Can indispensable services be private?

Question

It seems that the biggest British water service provider is on the brink of bankruptcy. The article pointed out that the government is ready to intervene and this is obvious, water service cannot be stopped, it would put the lives of millions of people at risk. The issue is that this give a lot of bargaining, or blackmail, power to the private operator. Nothing prevents them from extracting all the value from the companies they manage and them dumping the burden of the debt on the public under the threat of stopping an indispensable service.

Proponents of private services often argue that fraudulent bankruptcies would not happen because the provider would lose the company and all its value. But since all the value has already been extracted there is not much to lose and such cases do happen. Maybe that the nationalisation of the rail service in Wales is arguable because it was blamed on COVID-19. On the other hand it was followed by another case in Italy where the government overpaid to re-nationalise a road network left so much in disrepair that 43 people were killed in the collapse of a bridge.

Is there a way to prevent such cases? Can indispensable services in private hands really work without the risk of having to nationalise the losses every now and then?

Answer 1

Lots of indispensable services are provided by private firms: food, clothing, heating fuel, most housing, in some places water service, and in some places health care.

There are a variety of ways of preventing this from becoming a crisis.

One is competition. Food, clothing, housing, and actual provision of health care where it is private are provided by many firms, and generally speaking, not all of those firms will fail at once.

Another is regulation. Many "natural monopolies" like water service from a private company, are tightly regulated as utilities which locks them into a business model with a low probability of failure even thought it may not maximize shareholder profit.

There are also remedies short of nationalization if an essentially firm fails. For example, a receiver or trustee can be appointed for the firm, and/or the government can lend the firm money with priority greater than private creditors.

Of course, sometimes essential services are in peril no matter who runs them and no mater how well.

For example, the potato famine in Ireland would have caused death and hardship no matter who owned and operated the potato farms, although the harm certainly could have been mitigated with better government action to import substitute food.

A comment has noted that: "The nature of Irish agricultural land ownership at the time was, and still is, considered by many to be a major cause of the famine." This is a fair criticism. But, the point is that some problems are unforeseeable, or can no longer be avoided because society didn't take the actions it should have when it could. When this happens, a society is vulnerable to an exogenous force like a new disease or drought or weather change, or a war you aren't a part of that disrupts your supply chains. If your society faces a problem like this, you are stuck. There may be no way to meet everyone's needs once the problem is at hand with any legal regime. So, there will be at least some unavoidable suffering.

More recently, no health care response could have prevented COVID-19 from causing any deaths, although, again, there were better and worse possible responses.

Answer 2

Where I live there was no water system 50 years ago. The first residents in the area drilled their own wells. Sometimes a property owner might get their water piped from a neighbor, with the future of the arrangement not thoroughly planned for. Eventually the residents banded together to create a water system. They bought a used storage tank from a brewery, and maintenance and most repairs were by volunteers. As the neighborhood grew and the system aged and there were more demands on the volunteers, we eventually accepted a nearby city's offer to take over operations and needed upgrades, in exchange for water (fortunately the system's wells have a lot of excess capacity). We still own the water system, though, and are still outside the city's boundaries.

At what point during the neighborhood's development would private water provision be forbidden, if indispensible services cannot be in private hands? Would someone building a house many miles from the nearest city be obliged to buy all their water from that city? Would the local authority be obliged to provide water to any new resident regardless of how far away they are from government water infrastructure?

If someone building a house is responsible for their own water, they can look at how much it will cost to obtain it, and it will be one of the factors that decide whether it's worth it to build a house there. If the government has to provide water to anyone anywhere, then it has to decide where people are allowed to live. It seems a lot of discussion about whether services must be provided by the government assume the services already exist, and ignore the cost tradeoffs that people make when figuring out where and how to provide the services to begin with.

Answer 3

In theory it is possible, but there is a catch

There are many different ways for the management to suck out all the resources of the service provider. They could overpay suppliers and subcontractors or pay the market price for low quality maintenance. They could use the company money to trade on the derivatives markets or they could simply pay huge bonuses to the executives. Those are the usual ways, but with some creativity they could come with other tricks, like losing on purpose some lawsuits and paying a lot of damages, the share of the damages that goes into the lawyer fees is so high that often there is room for kickbacks.

