The Water Has Been Sold; Next: Air. Pay up!

February 12, 2011 1:05 PM

How Small, Mostly Conservative Towns Have Found the Trick to Defeating Corporations. 'As the Right pushes privatization as a solution to the economic collapse, one organization is teaching communities how to defeat corporations.''For the past 30 years, there has been a deliberate effort to deregulate industry and to choke off federal support for public services and public spaces, paving the way for greater corporate control.''The goal is the same as it's been for decades: "The elimination of the public sphere, total liberation for corporations and skeletal social spending," 'One of the places where this strategy can be most detrimental is the corporate takeover of public water sources and infrastructure, which is elemental to our survival.'

'Corporations used to swoop in to try and "rescue" communities when they couldn't afford expensive upgrades, but now, even cities with well-functioning, in-the-black water systems are looking to sell or lease them in hopes that privatization will bring an influx of cash to pay for other programs.

Sadly, that's not usually how it pans out. "It's always the same false claim: Private is more efficient than public. The public unions are impossible to work with, they'll say, and we have a corporation that can save us dollars," Jack E. Lohman, author of Politicians: Owned and Operated by Corporate America, wrote in the Capital Times. "Rarely is that true, especially after they add all of the exorbitant salaries, bonuses, shareholder profits, marketing and political bribes that must be passed on to the taxpayer. These costs usually far exceed government waste, unless offset by egregiously low salaries that further harm the economy."'

'Any sane financial adviser would know that selling off a recurring revenue stream for a one-time boost to the budget doesn't make sense in the long run. After looking at the 10 largest sales and concessions of public water systems, Food and Water Watch found that rates went up an average of 15 percent a year in the 12 years following a privatization deal.'

So what can be done? Perhaps a new approach being pioneered by the Community Environmental Legal Defense Fund.

Previously (tangentially).

posted by VikingSword (60 comments total)

I just mentioned this in the Wisconsin Govt/Unions thread.

The person in charge of the regional water purveyor/utility made (in fiscal year 2009-2010 salary, benefits, etc) about $290,000 (less than the $350,000 that I had remembered).

The person in charge of the state-wide power company made (in 2009 salary, benefits, etc) about $4,495,000.

Now this is a bit of Apple's and oranges - the regional water purveyor/utility serves a population of about 2M people, while the energy company serves a population of about 2.7M people. So you'll forgive me if its a little bit off in terms of scale.

To quote someone else in that thread, The math doesn't work.
posted by SirOmega at 1:19 PM on February 12, 2011 [3 favorites]

Bah, why the hell did I write "Apple's" instead of apples.
posted by SirOmega at 1:20 PM on February 12, 2011

Give these people air!
posted by Relay at 1:25 PM on February 12, 2011 [1 favorite]

It's an interesting article, I think the liberal/conservative bit thrown in is a bit of a canard and there may be other factors (scale of community for instance) that have a lot to do with it... or what type (social vs fiscal) conservatives you are dealing with, etc etc...

However, not to be pulled too far down that path myself, local movements to assert control over basic necessities seems like a reasonable route to go. I tend to be one of those people who think that we can not fully embrace either centralization -or- decentralization of services. For some things one works great, and for other things the other is optimal. We, as humans, seem to want to put all our eggs in one basket and say .... "Centralizing X works well so lets do it for Y,Z,A,B,C..." Or, "Decentralization works great for Q, so it must be fantastic for R, S, T, U, V..."
posted by edgeways at 1:33 PM on February 12, 2011 [3 favorites]

Bah, why the hell did I write "Apple's" instead of apples.


Apples®

Seriously though, there's a few flaws in this and the two biggest ones involve the influence of state and federal policies in local expenditure and price fixing on the corporate level.

First, if the federal and state governments disable local autonomy by forcing them to accept the lowest bidder and putting them in a situation where they have to conclusively prove backing out of what turned into a shady deal with unfulfilled promises by the corporations part is economically sensible, then the local governments have their hands tied and purchased by the lobbyists lurking the state congressional halls.

