Governance: the Public/Private Balance

Governance: the Public/Private Balance

Market failure was often attributed to the lack of information, inappropriate incentives, or both. To counter market failures, centralized planning is seen as a way of aggregating information about social costs and social benefits in order to maximize the value of natural resources. Decisions based on this aggregated information are to be made by disinterested resource managers whose goal is to maximize social welfare.(Dryzek, Schlosberg, 2003:212)

The essence of a public good is that it is available to all, and no one can be denied access to it. Thus a private agent has no incentive to invest in its preservation or improvement, since it would be impossible to recover costs from users (‘free-riders’). Moreover, as ‘the tragedy of the Commons’ (Hardin, 1968) highlights, no single agent has an incentive to refrain from exploiting it, since others would continue to do so; unless effective co-operation arises amongst users, there is likely to be over-exploitation and abuse of the resource (Doolittle, 1989).(Winpenny, 1994)

A groundwater aquifer lying under a number of properties is one example; it is possible to control extraction by co-operative agreement, legislation governing sinking new wells, regulating extraction, adjusting the energy prices for pumping, etc. In practice however, this is difficult, and the widespread depletion of urban (and many rural) aquifers is proof of this.(Winpenny, 1994:13)

As effective and efficient water systems management is linked to social and economic development legislative and regulatory structures are being reoriented to incorporate a set of revised principles. Most notably, “…water must be considered a commodity, thus governments and societies must recognize water’s economic character.” (Rogers, Lydon, 1993:xii)

Basic economic principles suggest that if a good is free, people in a position to do so will demand it without limit. Demand will be infinite. But, if a specific cost is attached to a good, it will change both the demand for it, and the supply. A reasonable price for water will make consumers think about how much they wish to consume, and will tend to restrain their demand, thus freeing certain quantities of water for other uses.

Tunisia and Morocco, have found that incrementally raised water prices have a limited impact on demand. While higher price is thought to make available greater supplies of the commodity (a sufficiently high price for water in Arab countries, for example, could bring forth essentially unlimited supplies of expensive desalinated water).(Rogers, Lydon, 1993:xiii) Rogers and Lydon suggest, however that “…if using water is gradually linked more directly to meeting a portion of its cost of supply, water use decisions throughout society, down to the level of individual farm and family consumers, will be more rational, and more cautiously respectful of the basic limitations of supply in the region.” (Rogers, Lydon, 1993:xiii)

Stephen Merret points out, in most countries, the supply of fresh and wastewater services were, until recently, a public sector responsibility. Applying supply economics to its decision-making process looked principally to unit costs of output and with the availability of capital funds to finance water projects. Hence the important distribution and maintenance costs along with the multitude of externalities were overlooked, and subsequently did not enter the equation. Where these funds came from international agencies or the private capital market, in the last resort government was responsible for meeting debt obligations. Simultaneously, the economics of demand was largely ignored, because water, although costly, was not priced effectively.(Merrett, 1997:139)

Jan Kooiman, in 1993, illuminated the importance of a shift in balance between government and society toward the increasing influence of the private sector and the market in coping with the dynamic complexities of modern society. However, he posited that there is more to demand management than pricing.

Kooiman, advances the notion that effective governance must incorporate the unique political and societal actors and dynamic forces that define a social system to effectively develop a sustainable government structure whereby effective government is considered a steering mechanism for good governance.(Kooiman, 2002) It must coordinate a process of cooperation amongst government private and social actors.(Kooiman, 2002; Rogers, Hall 2002) Most importantly, governance systems must overcome legitimacy and accountability problems of marketization.(Rogers, Hall, 2003)

For generations it was assumed that government would manage most service delivery. Toward the end of the twentieth century the failures of centralized systems became increasingly apparent, governments began to look to alternatives to public sector control and management. National governments and international financial institutions began to consider the advantages of, such public sector companies becoming “autonomous”. The economic viability of the enterprise took on great importance.(Merrett, 1997:139) Lack of water sector efficiencies, however, continued to plague communities.

Richard Box discusses the increasing demands of the public sector in running government like a business, and importing private-sector concepts such as entrepreneurship and privatization while treating the citizen like the “customer”. Box concludes that emphasizing efficiency, instrumentally implementing policies, and removing substantive policy deliberation from the public realm “threatens core public-sector values of citizen self-governance and the administrator as servant of the public interest.(Box, 1999) The greater role of private actors and civil society in the decision making process allows for integrative governance, hence is better able to balance efficiency and fairness.

