Granny’s waterworks

Written By: - Date published: 1:30 pm, November 2nd, 2009 - 17 comments
Categories: articles, privatisation - Tags: , ,

I think Granny Herald must have shares in Infratil, based on her rubbish editorial today:

Particular fervour is reserved for private-sector participation in this sector, perhaps because water is one of life’s necessities. Rarely is it conceded that, in reality, it occupies the same utility bag as electricity, which in this country and elsewhere has been shown to sit comfortably in private hands.

Um, no. It’s one of life’s necessities.

Rarely, either, is it admitted that, in matters of utilities and infrastructure, private-sector involvement is often essential to bridge the disparity between the demands on the public purse and the resources available to meet them.

Huh? Where do private sector owners get the money from? Oh yeah, the customers, who are also the people who pay for public services. There’s no free lunch here. Either we pay for a public service or we pay a private company, which is just out to make a buck (from your wallet) and isn’t accountable to the public.

As well as providing much-needed investment, private participation brings cost efficiencies and financial discipline.

And, pray tell, what evidence is there that the private sector brings cost efficiencies over and above the cost of the private companies’ profits? Evidence from outside a first year economics textbook, please. And, how does the private sector provide investment? Oh, right by borrowing the money, which has to be repaid with interest (at higher interest rates than the government can borrow at), ultimately paid for by the customer.

Boot (build, own, operate, transfer) schemes have, however, been widely used in Australia, albeit not always successfully.

Yes, great! Let’s copy a failed model!

The secret, from a ratepayer perspective, is safeguards that ensure the public partner does not have to bear more than its share of bail-out costs if a project fails to meet expectations. The private company must be in no doubt about the risk to itself.

Um, and again, fail on the basic economics. How does a company cover itself against risk of loss? By buying insurance or building up cash paid for by passing the cost on to, you guessed it, the customer.

At the same time, however, such companies need to be able to make any project profitable. A fair return is essential

Or, we could just continue to pay for local government to provide the services and not pay anyone’s profits. No?

the law will be changed to stop councils controlling the management of privately run water services but they will retain a final say on pricing and policy. That backstop may answer some of the concerns of those who fear the cost of water services will escalate. But it could also offer a considerable disincentive to private investment. If councils are inclined to meddle, companies may see themselves having too much of a burden of risk and too little chance of a viable return.

So, that passage admits that councils would have to let water prices rise if water companies are privately run. Wow, I’m really getting sold on this idea.

In England, the private sector has shown a ready appetite for investing in water services. The experience has been somewhat chequered, with critics pointing to price rises and queries over water quality.

Yeah, let’s have some of that here.

In time, the degree of private-sector interest will show if it has got the balance right.

Basically, Granny’s saying ‘let’s have a great experiment with the provision of a critical resource following the disastrous example set overseas. We’ll know it works if companies swoop in to suck profits out of us!’ Sounds fun. But, hold on, I thought success was people getting dependable, high quality water cheaply. Silly of me, I was thinking that this was about the interests of the people, not the corporates.

Currently, we have perfectly adequate publicly-owned water services but, apparently, a ‘balanced’ approach means allowing foreign-owned companies to come in and make a profit off them. There’s no balance there – just the blind, self-serving ideology of the right.

17 comments on “Granny’s waterworks”

  1. Armchair Critic 1

    The assets will be sold to companies like Infratil, who bought Lubeck Airport for 10m in 2005 and sold it back to the Lubeck council this year for 25.5m. Nice business if you can get it (who would have guessed that even greed is an exportable commodity), but from a ratepayer’s perspective there is no sense at all in doing this.

    • Rob 1.1

      Honestly these sorts of comments leave me cold. Why is it the company’s fault that they purchased this asset, they surely did not hold a gun to the council. Then further why is it the fault of the company that they sold the asset for a profit back to the council. The council obviously felt compelled to pay 15.5M more for the asset, maybe it was due to the airport performing better than when the council managed it.

      I think the fault here sits with the council and that the people on the council obviously had zero skills in managing an infrastructure asset.

      This is probably the predominate reason that a lot of people (not all obviously) have issues with large state ownership. They just have a clear lack of understanding on how to manage these services correctly.

