American Enterprise Institute

March 22, 2006

[Edited transcript from audio tapes]

9:45 a.m.	Registration
10:00	Introduction:	Roger Bate, AEI
	Panelists:	Roger Bate, AEI
		Andrew Morriss, Case Western University
		Kendra Okonski, International Policy Network
11:30		Adjournment

Proceedings:

Roger Bate:  Good morning, ladies, and gentleman.  We're going to get started because it’s ten.  I know quite a few people have been delayed in getting here, but I’m sure they will be here shortly.  My name is Roger Bate.  I’m a resident fellow here at the American Enterprise Institute and I am delighted to be moderating this event today with our two excellent speakers.  It’s a topic I’ve interested in for a very long time.  It’s extremely timely, given events in Mexico, where Kendra was until a few days ago. 

Unlike most environmental and health issues, I would argue there is agreement from the left, right, libertarians, and authoritarians that we’re running out of fresh water.  And that pollution is an increasing problem, at least in the poorest spots of the world.  However, the causes of our problems and the solutions to them cause many disputes and differences in opinion.  We’re going to be looking at some of those today.  Water politics is a veritable acronym soup.  There are so many agencies in so many locations, with so many names and acronyms, that it’s easy to get lost. 

I found myself in hot water, pardon the pun, back in 1989, when I gave my first ever talk on the impending British water privatization.  I knew absolutely nothing about water, and frankly not a great deal about privatization, but I was the only person in the financial services sector of the organization I was working for that was prepared to stand up and talk about it.  I kept on referring to the then National Rivers Authority by its acronym of NRA.  There were a lot of Americans in the audience, and they became somewhat confused.  What the hell was I talking about?  I realized quickly that one has to know one’s environment in which one is talking.

Rich country water problems are important, and we will probably deal with some of those today.  But like the authors of this book, The Water Revolution: Practical Solutions to Water Scarcity, I’m sure we’ll be talking more about the water in poor countries and some of the problems they have.  Mismanagement of water in the developed world is of course a problem.  The depletion of the Ogallala Aquifer in the United States is a major one.  In poor countries, mismanagement is lethal.  By various estimates, over a billion people lack access to potable water.  Probably around two billion lack access to decent sanitation around the world.  Diseases like typhoid, cholera, and the various dysenteries thrive in this environment.  Other diseases like billhartsia, malaria, dengue, and yellow fever are made far worse in poor management environments. 

At a resource level, under current rates of exploitation – which are always dangerous to extrapolate from – cities like Beijing will run out of water well before the middle part of this century.  The desire for water drives some of the international problems what we have today.  International water politics can destabilize entire regions.  There is a chapter in the Jordan/Israel peace treaty dealing with water itself.  I tried to read it, and found I didn’t understand most of it because it was written in “legal speak.”  Frankly, I think it is important, but these kinds of international treaties are very difficult.  We’ll come back to that.

I found out about a minor conflict, although it obviously affected the people involved very deeply.  When I was sitting on an advisory committee to the South African government on water, I noticed something.  I can’t say I was being particularly smart by noticing this; I just read the documents.  The legally agreed on allocation of water going through the Crocodile River in the Mpumalanga province, which is in the eastern part of South Africa, was far less than it should have been.  I think the allocation was supposed to be somewhere between 30 and 40 percent...can we please turn off all phones?  Thanks so much.

I pointed it out because what was happening was the politically less active, the Mozambique farmers, were being harmed by this lack of access to water.  The senior representative of the South African farming community looked menacingly at me and said, “Let sleeping dogs lie, Dr. Bate.” 

This is was my introduction to the very real world of water politics.  I was extremely English at that point, as you can imagine.  I really don’t know what to say.  It brought home to me that old phrase from Mark Twain:  The whiskey is for drinking; the water is for fighting over. 

While water wars are still the stuff of fiction, conflicts are undoubtedly increasing.  Dealing with conflict resolution and international border disputes is extremely tortuous, and often useless.  Improving national, state, local, and individual allocation uses and rights is certainly easier and much more worthwhile.  Kendra Okonski of the Sustainable Development Network will discuss many of those examples today. 

Water in all rivers, probably nearly everywhere in the world, is owned by governments.  Most water everywhere is owned by governments.  However, everywhere people use water all of the time.  What is the relationship between use and ownership?  What incentives to use in different settings?  How can allocation be improved through changing incentives?  How has law adapted to deal with those?  To explore these and other topics, we have Professor Andrew Morriss from the Case Western School of Law, who is an expert on water law.  He’s told me before that as a professor, he can speak for hours.  That’s why he’s sitting next to me; so I can kick him if he goes over his time. 

Before they speak, I want to briefly touch on the general history of water development.  You’ll be glad that it’s very brief.  I would argue that water development in many countries has gone through similar phases – almost identical phases in some cases.  We can expect the same from the poor and developing countries today.  Indeed, we’re seeing this in China – rapid growth leading to some misuse, but also massive misallocations.  Water is in the wrong locations for that development. 

Stage one of general water development has been hydraulic infrastructure development.  This is supply enhancement, dam building, irrigation equipment construction, domestic and industrial piping, and massive increases in use.  Stage two is where a limit is reached so that such development becomes hugely expensive or environmentally destructive.  At this stage, pollution probably reaches its height, except in the former Soviet countries, because environmental destruction didn’t stop development in any sense.  Think of the industrial revolution from my home country of Britain, and also through most European countries and parts of the United States, through World War II and into the 1950s. 

The next stage places quotas on the water use through the political system, leaving some outside of the political system high and often very dry. 

Then the next stage is continued implementation and infrastructure development, but at a much lower level than before.  At this stage, you tend to find more sophisticated management.  Adding to quota systems, you end up having pricing come in as well.  Until this point, water is almost never close to its cost deliverability, let alone its opportunity costs. 

I will just mention South Africa because I was doing work there.  In South Africa, nonpayment from the black majority was a form of protest.  It was against the Apartheid government.  When that has happened for twenty or thirty years, it makes changing attitudes very difficult.  It’s difficult to get people to pay for something they’ve never paid for before.  This is certainly the case within the farming community. 

When I was doing work on this topic in South Africa, I would routinely go to locations and speak to people and find out that the meter had been smashed again.  An unfortunate rock must have landed on it for some unexpected reason.  People don’t like to pay for something that they have taken for granted for decades.

  These stages overlap.  In the final stage, supply continues to be augmented due to political pressure, even where it’s also impossible to do so without massive economic cost.  In some locations, markets have been tried for rural water and agricultural water.  There are further restrictions placed on use, often for environmental reasons.  For domestic supply, this is probably the stage where privatization is the form of desperate solution.  All else has failed; let’s try the market.  This is where we are in many places today.  I would argue that many of these situations are not sustainable. 