The possibility of the financial collapse is always there, in order to prevent it there should be a strong regulation that includes at least:

1. A tight limit on the debt the company can take in. A threshold like 20 or 30% of the total turnover. It must be very low because in case of emergencies it can easily skyrocket.
2. A mandatory minimum spending on maintenance as a fixed share of the turnover, paired with external controls over the quality of the spending.
3. A cap on pay and bonuses for the management and a cap on dividends.
4. Severe penalties that include jail terms for managers that inflate the accounting in order to justify higher bonuses or debts over the threshold.

As things stand, in the Western world it is easy to circumvent those measures. Point 1, the debt limit can be circumvented by:

• Do not prepare for unforeseen events. Wait for accidents to happen, turn each of them into an emergency and invoke one exception after another.
• Hide the debt in subsidiaries or make complex financial operations like Goldman Sachs did to hide part of the debt when Greece entered into the Euro zone.
• Invent phantom businesses like the Enron energy trading.

Point 2 needs a strong enforcement. A huge team of inspectors well prepared, but also the ability to punish the inspectors that do not do their job otherwise no matter how good is the team you put together over time it will become corrupt. Now, if you look at all the big financial scandals of the last fifty year you will see that the role of the control agencies involved goes from negligence to complicity, however it is very difficult to find cases where the inspectors were punished fro their failures or their complicity. This suggest that very little will change.

Point 3 can be circumvented in many ways, to see an example just look at how Carlos Ghosn raised his paycheck and got away with it.

Point 4 points to something very rare in the Western world. Except for few cases that make the news jail is for the poor people who cannot afford a well connected lawyer.

The catch

Until now this answer points to actual problems of the current world, not to a theoretical world. Someone might argue that a government strong enough and willing to impose and enforce the above mentioned regulations is more akin to an Alice's wonderland. But in theory is still possible. However in a country with such a government and such a strong commitment to defend the public from corrupt practices chances are that even a state owned company would be well managed by honest administrators. Even in this case mantra private is more efficient would lose weight.

Conclusion

As things stand the risk of a forced nationalisation of the losses of a private service will remain hanging like a sword of Damocles wherever there are privatised services, not just in the Western world. The real problem is that the mantra private is more efficient distracts the attention from the fact that fighting corruption should involve both private and state owned businesses.

Answer 4

I know this is as much opinion as anything else, but then the OP's question does ask for opinions about how to prevent these failures. And my opinion is controversial, since it rejects the orthodoxy, that private enterprises and 'The Market', that magical entity, will solve all problems. But please bear with me there will be plenty of opportunity to argue against me and vote me down.

It seems naive to me, to think that if we give large, public services, like health care, infrastructure etc to large, private companies, then they will magically make things both better and cheaper; and I think the crises in NHS, energy supply and now water supply demonstrate this point.

Try to put aside, for a moment, the beguiling ideas about the free market and libertarianism, that were introduced into mainstream politics by the likes of Thatcher and Reagan, and think about it. Private companies have one, overriding objective: to make money - as much as possible, for as little investment as possible; that is the fundamental condition under which they operate. A company that doesn't make money, simply dies.

So, how can a water supplier optimise their short-term profit? Obviously by under-investing in pipes, repairs and water treatment works, as well as raising prices, which they can do, because they have a monopoly and because the authorities have proven to be rather toothless. That, and of course building up debt.

So, rant over, what can be done to fix the situation? I would say, nationalise them - work out what a reasonable price would be (ie, ask somebody independent), then subtract the cost of repairs and investments required to get the whole operation up to the desired standard. And keep it nationalised to take out the profit motive, but also learn from how successful companies run their business; the problem that always seems to kill of public enterprises is some combination of bureaucracy and lack of real incentives, that invariably favour incompetent leadership and unmotivated workers.

That's all - now shoot!