Posts tagged with: privatization

To provide water for people, communities have usually turned to  two different options: public or private utilities. However, if Bolivian President Evo Morales, leader of the Movement Towards Socialism Party, gets his way, the United Nations will pass a resolution blocking the sale of public water utilities to private companies. If adopted, this resolution will cause problems for many nations, especially the undeveloped countries receiving support from the U.N. that will be forced to abide by one option—public supply of water—instead of being permitted to consider privatization which may be more efficient and cost effective.  The makes the global water crisis much worse.

It will not help any country to limit its options when searching for the most efficient and cost effective solutions for providing a clean, sanitary, and abundant source of water.

Theories and examples in support and against both private and public water utility systems are numerous. A study conducted by the University of Michigan showed that water prices, in general, are too low. The study explains that direct and indirect subsidies, in both developed and undeveloped countries, have caused low prices, resulting in water waste. Furthermore, the study argues that if the subsidies are removed, the price of water will increase and provide an incentive for those utilizing water to not waste it. This, in turn,  will result in the investments that are needed to develop more efficient technologies. If subsidies are removed, then a lighter burden is placed on public funds.

Lending support to the findings of the University of Michigan study, a survey conducted in 2004 by Global Water Intelligence found that the under-pricing of water is widespread. The study analyzed the prices charged by water utilities in 132 major cities worldwide and found that 39 percent of water utilities had average tariffs that are set too low to cover basic operation and maintenance costs. Some 30 percent had tariffs that are set below the level required to make any contribution toward the recovery of capital costs.

Changing the price system may be a solution. Some argue for a metering that charges water users based on consumption. However, while subsidies are proving to be largely inefficient the question must be asked: Can those in undeveloped countries, who are already living in a state of grave poverty, afford increased prices on water?

The International Development Association and the World Bank are quick to point out the success of private water utilities. Examples can be found in Rwanda and Mozambique where the private sector helped provide, improve, and/or expand the water supply. The U.N. has acknowledged five reasons to pursue private sector partnerships.

A private sector supply of water can be more efficient and cost effective. According to the World Bank, it is estimated that in the United States each dollar of public funds raised for utilities has an opportunity cost of $1.30 of private consumption, and the average opportunity cost for each dollar of tax revenue raised is $1.17 for 38 African countries.

Critics of the privatization of water argue that while it is more efficient and cheaper, the private systems fall short of social equity in supplying water and charge higher prices. While there have been unsuccessful stories of privatization, the aforementioned examples in Rwanda and Mozambique are a just a few of the many success stories, and, as The Economist notes, when private utilities charge higher prices, that often corresponds to higher rehabilitation investments, better water quality, and better service.

Privatization will also promote the decentralization of  government, and in the case of many developing nations, remove the control of water out of the hands of corrupt bureaucrats. A large overarching centralized government is not needed. Instead, the principle of subsidiarity should be applied.

Private entities are able to supply an efficient and cost effective supply of water. Privatization is an effective solution, and its ability to meet the needs of consumers has improved. As a result, water supply can follow the principle of subsidiarity by utilizing other alternatives to supply water instead of through a system brought forth by a centralized government.

It is important to note that just as public utilities are open to corruption, inefficiencies, and poor management, so is privatization. Privatization can fall subject to a corrupt government. The example of Detroit is instructive here. For example, when a government decides to contract a private utility to supply water, instead of having an open bidding process, the government accepts no outside bids and picks a company that is owed a political favor. If privatization is to succeed government must take the appropriate actions to allow it to succeed and also nurture an environment that is open to decentralization, promoting business without unnecessary government interference.

Blog author: jballor
posted by on Wednesday, February 14, 2007

In this week’s Acton Commentary, I examine the most recent buzz-worthy trend in the lottery industry: privatization.

While most critics of these moves have pointed to the foolhardiness of selling off a long-term income stream for a lump sum jackpot, I argue that privatization by itself does nothing to address the underlying problems afflicting the lottery business. I conclude, “A government-run monopoly would merely be replaced by a government-enforced monopoly.”

