Water Sector Privatization: The Anger and the Analysis

Yesterday I presented my project to a wider audience at the Ecologic Institute. I believe that it was quite well received and there was a lively question and answer session after it was over. Not surprisingly, the privatisation of water sector assets and management came up. This is clearly a burning issue brought up by former colleagues in D.C., the press, and on the ground here in Berlin where the utility is now fully back in public hands. A couple of weeks ago I started digging into the debate and the literature, and I feel like I’m starting to get a handle on this issue.

I started my investigation with a strong critique of the World Bank’s promotion and financial support of private involvement in the water sector. The critique comes from the Corporate Accountability International (CAI), a group that cut its teeth in a boycott of Nestle for its practice of promoting baby formula despite unsafe conditions in developing countries. It’s very clear they’re very upset, and for good reason. As they point out in the report:

  • more people die from unsafe water than from all forms of violence, including even war; and

  • waterborne diseases are a leading cause of death among children under five, killing more infants than HIV/AIDs, malaria and tuberculosis combined. (CAI 2012, p. 2)

And despite these challenges, CAI believes that the World Bank has spent the last two decades promoting privatization as the one and only solution without evidence and often despite strong public resistance in recipient countries. Additionally, despite high profile failures such as with Manila water, where a tidy profit was made despite any significant progress on connecting more households, the World Bank continues to push privatization and take a financial stake in the profitability of such projects through the International Finance Corporation (IFC).

The CAI admits that the World Bank acknowledges that hopes of private investment in water infrastructure, particularly for expanding access, have been largely dashed and that the World Bank has retreated to promoting the operational efficiency that can come from private sector management.

Indeed on the failures of privatization to attract significant private investment in water infrastructure, the World Bank and CAI are largely in agreement. The CAI’s critique largely rests on World Bank documents such as this. Where they differ is whether the term operational efficiency has real meaning or is a cynical cover for promoting continued corporate profit.

I believe that here is where CAI goes to far. They start mocking successes by private management at  the reduction of “non-revenue water” water and enforcing bill collection. Given that non-revenue water is just an industry term for water waste, CAI shouldn’t get so cute. Wasting water, moreover wasting water after it has been treated, is a problem for society as a whole. And the ability of utilities to collect sufficient revenues to sustainably run their operations is an area of significant concern, even in wealthy countries such as the United States.

And so CAI’s critique, while quite well written and informed at many points, can be summarized as a laying out failures of the past that the World Bank acknowledges and ending the appearance of impropriety from the IFC’s taking a financial stake (where they have a point). But ultimately it falls flat, as one can imagine, many systems were public before they were private, and everything wasn’t perfect back then either.

So at this point I started looking for something that could provide a different perspective on this public/private divide. Given my political science background I was quite tickled to try a 2006 article on governance in the water sector by Gordon McGranahan and David Satterthwaite at the International Institute for Environment and Development. Their treatment of the issue certainly has a lot more nuance than those of the CAI and World Bank, pointing out how the urban poor are often underserved under public systems as well as private, the importance of small scale private water entrepreneurs in filling gaps in the system, but also how corruption can even exist between public and private systems as public systems take kickbacks from the small scale entrepreneurs, who in turn gouge the poor. As corruption rears its ugly and very slippery head, we are told to focus on governance, a part of which is comes from improving economic circumstances of the poor, which maddeningly is presumably related to the availability of functioning infrastructure.

Needless to say, this is not a satisfying solution. Suddenly we’re into all the messiness of the world and having to fix multiple issues at the same time  as they all interact with each other in only partially understood ways. At this point one starts to appreciate how exciting the previously grand ideological commitment the World Bank had to privatization must have been. And the clarity of the CAI outrage which is based on very clear wrongs.
Even though one was clearly wrong and the other offers no clear direction beyond an alternative ideology, at least they offer clear guides to action. Which probably explains the continued salience of the private/public debate. It’s clear there are no panaceas in the water infrastructure arena. But the terms themselves awaken memories of intense ideological debates of the past, not least the policies of Reagan and Thatcher and the Washington Consensus. And they no longer stand for any coherent and comprehensive program for fixing our water infrastructure problems so much as they are markers of who one is and where one stands in relation to other people.

A (Technically Unsound) Technocratic Dream

I submitted this to the NYTimes as an op-ed last week. It wasn’t good for them. Passing up on stuff like this, no wonder they’re losing money! (Kidding).

An op-ed by Henry Petroski, civil engineering professor at Duke is an old reincarnation of the technocratic dream, get the politics out and just let the experts do their work, and everything will be fine. But while we’re almost always better off with experts than without, sometimes they get it wrong. As JFK said following the Bay of Pigs “All my life I’ve known better than to depend on the experts. How could I have been so stupid, to let them go ahead?”

Prof. Petroski himself diverts about halfway through the article from a rather nice discussion of changing perspectives on infrastructure and the limitations of cost and risk benefit analysis to make a political argument of his own. “Underdesigned” systems risk physical damage and human life we are warned. Yes an “underdesigned” system is always bad, but so is an overengineered system, which will needlessly waste resources with no benefit.

Prof. Petroski unfortunately does not realize that he has begun to make political arguments of his own, declaring that engineers are absolved of any responsibility to change their ways as we deal with climate change, we just need to give them enough money.

He holds up the efficiency of the Hoover Dam project as the ideal we should aspire to in contrast to the embarrassingly expensive and delayed Bay Bridge in California. But this equates the efficiency of the planning and building of the project with an ultimately successful outcome from the project. The Hoover Dam also took the brakes off growth in the arid Southwest and allowed massive cities and a thirsty agricultural system to sprawl in the desert. To the extent the dam aggravated unsustainable growth in this water poor region, we can say it was a disastrous and expensive failure, no matter how good the engineering was.