Secondly, when the corporations do the bait and switch (a la Vanderbilt) where they intentionally lowball their prices since they can afford to write off longer term losses than the little guys until the local utilities cannot afford to compete... then takeover those contracts and recoup on the backend, it would require those already in the pockets of lobbyists to turn around and bite the hand that feeds them.

The only solution is going to be a resurgence of the Red Scares the US had in the 20's, 40's, and 60's, where enough people start suggesting the ultra-progressive, and thus Communist, ideologies, the corporations say "Ok, shit. We'll play ball, and our execs will go back to paying taxes on their capital gains and 75% of their income we have enough ammo to blame the Unions again..." (Not to say they're above reproach in some cases) will we see results.
posted by Bathtub Bobsled at 1:39 PM on February 12, 2011 [1 favorite]

"75% of their income until we have enough ammo to blame..."

Shit, as if the run-on sentences weren't bad enough. Sorry.
posted by Bathtub Bobsled at 1:41 PM on February 12, 2011

"Any sane financial adviser would know that selling off a recurring revenue stream for a one-time boost to the budget doesn't make sense in the long run. "

Actually any sane financial adviser knows that whether it makes sense or not depends entirely on what you get paid for it. This is one of the core concepts of sound financial planning.

The author's financial illiteracy does not bode well for his advocacy.
posted by storybored at 1:43 PM on February 12, 2011 [1 favorite]

I think it's pretty obvious from context that they're not getting paid enough to make it a good deal, or else there wouldn't be a whole article about how it's a terrible idea. But nitpicking every detail surely discredits the content.
posted by Dr.Enormous at 2:00 PM on February 12, 2011 [3 favorites]

Bit of a derail, but I was about to post something on the now deleted WI pension fund thread about the relation between the recent crisis in mortgage-backed securities (that helped the fuel the housing bubble and brought the banking system to the edge of collapse) and the ongoing crisis in state pension funds, and it may also be relevant here, b/c they are in fact related: both in terms of the level of risk and the possibility that banks have been looting the state pension funds. For instance, about a month ago a coalition representing more than $430 billion in pension fund investments asked the boards of four of the largest U.S. banks to examine their mortgage and foreclosure practices.

This follows recent revelations of banks overcharging several states (re: attorneys general in California, Virginia, Tennessee and Florida broadened their investigations into whistleblower allegations that public pension funds in the U.S. were overcharged for currency conversion by tens of millions of dollars), and ongoing investigations by NYSAG Cuomo into systematic pension fund corruption/fraud.
posted by The Emperor of Ice Cream at 2:00 PM on February 12, 2011 [3 favorites]

Hmm, functional water systems sound like SOCIALISM to me.
posted by fuq at 2:03 PM on February 12, 2011 [2 favorites]

Yeah, harumph! Look at what a mess private corporations have made of electricity distribution and delivery...
posted by ZenMasterThis at 2:09 PM on February 12, 2011 [1 favorite]

...and generation, even.
posted by ZenMasterThis at 2:11 PM on February 12, 2011

There are markets for electricity. And perhaps you've forgotten the biggest fuckups in the power distribution grid are due to corps not performing adequate maintenance and testing... Because it cuts into the profits.
posted by seanmpuckett at 2:16 PM on February 12, 2011 [4 favorites]

If you want the government to protect you against powerful corporations, it's not clear to me that you're actually a conservative.
posted by LastOfHisKind at 2:26 PM on February 12, 2011 [4 favorites]

Actually any sane financial adviser knows that whether it makes sense or not depends entirely on what you get paid for it. This is one of the core concepts of sound financial planning.

Well, from a purely financial standpoint, that's true -- if someone pays you enough for a recurring revenue stream, it's absolutely worth doing.

But the thing is, you then need to use that money to obtain another revenue stream of some kind, or you'll eventually consume and destroy the money. Governments have a bad habit of using money in ways that will not generate a later return.