And as I’ve claimed previously, government reliance on lotteries as a morally praiseworthy generator of income is illusory. UPDATE (HT: Mere Comments): Here’s a bit from the abstract from a recent article examining lottery trends from 1976-1996: “One of the most important policy-oriented determinants of income inequality is the lottery and a significant portion of the increase in income inequality over our two-decade time period is attributable to the increasing prevalence and popularity of state lotteries” (Elizabeth A. Freund and Irwin L. Morris, “The Lottery and Income Inequality in the States,” Social Science Quarterly 86 [December 2005 Supplement]: 996-1012).

The newest incarnation of the Michigan Lottery’s attempt to sell the industry as contributing to the common good describes the lottery as a thread running through all sectors of society, connecting everyone in a single bond of community. Is it really true that under a state-run lottery system that “we all win,” or all we all simply trapped in the same web?

Earlier this year the New York Post reported that the expansion of legalized gambling is having a deleterious effect on the ability of non-profits to raise funds through gambling fundraising events (HT: Don’t Tell the Donor).

And now there are some plans in the works to expand lotteries to a whole new level. The UK Telegraph reports that within five years a multi-million dollar worldwide lottery could be put in place.

I actually am quite (pleasantly) surprised that some enterprising young congressperson hasn’t yet been successful in putting forward the idea of a national lottery. Surely the Commerce Clause could be invoked to regulate and nationalize the regional interstate lottery games that are currently underway. The talk about something like No Child Left Behind being an unfunded mandate could be cut off in one fell swoop.

Read the entirety of this week’s commentary here.

Let’s engage in a little thought experiment. How would you feel about the following scenario?

1) The government bans all activities associated with Industry X because it judges that this industry damages the common good. Industry X is under government prohibition.

2) After enough time has passed and a new generation of bureaucrats has arisen, one of them has the idea of resurrecting Industry X because it has the potential to create new streams of revenue for the government.

3) The government then legalizes Industry X but imposes strict controls, such that the government itself is deemed the only institution responsible enough to administer these activities. We now have a government-run monopoly on Industry X.

4) After initial success, the income from Industry X suffers for a variety of reasons, including competition from private enterprises in competing industries. The government realizes that it cannot run Industry X effectively, and so decides that it must privatize the industry.

5) The government doesn’t want to lose all control of the industry, however. It just wants it to be run more like an effective private-sector business. The government decides to take bids to sell of its interests in Industry X. The winner gets the exclusive right to run Industry X and is protected by a government-enforced monopoly.

At the end of this chain of events, the government has cashed in on years of running its own monopoly on Industry X, and has also gotten a huge windfall in the sale of its monopoly to a private firm.

That industry hasn’t become a real competitive market, however, because the private firm has a government-enforced monopoly on Industry X. It is still illegal for anyone other than that private firm to create a directly competitive business in that industry.

That sounds pretty bad to me. But the reality is that we are between stages 4 and 5 in the lottery industry in America today. States like Illinois and Indiana are considering selling off their interests in running a statewide lottery.

In Illinois, for instance, state officials have seen lottery revenues fall due to competition from other forms of gambling, including casinos and Internet poker.

This has led John Filan, the chief operating officer of the state of Illinois, to come to the following epiphany: “This is fundamentally a retail business, and governments are not equipped to manage retail businesses. Gaming is getting so competitive around the world that we’re worried our revenues could go down unless there is retail expertise.”

Governments are not equipped to manage retail business. What a revelation!

Rather incredibly, however, the criticism of these moves has not come from those worried about the vitality of the market and its advantages. Instead, economists are concerned that states are being short-sighted in selling off long-term income streams for a single short-term payday.

Melissa Kearney, an assistant professor of economics at the University of Maryland says, “It’s unclear exactly what is gained by selling a lottery, except for a huge pot of money that legislators can start spending right away.”

Charles Clotfelter, who teaches economics at Duke University, agrees. And Edward Ugel, author of the forthcoming Money for Nothing: One Man’s Journey Through the Dark Side of America’s Lottery Millions, writes that “Illinois is selling its future in order to fortify its present.”

Nowhere is any concern expressed over the impropriety of a government-enforced monopoly (even less one that is government-run).

If it is true that lotteries are “retail enterprises” that are inherently risky, and that government is ill-prepared to run them and that they should be turned over to those who are “in the risk-taking business,” then the government should legalize lotteries and open up the industry to real competition. A government enforced monopoly of a privately-run lottery system is no solution.