I worked for four and a half years at the U.S. EPA and spent much of my time working on water quality problems from stormwater runoff, a problem created by the last generation of engineers when they came up with what seemed to be a logical method to protect developed areas from flooding. In response to the water quality problem, a new generation of green infrastructure technologies, such as rain gardens and green roofs, and planning methods that favor preservation and connection between existing green areas have been developed to address both water quality and flooding problems in a cost effective manner. The technologies also offer carbon sequestration to adapt to climate change and reduce heat island effect which can help cities adapt to it.

These technologies didn’t develop in a vacuum or in a silo, they were the product of engineers and decision makers recognizing a problem and working together to make sure that the “know how” to address current problems existed and that the policy and political environment was such that this know how could be applied. Despite their promise, these techniques are often seen as unproven and resistance is still strong among those trained in the last generation of techniques and the policy environment can often hinder their adoption.
The challenges we face are immense and no professional or academic discipline is exempt from periodic re-examination of its role. Indeed, there is much consensus that the solutions to our problems will be interdisciplinary. And here Prof. Petroski might do well to consult economists and political scientists before laying the blame at an amorphous “political climate.” Because if we currently had all the money and the proper political institutions and decision making frameworks to solve our infrastructure problems in the face of a changing climate, they wouldn’t really be problems in the first place.

(Herbert) Simon Says: “If…for want of a nail the kingdom was lost…rational behavior would be virtually impossible.”

Those of you who with whom I have debated philosophy or discussed social science know that I am a big fan of the late Herbert Simon. He was one of the great minds of the last century and his work laid the groundwork for organizational and decision theory, cognitive psychology, and artificial intelligence. Concepts he developed such as “satisficing” and “bounded rationality” are still in good circulation and are once again gaining steam with the rise of behavioral economics.

The point is, he’s big, and will continue to be big as the field of economics tries to find new direction after the global financial crisis. He was mainstream in the sense that he received the “Nobel” for economics and was in close contact with the likes of Kenneth Arrow and Milton Friedman, but he was always more of a political or social scientist, and so his work is more accessible and useful to interdisciplinary practitioners. His philosophy is a very sparse and pragmatic rationalism, one that leaves abundant space and encourages empirical inquiry, but at the same time is coherent and clear enough to save the investigator from losing sight of why the investigation was begun in the first place.

 

So, I’m experimenting with a little series with Simon quotes and expanding a bit on why I find them insightful and useful for my work. The quote in the subject line comes from Simon’s Administrative Behavior. (The full quote is at the bottom for those of you desiring more context.)

This quote speaks to the conditions under which rationality is in fact possible, and that we routinely encounter areas where we can behave in a rational manner, has more to do with how the world around us is organized, than with our prodigious calculating powers. The quote from Simon paints a particularly clear picture of the lunacy of any complex enterprise for which success was only possible through such exacting requirements for planning and execution. A king whose plans were so delicate, no matter what his abilities, would not be a king for long.

And what does this tell us? It gives a perspective on adapting to all the challenges of an increasingly complicated world, especially those that come from disrupting natural systems that our societies were long accustomed to behaving in a regular manner. Through better organization, better communication, and better science we can make better decisions, but there are certain levels of complexity under which we collectively and individually will not be able to behave rationally.

 

The quote also speaks to the advantages of designing our institutions for simplicity. While I don’t think this is at all controversial, one must hold in mind that simplicity may demand what some see as arbitrary. A little tweak, a little exception can always align a policy better with the realities on the ground. The result can often be something such as the U.S. Tax Code, which by virtue of its very complexity undermines many objectives that it may at the same time seek to promote. My axiom is to accept the small stupid where possible, in order to avoid the big one.

In his later work, Simon describes two different design programs, and warns that we must differentiate them. The first is the Apollo Program, truly an amazing feat and one that people cite to this day “If we could put a man on the moon, couldn’t we…?” If only all our problems could be solved with time, money, and engineers. But they can’t. The goal of the Apollo Program was very clear and all the necessary money was made available. And so Simon contrasts it with the problem of organizing and maintaining a free society. And here he points to the U.S. Constitution, a work that is still in progress with goals that are much more vaguely defined and which we still fight over.

Indeed, a spacecraft can be lost for want of a rivet or a failure to convert from metric. But a society should not be. And yet some of the shriller and most heard voices are yammering about issues that are no larger than nails..

And here is the quote from Administrative Behavior (Third Edition):

“It has already been remarked that the subject, in order to perform with perfect rationality … would have to have a complete description of the consequences following from each alternative strategy and would have to compare these consequences. He would have to know in every single respect how the world would be changed by his behaving in one way instead of another, and he would have to follow the consequences of behavior through unlimited stretches of time, unlimited reaches of space, and unlimited sets of values. Under such conditions even an approach to rationality in real behavior would be inconceivable.

Fortunately, the problem of choice is usually greatly simplified by the tendency of the empirical laws that describe the regularities of nature to arrange themselves in relatively isolated subsets. Two behavior alternatives, when compared, are often found to have consequences that differ in only a few respects and for the rest are identical. That is, the differential consequences of one behavior as against an alternative behavior may occur only within a brief span of time and within a limited area of description. If it were too often true that for want of a nail the kingdom was lost, the consequence chains encountered in practical life would be of such complexity that rational behavior would be virtually impossible. (Simon, 1976, accessed through RJ Gray, 1999)