Water privatization in Scotland

I have not followed the privatization battles closely, although I do know something about the nationalization movements during the 20th Century. I’m wondering if there is an odd symmetry between them.

Nationalization often happened when foreign (usually American or European) investment was reaching the end of the investment cycle. Originally enormously efficient, it had become antiquated and of lessening utility for failure of further investments. It was usually at that time that nationalistic government would steop up, nationalize the industry or service, and be so broke for paying for it that there were no funds left to invest. And so the immediate problem–an infusion of capital–does not occur.

Those of us who have spent much time outside First World countries are probably pretty jaundiced about local governmental entities managing any kind of business enterprise. Nationalization is rarely an easy solution because it usually doesn’t address the right questions and ties up capital that should be invested in moderning and maintaining equipment. The lack of transparency and corruption that often go along with the management of such activities–ironically, the antithesis of market capitalism, which largely assumes honest behavior and nondishonorable intentions of the actors (yes, I know; how quaint–is what usually drives foreign lenders and aid specialists to distraction. Something–anything!–has to seem better than the corruption on the ground.

The problem becomes that in most cases, the foreign companies buy up the governmental enterprise at bargain-basement prices, even for a mismanaged system. (Again, this is not unique to capitalism: the Russian mobsters currently running the Russian economy made huge profits by buying companies like GasProm at about 10% of their value, and stories of Chinese privatization make amusing reading for inquisitive accountants.) The government officials negotiating the sale usually seem to end up with surprising amounts of money from the sale, even though the enterprise was not their property. The foreign companies then take a look at the books and the equipment and realize that they’ve bought a company in drastic need of massive capital infusion. (Reminder: socialists need capital, too).

Their solution, alas, is to exploit their monopoly position and make the ratepayers pay for it instead of obtaining the funds on the open market and amortizing them over a reasonable period of time through sales of bonds and the like. We can discuss appropriate financing mechanisms elsewhere, but what strikes me is that I get the distinct impression that the privatized companies are pretty much in the same condition as the nationalized companies were: neglected, starved for capital, rundown, and in poor condition. It’s an odd symmetry that I would not have expected with nationalized industry.

It’s not really all that surprising in some respects, since most governments, like most businesses, don’t really understand that capital assets deplete themselves. Private enterprise delighted to take a depreciation allowance on their tax returns, but rarely use the saving to reinvest fully in the depreciated asset. My observations is that governments aren’t much better than private industry in reinvesting, and quite often are dramatically worse. (Take the transportation system in southern California, for example….please!) It would be an interesting discussion to figure out mechanisms for failing state enterprises which are being starved for necessary capital to get them what they need.

I have heard Bolivians complain that much of the capital that has gone into major improvement projects like water systems is fundamentally inadequate, because the users do not have enough money to pay the real costs of the service and there is no local capital available to continuously reinvest in improvements and captial maintenance. It’s a perplexing problem, and I’d be interested to hear from those who are more familiar with the literature of development and the anecdotal evidence that surely has accumulated.

Whoever owns the company will still have to make some serious capital investments. Public ownership, alas, does not solve the problem of dilapidation.

just to let you know, yesterday the city of Bergen and a great part of western Norway woke up to a peculiar stank… It took a while before pple figured out and connected it to what happened n Scotland some days earlier….
So, a couple of decades ago we had the acid rain from pollution in GB, we had and still have Technetium-99 from the nuclear reprocessing plant at Sellafield, GB, and now have had the Scottish stank.
Well, “lang may yer bum reek” as my mother once mispronounced an old Scottish saying. Have a good labour day weekend!