In the closing decades of the 20^th Century, the market was proposed by many in western countries as a means of supporting economic growth, social equity and environmental problems. Government relied increasingly on non-governmental partners to do its work, through processes that relied less on authority for control.” (Kettle, 2002:i) This resulted in a trend toward deregulation and a greater role for the private sector and civil society. This institutional restructuring of the State aimed to reduce government command and control functions with more individualism and private enterprise as the market becomes the superior resource allocation mechanisms (Kettle, Donahue and Nye; Kettle, Donald, 1993: and Donahue, and Nye; 2002)

Water has increasingly gained prominence as an economic good because, (unlike sunlight and the air) rivers, lakes, estuaries and coastal waters can all be appropriated into the ownership of public or private bodies. Water’s status as an economic resource, rather than as a free gift of nature, has been reinforced in the past 15 years because of a global shift to the privatization of public sector infrastructures(Merrett, 1997:177)

“The water crisis, may be considered to be the direct result of four important, but interrelated, phenomena” related to the free market.”(Biswas, in Biswas, et al.1993) According to Asit Biswas the overwhelming thrust of the 1980’s market liberal hypothesis was that “if right water prices could be charged to the farmers, they would become rational optimizers. If farmers have to pay an economic price for the water used, its distribution would become more reliable and equitable. Government departments would receive the revenues generated by water pricing, which, in turn would enable them to operate and properly maintain their irrigation systems. Water pricing, it was assumed, would contribute to a desirable win-win situation. These hopes, however, have remained unrealized thus far.” (Biswa et al, 1993)

Governments routinely miscalculated the cost of collecting and distributing fresh water with human labor inputs and, often, civil engineering infrastructures, according to Stephen Merret.(Merrett, 1997) Costs associated with the management and allocation of water are not new as is illustrated by the cases of ancient Egypt and other Middle Eastern empires, Imperial China and the Inca civilization. However, the economic nature of water resources, Merret suggests, has become more widely accepted because of the economic and financial costs imposed by laws to protect water quality; because of water scarcity and the associated competition between users; and as a result of the global shift to the privatization of public sector infrastructures since the end of the 1970’s.(Merrett, 1997)

The economic valuation of returns on projects relative to their costs is no longer the main criteria for choosing projects. Rather, within the financial constraints facing them, policy-makers, “make decisions about the country’s economic development in a manner consistent with is social, political, and environmental values.”(Merrett, 1997)

With an understanding of the multitude of social and economic factors in a decision-making equation cost-benefit analysis has been replaced by social cost -benefit analysis (SCBA) to evaluate water infrastructure programs.(Merrett, 1997: 86) The process allows decision-makers to understand who is likely to benefit or to lose from the project and what their anticipated behavioral response may be. The method for the evaluation of capital projects concerns itself primarily with the costs and benefits of the activity from the point of view of the nation as a whole…”This holistic rather than partial approach is why the term “social cost-benefit analysis” is used.( Merrett, 1997:87)

Water pricing and cost recovery will unquestionably be an important policy instrument in the twenty-first century, but at least two fundamental issues have to be considered before it can be effectively implemented. First, water pricing has thus far been viewed primarily as an economic instrument for efficient water management, but the socio-political and cultural implications of water pricing in developing countries have generally not been understood. There is a need for careful consideration before instituting a pricing schedule to maintain “specific socio-political objectives of food security, provision of clean drinking water, and increasing the income and health of the rural poor. If economic water pricing is to be introduced, other policy instruments have to be developed to achieve the same objectives.” (Asit in Biswas, Asit, Jellali, 1993:13)

The supply-led approach to water provision, coupled with a failure to price at an economic level, guarantees a long-term water ‘problem’. It accelerates the rate at which readily available surface and renewable groundwater sources are allocated, and often leads to an irretrievable mining of the aquifer. The negative consequences of bringing water to farming areas in the Middle East has demonstrated how a future shortage becomes inevitable (Allan, in Winpenny, 1994:17)

The case for a greater reliance on the management of demand through the allocation of economic mechanisms is attributed to the criticisms of the current systems. Comprehensive planning and central distribution, on the one hand, and supply augmentation, were seen as essential to addressing the increasing problem of water allocation systems. According to Allen, managing demand entails taking into account the economic value of water in relation to its cost of provision, and introducing measures which require consumers to relate their usage more closely to those costs. It entails treating water more like a commodity, as opposed to an automatic public service.(Winpenny, 1994:27)

The move toward decentralized, comprehensive systems with greater stakeholder involvement in the management and maintenance of water resources brought about a new sensitivity to the importance of controlled distribution as water resources are being overly exploited and are often critically in danger being devastated. The paradigm shift away from centralized control to greater stakeholder involvement brought about a renewed awareness of the need for water conservation and efficient use. As a result, the value of economic incentives to encourage a change in use patterns, along with important regulatory and legislative support mechanisms has become accepted. According to Winpenny, treating water as an economic resource means less waste, confining its use to where it is really valuable, and preferring reallocation to new supply schemes where these are costly in economic and/or environmental terms.(Winpenny, 1994:27)