Conspiracy of Silence Over Water Charges

This article was first published in "The Australain Financial Revue" Thursday 6 January 2005.

Guilt is a wonderful thing. Persuade people that they are destroying the country by expecting to have showers, wash their cars and water their gardens and there is no limit to how much you can extract from them.

No Dams

Worse still, unlike normal competitive industries, none of the new-found “profitability” of water authorities is leading to a rush of new investment in much-needed water storage infrastructure.

Quite the contrary: state governments are trying to find reasons for forcing a massive and uneconomic duplication of water infrastructure, as each home has to fund its own mini-reservoir.

(It may be socially more efficient to build a new dam and save the community the potential health and financial costs of millions of tanks but such high private costs are not borne by state budgets.)

So why are water users accepting being charged rates of return on the replacement cost of assets they have previously paid for? Why are people blindly accepting that it is a real “reform” to pay twice or thrice over? Why does business seem to accept calmly the inevitability of infrastructure service provision falling below Third World standards as their input costs rise?

Silent Economists

More to the point, why are economists so silent? Economists ought to understand marginal cost pricing, sunk costs and external benefits to serviced land; they ought to understand the difference between a true cost of supply and a monopoly rent.

One can offer come conjectures. Perhaps few economists these days study the history of economic thought and understand the difference between “capital” as a factor of production and “capitalised value” representing the present worth of monopoly taxing power.

Perhaps, beguiled by the mysteries of creative accounting, some economists confuse “profitability” with “economic efficiency” – forgetting that even slavery and Roman tax farming were quite profitable in their day.

No Debate

Perhaps academic economists are too busy chasing research grants to want to ask the sorts of questions which were once their bread and butter. Perhaps there are economists employed by governments or utilities who understand it all perfectly well – and equally understand where their pay cheque is coming from and why silence on their part may be golden.

Or perhaps it just comes back to guilt. Why ask hard economic questions when water users are allegedly destroying Australia?

But it should not be seen as some sort of secular blasphemy to question the justification for high and rising water supply charges, especially as infrastructure adequacy diminishes.

Nor should Melbourne and Sydney urban water users, for example, feel embarrassed by pointing out that their water use does not

contribute to Murray-Darling degradation and their industries and people have already paid for their existing water infrastructure.

Nor should it be seen as bad taste to question why some users of water are charged far less than others.

Whatever the reason for the missing economic debate on water, the silence of the economics profession is indeed puzzling. Long-established optimality rules on marginal cost pricing and on minimising deadweight loss of public utility pricing are quietly being dumped under a wave of spurious water pricing “reforms”, yet nothing is heard from most economists. The deadweight losses of explicit sales taxes or income taxes attract attention but few economists seem to understand that administered and arbitrary water prices are really disguised taxes imposing similar or worse deadweight losses on the community.

Hopefully, the quietude on the social and economic costs of water pricing abuses will not last. Perhaps the federal treasury will see that its revenue base must suffer as jobs and investment are lost due to disguised state excise taxes on water and other abusive infrastructure charges.

It may also wonder why it has so strengthened the fiscal power of states through a GST inter-governmental agreement which is so easily avoided. State oppositions may also start to examine the clothing of emperor-premiers balancing budgets through asset rundowns, underinvestment and “taxing dividends”.

When the drought of economic questioning about so-called water reform finally breaks, it will be interesting to see how quickly and powerfully the surge of business and voter resentment rises. It may be a rather spectacular sight, like Australian rivers in full flood.