As I looked at the news this morning, I realized that we have an uphill battle to have any kind of meaningful debate on this topic.  It becomes so polarized.  This is a piece from the BBC News website.  It’s a fair attempt at trying to balance the debate.  But as is often the case when it comes to reporting on water, the media polarizes those who apparently demand total government control of all water access, and those who apparently demand the commoditization and privatization of all water everywhere.  There are of course far more nuances in the debate, and I hope we will discuss some of those today. 

I have at least made reference to who the speakers are.  You all have the packs with you today.  They’re both experts on either the topics of water or international policy, which I think is the most important part of this today.  We’re going in slightly different order. 

Andrew, why don't you kick off?

    Andrew Morriss:  Thank you.  I want to talk broadly about the role markets play in providing water to people.  I think Kendra will give more specific concrete examples from some developing countries.  Basically, we have a choice today.  It's a choice between markets and condemning millions of people to die of thirst and waterborne diseases.  There really aren’t alternatives to providing water through the market. 

I was at a conference recently where this topic was being debated.  The conference was structured around the idea that there were different perspectives.  I was on a panel with someone who related to Hopi creation myth, which talked about the sacredness of water; with a Protestant theologian, who discussed the Genesis story and the need to respect all of God’s creation; and then myself, and I was speaking about markets.  The theme of this conference was, can't we all just get along? 

Let’s take the best of each of these.  My answer was that no, we can’t get along.  At most, two of three of those perspectives are true.  It can’t be the case that the economics is true and that water also falls into some nebulous category of a human right, and having to be allocated by governments. 

We have to make a choice about this.  I want to argue that markets are the preferred way to value resources, and indeed the only way to value them, for a number of reasons. 

First, markets are a very low-cost way of providing information to people about the value of the various resources. 

Second, markets allow the uses of water or other commodities to vary with changes in knowledge and demand.  They provide a dynamic valuation of resources. 

Third, markets encourage the production of new knowledge about water.  They encourage people to think of new ways to produce water, to make it available for new uses, and new ways to deliver water.  That’s very important because that means we’re encouraging investment and meeting human needs. 

Fourth, markets do not require that there be large-scale agreement about how to use resources.  They allow diverse resource using to coexist peacefully.  What we really want is for people to get along.

Of course, markets are not perfect.  There are problems with externalities and providing access to people without resources.  In general, markets solve these problems better than any other alternative.  Normally, the case for markets is presented as one of economic efficiency.  If you read the water economics literature, it’s mostly about efficiency in a very standard neoclassical way, where the supply and demand curves cross and we want to get to that point.  I think that understates the value of markets for water.  We can certainly learn a lot from that kind of analysis, but we need to reach deeper into economics and apply some other traditions before we fully understand it.

Ronald Coze pioneered what is called transaction cost economics, which focuses on reducing the cost of transactions as a way of increasing welfare.  That’s very important.  James Buchanan and Gordon Tullock pioneered public choice theory, which applies economic insights to the politic process.  That’s also very important with a valuable commodity like water.  A variety of economists fall into the Austrian school that focuses on how markets actually operate, which is crucial to understanding water markets. 

Let me go through these different advantages, and I’ll try to avoid getting kicked by staying reasonably brief.  First, markets are a low-cost signal mechanism.  They transmit information very cheaply.  That’s important because the cost of information is an important part of the cost of doing business.  If we can keep the cost of information lower, people are going to make more use of it. 

When we observe the market price of a commodity, we gain a lot of knowledge about it without having to know a lot of details about what is behind that market price.  If the price is going up, we know that resource is becoming more valuable and conservation is more valuable.  If the price is going down, we know something has happened to make the resource more available.  Particular markets generally offer a range of prices for a commodity.  If we have futures markets as well as spot markets, we then have some information about people is going to happen in the future as well as now.  All of these things are ways that we can learn about the future of resource without having to do a lot of investigation on our own. 

If we can make information be transmitted cheaply, we do a number of things.  First, we help people learn about the relative scarcity of a resource.  That lowers the barriers to transaction, which means there are more transactions and more voluntary trade.  Trade is good because trade increases wealth.  That’s one advantage. 

Second, the low cost of information means that people will make use of more information to guide their transactions.  When we have more information, we can reduce risk.  Risk is a cost, and reducing the cost of information means we reduce the amount of risk.  Lowing risk increases welfare. 

Third, lowering the cost of information also allows more complicated transactions.  For example, if you think about how a farmer might structure a transaction in a water market, they might purchase water rights that are contingent on the level of water available in a river.  If there’s a lot of water, he can take 100 acre feet; if there’s not so much water, he can only take 50 acre feet.  Then the farmer can go out into the market and buy insurance or speculative crop futures to hedge on the possibility of less water. 

It will reduce the variability of return to the farmer, reduces risk, and make him better off.  There are a number of opportunities like that when we have markets and can get more information into the hands of people who are engaged in transactions.  That’s a good thing.

When we have markets, we actually learn things that we didn’t know otherwise.  Take for example, things that are sold on Ebay.  I have a lot of junk in my garage.  If I put it on Ebay, it turns out that someone else wants that junk.  Information that I didn’t have before – other people want my junk – is now available to me and I’m able to get stuff out of my garage, and into the hands of someone in California who really wants this box of Beanie Babies that my children no longer play with.

Water is no different.  When we put water into the marketplace, we learn there are people who want the water, and we learn how much they want it.  Just as before, I’m faced with the Beanie Babies in the garage.  I don’t know if it’s really worth having a garage sale, or putting a classified ad in the paper.  Ebay lowered the cost of doing transactions, and it enabled me to learn about other peoples’ valuations.  They gave me a fairly broad and deep market of potential Beanie Baby buyers.  I learned what my valuation of it was, and I learned about their valuation.

The same thing happens with water.  When we put water into a market context, we learn how much other people value the resource that we have now.  For example, think about the different uses of water.  One use might be watering the grass, and the other use might be drinking it.  Normally, we would think that drinking it is more valuable than watering the grass.  But that’s a very general level. 

It’s true that in general, a drink of water is more valuable than watering grass.  When we look at how water actually gets distributed now, residential users are presumed to be drinking most of their water.  In fact, mostly they are just watering their grass.  Golf courses are presumed to be mostly watering grass, when they may be bringing utility to a larger number of people.  A lot of people enjoy playing golf.

If we put this into a market and we give people price signals, the homeowner – who is currently being charged relatively water for his presumed high value use – is going to have information about other peoples’ need for water and they are going to change their behavior based on that.  They’re going to learn from the market price, and adjust their behavior accordingly. 

The second advantage we have in distributing water through markets is that markets are a dynamic source of information.  When things change, markets respond quickly.  The financial markets, which are among our most efficient, respond to new information in a matter of minutes.  There’s no reason to think that water markets would be any different. 

One signal of what water prices would do is this:  If water prices are high, it will encourage new firms to enter into the market.  If market prices are high in one place and low in another, it’s going to encourage entrepreneurs to find ways to move water from the low cost place to the high cost place.  This dynamic process is going to allow new information to be factored into how people use water.