      • Armchair Critic 1.1.1

        Rob – there is nothing explicit in my comment about fault or blame. If there is something implicit, it was unintended, except for a hint of sarcasm in the “good work if you can get it”.
        I agree the fault lies with the council. But I don’t think it is obvious that the council had zero skills in managing the asset. How did you reach that conclusion? I would say it is more likely that the council was captured by an ideological group that believe that council’s have no business owning infrastructure, so they sold this asset. But the reporting by the MSM has been short on detail, so it is hard to be sure.
        Care to enlighten us with your opinion on the virtues of the privatisation of Auckland’s water infrastructure? How happy would you be if something similar happened here?

      • snoozer 1.1.2

        or an ideological government sells off the asset, the private purchaser proceeds to run it down and asset strip it, the government realises it can’t let a major piece of infrastructure fail and has to pay through the nose to get it back because the company knows that the price of the asset failing to it is negilible but very substantial to the government.

        Private companies are always trying to get their hands on vital infrastructure because it lets them point a gun to the local or central government’s head – ‘pay us a nice rate or return – bail us out when we fail to invest – buy it back before it too late at a premium, or we can derail your economy’

  2. ghostwhowalksnz 2

    Seem to forget that water supply and distribution is a MONOPOLY.

    We need investment in NEW businesses not the private sector freeloading on public sector cash cows-( which are bought with offshore funds in highly leveraged transactions that avoid any local taxes)

  3. BLiP 3

    The New Zealand Fox News Herald is part of a foreign-owned multinational transporting cash out of the country and it seems to have pulled out all the stops in promoting the National Ltd® in the last few days. The weekend edition provided a canvas for John Armstrong to indulge his googly-eyed giggly-girl infatuation with John Key and included page after page of glowing reports on the PM’s mastery – then the editorial today, plus Patrick Gower’s 8 out of 10 rating and snow job on Crusher Collins, with a promise of more such puff pieces featuring National Ltd® minister to come, and yet another story showering praise on John Key this time for his globe-trotting diplomacy.

    Crosby/Textor must be creaming their pants but I wonder why there’s this apparent upsurge in pro-National Ltd® coverage at the moment? Can’t just be that its one year since the election, can it?

  4. Tom Semmens 4

    The British water privatisation experience hasn’t been “chequered” its been an abject disaster, widely studied and quoted as to why you shouldn’t privatise water.

    A report at http://www.psiru.org/reports/2001-02-W-UK-over.doc tell us:

    “…For the period 1993-1998 water mains in poor condition (grades 4 and 5) increased from 9% to 11%, equating to £0.78bn worth of pipes moving into these categories. As of March 1998 (the latest assessments) 10% of critical sewers were also in a poor condition… …A number of companies deliberately cut their investment programmes and used the ‘savings to maintain or increase their dividends. The companies which did this include Thames Water, North west water, and Yorkshire Water.

    “Britain’s biggest water company is to cut its investment programme by £350 million – but it will not be passing on the savings to its 7 million customers. Thames Water has no plans for early price reductions or rebates. Instead consumers – whose bills have increased by 50 per cent since privatisation in 1989 – face yet another rise in April, by inflation plus 0.5 per cent…”

    or

    http://www.foodandwaterwatch.org reports:

    “…There was soon a sharp public outcry as consumer water prices rose. On average, prices rose by over 50% in the first 4 years. The first 9 years produced price increases of 46% in real terms (adjusted for inflation).The public was further outraged when information was released about director’s pay and the profits of the 10 water companies. The real value of the fees, salaries and bonuses paid to the director’s increased between 50% and 200% in most of the water companies. The profits of the 10 water companies rose 147% between 1990 and 1997. Profit margins in the UK are typically three or even four times as great as the margins of water companies in France, Spain, Sweden or Hungary. This could explain why most of the 10 UK companies were quickly purchased (after the 5-year “protection’ period) by the big corporate water multinationals including Suez, Vivendi and RWE…”

    in New Zealand, where the ideal business model is of unfettered crony capitalism extracting monopoly rents whilst running down infrastructure – you can guarantee we’ll repeat every mistake the Brits made, plus some more.