It would be very unusual for a municipality to sell off its water system and actually end up in better shape, no matter what the price was. Nearly always, they'll turn that kind of lump sum into projects that actually COST money to maintain, instead of GENERATING it, while simultaneously harming their economy by paying too much for water. They increase their overhead, decrease their revenue directly, and then decrease it again through indirect effects. Bad, bad scenario, no matter how exorbitant the initial lump sum was.

There may be communities out there with sufficient financial savvy to handle this kind of situation well, but I certainly haven't heard of any.
posted by Malor at 2:32 PM on February 12, 2011 [2 favorites]

Sounds like there's areas of policy where there are still some conservatives who are able to come to grips with the substance of the issues rather rhetoric.
posted by weston at 2:35 PM on February 12, 2011

ZenmasterThis: Look at what a mess private corporations have made of electricity distribution and delivery...

Just as a data point, I lived for awhile in a community with a city-owned electric company. They were truly outstanding, with better rates than anywhere else in California. When the blackouts hit during the early 2000s, due to the Enron debacle, they were serenely unaffected, sailing through without a problem. The lights in the city stayed on, while they were flickering everywhere else in the state.
posted by Malor at 2:36 PM on February 12, 2011 [5 favorites]

Another way of putting it: I think it's a very bad idea for governments to outsource civilization.
posted by Malor at 2:41 PM on February 12, 2011 [29 favorites]

I've been reading a bit lately about Thomas Linzey of the Community Environmental Legal Defense Fund as a possible choice for a local lecture series. He's been doing legal work in this realm where cities (including Pittsburgh) pass local ordinances that strip or severely restrict the corporate rights of personhood within their jurisdiction. I had no idea anyone was going to this length to present a serious challenge to these corporations. Interesting stuff.
posted by sapere aude at 3:10 PM on February 12, 2011

OK, next time I read the frickin' article first. Sheesh. Leaving now.
posted by sapere aude at 3:12 PM on February 12, 2011

The problem with the analysis is that the one time boost in revenue may be the best choice for the politician. They aren't analyzing what is best for the people.
posted by furiousxgeorge at 3:12 PM on February 12, 2011 [1 favorite]

Actually any sane financial adviser knows that whether it makes sense or not depends entirely on what you get paid for it. This is one of the core concepts of sound financial planning.

NEVER make long-term payments on short-term assets. NEVER sell long-term assets for short-term payments. Easy.

And selling control of water? Absolutely, positively the stupidest fucking idea ever.
posted by Benny Andajetz at 3:24 PM on February 12, 2011 [6 favorites]

The Water Has Been Sold Next Air Pay up
In Little Nemo in Slumberland, Winsor McCay depicted a planet Mars ruled by ruthless capitalists who owned the land and the air and forced the hapless Martians to pay for the privilege of breathing. Not too bad a satire for a 1910 comic strip.
posted by elgilito at 3:45 PM on February 12, 2011 [2 favorites]

And selling control of water? Absolutely, positively the stupidest fucking idea ever.

I don't know… it worked out well enough for the people of Cochabamba, Bolivia.

Oh wait, I meant it totally didn't. My bad.
posted by Civil_Disobedient at 4:04 PM on February 12, 2011 [3 favorites]

"Centralizing X works well so lets do it for Y,Z,A,B,C..." Or, "Decentralization works great for Q, so it must be fantastic for R, S, T, U, V..."

Decentralized Q would make for some more interesting James Bond movies.
posted by box at 4:13 PM on February 12, 2011 [2 favorites]

The problem with privatization of utilities is that these are natural monopolies so by giving them over to *anyone* (gov't or corporations), there's no competition and competition is what would make things better in the long run.

I don't think the issue is that one (govt) or the other (corporate) form of ownership is inherently bad. I think it's whether the particular owner is competent and has integrity.