You may think that water has been around for a long time, and that we know all about it.  That’s not the case.  New information about water comes out all the time.  For example, we now know much more about the value of in-stream uses of water than we once did.  When we freeze a current set of knowledge, it creates problems. 

Many western states in the U.S. did not recognize in-stream uses of water in their water laws.  If you didn’t withdraw water from the stream and apply it to irrigation, you would lose your water rights.  This prevented the new knowledge that came out that in-stream uses in low flow was very high, economically and ecologically.  Recreational uses of the water – fishing, rafting, and so forth – generated substantial income.  It prevented those uses from being recognized.  If we have a water market that is dynamic, that new knowledge will come in and uses will change.  Moreover, it creates an incentive for people to discover those uses.  Making that dynamic available creates opportunity for profit.

Markets also create an incentive for new knowledge.  We will see people who hold water rights invest in new technology to maximize the value of their rights.  What kind of new technology can there be about water?  One thing is the new technology for delivering water.  Perhaps it is just upgrading the old technology. 

I used to live in Massachusetts, where some of the water pipes were still hollowed out logs from the colonial era.  There was a massive dispute over water in southeastern Massachusetts, where the leakage from the water system was so substantial that an entire new interface and transfer was being proposed, rather than digging than up the old pipes and replacing them with new ones.  No one owned that water in the pipes; when it leaked out, it couldn’t cost anybody anything.  If someone owned that water and it was seeping away into the earth, I think we’d see newer technology being invested into the delivery of water. 

We’d also see invest in new sources of water.  New sources of water may sound odd because we know where all of the water is.  Think about reducing waste as a new source of water.  Technology has enormous potential to change the amount of water we use.  In agriculture, the water demand for specific crops is quite different.  If people can sell their water rights, they may decide to grow more drought-resistant crops that use less water.

The steel industry used to use about 200 metric tons of water per metric ton of steel in 1930.  It’s about 20 metric tons today, and the most efficient steel manufactures use only about three or four metric tons of water per metric ton of steel.  That’s a dramatic change.  It’s an example of what can happen when people have to pay for a resource.

Water can also come about from reducing use through different shower heads – we’ve all experienced those – and the new front loading washing machines.  These are going to mandatory, starting next year, and supposedly use less water.  It can also be found in home building, for example.  They can use less water-intensive plants in the developments they build. 

If you drive around Phoenix, Arizona today, you’ll see a lot of fountains and grass.  That’s made possible by the fact that those of us who don’t live in Phoenix are subsidizing the delivery of water to Phoenix.  They developers are not paying the full cost.  My parents live in Yuma, Arizona and pay less for water than I do, and I live near Lake Erie.  Perhaps income is flowing from people outside the desert areas to people inside the desert areas through the water.

Water companies and entrepreneurs can also invest in how to produce and distribute safe water.  One of the most interesting speakers at this earlier conference I was at was a gentleman from Coca-Cola.  He talked about how Coca-Cola invests in water systems for all its employees at plants in India.  They found that safe drinking water reduced illness so much that productivity went up.  It was worth the cost of providing water to their employees so that they wouldn’t get sick.  That of course had side benefits for the employees’ families.  Coke is also providing water systems for schools in India, and doing an enormous amount to deliver safe water.

Markets tolerate diverse ends.  This is really important.  We don’t all agree on what should be done with water or with other commodities.  One of the nice things about markets is that I can buy water to use my way, and you can buy water to use it your way.  We don’t have to make a collective agreement about it, and that reduces the opportunity for conflict.  If we all have to look to the government to decide how water is to be used – who is paying what and where it will be delivered – it is contentious.  That goes back to the Mark Twain quotation.  Some of the battles over water projects in the Southwest have gone on for decades.  They consumed enormous amounts of resources that could have been productively used for something else.

There are a lot of criticisms of water markets.  I want to briefly touch on some of those.  One is that there are externalities involved in the use of water.  For example, if we price water, then all of the water will flow to urban areas; rural towns will be left high and dry.  Oddly, one of the main examples that are often used to make this point is the disaster of the Aral Sea.  The Aral Sea was an example of Soviet economic planning, which is the antithesis of a free market, but it frequently comes up as an example of externalities.  Let’s set aside whether the Soviet bureaucracy was really a market or not, and look at the question, what are the externalities involved in water?

The first questions is, are there a lot of them?  There are a lot of unpriced attributes of goods, but these are often actually related to priced attributes.  For example, in-stream flows are bad for ugly fish that nobody likes, but it’s also bad for game fish that a lot of people like.  If you provide water for the game fish, the ugly fish gets some too.  It’s often the case where the discreet problem is related and solved by something that would happen in the market anyway. 

Second, we don’t have to get rid of markets even if we do want to save the ugly fish.  The ugly fish are there, and they’re not getting any water.  If we simply give a market actor some resources and send them out with a mission to save the ugly fish, they will be able to do that without removing the market framework.  They can buy some water rights and leave the in-stream flows.  It’s not necessary to throw out the whole market.

It may not be the case that there are a lot of these effects, but it’s talked about.  For example, in the movement of water from rural areas to urban areas; the price of water in urban areas is so high, and the economic productivity of water in rural areas is so low, that we often think the water is going to move to urban areas. 

These examples are all based on the first unit of water that will be moved from the rural areas, which would be the lowest valued use in the rural area to the highest valued use in the urban area.  As markets progress, I think we would be more likely to see an intermediate set of trades.  We wouldn’t see all of the water moving from rural areas because as water left the rural areas, the remaining uses would be the higher valued uses.  They would be more likely to be maintained, and the city would become satiated.

These qualifications reduce the degree with which we need to be concerned with externalities, but they don’t eliminate it.  Is it true that these are a problem?  Well, yes, it is a problem.  Markets are not going to take into account unpriced attributes of goods.  The question is not do externalities exist in markets, but to compare markets to the existing system of allocating water.  The question is, are externalities better dealt with by governments and administrative allocations, or by markets?  I think there is little reason to believe that an administrative or political solution is going to be more successful than a market in dealing with these things.

If we’re talking about problem that is caused by a lack of knowledge – no one knows these fish need water in the river – why do we think the government will know about that if the market does not?  If the problem is that there are people lacking resources to participate, why do we think those people are going to be able to influence the government to protect them?  Governments typically do not have a great record in protecting those with no resources.

The second criticism that is often made is that water is a natural monopoly.  It’s very expensive to build water treatment plants and pipes, so we should have it recognized as a natural monopoly.  There are two problems with this claim.  First, there may well be aspects of water provision that are monopolistic.  It may indeed by expensive to build desalination plant in a small jurisdiction where there isn’t room for more than one.  If the economies of scale are sufficient, perhaps only one plant is optimal or possible.  That doesn’t mean we should government control over the entire system.  It’s important to look and see what this claim is being made about.

It turns out that economic scholarship has recently found that natural monopolies do not exist nearly as much as had been thought.  The whole idea of natural monopoly has some serious problems that need to be addressed.  We are no longer certain that this argument is solid.

