Thoughts on economics and liberty

The case for water privatisation

[This blog post is a placeholder]

Water and rail privatisation are challenging but can be successfully implemented, under appropriate regulatory oversight. Thatcher's privatisation saw consumers benefit (on average) both in terms of service quality and lower real prices. Water was an exception (initially) but I gather that this was due to lax regulation in the initial years. As regulation has tightened, things seem to have improved. There was a massive increase in labour productivity as a consequence of Thatcher's privatisation in the UK. Tends of thousands of people enabled to perform more useful things with their time.

This blog post is intended to be a placeholder for relevant research/papers in relation to water privatisation.

The Case for Water Privatization

The Untapped Potential of Water Privatization By Edwin S. Rubenstein

​Privatization of Water Services in the United States: An Assessment of Issues and Experience – by Committee on Privatization of Water Services in the United States, Water Science and Technology Board, Division on Earth and Life Studies, National Research Council

Private Sector Participation in Water Infrastructure: OECD Checklist for Public Action.

Water Privatization Trends in the United States: Human Rights, National Security, and Public Stewardship.

The UK's Privatisation Experiment: The Passage of Time Permits a Sober Assessment

Service and delivery – performance of the water companies in England and Wales 2009-10

My notes on FB: here | here | here | here | here | here This contains a grievance list, as well. The real benchmark must be the service levels in government hands. That is almost always at a deplorable level. (I do agree that public sector mangement can – in such cases – if carried out on the pattern of Singapore – with full-on incentives for executives – including stern accountability – can deliver comparable outcomes. Putting IAS officers who can never be dismissed is never going to work).

Implication of water Privatization in India.

Delhi looks at Nagpur, Hubli models to put water supply in private hands


Re: rail privatisation.

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Sanjeev Sabhlok

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7 thoughts on “The case for water privatisation
  1. Harsh Vora

    Thanks for sharing this Sanjeev. This topic needs to be dug deeper. I’m going to research on it in detail and will soon write an article about it.

  2. Sanjeev Sabhlok

    Sanjeev – I was listening to this video on water monopoly.
    Given that fixed costs will be high. How is this problem solved in real world.

    This also tells how privatization can go all wrong

    This is much about regulatory/incentive contracts, Vishal. No such thing can be implemented without a strong regulatory regime.
    Why is that a better idea than directly managing?

    Well, if you had incentives perfectly aligned (as they do in Singapore – but in their model there is absolutely NO possibility of any Ministerial/bureaucratic intervention) you could run in the government sector successfully.

    Since that is not easy you are better off by setting a stringent regulatory framework and using the carrot and stick to achieve results. Pricing models based on benchmarking/ rate of return (partially) etc. can ensure overall returns are not monpolistic.

    Wherever any such thing has failed it has done so because of lack of regulatory expertise.

  3. Sanjeev Sabhlok

    One of the reasons why privatisations in India (particularly of complex matters such as water and railways) are difficult is due to shortage of trained economists.

  4. Sanjeev Sabhlok

    This video talks that private providers who lay pipe can become a monopoly. How can this situation be handled.

    How is electricity provision handled – the guy who lays and owns the grid has a natural monopoly, and yet it is possible to have multiple suppliers over the same grid.

    Again, similarly with railway tracks – the owner is a natural monopoly but multiple carriers can run their trains over the same tracks.

    In general, anyone who sets up or owns a natural monopoly is regulated for a return on equity – this is a cost plus model that is used, not necessarily the only one that can be used, but seems to keep everyone happy. Key factors are how the underlying cost has been verified and what is the amortisation period allowed to the monopoly, and what happens post amortisation period. For examples, look to US electricity suppliers and rail carriers.

    Unbundling is the key. The distribution grid (a ‘natural monopoly) has been successfully privatised in Australia. There are many ways to privatise and regulate, but unless you’ve got a dedicated “privatised public sector” system like Singapore (its model is quite fascinating, but that’s discussion for another day), no ordinary bureaucracy can outperform the incentives of a privatised system

    In the cost plus model all the incentives would be aligned to jack up the cost.

    Even the basic cost+ model has almost always proved cheaper than direct government delivery, since it is always linked with a productivity dividend. In UK the privatisation of water led to achieving better results with half the staff.

    The issue that socialists bring up on a private cost-plus model is gold plating by the operator. What they conveniently forget is the corruption costs on government build outs – you have to only follow the irrigation scam in Maharashtra to figure out the HUGE costs – allegedly over Rs10,000 crores have been stolen in irrigation projects over the previous 7-8 years. And, Ajit Pawar still remains as a cabinet minister, and none of the bureaucrats have been charge sheeted yet. Not to forget Sushil Tatkare, who is also a minister.

    So, in the second case, tax payers money is looted and paid out by the government to these corrupt entities.

    In the first case, even if golf plating happens, the private entrepreneur has to pay out cash from his pocket to build out the enhanced infrastructure/capital costs and then recover it over the next 10-15 years. Typically, a physical inspection and a proper audit can simply remove the extra costs from the capital structure – so the private guy takes a big risk with this strategy, if you have a strong regulatory and transparency in the process. The other issue of billing capital costs without doing the work is resolved through a simple physical inspection. Finally, inflation risk is on the entrepreneur in this model. So, he pays with say, 2014 rupees, but gets paid back in 2019 or 2024 rupees – who knows what is the value of the rupee then?

    Privatisation eliminates corruption entirely. The government is no longer in the business of corruption but in the business of demanding accountability – which is fine. When done properly this is the almost as good as the Singapore model – which is so stringently honest and driven by private incentives – in the public sector – that it is almost impossible to replicate it elsewhere.

    Keeping such stuff in government hands is almost always the worst option.

  5. vishal

    Quite a coincidence. One Sanjeev Sabhlok is cursing the government for not privatizing the public sector, Another Sanjeev Sabhlok is cursing the government for privatizing the public sector. (That’s why democratic developing country takes time to developed because they want to lose vote bank)

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