For every corrupt and profit-hungry corporation, there are corrupt and slothful governments. In the end, it is proper oversight and making sure the right people are in place that really matters.
posted by storybored at 4:49 PM on February 12, 2011

"[T]hese are natural monopolies" only if you consider 19th century distribution technologies.
posted by Ardiril at 5:14 PM on February 12, 2011

"Any sane financial adviser would know that selling off a recurring revenue stream for a one-time boost to the budget doesn't make sense in the long run. "

Actually any sane financial adviser knows that whether it makes sense or not depends entirely on what you get paid for it. This is one of the core concepts of sound financial planning.

The author's financial illiteracy does not bode well for his advocacy.

Frankly, that's pretty fatuous. I mean, we can debate how true any statement is theoretically, but when seen in the context of a particular set of conditions, all such theory becomes just that - theory.

And in the concrete reality, the statement in the article is pretty accurate. It was made in the context of essential government services being sold off to corporations, and from tested experience in the field, data that has been provided in the article, the analysis shows that the community loses in the long run. In that context, the statement is therefore quite accurate.

Furthermore, it doesn't take much thought to see why that is so, quite apart from "corporate greed". After all, if the corporation pays *more* than what the recurring revenue stream is over whatever period of time, they'd be losing money. They are in the business of making money. Therefore they will turn around and charge more than they paid out - ergo, the community loses out, long term, necessarily. Saying "but the government would get to invest that lump sum", still does not put you ahead, because the corporation could do exactly the same thing, and presumably if they thought the'd get more that way, they would not go for the deal in the first place - again, they must make more from it. The other propaganda point is that the corporation will be so much more efficient, and therefore everyone would benefit win-win - except it doesn't work out that way, because the prices go UP, and so, the community ends up paying more, rather than the corp being more efficient so they can charge less and still make more profit - just ain't so.

Of course, this is a particularly stupid supposition, because the totality of the financial impact is not limited to the immediate transaction. After all, the corporation is now free to charge much greater prices for the services. So let us say the corp pays $100 to the government, while the recurring revenue stream is $1 a year, and so the government can say "well, we came out ahead for quite a while" - but that's not at all what happens, because now that the corporation has control over the revenue stream, they can charge, say, $50 a year, and what happens then? They're ahead within 3 years. And - drumroll - what happens in reality? Well, wouldn't you know - prices have gone up every time the community has gone for such a deal - bingo! Surprise, surprise.

And finally, if you want to get all mathematical about it, given unlimited time, you could always pile up enough recurring revenue to make more than any lump sum given up front - since the lump sum is going to be finite, while recurring revenues are infinite barring the heat death of the universe.

Bottom line: given the specific situation, the statement: ""Any sane financial adviser would know that selling off a recurring revenue stream for a one-time boost to the budget doesn't make sense in the long run" is far more likely to be true than any real-world possibility of the community coming out ahead in such a transaction.

One may take all sorts of issues with the article, but what you picked is not a good target - because we have real-world data to back it up.
posted by VikingSword at 5:19 PM on February 12, 2011 [13 favorites]

In the end, it is proper oversight and making sure the right people are in place that really matters.

In a functional democracy, elections are supposed to be the oversight mechanism. If water is too expensive due to corruption or sloth, the elected representatives in charge of supervising water supply can be - theoretically - booted out of power in the next election cycle. Granted, this doesn't work as well as it should, but a least some power is in the hands of the voters. At worst, take to the streets and riot. But there's no mechanism - even theoretical - when a corporation is in charge of the monopoly. How can a local community tar-and-feather out a greedy, largely invisible monopolist who only answers to its shareholders and can bribe its way out from any legal or political problem?