The poor are often thought to be disadvantaged in markets.  This is a very powerful and emotional argument, and one that perhaps Kendra experienced at the conference in Mexico.  We need to think about this carefully.  It’s true that people without resources don’t generally do well in markets.  People without resources don’t generally do well in governments either.  In the real world, we want to compare actual institutions. 

One of the things important to recognize is that the poor are not an undifferentiated mass.  There are some people in the developing countries who are receiving water, and there are some who do not get any water. 

A privatized water system is criticized for raising the price of water above the politically determined price, and so the people currently receiving water will pay more.  The people who aren’t currently receiving water have actually been paying far in excess of the current price because they have to but it from trucks or go long distances to wells.  Even if the market price is higher than the current political price, those people may well be paying less in the future. 

It’s important to recognize these two groups; the relative size of these groups will determine whether it’s a regressive policy or not.  What we have is a very strong case that the current policies for water provision in many developing countries are actually a regressive tax on the poor and primarily subsidizing the wealthy.  Real water costs may well drop for many poor people.

The poor generally suffer when property rights are not specified, because the people with unspecified property rights are generally poor.  If we get a system of property rights for water in place, it’s quite likely that the holders of those property rights will be people who are currently poor.  With that, I think I’ll stop.

    Kendra Okonski:  Thanks so much for coming.  Thank you very much to Roger and to Courtney for having us for this event.  I hope that you all will have some good questions for us.

 I was just at a water forum in Mexico; actually, I just came back last night.  You probably heard a little bit about it in the media.  One of the most media-savvy events that happened was a little protest inside the forum.  I think the term that the Latin Americans used to describe the protestors -globophobicos – which means fear of globalization, is appropriate.

 This woman here is Maude Barlow [phonetic], who is perhaps the best known antagonist of the water commodity and markets idea.  There she was making a speech about why this conference is full of corporate interests and is has nothing to do with allocating water to the poor.  I was rather offended by that.  I found at least 50 people who nothing to do with corporations, and were just interested in the details. 

It was amazing to walk to through the expositions.  There were people who had all sorts of different pipe systems and treatment systems.  They were dedicating their entrepreneurial and intellectual skills to solving this problem.  I thought maybe for once these people should just put up a Power Point presentation.  How do they aim to solve the world’s water problems?  Instead, they just protest these sorts of events.  They say it’s full of corporate interests.  I wondered if these little scouts from Mexico City were corporate agents in training.  I thought they were really cute.  That gives you a flavor of what was happening at this event.  It was huge and disorganized, but there were a lot of people who had interesting ideas about addressing this problem in the future. 

I want to start with some general comments about government allocation of water.  I don’t think I’m nearly as eloquent as Andrew, but these are unifying characteristics of water system.  I’m especially talking about poor countries here.  That’s an area I’m very interested in.  Most of the contributors to the book are from poor countries, or have a wealth of experience in that area.

What I find with government water systems is generally that subsidies don’t help the poor; they help people who are wealthy and might own swimming pools.  Generally, those people pay a very low cost for water.  This is what came up in discussion about Mexico’s water system, for instance.  A subsidy can also be referred to as poor cost recovery.  Someone has to pay for those costs. 

Government water systems don’t have a metric for decision making.  This leads to them to have poor customer service and measures of inefficiency, such as a high number of employees per 1000 connections.  That’s kind of a standard way of measuring the efficiency of a system around the world.  A political connection is often required to obtain a water connection.  Even then, a water connection doesn’t guarantee that you’ll get high quality water. 

I co-wrote a chapter in the book with my colleague in Ghana, Franklin Kujo [phonetic].  Franklin has lived in an apartment for six months.  He has a water connection, but never has one drop of water flowed through it.  The officials from the government water system will come and say he owes them a bill for each month.  They threaten to turn it off unless he pays the bill.  This suggests that there is a problem.  Even the WHO’s statistics reflect this fact.  They say that 90 percent of urban Ghana has access to water, but access doesn’t necessarily mean water.

Billing and metering are erratic.  Generally, less than 50 percent of the people in a government water system pay their bills.  Moreover, the government has no incentive to measure how much water is flowing from each of those connections.  Because of all of this – a lack of ability to generate revenue – the infrastructure system is decrepit and failing.  It leads to large losses of water.

I think the unifying characteristic here is that water scarcity is an economic phenomenon.  One of the wettest places on Earth is Ashram, in India.  They suffer a huge drought, in the sense that people don’t have access to drinking water.  It shows that physical proximity to water does not necessarily mean the water is available in a form that humans can use.

I’m going to go through some specific examples found in the book.  Most of the contributors are not here, although one colleague, [indiscernible], is here.  He might have something to add afterwards.  He has written a global overview of water use.  The other contributors looked at various specific instances of rural and urban water use around the world.  Since I was just in Mexico, I think that is an appropriate example.

I met Jesús Campos, who is with Mexico’s water regulator, Conagua.  One of the things that Jesús spoke about in the forum is that the cost of water delivery all across Mexico is ten times greater than the price charged to consumers.  That means that people with connection who do get water are getting subsidized.  I believe it is subsidized by the taxpayers, although I might have missed some of the details because I was listening in Spanish.  Because the wealthy and middle classes are the one most likely to have a water connection, the poor don’t benefit from that subsidy.  That means that the poor pay the most for water. 

There are a lot of water tankers that drive around the city, and the poor obtain their water from those tankers, or in other ways.  Jesús also noted that the cost of bottled water relative to the cost of water obtained in other ways is very high.  On the other hand, if someone isn’t paying their bill, the Mexican law prevents the water systems from disconnecting that person.  He also noted that when you add up the individual costs to obtain water across the country, they are far greater than the investment that would be required to privatize the system. 

What do I mean by individual costs?  For instance, a family might buy a pump and install it onto their pipes in the street.  They extract water and use energy to do it.  It means that people in the rest of the system are harmed by it because the pressure goes down.  This is also true in India, as we will see in a little bit.

Another bad instance of water use is in Ecuador.  In particular, this is rural water use and irrigation.  Economists often speak of a political system creating concentrated benefits and dispersed costs.  This is the case with irrigation.  Whenever the government has a new irrigation project, the rural elite are the first ones to find out about it.  They go and buy up land where they know that project is going to take place, and they receive a windfall courtesy of the taxpayers.  It also leads to very inefficient water use and environmental damage.  For instance, there is very little money left to invest in watershed conservation.

On the other hand, we have Chile, which I think is an outstanding example of a system that could be emulated throughout the world.  It’s a market-based system, and it’s crucial that we recognize it’s based on property rights.  All of the water companies are locally owned.  In less than three decades, Chile has achieved universal 24-hour access to potable water in the urban areas, and it’s at about 95 percent in rural areas.  Because these systems are able to generate revenue, they are now able to invest in sewage systems and in wastewater treatments systems.  I think the results speak for themselves there.

