IUE e-chapter 11 : Water and wastewater restructuring: privatization, concessions and trading


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Chapter 11 uses the theories propounded in Chapters 1-8 to examine some of the main water and wastewater restructuring efforts that have been tried in practice around the world. Most fundamental of all are the theories of Chapters 1, 3 and 4.

The chapter begins by summarising the results of calculating the forward-looking Long Run Marginal Cost (LRMC) of water, known as the Long Run Incremental Cost (LRIC) of water, which were explained in Chapter 5. This shows that the real LRMC of water is nothing like the continuously-declining shape that most elementary economics textbooks assume. As Chapters 3 and 4 have explained, the real reason water is such a strong monopoly is because of its massive sunk costs, not its high fixed costs. The stages in the water and wastewater industry value chains from Chapter 1 are explained and summarised in a general utility value chain diagram.

The water and wastewater restructuring experiences from around the world begin with the British experience in the late 1980s of Mrs Thatcher’s full-scale privatization of a water sector that was previously mostly publicly-owned. This required the establishment of three inter-locking regulators – economic, environmental and public health – and the sale of massive public assets such as reservoirs, sewers and water pipes under almost every road in England and Wales. It also required the re-privatization and integration of thirty dividend-controlled water monopolies into the regulatory ambit. The sale of all these publicly-owned assets yielded the government a sum of £6.5 billion, but this was exceeded by debt write-offs and gifts from the Treasury in the previous year or so of £6.6 billion, so that this sale of one of the most innately profitable public sector monopolies (around 40% of industry revenue is operating profit) actually yielded no net gain to the taxpayer. The emergence of the UK’s form of price-capping regulation by the economic regulator of the water industry was described in Chapter 8. Chapter 11 continues by examining the main results of the subsequent 25 years experience of regulating private monopolies, including mergers between the smallest water-only companies, but no mergers of the larger wastewater companies. In contrast to electricity (Chapter 9) and gas (Chapter 10) there has been almost no emergence of competition-in-the-market; the value chain diagram at the start of the chapter explains why these are particularly difficult to achieve in water and especially wastewater.

The next experience of water and wastewater restructuring examined is Chile’s partial privatization of its water utilities under a national economic water regulator SISS. Starting from an unusually well-funded and unified public sector water industry, the industry was privatized in three waves of declining force, as the ideological impetus for privatization weakened. The Chapter then examines two well-known Latin American water concessions of opposite successes, the Cartagena 1994 concession, which seems to have worked as well as could have been expected, and the 2000 Cochabamba concession, which was a famous disaster. Brief lessons from these two extreme concessions are drawn, before the more typical mixed experience of a concession like Buenos Aires (1993-2006) is reviewed for some general conclusions from water and wastewater concessions.

Finally the Chapter examines water trading, both in theory – trading of rights and physical trading – and in practice. The experiences of limited bulk water trading are reviewed, and the conditions for more water trading in densely-populated countries are explained. Finally the experiences of water rights trading in Chile and the USA are contrasted with Australia, where they did their homework, were able to adjust for prior historical claims in a manner seen as socially fair, and set up initial conditions correctly.

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