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Privatised water combats supply problems

If you want sensible use of water resources, then we need real market prices.

Last month saw the beginning of a vicious drought in South Africa, which has seen millions of people affected in Cape Town and has seen government rationing the supply of water to 50 litres per person per day. A report by Channel 4 News seems to blame climate change and the population increase for the drought, and one woman interviewed says that the government needs to improve its distribution of water. But is it really the government that can find the solutions to water distribution problems?

In an article for PoliticsWeb, free-market advocate Russel Lamberti that water provision in South Africa inherently suffers from socialism. He points out that the state monopoly on water has made it inefficient, and that the distortion of market prices has created expensive provision for prices under the market value. The fact that people get water cheaper than they would otherwise, makes them consume more water, which contributes to the droughts. The author continues:

"The local government has scrapped the first-five-kilolitres-free policy in all but the least affluent suburbs, but even these new prices amount to a near-free R25 [€1.69] for 5,000 litres. We know this is a dramatic under-pricing compared to the free market since according to various news reports people are marking up and selling municipal water in secondary black markets and some buyers are willing to pay around R3,000 [€202.98] for 5000 litres of privately delivered water in Cape Town. Water fetching these prices on the free market also makes a mockery of the oft-repeated trope that ocean desalination is “too expensive.” Instead, it is obvious that reticulated municipal water is too cheap."

Credit where credit is due: I was pointed in the direction of this issue by an op-ed from Ivo Vegter in the South African Daily Maverick. The columnist bemoans the absence of economic understanding by the government, which seems complacent in its solution to restrict the water supply. The fact that South African Breweries, a subsidiary of SABMiller, has the ability to give away 9 million litres for free is, according to the author, obvious given the better management of water through private hands. However, relying on private companies' donations, for a need which effectively a city-need of 600 million litres a day, is indeed a drop on a hot stone.

Talking about water privatisation in South Africa, Vegter writes:

"It is common in the developed world, where 80% of water supply is private, but rare in developing countries such as ours, where that figure drops to 35%. The biggest factor determining success or failure was, not surprisingly, government corruption. Studies found that outcomes range from making no difference, in some cases, to significant improvements by a range of measures in others. Face it, no water supplier can conceivably do worse than the City of Cape Town is doing right now."

This has indeed been a mind-boggling thought-process to me for a while: when we compare agriculture&retail with a sector such as healthcare, the common man would tell us that of course the first one should be in private hands, while the latter should be in the public domain. Privatisation, so it says, would lead to scarcity or increased prices. I believe it's safe to say that most people would die from a lack of food before suffering from an absence of health insurance. And yet, we trust agriculture to be run privately, because we are aware of what collectivism did to the supply of food in, for example, the Soviet Union.

Water privatisation works in the same way: if you do not provide the incentive to use resources according to your needs (which happens if you have real market prices), you will get an inevitable market distortion. This is why public water infrastructure is regularly in very bad shape and unable to provide for the population. What else could be the reason for South Africa's drought? The water supply is completely in the hands of the state? There comes when you simply cannot blame the free market anymore.

Daniel Mahoney from the British Centre for Policy Studies wrote in a piece for CapX that water privatisation actually increases productivity in the United Kingdom:

"When people argue for the government to borrow enormous sums for nationalisation of the water sector, they often justify it by pointing to the 40 per cent real-terms increase in water bills since privatisation. But it is completely misleading to claim this hike in bills is due to privatisation. It is easy to forget how the water industry faced chronic under-investment under state control. Since the industry moved into private hands, the improvements have been astonishing. Customers are now five times less likely to experience unplanned supply interruptions and water companies have reduced leakage by a third. The industry is also now 64 per cent more productive than it was under nationalisation."

This is true in South Africa as much as it is in the United Kingdom and elsewhere: if you want sensible use of water resources, then we need real market prices. The only way to ensure that long-term stability for water provision, is if the supply is completely privatised.

Submitted by Bill Wirtz on 19 February 2018