There have also been many benefits of water efficiency in farming.  Chile exports a lot.  I had the great fortune of living there from 1993 to 1996.  I was observing this, but I didn’t really know what was going on at the time.  I was only sixteen.  Eighty-four percent of Chile’s water is used in agriculture.  It’s really important that they have efficient water use because of that.  Their market driven system means that farmers internalize the cost of water.  They know how it costs relative to other inputs and uses.  This leads them to invest in technologies that create more efficiency, and they invest in higher value uses.  Many of us get fruits and vegetables exported from Chile during the winter months.  That’s a much higher valued use of water than say growing wheat.  We also may enjoy Chilean wine; I do.

Chile also has a spot market for water, which I think is really unique.  I didn’t find that anywhere else in all of my research.  That’s important because it helps farmers to accommodate risk into their decisions.  It’s also important to recognize that it requires a formal institutional framework.  Formal water user associations in that area enable trust among the users.  The farmers can sell marginal units of water to urban water providers.

This is a quotation from the authors of the chapter, Douglas Southgate and [indiscernible]:  “It is doubtful the competition over water resources, inevitably created by economic expansion in Chile, could have been resolved as efficiently in the absence of policies that stress ownership and markets.”

I think that is a really nice quote.  It represents what I think, and a lot of the results of the other contributors to the book.

This is a graph that was featured in an article in the journal Political Economy last year, by a couple of Argentine economists.  In Argentina around the mid-1990s, some municipal systems privatized their water delivery.  The authors though this made a nice real world experiment, where they could compare private and nonprivate water companies.  They especially looked at child mortality as an indicator of health.  You can see that the gray line represents the privatized companies, and the black line represents the nonprivatized companies. 

Around 1995, this all sort of crystallized.  The private companies were definitely private, and the public companies had obviously stayed public the whole time.  You see a huge drop in child mortality there.  They looked at a lot of other variables and decided this was the factor that affected child mortality.  It’s a nice graph that shows why markets are not just efficient, but have health benefits for the poor as well.  This happened in places where the water system was extended into poor neighborhoods.

Moving on to Africa, this is the chapter that I co-wrote with my colleague, Franklin from Ghana.  We often hear of Africa as the place where water and sanitation are dire.  We see frequently see images of drought; there’s a drought in eastern Africa right now.  This is an area that deserves a lot of attention.  We just looked at urban water.  I think rural water is fairly complicated and we didn’t have time to look at it. 

All over Africa, people are moving to cities.  You can see a trend in the past ten years.  Millions of people are moving to cities and away from rural areas.  The reality is that the urban poor don’t have access to government water.  Governments in most African cities don’t provide any sewer services.  And as I mentioned before, access does not equal water, as in the case of our friend, Franklin.  He is a relatively privileged person in Ghana.

We noticed that there were quite a few successes with top-down privatization in a few countries, mainly Senegal, Guinea, and Cote D’ivoire.  All of them are interesting in their own right.  That’s not to say that privatization has solved all of the problems that might exist in a water system, but in these three countries, there have been many successes.  In Senegal, for instance, they enabled private developers to invest in network extensions.  Sixty percent of the network additions were funded by private individuals outside of the water company. 

In Guinea, I think there are good things and bad things.  They are forced to supply nonpayers.  If government is lagging behind on its bills, then the companies have fewer incentives to extend their networks.  Cote D’ivoire is interesting because it’s had a private system since 1959.  Generally, it is recuperating all of its costs.  There is a sort of cross-subsidization.  Industrial users are subsidizing domestic users, and enabling the network to be extended.

I think the more interesting phenomenon is what Franklin and I discovered when we were looking through the literature.  First, let’s look at the barriers and then go into that interesting phenomenon.  Twenty-seven percent of urban Africans live in the outskirts of the city; they live outside the formal urban boundary defined by the government.  The government perversely defines the boundary as that area which received public services.  It can essentially ignore the poor – this 27 percent of people who live on the outskirts.  In addition, they deny land tenure to these people.  The poor do not receive government services like electricity or water. 

Another characteristic of these systems is that they will sometimes have certain distribution points with water kiosks, where they nominally supply subsidized water to the poor.  In Nairobi, the government appoints the kiosk operator, who then charges 18 times the price of the subsidized water.  I think that statistic is especially egregious.  What you have is people being entrepreneurial inside of government.  Apparently, being a kiosk operator is one of the most lucrative jobs you can have as a government appointee.

Generally, the poor are excluded from government water provision.  This interesting phenomenon that I discovered is that the informal sector is basically solving the water problem.  That’s not to say it’s perfect, or that things shouldn’t change.  It is interesting because it’s something we don’t hear talked about in the media by opponents to private water provision - they argue that no one should supply water at a profit.  These informal entrepreneurs are making a profit by supplying water, and they exist in almost all African cities.  Not only do they deliver water, but also sewerage.  They are using markets to do this.  The poor are paying for their services.

Generally, these people operate in their own neighborhoods.  It might be a one or two man operation; they are very small businesses.  Their advantage is that they have local knowledge, are very flexible, and they are very competitive.  This is basically an unregulated market because it’s in the informal sector.  When they do make a profit, they reinvest it in their business or community.  I think it’s interesting that you don’t see these opponents of private water provision protesting against these people.  They would probably get run out of town.

The real problem here is the informal nature of these entrepreneurs.  It means that they can’t expand or take advantage of economies of scale.  They also can’t guarantee quality.  If you have a contractual relationship with your water provider and he provides you with bad water, you might have some legal recourse.  Because you are working in your local neighborhood, you have to maintain your reputation.  That helps, but it’s not necessarily a guarantee.  The informal nature of these businesses also means that government officials use their power to exact bribes from the businesses.

This phenomenon is not just happening in Africa, but also in India.  The chapter in the book that looks at urban India is largely a case study about one slum area in New Delhi.  Let’s look at New Delhi’s municipal system first and then we’ll talk about the case study.  New Delhi has a gravity fed water system; it’s not pressurized.  Water flows from the north side of the city down to the south side.  By the time the water gets to the south, there’s literally no water left. 

My colleague from India said that this also leads to huge waste of water because when it’s available, you fill up your storage tank.  Then the next time it’s available, you drain your storage tank and put new water in because you’re not sure when it’s going to come again; you want it to be as fresh as possible.  We also see individual efforts to extract water from the system, like pumps on the lines.  This decreases pressure for the other users.  It’s an expensive use of energy that might otherwise be avoided. 

Moreover, the government doesn’t recognize slums and shanty towns as legal.  I lived in New Delhi for a few months.  While I was there, the city government was bulldozing certain areas that were illegal.  These were people who had invested in their homes, and the government came in with a bulldozer to plow it over.  That situation is underpinning all of this and deserves a lot of attention.  Our friend, Hernando Desido [phonetic], is working on this, but all of us should be concerned about it too.

