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Water – Can It Be A Competitive Industry?

(I focus on the UK here in this brief commentary; needless to say, readers in the US and other countries such as Singapore or parts of Europe will have plenty to add. I remember reading about how water rights and arguments over it has been a huge issue in the US Southwest, for example, for decades. Chinatown, the old Jack Nicholson film, is a favourite of mine.)

There are restrictions on water use in the UK at the moment, which has been through one of those long, hot summers that are great for a few weeks as people get out the barbecues and soak up the Vitamin D, but become a pain when folk have to work when the country cannot seem to manage air conditioning. And then the “green and pleasant land” goes the colour of café au lait. There are issues about whether, if such weather remains a regular feature, that certain crops such as wheat have to be irrigated. (Much wheat is grown in East Anglia, where my Dad had a farm and is the driest part of the UK, being on the eastern side of the country.)

From a free marketeer’s point of view, the water business is a bit of a challenge. The system of pipes, reservoirs and meters put in place can, to some extent, have business features and use the price mechanism to allocate resources (water meters, for example), but it is not all that feasible or politically easy to have different water firms competing to supply the stuff over rival pipes, dig out rival reservoirs, or desalination plants, etc. Digging a reservoir typically will require a compulsory purchase power, or what in the US is called Eminent Domain, and that is not something that is easily granted to a wide variety of suppliers of water.

So in the eyes of many, much of today’s water sector is what economists call a ”natural monopoly”. (The competitive bits might include supplies of bottled drinking water, home equipment for filtering water, private water storage, etc.)

Monopolies tend to be abused by those running them unless there is a realistic prospect of competition to keep people honest. The cluster of firms running the water organisations in the UK, such as Thames Water, are in some cases listed firms and pay a dividend, or they are owned by other listed firms (sometimes classed by asset managers as “infrastructure”). The salaries of their senior executives are the subject of much angst in the press, including the supposedly pro-capitalist ends of it, never mind those reflexively hostile to business. Because of the natural monopoly aspects of these firms, they are regulated by a quango called The Water Services Regulation Authority, which sets certain standards including pricing. From time to time there are calls for water utilities to be renationalised, although it is worth noting that in the last big drought in the UK of 1976, utilities were state owned, and that certainly did not prevent all kinds of water bans and restrictions. (Here is a paper written 21 years ago from the Institute of Economic Affairs about water utilities and competition.)

So what should classical liberals and libertarians think about this? Are there examples from around the world on how to inject genuine competition into a field deemed always to be a monopoly, or should water supply be a sort of minimal state function like law and order, akin to how one might think about the cardiovascular system of the body? Would an anarcho-capitalist order be able to handle these questions (rival agencies running packages for water/power, etc with different pricing regimes all competing against one another?)

It does seem to me that there should be more opportunity for innovation and change that could put water companies under healthy pressure. For example, building several desalination plants (they don’t have to be even very big – nuclear-powered submarines use them) might be an idea for a commercial provider who could offer to supply cheaper water into the system, but I am guessing the price incentives would need to be big enough to justify the costs, depending on how expensive a plant is or whether they can be build in sufficient amounts to achieve economies of scale.) There is even a specialist market in small desalination/reverse osmosis tech for producing water for folk such as sailors, etc. (See an example here.) And see here for an interesting article from the Massachusetts Institute of Technology.

One could, I suppose, have a system where water suppliers compete to supply water into a series of reservoir hubs for an agreed amount; the water could even be shipped or piped from wetter parts of the UK such as Wales and Scotland, and be a nice source of revenue for those places. Maybe it is time for Scottish nationalists to spend more time figuring out how to get rich by using this resource instead of bellyaching about the evil English. Also, very large users of water – agri-businesses irrigating land, or industrial users – have the bargaining power to negotiate prices and hence could even build mini-reservoirs of their own, assuming governments allowed it.

There may be plenty of other ways to think about the limits, but also the potential, of making the business of water more competitive and businesslike. Because it strikes me that if those arguments aren’t made in a constructive way, the usual calls for State control will be ever louder. The past few years, such as over COVID-19, have taught us, surely, that fear of bad things happening plays all too often in one, clunky direction.

