Water for Sale: How Business and The Market Can Resolve the World’s Water Crisis

Published November 1, 2005

Water for Sale:
How Business and The Market Can Resolve the World’s Water Crisis

by Fredrik Segerfeldt
Cato Institute, June 2005
$12.95, 160 pages paperback, ISBN 1930865767

There is a great debate raging around the world about a future world water crisis. Some predict wars and civil conflicts, while others are more sanguine in their predictions.

At this very moment nearly one-third of the world’s population lacks an adequate sanitary water supply or domestic waste disposal system. Others are limited in their productivity by the hours they must spend fetching water or the limited water available to grow their food.

Much of this continuing impoverishment exists because capitalism, privatization, and individual property rights are not allowed to play their role in obtaining and distributing water to citizens of less-developed nations. Because water is a necessity of life, much of the world believes it must be managed and distributed by the government at prices that rarely reflect its value.

Water Wars

Fredrik Segerfeldt, a communication specialist serving as senior advisor at the Confederation of Swedish Enterprise, has meticulously documented in Water for Sale: How Business and The Market Can Resolve the World’s Water Crisis the full impact of government intervention in water supply the world over. Concurrently he shows that solutions can be found in the many case studies where privatization has served the public well.

Segerfeldt tells us things are worst in the big cities of the Third World. “Every year more than a billion people contract water-related diseases and nearly half the urban population of many of Africa’s, Asia’s and Latin American cities may suffer from one or more diseases associated with inadequate water and sanitation.” Water shortages account for approximately 12 million deaths annually throughout the less-developed world.

According to Segerfeldt, during the past 550 years some 507 interstate conflict situations worldwide–including 21 cases of outright hostilities–have arisen from disagreements over water.

Pricing Water

The big problem regarding the price of water in poor parts of the world is that it is too low for supply and demand to converge. Instead of water being made to bear its own costs, Segerfeldt notes, “the production and distribution of it are subsidized out of taxation revenue. No less than $45 billion is spent in the third world subsidizing water.”

Excessively low prices fixed by politicians have led to waste and misallocation of resources–in short, inefficient use of water. Distribution has been managed by bureaucrats and public authorities with a low level of competence, little capital, and distorted incentive structures. Lack of property rights and no water trading have resulted in water being pent up in less productive activities, thereby compounding poverty.

In developing countries, the price of water is so low that on average it covers only about 30 percent of the supplier’s expense, so there is little money to use for maintenance and infrastructure investment to improve distribution and quality.

If the price of water is so low that extending the supply network to new users costs more than the distributor can expect to recoup by means of charges, there is little reason why the network would get expanded. Why invest in a guaranteed loss?

For political reasons, Segerfeldt says, “the price of water is simply too low. Everyone can afford it, but the government can’t afford to reach enough people and those that get it waste it.”

Farmers–who account for 70 percent of the world’s water consumption–are often hugely uneconomic about it, growing water-intense crops that are less nutritious and less profitable. Half the water used by farmers yields no crop at all because of poor practices. According to Segerfeldt, “a reduction of just 10% of the world’s agricultural water would actually double the available potable water supply.”

Positive Example in Chile

Among many excellent case studies in Segerfeldt’s work is that of Chilean agriculture, which has accomplished a massive transformation thanks to trade in water.

“Most important it has moved from low-value activities, such as cattle farming and cultivation of cereals, to fruits and wine production, which is much more lucrative,” he writes. “The Chilean city of La Serena has for years been able to keep up with rising demand for water by purchasing it from farmers in outlying areas far more cheaply than if the city’s taxpayers had been forced to finance a previously planned dam construction.”

Farmers owning the water they need for agriculture are not at the mercy of the public sector and its capricious pricing and quotas, and can make decisions in their economic best interest.

Water trading is occurring more frequently around the world, but often illegally and thus not protected by the rule of law. India, Mexico, and Brazil are beginning to institute water trading legislation.

Profit Motive Works

For-profit water corporations are more likely than government bureaucracies to handle water with care. Profit motives give them strong incentives to conserve water and see to it that customers are served rather than water being spilled. Furthermore, trading will guarantee maximum output of water, while clearly defined and recognized property rights to water lower the risk of conflicts. When countries trade water with each other–allowing water to be acquired by means other than force–those peaceful means are likely to be used.

Critics of privatization will highlight individual cases of poor families who still do not get water in spite of privatization. But profit impels companies to satisfy as many customers as possible. When water systems are privatized, the record shows, the number of people served increases by an average of 40 percent over the number served by the government-controlled water supply.

Segerfeldt’s extensive experience around the world yields the following insightful comment:

“Anti-privatisation activists use separate standards when judging public and private water management. As soon as any fault occurs in the private distribution of water, their anti-corporation bias persuades them to blame privatisation. Public sector failure, on the other hand, is rarely blamed on the fact that it is in the government’s hands.”

Increase Private Sector’s Role

The point of this book is not that all water distribution has to be private. Rather, Segerfeldt’s main argument is that an increased role for private enterprise and market reforms, if carried out properly and wisely, could save millions of lives and give access to clean, safe water to hundreds of millions of people who today are deprived of it.

Segerfeldt concludes this outstanding book with the following comment. “People who today are without water do not need dogmas and street demonstration, they simply need water.”

Jay Lehr ([email protected]) is science director for The Heartland Institute in Chicago and one of the nation’s leading experts on groundwater hydrology.