A topic that has stirred a lot of attention due to its negative side effects is privatization of formerly public water facilities. The process is essentially always the same; before selling out the facilities to (mostly foreign, corporate) investors, water was affordable for everybody, especially poor citizens. After privatization, prices started hiking immediately and in most cases, companies are literally thrown out of the country as a result of their business practices.
Five years ago the issue of water privatization exploded here when massive public protests forced out the California engineering giant, Bechtel. Within weeks of taking over the city’s public water company Bechtel hiked up rates by as much as 200%, far beyond what the city’s poor could afford to pay.
I wonder how Austrian theory could solve the problem. I figured two solutions, both of which don’t appear satisfying:
Price explosion sets incentives for competitors to enter the water market and underprice the former monopolist. However, until a possible competitor has set up his facility and built access pipes to all the homes in town, a number of people might already have died of thirst due to the unaffordability of water. It is furthermore questionable how a new competitor should enter the water market if the existing private company has a natural monopoly on all water sources near town and denies usage.
Water scarcity had been covered by public management and the new price of water represents the real value of water. But obviously, water provision was sufficient before (otherwise, I suppose, people would’ve been protesting already) and became unaccesible for certain groups of citizens only after it had been handed out to private investors.
Is it therefore desirable to keep vital resources, such as water, in public administration, or have major mistakes been made in former privatization projects?
Where to begin… the first problem is that those who formerly had access to the resource should retain that access, at least until the firm is able to negotiate better terms. This is also the rationale behind privatizing roads. The other issue is whether this is genuine privatization, or whether it’s a firm partnering up with the State. Regarding your two possible counterpoints, 1) is correct; however, the State has hampered competition in many areas, for instance the market for corporate control. 2) might also be correct - but here you’re ignoring the dynamic role of entrepreneurship. Initially, water will be pricey to provide, until the State’s mismanagement is done away with. It does not follow that because the state made such a mess out of something, that it should remain socialized to avoid the painful correction. And even if I were to concede that this was a market failure (which it isn’t), it would still be a non sequitur to say that the State should handle things - jointly-owned firms are an option…
When a resource has been sudsidized for many years, it shouldn’t be shocking that prices rise when it is privatized. The prices will move to the equilibrium of supply and demand. It cannot be said that it is a failure unless the supply is being deliberately shrunk. The market is doing exactly what it should be doing, rationing scarce resources rationally.
This sort of ‘privatization’ has nothing to do with libertarianism. State monopolies are transfered to ‘private’ corporations whose only merit is that they are conected to the political mafia that runs the country. The new firms retain all the privileges that state monopolies enjoy. And then right-wingers praise the ‘free-market’ - I can’t think of a better way to discredit a real-free market than this type of fraudulent ‘privatization’.
Obviously, privileged corporate monopolies will not be inclined to provide better services than a state bureaucrat does. I’m also confident that granting shares of the privatized resource to those citizens who built and ran the facilities with their tax money will help prevent exploitation. However, I’d find it intriguing to know how Austrians would resolve the following scenario:
Town A has a limited number of water sources and a privatized water market. At point 0, a genuine competition among several providers existed which kept quality high and prices low. But after a couple of years, one provider successfully marginalized all competitors and obtained control over all the town’s water sources. Unfortunately for the little town, the new monopolist raises prices to staggering levels. Even more unfortunately, despite the high market price of water, it’s still unprofitable for the closest bordering water facility to enter the market as, for some geological reason, laying pipes would be a too costly enterprise. While the geological obstacles might be solved at some point in time by an inventive engineer, we still must admit that our little town is in a monopoly grid for an uncertain amount of time.
Now, I’ve studied to some extent Dominick T. Armentano’s observations on monopolies, and, as I understand, he claims that a monopoly must either be benign or virtually impossible since
a) free entry into the market creates a ‘system of checks and balances’ for the supposed monopolist and therefore, he is forced to provide competitive quality and prices
b) a monopolist’s product faces competition with goods of a similar nature so that customers might at some point turn to related products instead of paying high prices or accepting low quality
or c) if there is no comparable good, they will just stop buying the monopoly product at too high prices or too low quality.
However, there is no good like water, plus you can’t just stop buying it, and free entry in the market didn’t prevent a malicious monopoly in that case.
I’d very much appreciate your thoughts on the problem, gentlemen.
You can transport water with trucks and then plug it into the pipes of a residential area. Besides, with strong financial institutions, you can rapidly invest into provisory infrastructure and then ultimately replace it with something proper. Also, if a water company did something like that, in the future, customers would want a contract to fix the prices for a certain period, and then a time span to re-new it. (if they didn’t, from the start.)
I think the bigger problem with public utilities is that there isn’t much physical space for competition, and there’s too many people to negociate with them all whether you can get the pipes through their road or whatever… You’ll need some association to manage that and negociate in the name of the people of that part of the city.
I think one thing people don’t realise is that this water was being paid for in taxes (subsidies). If we made a precise calculation of how much of your taxes, plus what you paid for before privatization, went to pay for water, we’d end up with a fairly similar number. Of course, taxes are never dropped when utilities are privatised, so the real disposable income people have falls.
Secondly, as people have said, this has nothing to do with real privatization. This is just a farce, where a state monopoly becomes a privately owned monopoly. Sometimes I wonder if the whole thing is played out just to create a strawman and critisize the free-market. It’s quite clever isn’t it: the cronies presiding over these privately owned corporations get a nice little profit (albeit short-term), while their buddies in politics get an expansion of power. Always the consumer that is hurt.