  5. Clarke 5

    Given the standard right-wing approach to contentious and unpopular issues, I expect we will begin to see an artificial crisis being manufactured by The Herald in the not too distant future, softening punters up for privatisation.

    In fact, I suggest The Standard start a sweepstake on the home page – first one to predict the correct date of Granny’s “Auckland Water In Crisis!” headline wins … I dunno, a year’s subscription to The Herald? Second prize can be two years subscription.

  6. Tom M 6

    “And, pray tell, what evidence is there that the private sector brings cost efficiencies over and above the cost of the private companies’ profits?”

    http://cesifo.oxfordjournals.org/cgi/content/abstract/49/3/429
    Or specifically:
    http://ideas.repec.org/p/nbr/nberwo/6215.html

    Google is a great tool to save yourself from looking like you don’t know very much about what you’re talking about…

    • Armchair Critic 6.1

      Good one Tom. Got any links that:
      1. don’t require a subscription, and
      2. don’t conclude “no conclusions can be drawn, but trends are positive”, and
      3. relate directly to NZ (where the management of utilities is relatively good under a public service model), rather than Latin America, where the ethos around public utilities is quite different to NZ’s.

      • BLiP 6.1.1

        Air New Zealand, maybe?

      • Tom M 6.1.2

        Most if not all academic journals require subscriptions.

        So to be clear, you want economic evidence that:

        1) Is not published in an academic journal
        2) Draws large conclusions from small-ish case studies
        3) Assumes that utilities are always well-run
        4) Is not written by an economist

        In this case I suspect you will be difficult to persuade – but in any case the point wasn’t to argue by induction from Mexico that privatisation is everywhere and always good. That’s an absurd claim. And in fact, privatising monopolies in particular often goes very poorly.

        The point was that there is plenty of evidence out there that can be found with a quick google search, and it’s really weird how often people on this site (and particularly this author) often bemoan the lack of evidence for positions for which there is really quite a lot of evidence.

        • felix 6.1.2.1

          Thing is, Tom, whenever the subject of privatising water is talked about here the only examples given are latin american ones with little relevance to the situation in Auckland.

          If you have information about the experience of privatising a well run efficient publicly owned 1st world water system then by all means post it.

          Otherwise the relevance will, and should, be treated with skepticism.

        • Armchair Critic 6.1.2.2

          “Most if not all academic journals require subscriptions”
          I had noticed, many years ago. Not much point in posting links to them in support of an argument, though.
          “So to be clear then, you want economic evidence that:
          1) is not published in an econimc journal”
          No, published in an academic journal is fine, but if I can’t read it without a subscription, it’s no good to me.
          “2) Draws large conclusions from small-ish case studies”
          Well, just drawing a conclusion would be fine. Studies that don’t draw conclusions don’t really support an argument. I agree that big conclusions from limited case studies are not good.
          “3) Assumes that utilities are always well-run”
          No, just run like they are in New Zealand, rather than how they are run in Latin America. As Tom Semmens points out, the example from the UK, which may well be the most similar to the situation in NZ, has been “an abject disaster”. From what I could see in your references, they related to all sorts of privatisations, not just utilities, so the conclusions drawn are not specfic to utilities. Which puts a bit of doubt about the applicability of the conclusions to utilities.
          “4) Is not written by an economist”
          No, contributions from economists are good. But utilities are not solely about economics. Economics is just one facet of what makes a successful (or indeed an unsuccessful) utility. Having input from other professions that are involved in running utilities would provide a broader perspective. So rather than a paper with written by two or three economists, I would be more heavily influenced by a paper written by an economist and a non-economist.
          “In this case I suspect you will be difficult to persuade”
          I suspect you are right. And I agree with most of the rest of your comment. Except the bit about “plenty of evidence”, and my only disquiet here is the quality, rather than the quantity, of the evidence.

    • Armchair Critic 6.2

      And number 4. – are not written from the narrow perspective that one gets when economists write papers?

  7. chris 7

    I thought wellington and auckland’s water supplies were already privitised? Not that i support dumb ass privitisation at all.

    • Armchair Critic 7.1

      Commercialised, corporatised in parts, but not fully privatised. Not yet, anyway.

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