This case study looks at an entrepreneur who set up a pipe network in a slum.  He serves between 50 and 100 customers.  He has installed a pump at a well, and his customers pay for water to be delivered twice a day.  They pay 200 rupees a week or a month, I can’t remember.  It’s basically the same cost as what is estimated to be the appropriate cost of water by water experts in India.  These are really poor people, probably some of the poorest people in the world.  But they are paying to have reliable, high-quality water delivered to them.

Rural India is also very interesting.  There is a lot of great research going on about how informal markets are solving water problems.  These are two examples.  The first one is from Gujarat.  The topography of this area is such that rainwater basically flows right down to the ocean.  It’s like an inverted saucer.  The government solution was to build a lot of large dams, and they promised the farmers that they would have water for irrigation. 

Some farmers do get water for irrigation, but many don’t.  At the same time, the farmers had depleted the groundwater.  What they decided to do was to build small check dams in streams and small rivers.  Their idea was that this would help change the groundwater situation; it would help water infiltrate the ground, and they would have more water for their uses.  This isn’t a formal market with property rights, but it’s a decentralized institutional arrangement.  The farmers had reasserted their riparian rights that had been trampled on by the government.

One of the most interesting aspects of this is that because the farmers had to invest their own creativity and find ways to solve their problem, it made them more acutely aware of their water.  It made them be more efficient.  They’ve invested in a lot of technologies, like sprinklers and drip lines that use water more efficiently.  It means they are growing higher value crops, like orchards. 

We’re also publishing an edition in India that has more of a focus on India.  Farmers in a district in Tamil Nadu sell their water to the hosiery industry.  This is where about 50 percent of India’s knitwear experts are located.  I thought this statistic was amazing.  The water market between farmers and the knitwear industry is estimated to be worth $24 million.  The loss of agricultural production is worth about $50,000.  I think this is an informal market, but I don’t know if it’s legitimate in the eyes of the government.  When you enable users to trade with each other, it creates much more value. 

Finally, I think this is my last example.  China is an example of what we should not follow.  The situation is quite dire.  It may not be as dire as represented in the book.  I just read Roger’s article this morning.  I think the man who wrote the book is an economist who is very interested in decentralized institutionalized arrangements.  These have been absent for most of China’s history.  This is an interesting question.  How do you enable these things to come into existence?  If people don’t have a preexisting understanding of markets and property rights, how can you solve that situation? 

Until recently, China’s water was allocated in top-down way by the government.  The top government agencies would say that they have this much water.  Each agency gets so much water, and they allocate it to sub-agencies.  What you have is an overestimation of water supply, overinvestment in capacity to use it, and the situation seems dire. 

It’s also characterized by rent seeking.  State-owned enterprises don’t pay their water user fees.  They have accurate data about the extent of water existence in certain places at certain times.  The author called this a “pump race.”  They have extremely high inefficiency of use, compared to other countries.  They also have huge environmental problems.  They have no sewer treatment or facilities at all.  This exacerbates water scarcity in a place that’s already water scarce, at least in some places in China.

The author wrote that China’s history has characterized by Oriental despotism.  They don’t have a history of property rights, and very little experience dealing with formal markets.  This has led to some unsuccessful joint ventures with foreign companies.  The terms of the contract were skewed toward the foreign company.  I would suggest that is not the way to privatize.  They seem to be learning from that situation.  That author stresses that decentralized allocation of water will produce far more benefits in the future.

What lessons can we learn from all of this?  I think the results speak for themselves.  Government systems around the world, with a few exceptions, are generally characterized by waste, inefficiency, inflexibility, corruption, and lack of innovation.  Subsidies help politically connected people get water, but necessarily the poor.  It was interesting that a Spanish environmentalist at the water forum said, “Mexico uses a lot of water.  Why is that?  Why can’t you just invest in low-flush toilets, low-flow showerheads, and front-loading washing machines?”

Like many environmental advocates, he misunderstood that people need appropriate incentives to engage in and acquire such technologies.  If you’re not paying the right price for water, of course you’re not going to buy a low-flush toilet.  Who cares how much water you use?  I’ll make a few more observations.

Formal private provisions generally result in the opposite:  efficiency, fair outcomes, better customer service, better environmental outcomes, and more transparency.  If you have privatization in a poor institutional environment, where you lack the rule of law and enforceable contracts, that privatization is unlikely to overcome those problems.  It is most likely to suffer because of them. 

I don’t think there is any one-size-fits-all solution.  We should respect what these farmers in Gujarat have done and let them get on with it.  One of the people who wrote a forward to the book, Ian Byatt, was the first regulator of OFWAT in the U.K., when the water system was privatized.  He said that we should involve people, not politicians, in water.  I think that means embracing decentralized institutional arrangements, whether that is formalized property rights and markets or informal ones.  The benefits of formal markets are very apparent, because you can have enforceable contracts.

We should recognize the entrepreneurs of all sizes, shapes, and forms are interested in allocating water and finding new ways to use it.  In the African and Asian situations, governments need to extend a formal legal existence to the poor and their businesses.  I believe this could help solve water scarcity.  In the case of the U.K., where I live, we need a real market in combination with eliminating perverse subsidies to farmers.  Thank you very much.

[Applause]

Questions and Answers

Roger Bate (moderator):  Excellent.  Before I open this up to the floor, a question comes to my mind.  Given the partial failure of some privatizations in the developing world – there are always degrees of imperfection in a whole host of solutions – do we actually need a dictatorship to push these things through?  After all, the legal changes that led to Chile’s great success were brought in under the Pinochet dictatorship.  Therefore, perhaps we should be expecting more from China than India. 

Although they may not have the property rights history – and I know nothing about Chile, I hasten to add – are we expecting them to go in the direction of the Soviet Union?  Perhaps they will have a total and utter environmental disaster.  Or do you think they can learn from the best of the rest of the world? 

The one example you held up as being maybe not perfect, and I agree with you, but a lot of that was brought in because of the power of the government at that stage.  Communist Chile was certainly not as controlling as communist China.  But I ask that question simply because the opposition and characterization of the debate that I see says perhaps that we need some kind of radical government to push those things through.  Or am I just being over the top?

 Kendra Okonski:  Let’s distinguish urban and rural.  The people who are already supplying water - the entrepreneurs – their activities are considered illegal by the government.  It would be very easy for the government to simply make it easier for businesses to register, and decrease the amount of time it takes to enforce a contract. 

It might take two or three years in the Indian court system right now.  That would be a simple and cost effective way to address the problem.  It’s probably not as simple as that, but I don’t think it requires a dictatorship.  It’s simply extending a formal legal existence to the poor.  In that sense, I don’t know.  I hope that India will recognize these things, and they seem to be moving in that direction.

With China, I don’t know.  Maybe the country is so complicated that it’s difficult for Westerners to understand it.  Governments will still randomly exercise its control over people who are engaging in transactions considered illegal, but they are legitimate economic activities.  I don’t know.  I think that if people in Chile really didn’t like the system, it would have been reformed by now.  They’ve had three successive democratically elected governments, and most of the reforms that were passed through have stayed on that track.  They even have a left-wing government, but the success speaks for itself.