I live in a country where the old and rather efficient state-run monopolies that drove the nation's growth post-WW2 have been slowly replaced by private ones, and the only benefits for us the people aka "consumers" (not for the top executives and shareholders) have been price hikes, billions spent on idiotic advertising, obfuscated prices that change every minute, uncomprehensible legalese on contracts and higher suicide rates among employees who somehow couldn't handle the transition between the "competent civil servant" status and the "corporate tool" one.
posted by elgilito at 5:42 PM on February 12, 2011 [8 favorites]

at least some power is in the hands of the voters - Voters cannot change history.

no mechanism - even theoretical - when a corporation is in charge - The mechanism is called a contract.
posted by Ardiril at 5:48 PM on February 12, 2011 [1 favorite]

For every corrupt and profit-hungry corporation, there are corrupt and slothful governments.

Well, sure. But -- although it isn't always true in practice -- in theory, the government works for us. Corporations are not in the business of making sure people have clean, drinkable water; they're in the business of maximizing return on investment. Turning the necessities of life over to them is a very, very bad idea.
posted by steambadger at 6:20 PM on February 12, 2011 [3 favorites]

On preview: what VikingSword and elgilito said.
posted by steambadger at 6:23 PM on February 12, 2011 [1 favorite]

Voters cannot change history
Voters voted for nationalisations in my country, several times in the past century. They did make history. That's one of the points of voting actually.

The mechanism is called a contract
Which is worth what exactly? What kind of leverage does a community, let alone an individual, have against a rogue monopolist who decides that the contract is void and can afford decades of legal fees to fight the case? (I agree that this may work better in countries that allow class actions though).
posted by elgilito at 6:52 PM on February 12, 2011 [2 favorites]

Well, that's YOUR country. We're talkin' 'bout the good ol' USofA here.
posted by Ardiril at 7:02 PM on February 12, 2011

All I know is, these dipsticks are thinking way too small. Look at all the wasted opportunities in leveraging the market value of air. That's right, its time to license and commodify the wasted revenue stream currently being neglected through the shortsighted and shameful policy of allowing consumers to have free and unlimited access to oxygen.

Put into the hands of a well-run corporation, customers could be given the opportunity to select and choose the atmosphere of their choice; enhanced respiration experiences could capitalize on the demand for upscale and designer inhalation events.

The potential for strong brand-building and increasing shareholder value through the controlled distribution of an increasingly limited and in-demand resource would surely result in increased tax revenues and expanding job opportunities for forward thinking communicates.
posted by PareidoliaticBoy at 8:33 PM on February 12, 2011 [1 favorite]

And in the concrete reality, the statement in the article is pretty accurate. It was made in the context of essential government services being sold off to corporations, and from tested experience in the field, data that has been provided in the article, the analysis shows that the community loses in the long run. In that context, the statement is therefore quite accurate.

If we accept that this true in the past, why does it necessarily have to be so in the future? The author's statement that any sane financial adviser has a no-brainer when presented with a short-term payment for a future revenue stream is the one that is fatuous.

Are governments too stupid to learn from the past? If they see that after privatization, all this evidence that the author has provided, that corporations raise prices then don't governments have certain options? e.g. put a clause in the privatization contract that limits price increases?

I'm not saying that privatization is best in all cases. I'm saying look at each jurisdiction based on the numbers. If a gov't provides water service that runs at a loss, and a company steps forward that can run it profitably while keeping prices acceptable, any lump sum payment will leave everyone further ahead.
posted by storybored at 8:47 PM on February 12, 2011

Well, sure. But -- although it isn't always true in practice -- in theory, the government works for us. Corporations are not in the business of making sure people have clean, drinkable water; they're in the business of maximizing return on investment. Turning the necessities of life over to them is a very, very bad idea.

Do you think food is a necessity of life? Do you think corporations should also get out of the business of providing food? Why or why not?
posted by storybored at 8:49 PM on February 12, 2011

What I keep coming back to is that it's not a case of government vs corporations. If your water supply is in the hands of asshats, you don't want to drink from the tap. There are asshats in government and asshats in the corporate world.

If your municipal authority is incompetent, privatization is a good idea.

If the corporations bidding for a contract are slimeballs, then don't privatize.
posted by storybored at 8:59 PM on February 12, 2011

Ardiril writes "'[T]hese are natural monopolies' only if you consider 19th century distribution technologies."