(I haven’t mentioned global warming yet, but while that issue has obviously been raised a lot by those who extrapolate trends from a period of weather, I think the issues here aren’t dependent on whether man-made global warming is true or not, or bad or not. For once, I am parking that subject to the side of the road.)

27 comments to Water – Can It Be A Competitive Industry?

  • Paul Marks

    As Mark Steyn pointed out (on GB news) last night – the last reservoir to be completed in the United Kingdom was finished in 1991.

    Since 1991 the population has increased by millions of people – due to mass migration.

    The “water crises” is really a MIGRATION crises.

    It is much the same with energy or food – a farm can not produce food if there is a housing estate, or some other development, where the farm used to be.

    As for the 19th century idea that such things as water “must” be provided by government is just wrong – Edwin Chadwick and co (including J.S. Mill) were just wrong.

    But shortages of water, and food and energy (and other things) are already being used as a excuse for state ownership – even though it is NOT private ownership that is responsible for the shortages.

    I am reminded of Henry George – as the population of California went up, so the price of land in California went up.

    Henry George blamed private ownership of land for the increase in the price of land – and demanded a “Single Tax” to “solve” this “problem”. The basic fact that it was the population increase (not private ownership) that was causing land to become unaffordable (both to buy and to rent) escaped him.

    It is the same with water. If you have lots more people in a given area (say the south east of England) the price is likely to go up and up – and there will be shortages.

    Can technology solve this? Well such things as desalination plants (water from the sea) may help – but the price will be very high.

  • Paul Marks

    “But high population density places still have water” – they do indeed.

    But remember that British control of Hong Kong was untenable because of where the water came from.

    And that Singapore surrendered when the water supplies were taken – although the British commander could have counter attacked (his forces did outnumber the Japanese 3 to 1).

  • Jacob

    Wrong caption on a pict:
    “Parliament Square in Westminster has been left bare by the heat”
    It has been left bare by the neglect to water it in the heat. I assume there is plenty of water in the nearby Thames.

  • Jacob

    The “water crises” is really a MIGRATION crises.
    And a failure to develop appropriate water infrastructure.

  • Jacob

    For me, living in Israel it seems quite funny to hear people in GB complain about lack of water…

  • Jacob

    You need not be a libertarian purist and forbid any Government intervention. Government activity is necessary for infrastructure projects. Better Government help (with all mentioned drawbacks) than no water.
    In Israel, desalination plants were built and are operated by private enterprise, under contract with the Government, which is obliged to buy all their output at pre-agreed prices. land for the plants was also assigned by the Government.

  • Jacob

    Another point to keep in mind is that a great part of the water used – is used for agriculture – for irrigation. This use should be subject to economic factors: if the water is too expensive you don’t grow your crop.
    On the other hand – water for urban use is another matter. A city dweller doesn’t use much water, and he can afford it whatever the price is.
    It doesn’t make sense to desalinate water to grow wheat.

  • Johnathan Pearce (London)

    It has been left bare by the neglect to water it in the heat. I assume there is plenty of water in the nearby Thames.

    The people who put up these pictures assume that in the UK, unlike the USoA, green spaces will not be artificially watered with sprinklers. Sprinklers are a symbol of American vulgarity to we Brits.

    I remember, it must be in the 70s, watching all those US TV shows such as Dallas, Columbo, etc, and was struck by the affluence of societies in places such as Texas and LA where people kept their laws emerald green.

    The “water crises” is really a MIGRATION crises

    Not really. The drought of 1976 took place when the UK population was about 10 million less. Israel, for example, has developed excellent irrigation and water management – it is a leader in the field – and its population has grown.

    More than a century ago, the UK had mass cholera outbreaks because of dirty water and poor sanitation. Some of this isn’t really down to actual size of a population per se, but about the willingness to invest in tech.

  • Patrick

    I think the answer is properly regulated private industry. Ofwat is a joke. Yes they can and should make a profit, but their licences to operate should mandate investment levels, storage, inter-regional transfers, etc. Resilience may not be profitable but it can be required. But that requires politicians and regulators to be competent and not captured by the industry or the blob.

  • Johnathan Pearce (London)

    Paul Marks also repeats the migration issue as a factor. To some extent it is true that there has been a failure to upgrade our water system to keep pace, but as I said, we had a bad drought in the mid-70s when the population was smaller, and when the utilities were owned by the state.