Roger Bate (moderator):  One would hope that others would permit it without a dictatorship, of course.  Andrew?

Andrew Morriss:  It’s a good point.  Sometimes you need a big bank to get things started.  In opposition to that is the fact that market solutions really rely on local institutions and local knowledge.  The diversity of things that Kendra talked about shows that.  It’s not really possible to impose this from the top down.  In Chile’s case, there was a preexisting culture of property rights, civil rights, democracy, the rule of law, and so forth.  It was getting to back that.  The government in Chile was able to build on that success.  That would be a reason why I think we wouldn’t expect China to beat India. 

It’s hard to make the case for markets because people want to know exactly how it’s going to work.  We can’t tell you exactly how it’s going to work.  Markets and the market solutions are going to be different in different places.  You have to recognize that and say what really matters are to understand the incentives.  The incentives to get it right are what matters, not saying what exactly it’s going to look like.  Governments have the advantage of giving a five year plan.  Their record of delivery may be appalling, but here’s a plan with charts, diagrams, and schedules, and stuff like that.  They’re not going to do it, but it looks good.  That’s hard for us to compete against.

Roger Bate (moderator):  We have about 20 minutes for questions.  If you can, please announce where you’re from and keep questions as concise as possible.

Ms. Montgomery (audience member):  I’ve done some work in urban water supply in this country.  A couple of questions come to mind here.  I would be really uncomfortable combining these issues.  The delivery of water and the distribution system is a product all on its own.  You can deliver bad water or clean water, but the expenses of building network are quite considerable.  Certainly, the quality of that network preserves the quality of the water.  There is plenty of leakage here in the District of Columbia, and they’ve still got steel pipes.

It bothers me to have these all mixed together.  It seems to me that there are three classes of problems.  One is basic acquisition of the water.  The second is treating the water, and the third is distributing the water.  Based on the work that I did some years ago, the network in the metropolitan area costs like 90 or 95 percent of the total, compared to the acquisition and treatment of the water. 

When you look at a water price and you think it’s too low, it may well be that the cost of the distribution system was separately priced.  I’m guessing that’s not the case in your situation, but that is what is done in many metropolitan areas.

Roger Bate (moderator):  Do you have a question?

Ms. Montgomery (audience member):  Yes.  If you break this up into these subtle categories, it seems that there are different problems in non-North American places:  The issue of acquisition and the issue of treatment.  I think the private market applies better to the treatment and distribution than it does to acquisition, which can necessarily involve governments.  It could be that you don’t have the capability to supply large quantities of water, if you just have one well down in the ground.

Roger Bate (moderator):  I’m going to take two more questions right now.  The gentleman here is next.

Rod MacAlister (audience member):  Thank you very much.  I’m Rod MacAlister, with the African Development Foundation.  In the world of development, if there is somewhere between government and markets, what are the worst and best practices of promoting water for the poor?

Roger Bate (moderator):  Now we’ll have the gentleman here, and then the panelists can have a go at answering those three.

Sean Kay (audience member):  I’m Sean Kay.  I chair the International Studies program at Ohio Wesleyan University and I work at the Mershon Center at Ohio State.  I premise my brief question on the fact that I agree with on the privatization approach, but I want to get better informed about it myself. 

The assumption here is that markets are going to lower the transaction costs, and that builds in the assumption of increasing efficiency gains in distribution.  A lot of this is also drive by use issues that are external to the product of the delivery of the good.  These can also artificially raise the price or the need to make the water cleaner if you have siltification in reservoirs and rivers. 

The price may not actually be set by market; it could be set by externalities.  My first question is how do you control for that?  In economic terms, you also have a collective action problem here in terms of the demand side of the equation.  You have a lot of people who won’t have the resources to get access to the water.  I’d like to know more about how that fits into the model of having prices set by the market, relative to the delivery of the good.

Roger Bate (moderator):  Okay, great.  Who wants to tackle the first question, which was about privatization and various aspects of acquisition, treatment, and distribution?

Andrew Morriss:  You’re right; there are distinct problems.  In the U.S, we’ve been wealthy enough and the governments reasonable enough that a lot of our distribution systems are well set up.  Most people aren’t using hollow logs to transmit water anymore.  Although, in Cleveland where I live, the water mains regularly explode and send up geysers that damage the surrounding buildings.  At least once a year a street blows up.

What we don’t see with the state provision of distribution networks is much innovation in metering or time of day pricing, but we have seen them in the electricity markets as they deregulated.  The capacity of a water system is a constraint on the use.  If you price higher at a peak use time, you’ll reduce the peak use time.  Then you can reduce the expensive provision of water at those times. 

Despite the fact that there are very high capital costs in setting up a basic distribution system, there is a lot of room for improvement in how we deliver water at both ends of the system.  We could see better metering and pricing schemes that give people incentives.  Instead, what we’ve seen in the United States is a mandatory approach, where we mandate things like low-flow shower heads and toilets that don’t work.  It’s been ineffective because it’s been a top-down thing.  I agree that there are separable issues and they need to be addressed individually.  Do you want to tackle the rest?

Kendra Okonski:  Yeah, I’ll answer that one too.  The U.K. has a privatized water system.  I have to admit I don’t know much about the details of how it was done.  I think they did manage to create many competitive elements of all three of those aspects of water delivery:  acquisition, treatment, and delivery.  There is a chapter in the book, which I didn’t even speak about, that addresses the system in England and Wales and compares it to Scotland.  I do recommend reading that.

Colin Robinson, who is a colleague of ours at the Institute of Economic Affairs, is a renowned economist who discusses those problems in more detail.  In terms of best and worst practices, I guess I came across a few of these when I was doing research.  I wouldn’t say that these are necessarily unifying and wide-scale things. 

I met some people from U.S. AID two days ago who were at the water conference.  Their focus combines water and sanitation issues.  They don’t separate them; they recognize that a large part of the problem is dirty water creates illnesses, whether that is poor sewerage or potable water.  Some of their initiatives in India seemed interesting.  I also met some of the NGOs who were working with water delivery in poor areas.  One of the things that they do is telling the government system to give us a connection here, we’ll pay for the installation of the meter, you bill us, and we’ll sort out the rest of the billing with the users.  I think that is a creative decentralized way to address the problem.  I think they were doing that in Bangladesh. 

One of the coeditors of the Indian edition of the book was discussing a World Bank initiative.  This was a real top-down approach; this was for water use in rural areas.  The national government then worked with local governments, and NGOs were set up to work...what is the name of the project?  The project was called [indiscernible], which means “our water.”  It had the same problems as the Indian municipal government systems, like inefficient use and waste of water.  When these things are imposed from the top down or models are imported from other places that would be the worst practice.