I'm curious: what 21st century distribution technologies changes piped water from a natural monopoly into a free market?
posted by Mitheral at 9:15 PM on February 12, 2011 [1 favorite]

Mitheral: The new Water over Ethernet protocol. It can transfer one molecule of water per successfully transmitted frame.
posted by Grimgrin at 9:55 PM on February 12, 2011 [2 favorites]

Teleportation. Seriously, Google it, I can't do all the legwork for you.
posted by indubitable at 10:00 PM on February 12, 2011

Someone explain to me how a municipality can pass "binding local ordinances that refuse to endow corporations with constitutional rights" in a community. State law trumps local law, and federal law trumps state law. The present reading of the Constitution is that corporations have the same rights as individuals. The fair city of Grand Podunk cannot ordinance that away. Nor can Grand Podunk afford to defend its ordinance in court. I don't see what is being achieved. What am I missing?
posted by bryon at 10:03 PM on February 12, 2011

After all, if the corporation pays *more* than what the recurring revenue stream is over whatever period of time, they'd be losing money. They are in the business of making money. ... And finally, if you want to get all mathematical about it, given unlimited time, you could always pile up enough recurring revenue to make more than any lump sum given up front - since the lump sum is going to be finite, while recurring revenues are infinite barring the heat death of the universe.

No, because money later is worth less than money now -- it's discounted. See the concept of net present value.

because the prices go UP, and so, the community ends up paying more, rather than the corp being more efficient so they can charge less and still make more profit - just ain't so.

There's no reason that part of the sale terms couldn't include price regulation.
posted by shivohum at 10:10 PM on February 12, 2011

There's no reason that part of the sale terms couldn't include price regulation.

Well, except that the business case typically is completely dependent on price increases.

Here in Victoria Australia we tried to do it with price regulation.

We got National Express (a British train operator) to pay a lump sum to run part of our public transport system for 5 years starting in October 2001, but with the ticket prices fixed by the State Government.

Result? 14 months later in December 2002 they said "We've decided not to run the trains any more, sorry, good luck sorting it all out" and walked away from the contract.

The State Government had to take over operations temporarily. There were significant unplanned expenses from the whole episode. The government then resold the rights to French company Veolia, presumably for a pittance.

So not a great experience overall.
posted by dave99 at 11:47 PM on February 12, 2011 [1 favorite]

If your municipal authority is incompetent, privatization is a good idea.

If the corporations bidding for a contract are slimeballs, then don't privatize.
posted by storybored

If your municipal authority is incompetent, you elect competent placements. The general public has no way of knowing if a specific company is run by slime-balls, (worldwide banking collapse ring any bells with you at all?) and even if they did, there is no guarantee that the company won't be run be slime-balls next week. Putting something as essential as water into the hands of an entity artificially designed and constructed to posses no conscience whatsoever is imbecilic; it's like giving a gun to baby.
posted by PareidoliaticBoy at 11:55 PM on February 12, 2011 [4 favorites]

what 21st century distribution technologies changes piped water from a natural monopoly into a free market?

Think differently.

Rainwater harvesting

Private well drilling

Air to water harvesting

Municipalities and states are making technology like this illegal
posted by AndrewKemendo at 4:30 AM on February 13, 2011

Those are all alternative sourcing methods not a replacement for distribution. They are also all tech that is essentially as old as pipes but that shouldn't disqualify them.
posted by Mitheral at 7:02 AM on February 13, 2011

If you want the government to protect you against powerful corporations, it's not clear to me that you're actually a conservative.

Depends on which interest group's preferred distortions of the language you prefer to adopt, because technically, belief in complete unfettered markets is not called conservatism at all but is called "classical liberalism" or "economic liberalism."
posted by saulgoodman at 9:02 AM on February 13, 2011

Quite a quote:
"The hardest places to work are the liberal progressive communities because they think we have a democracy and they are intent on working within the existing structure to try to find a remedy rather than tossing it and working on something from scratch," said Linzey.