    There is also the point that even if population growth hadn’t happened, people use more water – taking a daily shower or bath, dishwashers, sprinklers, etc. Modern industry uses a lot of the stuff. People live in more separate units (people marry later, get divorced more, etc) and in net terms, water use goes up.

    There has been a net shift towards the Southeast and the London area. But there is little chance of any government being able to reverse this soon, nor would I want it to engage in the hubris of trying to shove the public around the country like a lunatic playing with a chessboard. That’s why I think market-driven solutions work best. Come on Scotland and Wales – sell us some and make money!

  • Michael Taylor

    This isn’t too difficult . . . provided that Hong Kong is capitalist-enough for you.

    The answer is plainly to have them operate under a Scheme of Control under which the companies are allowed to earn a fixed rate of return on net operating assets – say 8%. If they invest in operating assets, their earnings go up. If they let their assets depreciate (for example, leaking pipes), then their earnings go down. If they find they are charging too much (ie, the return is higher than permitted), then the excess revenues go back into a price stabilization fund in order to curb prices, or cut prices, the following year.

    That’s how, for example, Hong Kong works its private, listed, electricity industry. Read this for details: https://mjtcoldwater.substack.com/p/high-water-rising-how-to-rescue-our

    It’s honestly not difficult to understand or implement. Provided, of course, that you’re prepared to put up with the sort of capitalism which Hong Kong has practiced.

  • Martin

    The water companies have apparently sold off a number of reservoirs over the past few decades, while no new ones were built. Strikes me as folly along the lines of allowing the Rough gas storage facility to be closed in 2017.

    I’m not sure best how the water industry should be structured and owned, but avoiding scenarios like the above should be a no brainer.

    Ross Clark’s Spectator article on water mentioned how Thames Water’s largest shareholders include Canadian pension fund for state workers and Chinese and Abu Dhabi sovereign wealth funds (ie state owned). Does kind of make the public v private argument more moot. Although generally favourable to ‘privatisation’ I can’t say it’s bad to have enterprises owned by the British state but fine for UK companies to owned by foreign governments.

  • Johnathan Pearce (London)

    Michael Taylor, that’s very interesting. Thanks. Bookmarked for later.

  • Michael Taylor

    Thank you Jonathan Pearce.

    Really, it’s just an application of the Kaleckian insight: ‘Workers spend what they earn, capitalists earn what they spend’.

    Current system: prices have got to be high to provide the profits for investment.
    Proposed system: investment has to be high to provide the profits, and so also curb prices.

  • Roy Lofquist

    There is a saying in the American southwest – Whiskey is for drinking, water is for fighting.

  • TomJ

    It’s not so much that watercos don’t want to build reservoirs, it’s that the NIMBYs who blight everyattempt to do anything wont let ’em. https://www.thisisoxfordshire.co.uk/news/19995644.oxfordshire-county-council-calls-giant-reservoir-plan-scrapped/

  • William H. Stoddard

    I used to copy edit for an organization that specialized in water policy. One of the recurring themes of their publications was that water was difficult to manage because it was sold nearly everywhere at below market rates and thus was overused. I’m not sure it’s possible to have state-owned water systems without political pressure leading to subsidy; it might be more efficient to have competing businesses.

    One person’s wasteful duplication of services is another person’s backup.

  • TomJ

    Lest anyone think my example is just a flash in the pan or local councils being daft in a way the wise central Gov’t wouldn’t be: https://www.bbc.com/news/uk-england-oxfordshire-12651131.amp

  • Paul Marks

    Jacob – I am aware that Adam Smith claimed that government was necessary for infrastructure projects – but he was shown to be wrong.

    The English and Welsh turnpike trusts produced a much more economic (private) road system, than the government roads of Scotland and Ireland.

    The same is true of the canal network – and other matters.

    Government has no resources of its own – it just takes resources and uses them LESS efficiently than people use their own resources.

    Of course I am not defending Credit Bubble “capitalism” – with everything concentrated into a few hands (BlackRock, State Street, Vanguard and the banks) I am talking about real free enterprise – where lending is mainly from REAL SAVINGS (not the Credit Expansion – the corrupt “Crony Capitalism” associated with Wall Street and so on – anyone who thinks New York City is a capitalist place is horribly misguided).

