The Listener, 26 April 1997.                 Back

Troubled waters.

Privatising the water supply will mean higher prices.

By Gordon Campbell - Staff Writer.

Should water be privatised? The clear wet stuff is so basic that few New Zealanders would willingly leave its supply, quality and pricing to the tender mercies of - to name one keen contender - the French firm Compagnie Generale des Eaux. This firm is one of two giants that control over half the water supply in France. Cause for concern: in areas controlled by private operators, French consumers pay between 16 percent and 44 percent more for water than people living in regions where local government does the job.

Here, Papakura has taken the first tentative steps down the road towards privatisation. The district council has signed a 30-year renewable franchise deal for its water supply with a consortium including the British Thames water company and … Compagnie Generale des Eaux.

Moreover, in Auckland, thanks to deputy mayor David Hay, the council will soon revisit a plan to corporatise Auckland's water supply. Around the country, many other councils are looking to restructure the way that water is provided - and paid for.
Overseas, water privatisation has earned itself a bad press. Take Yorkshire Water in England for instance. When it was privatised in 1989, the total bill for directors fees was 200,000. By 1995, Yorkshire's directors were paying themselves 641,000 for managing the service - so efficiently, says English writer Paul Foot, that by summer 1995 much of Yorkshire had no water at all.

As a reward for this performance, the salary of Yorkshire Water's chief executive rose from 75,000 to a package worth 347,023. Typical. The Tatcherite privatisations in gas, water and electricity have produced little or no improvement in services, but huge increases in directors' fees, options and perks, financed partly by mass sackings of staff. It's the same situation here. Within the privatised NZ Rail, six senior managers enjoy salary/share packages worth $4 million apiece, with an $8.3 million package for managing director Francis Small.

Funny thing though, efficiency gains are often cited as a compelling reason to privatise water. Don't we need to replace all those corroding, Victorian-era pipes and plumbing? Perhaps. The private sector, however, is unlikely to play Santa Claus and do it for free. The public have, or should be given a choice. They can pay to replace infrastructure where needed, through rates or taxes, or they can put themselves at the mercy of the prices set by the water entrepreneurs.

True. It would be nice if those entrepreneurs were so efficient that they could replace the dud pipes, enhance water quality and still keep prices down. That doesn't happen. Overseas, those who gain control of vital utilities tend to raise prices and mint money for themselves. In France, between 1991 and last summer, water prices rose six times faster than inflation. "When water management passes from the local waterworks to a private company," the Economist notes, "the price often goes up."

One key problem: local government here doesn't know the state of its assets. A 1994 Audit Office report found that 75 percent of councils had little or no reliable data on the condition of their assets, much less the value. Thus, Papakura council is entering its franchise deal before knowing what its assets are worth. Under the contract, the consortium will name a figure in a year - if the council balks, arbitration may occur. Why not find out the assets' value before letting it go? Alas, that is not the New Zealand way.

At base, water supply is a monopoly, not a market. The only point where competition can occur is in the tendering for the job and, even there, the highest bidder can quickly recoup the outlay by raising the prices charged to us, their captive customers.

On that score, Papakura residents can brace themselves for a price hike. Instead of the 81c a cubic metre rate that they currently pay, the contract freezes prices for two years, then caps them at the regional average. By the year 2000, says the Independent, Papakurians will not only be paying a good deal more - the price thereafter will depend on how well other Auckland councils run their operations.

Price can, of course, be a useful way of inducing people to conserve water. The best solution? A progressive pricing system whereby the basic service is affordable by all, while the price then increases for those who use lots. It makes no sense - and will create less accountability - to privatise. On the evidence, the profit incentive is as alien to the delivery of water as it was to the delivery of health.