Reminds me of Ian Morris' argument about the "advantages of backwardness'".
posted by doctornemo at 10:54 AM on February 13, 2011

Great article. Thanks for the inspiration.
posted by nickyskye at 5:28 PM on February 13, 2011

Putting something as essential as water into the hands of an entity artificially designed and constructed to posses no conscience whatsoever is imbecilic; it's like giving a gun to baby.

This idea came up before and I'm curious to know: Do you think food is an essential of life? Do you think corporations should also get out of the business of providing food?
posted by storybored at 5:57 PM on February 13, 2011

This idea came up before and I'm curious to know: Do you think food is an essential of life? Do you think corporations should also get out of the business of providing food?

It's not whether it's essential, but whether it's a natural monopoly.

Water distribution is a natural monopoly. There's only one provider. Laying new pipes is really expensive so the existing provider is protected from new competitors. The provider knows this, and increases prices as far as they can. Even your hardest free-market capitalist knows this is a poor outcome economically.

Food production is not a natural monopoly. Anyone can make food at home and sell it with a small amount of capital. Relatively free entry of competitors helps to regulate prices.

Now competition in the food market is far from perfect, but it doesn't have structural monopoly issues like utilities such as water distribution, and I have no issue with the private market coordinating it.
posted by dave99 at 6:23 PM on February 13, 2011

This idea came up before and I'm curious to know: Do you think food is an essential of life? Do you think corporations should also get out of the business of providing food?

Also, I'd point out that, while I don't think corporations should get out of the business of providing food, God help us if they were ever allowed to do so without any public oversight or regulation, because our meats would probably all be made out of poor children and sawdust within a few decades. Just in the past few years, we've found food producers slipping toxic compounds into dog food and baby formula to artificially elevate their ostensible protein content--not to mention toxic candy for the kids.
posted by saulgoodman at 7:36 PM on February 13, 2011 [4 favorites]

This deeply confuses me.

In the UK, privatisation of the utilities has been a very great success. Prices are significantly down - near the lowest, if not the lowest in Europe. Investment is drastically up, certainly over the neglect that a century of governments showed to our Victorian pipes.

Prices are now going up again, but that's because we've had the "efficiency dividend" from eliminating the government and bureacratic attitudes that used to dominate the UK's utilities. Friends of mine who work in the water treatment trade now tell me they have projects with actual budgets...

Off the top of my head, I can't work out why the US has had such a bad experience with privatising the utilities. Is it the structure of corporations working under federal rules - but taking contracts on a state-by-state basis? Is it a lack of strong regulators? (The UK chattering classes love to criticise our OffWat or OffCom or OffGems, but they have been largely effective - much more than I can see elsewhere).

Take an example: the UK breakup of the electricity monopolies into a market of energy producers, energy retailers and a national grid company. The result has been innovation, reduced prices and (just about) enough investment to keep the grid stable (it's not perfect - investment is going to have to rise again). This was largely copied by California and look at the mess under Governor Davis; blackouts, rolling brownouts and everyone paying a fortune.

Can anyone here shed light on why the outcomes are so wildly different? Is it just in the details? Or the lack of regulators? or what?
posted by Hugh Routley at 1:54 AM on February 14, 2011

In the UK, privatisation of the utilities has been a very great success.

I think it's important to point out that a lot of people in the UK have criticised privatisation, particularly of the railways.

Unfortunately, I don't know enough about the subject to offer a really informed comment, but just living in the UK exposes you to an enormous amount of criticism of certain privatised utilities (not water and gas, so much, in my experience).
posted by lucien_reeve at 3:51 AM on February 14, 2011

Oops: I forgot. There was another comment I wanted to make:

I think a lot of the problem here has to do with incentives.

Politicians and many corporations have incentives that are too short term. In practice, they gain too much by doing things that look good this year - and set things up badly for the future.

