THE POLITICS OF PRIVATIZING WATER SERVICES: IN THEORY AND PRACTICE A thesis submitted in fulfilment of the requirements for the Degree of Master of Arts in Political Science in the University of Canterbury by Victoria Treliving University of Canterbury 2000 TABLE OF CONTENTS LIST OF FIGURES AND TABLES ................................................................................. IV ABSTRACT ....................................................................................................................... V ACKNOWLEDGEMENTS .............................................................................................. VI INTRODUCTION .............................................................................................................. 1 CHAPTER 1 - PRIVATIZATION: IN THEORY AND PRACTICE ................................ 5 1.1 THE PUBLIC/PRIVATE DISTINCTION ............................................................................. 6 1.2 PRIVATIZATION IN THEORY ......................................................................................... 9 1.2.1 Privatize 'what'? ............................................................................................... 10 1.2.2 Direction of privatization movement ................................................................ 13 1.2.3 Principles for privatizing ................................................................................... 14 1.2.4 Sovereignty ........................................................................................................ 15 1.2.5 American privatization ...................................................................................... 16 1.3 NATURE OF GOODS AND SERVICES ........................................................................... 16 1.3.l Ostrom and Ostrom's classification of goods ................................................... 17 1.3.2 Essentialness and non-substitution .................................................................... 19 1.3.3 'Market failures' ................................................................................................ 20 1.4 PRIVATIZATION IN PRACTICE .................................................................................... 25 1.4.1 Publicly provided water supplies ...................................................................... 26 1.4.2 Complete privatization ...................................................................................... 28 1.4.3 Public/private combinations .............................................................................. 30 1.5 CONCLUSION ............ ··················· ............................................................................. 34 CHAPTER 2 - ECONOMIC APPROACHES TO POLITICS AND THEIR INFLUENCE ON ARGUMENTS FOR PRIVATIZATION .................................................................. 35 2.1 THEORIES UNDERPINNING PRIVATIZATION ................................................................ 37 2.1.1 Property rights ................................................................................................... 39 2.1.2 Public choice theory .......................................................................................... 42 2.1.3 The new public management. ............................................................................ 49 2.1.4 Agency theory ................................................................................................... 50 2.1.5 Transaction cost economics .............................................................................. 52 2.2 WHY PRIVATIZE? ...................................................................................................... 54 2.2.1 General arguments for privatization .................................................................. 55 2.3 ECONOMIC APPROACHES TO POLITICS AND THEIR INFLUENCE ON ARGUMENTS FOR PRIVATIZATION ............................................................................................................... 58 2.3.1 User charges ...................................................................................................... 60 2.3.2 Small-scale provision ........................................................................................ 62 2.3.3 Eliminate public monopolies ............................................................................. 62 2.3.4 Emulate private enterprise ................................................................................. 62 2.3.5 Increase the role and scope of the market ......................................................... 64 2.3.6 Reduce conflicting perfo1mance objectives ...................................................... 67 ii 2.3.7 Increase accountability ...................................................................................... 67 2.4 CONCLUSION ············································································································ 68 CHAPTER3 -PRIVATIZED WATER SERVICES IN BRITAIN ................................. 69 3.1 BRITAIN'S PRIVATIZATION PROGRAMME .................................................................. 70 3.2 THE WATER INDUSTRY PRIOR TO PRIVATIZATION ...................................................... 75 3.3 PRIVATIZATION OF THE WATER INDUSTRY ................................................................ 79 3.4 THE REGULATORY REGIME ....................................................................................... 81 3.4.l Office of Water Services and the Director General of Water Services ............. 82 3.4.2 Competition ........................................................................ ·................................ 85 3 .5 RESULTS OF WATER PRIVATIZATION ......................................................................... 87 3.5.1 Price ................................................................................................................... 88 3.5.2 Standards of quality and service ........................................................................ 93 3.5.3 Employment relationship .................................................................................. 95 3.6 CONCLUSION············································································································ 97 CHAPTER 4 - WATER SERVICES IN NEW ZEALAND ............................................. 98 4.1 LOCAL GOVERNMENT IN NEW ZEALAND ................................................................ 100 4.1.1 Structure of local government ......................................................................... 102 4.1.2 Role of local government ................................................................................ 102 4.2 NEW ZEALAND AND WATER SERVICES .................................................................... 104 4.2.1 Uses of water ................................................................................................... 105 4.2.2 Maori and water .............................................................................................. 106 4.3 LOCAL GOVERNMENT AND WATER SUPPLIES .......................................................... 107 4.3.1 Reasons for local government provision of water services ............................. 108 4.3.2 Legislative provisions for water services ........................................................ 109 4.4 VARIATIONS ON LOCAL GOVERNMENT PROVISION .................................................. 113 4.4.1 Local Authority Trading Enterprises ............................................................... 114 4.4.2 Contracting out to the private sector ............................................................... 118 4.4.3 Public/private partnerships .............................................................................. 119 4.4.4 User charges .................................................................................................... 121 4.5 THE WATER, WASTEWATER (SEWERAGE AND TRADEWASTE) AND STORMWATER REVIEW························································································································ 122 4.6 CONCLUSION·········································································································· 123 CHAPTER 5 - THE POLITICAL ECONOMY OF WATER ........................................ 125 5.1 HAS PRIVATIZATION ACHIEVED ITS OBJECTIVES?··········~··············'. ......................... 125 5.1.1 Efficiency ........................................................................................................ 125 5.1.2 Consumer responsiveness ............................................................................... 127 5.2 WATER SERVICES ARE NOT A MARKETABLE COMMODITY ....................................... 130 5.2.1 'Exit' versus 'voice' ........................................................................................ 131 5.2.2 Impersonality of market relations ................................................................... 132 5.2.3 Market relations as egoistic and exclusive ...................................................... 133 5.2.4 Commodities are 'want-regarding' ................................................................. 133 5 .3 THE PUBLIC UTILITY CONCEPT ................................................................................ 134 5.3.1 The threat to the public utility concept ............................................................ 134 5.3.2 The continued relevance of the public utility concept .................................... 135 iii