Samizdata

(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.)