Maybe some areas of society, the economy - or life generally - need long-term planning.
posted by lucien_reeve at 4:09 AM on February 14, 2011

Hugh Routley, I am not sure where you are getting the idea that utilities privatisation in the UK has been a great success. We do enjoy comparatively low prices in the UK, but it is not clear that this is due to privatisation

... the results show that market forces represent only about half of the end-user price (both for electricity and gas) whereas national fiscal and regulatory elements are responsible for the other half through distribution tariffs, energy taxes and VAT.

I am sure a limited number of ex-civil servants who became executives with stock options in the new companies would agree with you, and perhaps those who got shares at the time of issue at their vastly under rated value.

Water privatisation in particular had not been good news for the consumer, with prices rising steeply immediately after privatisation. They are forced to invest in infrastructure, yet show profits on their balance sheets, how does that work?

... the water companies have spent many tens of billions of pounds to rectify the problems of the past under increased quality and environmental regulations. One might have expected that such crippling demand to invest in new capital would have had an effect on the companies’ ability to deliver good profits to shareholders. To the contrary, both profits and dividends have held up very well (consistently above the FTSE 100 average performance). Together with the capital growth, especially just after privatisation, I suspect most long-term shareholders are very happy with their investment.

How did the water companies manage to achieve this ‘magic’? The answer is that they didn’t spend their own money to fund their capital programme. Many manage huge debt mountains that simply couldn’t be maintained by other private sector companies trading elsewhere in the open market. Additionally water companies with large capital programmes that they could deliver at a lower cost than agreed with Ofwat were allowed to drop this ‘profit’ straight through to the bottom line. It was this ability that allowed them to deliver large profits whilst building significant levels of debt. Reminiscent of the current banking crisis, the true cost of the UK water sector’s post-privatisation capital programme will in fact be borne by our children and grandchildren. The current generation of water and wastewater service consumers are in effect only paying the interest on that debt.

Kelda found that water provision was difficult when the regulators actually started paying attention and re-mutualised that part of the company.
posted by asok at 6:02 AM on February 14, 2011 [1 favorite]

That's a good comment, asok, but remember that it's okay to stick future generations with bills for infrastructure that they need to live. Giving them a debt burden for something that only benefits us is horrible, but a debt burden for something that's directly benefiting them as well is okay, as long as the debt is fully liquidated by the time the infrastructure is worn out.

There's probably nothing more important to civilization than the provision of water, sewer, and food, and pipes and treatment plants are absolutely essential. This is the kind of thing that long-term debt is extremely well-suited for, because these things last a LONG time.

Yes, it would be fiscally better to just pay for it up front; it would cost less that way, over time. But there are few governments in the world that have maintained that kind of fiscal discipline, due to their other stupidities in spending. Having painted themselves into a corner, long-term debt is their only option. It means that water is more expensive than it probably should be, but properly structured, this solution won't leave a mounting problem behind.

Now, if the debt isn't self-liquidating, then there's a big, big problem.
posted by Malor at 8:12 AM on February 14, 2011

Oh, I should also amend, that even had the water been kept in government hands, they'd still have had to do the same thing with debt. They don't have the money, either.

In other words, don't point at the debt as a reason why privatization was bad. It may very well have been a TERRIBLE idea, but the existence of debt itself is not a good indicator.

Considering the other debt burdens carried by governments, and the fast-and-loose books that so many of them run, pulling water off into a separate legal entity may have been a very good solution indeed.... it means that, even if the governments are forced into bankruptcy, as many probably will be, the water supply and pricing should be unaffected.
posted by Malor at 8:18 AM on February 14, 2011

...Just as soon as I can get five competing water providers to run accurately priced and independently graded taps to my house so I know which compromise of quality and price I can live with, sure, we can let the free market decide on water.

Should we give out monopolies to corporations based solely on whichever one's willing to pay the most for the privilege to set the rates? I really don't think so.

Or are you going to keep playing your one-note piano, Boring Story?
posted by Orb2069 at 11:17 AM on February 14, 2011