the world. They place much of the blame for the current problems on the very fact that 95% of the world's potable water is supplied by governments rather than by (properly regulated) private sector providers. Governments are inefficient at providing services, swayed all too easily by the desires of their political supporters, prone to corruption and even worse -- in many parts of the world -- do not have the simple competence (let alone capital) to operate a fully functional system.

Very well, as the report states, an obvious solution to this is that water should be provided by private sector firms, profiting from extending access, reducing wastage, increasing the purity of the water itself and generally making the world a better place.

In opposition to this is what Dr. Madsen Pirie at the Adam Smith Institute (another colleague in London's world of policy wonkery) calls, commenting upon the same report:

...ideologues who want all water to be 'free,' meaning delivered and administered by a state body funded out of taxation.

Now I do understand those ideologues; really, I do. They are motivated by a belief that no one should profit from such a basic human need as drinkable water. We're not exactly talking about Perrier here, simply water that doesn't actively kill you when you sip it. However, at this point, whatever the purity of their motivations, we run up against that slight problem of economic efficiency.

This isn't, as many think, a code word for more profits, more capitalism, the exploitation of man by his fellow man, or any other of those fashionable phrases. A system is economically efficient if we cannot increase the well being of one person without reducing that of another. Or, to put it the other way round, an economically inefficient system is one in which we can increase the well being of one or many people without harming anyone else.

Our question then becomes whether government -- as opposed to private sector -- provision of water is economically efficient or not?

You might recall this from December of last year:

In fact, we estimate that child mortality fell by 24 percent in the poorest municipalities. These results suggest that the privatization of water services prevented approximately 375 deaths of young children per year. We check the robustness of these estimates using cause specific mortality. While privatization is associated with significant reductions in deaths from infectious and parasitic diseases, it was uncorrelated with deaths from causes unrelated to water conditions.

That was from a paper describing the experience of the privatization of parts of the Argentine water supply system. There is also this fascinating comparison done by The Economist (sorry, subscription required).

The privatization of the UK water industry left an opportunity to see which management method really worked. In England, purely private profit making companies supply the water and sewage services. In Wales, it is a mutually owned company, one that does not specifically pursue profits. In Scotland, a state-owned company, again, run for goals other than pure profit. In Northern Ireland -- directly -- by a government department.

Now the UK is, despite the news stories you'll have seen recently, generally an un-corrupt country. There's plenty of capital, no shortage of good managers, a well educated workforce and so on. Whatever differences we see should be simply and only down to the different incentive structures that the providers face.

The results?


As you can see, the further away from a profit motivated entity the provider becomes, the worse the quality and the higher the prices. It would appear that government provision of water is simply economically inefficient by our above metric. Using private providers gives us better quality at lower cost, meaning users are better off with no one worse off. (It's worth noting that the three Celtic countries are a great deal wetter than England, rainfall dropping as one moves south and east across the UK. Really, how could anyone make water expensive in Ireland for goodness sake? They cast commemorative medallions for three consecutive days without rain!)

Now I will agree that this isn't completely free-market stuff. Water is a natural monopoly in a geographic area, the companies do need to be regulated. But that's OK; we know how to do that too (perhaps a little too detailed, no, mind-numbingly boring, to be explained in full here).

Perhaps I could put all this another way to drive the point home: Imagine you were one of those who had to walk for hours each day to collect inadequate amounts of stinking and infected river water that will probably kill at least one member of your family. News arrives that someone is going to build a new and complete water and sanitation system. Would you be happier to hear that it was going to be a profit maximizing capitalist entity, greedy money-grubbers acting in their own self interest? Or would you prefer Robert Mugabe? And if you knew the information above what would your answer be?

Or if you really want to get to the nub of the argument: We can't have just governments providing water and sanitation. Don't you realize it's all much too serious a problem to leave it to them?

The author is a TCS contributing writer and editor of 2005 Blogged.

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5 Comments

paying for clean water
Lomberg has estimated that if the money that is being used to meet the Kyoto were to be redirected, we could supply clean water to every man woman and child on the planet.

No Subject
Pure water doesnt just appear. It has to be pumped and then cleaned. This takes work. This takes technology. This takes capital. You are not paying for water. You are paying for the privilege of clean and readily available water that otherwise would have taken your own labor to produce. Simple enough. And this is why private companies can and morally should profit from the sale of water. The reason isnt and should not be so pragmatically argued as the author of this article did. It falls flat. And his handwaving argument that these companies need to be regulated is utter nonsense.

Providers and regulators should be separate and have an adversarial relationship
Even leftist can understand that providers and regulators should be separate and have an adversarial relationship. This is because they have opposing incentives. For government to provide water you would need non-government organizations to police quality.


provider and consumer
No regulator is needed, just an informed consumer.
The adversarial relationship is already built in.

Not to mention....
... that in many of those places, the local government could easily supply their own water if they weren't spending their resources on weapons to attack their neighbors.

Why is it that WE should supply anything; let THEM look to themselves for solutions to their most basic needs, instead of trying to be the best armed backward peoples on the planet.

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