    There is no reason why large scale water projects should be in the hands of the government in the United Kingdom.

  • Fred the Fourth

    In Silicon Valley, the largest reservoir by far has been drained for well over a decade. The dam was deemed unsafe because of the possibility of earthquakes (reaasonable) and potential flooding of San Jose.
    It is a government asset, of course, with responsibilities divided among California and Federal agencies.
    The news last year was that the rebuild plans were to be delayed yet another few years. This was because a proposal had been made to include a small hydropower plant. THAT meant that a new agency, Federal Energy Regulatory Commission, got to poke their noses in.
    Meanwhile, of course, the state is mandating increases in housing in the area.

  • TomJ

    Water in E&W is provided by private companies – has been since ’89; in Scot & NI it’s still by publicly owned corporations. The latest figut=res a cursory Google provices are from ’18:

    In the UK as a whole, about 23% of the water put into the public supply is lost because of leaks. In England and Wales the figure is about 20%.

    It is not immediately obvious public ownership is beneficial…

  • Myno

    For the future, various tech is being developed that extracts moisture from the air, and then uses sunlight to release it from the capture material. Geared toward 3rd world and desert applications, if it becomes sufficiently inexpensive for the 3rd world, it could sit in your back yard, or be incorporated into a fence design. Then you could unhook from your quango regulated public source. Of course it requires humidity and sunlight, which might turn out to be as reliable as wind power in some regions and seasons. “Bad weather Mildred, turn on the civic tap for a few days.”

  • Fraser Orr

    Paul Marks
    There is no reason why large scale water projects should be in the hands of the government in the United Kingdom.

    I agree Paul. When someone says “that is a natural monopoly” what they really mean is “I can’t think of a way to run a business to solve this problem” and that is a lack of imagination not a lack of capacity within the entrepreneurial spirit. One of the things is that it might not be possible to produce a water system like the one we have today, but that isn’t the goal. The goal is to ensure people have access to the water they need at a reasonable price. And a smart and innovative person can come up with many alternatives.

    Having said that though, I think it should be fairly down the “list of things to fix”. And I think an important point is that one important form of competition is the idea of federalism. So if the local city does the work to provide the water system and maybe buys competitively from larger suppliers all the better. If you don’t like it you can move to the town next door.

  • bobby b

    I think that the societal pressure to always avoid cutting off water – water! – to someone behind on a bill is what keeps this one from being a good private-function model.

    McDonalds could never have made a go of selling burgers if people expected burgers to be as close to free as possible, and completely free if you’re needy.

    Water has been an expected freebie in too many minds for too long (except in some limited areas). Historically, unless you were in a desert, water was plentiful. They never get that you don’t pay for water, you pay for pipe and pumps.

  • Paul Marks

    Frasor Orr – yes indeed, there is no reason for water systems to be state owned.

    The idea that, for example, the British water systems leaked less when they were government owned is just not true.

  • Paul Marks

    I do not know about “competitive industry” – but privately owned they water companies should be.

    The question is are they privately owned?

    For example, Anglian Water (the people I pay for water – or go without) are part owned by a Canadian government pension fund, an “Australian” pension fund (which turns out to be owned by some American financial entity) and a British financial entity that was originally created by the government.

    If this is really “private ownership” is open to doubt – and the same is true of much of the economy.

    “How owns this?” is a question that employees and customers often reply to with “I do not know” – that is NOT free market capitalism, that is Credit Bubble ism – an economy created by endless Credit Money being created from nothing and dished out to a few financial entities, who use the “money” to buy real assets (such as WATER – as well as, increasingly, farm land).

    Cantillon Effect.

  • Paul Marks

    There is also TAX LAW.

    Institutions tend pay less tax than individuals – who are subjected to high income tax rates, and such taxes as Capital Gains Tax and Inheritance tax.

    The last year when individuals owned most shares in this country was 1965.

    We have a system of Corporate bureaucracy – with hired managers “responsible to” other hired managers (“institutional investors”).

    South Dakota (and some other States – such as Wyoming, but Wyoming has lots of natural resources to tax) have no State Corporation Tax – but it has no State Income Tax, Inheritance Tax or Capital Gains Tax.

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