One of the best practices was noted by the Latin American authors in Ecuador.  I think it’s the Inter-American Development Bank who has been doing some interesting stuff with watershed conservation, trying to work with water users.  There is obviously a huge array of these examples.  It’s difficult to say.  Generally, the ones that work are based on decentralized knowledge and enable local people to work with what they have.

Roger Bate:  Thank you.  And the last question?

Andrew Morriss:  On the last question, I think a couple things come to mind.  First, people get water now.  If you don’t get water you die.  They are paying for it somehow.  Typically, they’re paying for it in time, because they have to wait in line or walk a long distance.  Or they are paying for it in illness, because the water isn’t clean and they get sick all the time. 

A good example of how private enterprise helps is the example of Coca-Cola in India.  When I heard from the gentleman who is the Vice President for Coke’s global water resources, it really impressed me.  They are providing water for a significant number of people in India because it’s in their economic interest to it.  It’s not just because they’re nice people and want to do it; they’re providing for their workers.  Every Coke plant in India has a free clean water tap for anyone who wants water.  They are also building water systems for schools because they found that a significant productivity problem came from parents who had their kids out of school.  The kids were out of school because the school didn’t have any water. 

In large sections of India, water is present in massive quantities for short periods of time, but it’s not around for long.  It was a matter of building collection systems, which was relatively inexpensive.  A significant number of Indian children are now in school year round because Coca-Cola found that making that happen was in its economic interest.

People will get it because it’s in other peoples’ interest to do it.  The other reason is that people are already paying for it one way or another; they’ll stop paying with illness and start with paying cash.  Then they’ll be healthy and able to work. 

There are certainly problems with recharge zones for reservoirs and things like that.  Most of those are government-run reservoirs.  Most of them are large-scale projects that have silt and salt built up from irrigation and things like that.  It would be unfair to ask the markets how they would fix the government.  What would be different?  Well, local knowledge would be taken into account; there would be smaller scale solutions.  There would be different solutions in different places.  Some of them aren’t going to work, but some of them are.  We learn over time what works; that things that work become successful. 

From the government, we get giant projects like the ones Kendra describe.  The Aral Sea was the result of an irrigation project.  Those big things are hard to reverse or to learn from.  We went through a massive dam building phase.  China is still building massive dams.  These projects tend to be environmentally destructive and destructive to peoples’ lives.  The benefit of markets is that it is more a mixed strategy.  That’s the best I can offer on short notice.

Roger Bate:  We have a comment or question down here.

Julian Morris (audience member):  I’m Julian Morris, from the International Policy Network.  I just wanted to comment on Kendra’s response to the U.K. way of privatizing the water utilities.  It actually hasn’t been terribly competitive.  It’s a highly regulated privatized utility.  Because there are some incentives, they have improved the infrastructure to some extent.  There is sort of a regulatory game going on in the U.K.  Because the price of water that is set by the government is determined by a formula that includes the cost of improving access, the water companies overestimate the cost of doing the improvements to infrastructure or the environment.  They gain the system that way. 

Colin Robinson actually suggested introducing something into the water system that would reflect your breakdown of the structure.  You’d have a separation of ownership between the delivery, the acquisition, and treatment.  You might get some problems because of the correlation between delivery and sewerage and acquisition.  Some have started to use directly treated sewage as part of the inputs to the system. 

Those specific problems aside, it’s possible to break down the system like that in principle, as long as it’s done in a way that enables competition to rise.  You don’t regulate access prices or regulate the way delivery is provided, because if you do that, then you undermine the incentives to improve the infrastructure in a suitable way for other partners in the market.

Roger Bate (moderator):  The next question is over here.

Gabriel Ross (audience member):  I’m Gabriel Ross, the author of Private Provision of Public Services in Developing Countries.  This is a very interesting book.  I couldn’t see any reference in it to quality of water.  I think it would be beneficial to have different qualities of water in the same area.  Does all water have to be drinkable?  Can one envision water for irrigation of a different quality than water for drinking?  Could we have a duel system, with water for drinking separated from water for washing or toilet use?

Roger Bate:  I’m happy to answer that question.  Yes.  In many instances in the work I did in South Africa, there were examples of irrigation in rural areas that was going to the agricultural communities that wasn’t potable.  Although, there was often a drive to make sure that all water was potable.  That will be harder.  From my limited knowledge of domestic delivery, it’s harder because you have to have more piping systems going into each house.  This often may not make sense.  But certainly within industrial and agricultural settings, there should be a lot more of that because it cuts treatment costs drastically.

Okay, we have time for two more questions.  Let’s go to the back and then the front for those two questions.

Bill Buctum (audience member):  My name is Bill Buctum [phonetic].  I’m with Moving Water Industries from Florida.  I have a question.  In a little over eight years and eight months, the 150 or so signatories to the U.N. Millennium Development Goal are going to be expected to reduce the number of people without access to safe water by half.  Obviously, many of those signatories are going to fail to achieve that goal.  What steps should be taken today to help ensure that more countries will meet the MDG?

Kendra Okonski:  I think one of the issues I’ve come across while working on this is that international agencies tend to think about top-down solutions.  I haven’t been able to check my email in the past 24 hours, but apparently the U.N. had just come out with a report lambasting privatization.  They say this isn’t the solution. 

The U.N. and the WHO, as I mentioned in my presentation, have statistics that I think are skewed.  They certainly don’t take into account these informal entrepreneurs who are providing water to slum dwellers.  They are a large portion of people in Africa and Asia.  The urbanization trend will continue to be very important.

One thing that could happen is that the WHO and U.N. should have a more realistic approach to the issue, which would take into account these decentralized ways of addressing water scarcity and sewerage.  I certainly didn’t hear anyone at the water forum speak about the things I talked about in Africa and Asia.  The World Bank has a lot of good research on this, but maybe a practical thing would be for governments funding these agencies to put pressure on them.  They need to recognize the broad over-arching issues. 

This is my second point.  They also need to recognize land tenure.  It would be an instrumental way to achieve that goal.  Frankly, I’m offended by the Millennium Development Goal.  Why do we just want to increase access by half?  Don’t we want all poor people to have sanitation and clean water?  Shouldn’t we do that as quickly as we can?  It doesn’t necessarily have to be by the top-down approach, although a top-down approach in which private companies are involved could be helpful.  We also need to recognize that entrepreneurs of all sizes, shapes, and forms should be engaged in this. 

Another thing to do is basically to have free trade.  These anti-privatization activists are quick to criticize the WTO for enabling trade and services like water.  But if that’s going to help achieve that goal, even if I don’t agree with it, let’s do that.  As I said, we should measure this by results, and not by ideology or rhetoric.  Those people have nothing to contribute.  The people at the water forum who were investing their skills in all sorts of ways are the people to engage in that.

Roger Bate:  Kendra, thank you very much indeed.  Unfortunately, the gentleman from the IFC is going to be able to ask his question.  We have run out of time, and this room now needs to be used for another event.  I apologize.  Thank you very much to our panelists.

[Applause]

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