Water: Public or Private Goods?

Water has long been treated as public goods and has been managed solely by state or state-owned enterprise. At the other hand, nowadays, there is a growing demand to treat water as private goods. Although, according to van der Veeren – and many other eminent figures such as Vandana Shiva – water should remind as public goods[1], in this paper one tries to elaborate the idea of water as private goods. Firstly, one discusses briefly the lack of state-management of public goods. Secondly, one explores the promise – at least at the theory level – of privatization. Thirdly, by bringing the promise to the empirical world, one analyzes the drawbacks of privatization. Lastly, one indicates improvement alternatives of water management policy.

State management through government body or through state-owned enterprise is well-known – at least in the developing and less-developed countries – for its low service quality, inefficiency, corruption, vested political interests, and mismanagement. It is – to some extent – caused by monopoly of service and goods, and public control. As a monopoly, state-owned enterprise does not have to improve its production efficiency in order to survive as in the competitive market. Customer has no choice but to accept the condition of goods and the level of service offered. Customer service is then not a factor to retain customer and thus generating low service quality. Water service – in term of degree of access and product price – is often used in political agenda such as election campaign. Setting product price based on political agenda without considering production cost will further deepened the net loss of water state-owned enterprise. In the end, all of these negative aspects create high transaction cost and therefore burdening the economy and the society.

The idea behind water as private goods is that by privatizing water, it creates a non-monopoly market. Non-monopoly market, theoretically speaking, implies that everyone can get into the market and offer his/her products to buyers. Buyer reacts rationally by selecting the optimal offer, which is the offer that gives him/her the maximal utility. In order to make his/her products competitive, producers will keep on innovating and improving its service and efficiency. By doing so, market’s efficiency is improving and so thus the buyer utility (as they now able to consume higher product quality, higher amount, or even cheaper product price). To some point, the market will reach its Pareto efficiency which is not achievable in the case of state management. It looks like a win-win situation.

However, this is not happening in reality. Instead of providing wider water access and cheaper price, privatization resulting in a higher price and stagnant water access. So why is it happening? Among other reasons, one highlights two subjects which are profit seeking and market entry. Profit seeking means that a firm’s prime goal is to produce profit. Firm’s business continuation is dependent to profit. In previous condition, state-owned enterprise may sell water below its production cost. Thus, when privatization is taken place, product price is corrected (i.e. increased) to its production cost and profit margin. Furthermore, firm may not provide water access to some people as there is not sufficient potential customer in some remote/small area. It seems difficult to enter the market as water processing industry needs high investment and working capital. This, by itself, is limiting the number of firm in the market. The market is now having oligopoly instead of having full-competition market. Although oligopoly is better than monopoly, but it is still not as good as the full-competition market.

Now, how are we going to deal with those problems? One divides it based on actors such as state, society, and company/market. State can play a role as a facilitator through issuing rules and regulations regarding water market. It can require companies to provide a minimum service level in term of water quality, access, water distribution, etc. It also can induce a price ceiling (i.e. maximum product price allowed) for water. In brief, it is state responsibility to ensure a conducive market for improving water services. Subsidies can also serve as one of government tools in providing water access and improving water distribution to the marginalized people. In the other hand, government can give subsidies in different sectors for example education and health (while maintaining high water price). The arrangement then is to ensure that the net benefit of subsidies – in education or health or etc – is greater than the net loss from increasing water price. Thus, it improves the net welfare.

Society plays important role in controlling firm’s practices through public participation. Public participation can varies from submitting service complaint until boycott. The crucial factor here is that society is information-literate (i.e. having enough information). Public can also participate in form of capital/equity (i.e. buying stocks) so that public gains some control over company’s business practice. Another form of public participation is through legalizing the cultural/traditional water management. This traditional arrangement – such as Subak in Bali-Indonesia – has proven to be effective and efficient.[2]

Company should balance its prime goal with other goals. Company practices should be in-line with those of sustainable development. Corporate social responsibility – as one kind of sustainable development approach – deals with balancing company’s economic goal (profit), environment goal, and social goal. This notion seems to be a win-win solution for companies as it still takes profit into account without excluding environment and social problems. There is wariness that once water becomes private goods, it will exclude more negative externalities from its production function (i.e. firm does not internalizing externalities). However, externalities are also been dealt with in corporate social responsibility scheme through increasing/improving environment indicators and social indicators.

In summary, one tries to demonstrate the possibility of transforming water from public goods into private goods. Although empirically water privatization does not meet its promise, yet by making a better preparation (i.e. making a conducive market) the promise may be fulfilled. The preparation can be done by state, society, and company. As long as the company is internalizing externalities – that is correcting the property rights – and state is able to cut the effect of price increase by giving subsidies – that is improving net welfare –, then water privatization would not be of any problem.

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[1] van der Veeren, Rob, lecture in class of Environmental Economics in Practice, 08 November 2006, Wageningen University and Research Centre.

[2] Suarja, I.G. and Thijssen, Rik, Traditional Water Management in Bali, LEISA Magazine, September 2003. Accessed at 13 November 2006, available on-line at:
http://www.leisa.info/index.php?url=show-blob-html.tpl&p%5Bo_id%5D=12689&p%5B