Public to Private will be a recurring series in which we will use imagination and brainstorm to come up with theoretical private sector alternatives to existing public sector services. Below is Article #1 in which we will apply this method to the supply of water:
Larry the socialist, a recurring character in my writing (see here, here, here, and here), cannot conceive of how the free market could possibly supply water. He believes that such a service is a “natural monopoly” that can only be provided through the oversight of a central authority. This in spite of the Flint water crisis, and evidence that “every major city east of the Mississippi” is deceiving their residents about the level of contamination in their water. When confronted with the idea of privatizing water supply and taking it out of the hands of governments, he had this to say,
“…we can also not convince every household to set up 15 pipes if there are 15 water providers.”
Larry is certainly not alone in his beliefs. This lack of imagination permeates mainstream thought, and is a common rebuttal of those who would seek to have private businesses compete to provide these necessary services.
The truth is just as is seen in the technology sector and in the sectors of healthcare which are largely unregulated (i.e. LASIK eye & cosmetic surgeries), the free market always does a better job of providing high quality, low cost goods and services than central planners ever could. This includes the supply of water.
New York City, with its nearly 8.5 million residents, would be a great place to test this hypothesis:
Imagine that those who hold political power in NYC had a revelation, admitted that they are corrupt, do a generally terrible job, and are incapable of managing not only the city’s finances, but also its vital services. That they too, like Flint, have been deceiving residents of the city about the quality of their water supply. They announce that they will be systematically transitioning sovereignty away from government towards the individual. They announce that they will immediately be cutting taxes, spending, and auctioning off government property and services. All revenue from these sales will go towards paying down the city’s debt and buying out former government employees’ pensions.
Coca-Cola, Nestle, and Pepsico engage in a bidding war to take over the city’s existing water supply, with Coca-Cola ultimately winning with a $1.85 billion offer. Initially, they are (like the government before them) a monopoly, and are able to charge high rates to supply water.
Nestle, seeing the opportunity for profits, and knowing that NYC’s vast underground sewer and subway systems would make laying new piping relatively easy, decides to invest $1.5 billion towards a competing system. They sign a lease with a nearby water supply, rent space in the sewer and subway systems to run supply piping, and build a brand new state-of-the-art water treatment facility. Less than a year after the government sold the existing system to Coca-Cola, Nestle enters into the market and provides competition.
To gain market share, Nestle sets their prices 15% lower than Coca-Cola’s, offers to cover the cost of connecting the buildings of new customers into their supply lines, and guarantees water quality. Their guarantee includes a promise to cover the health care costs of anyone who gets sick from consumption of their water. Nestle hires Marc Edwards and his Virginia Tech environmental engineering team to verify the quality of their water. Nestle also publishes a list of more than 100 other private laboratories that customers can use to independently verify the cleanliness of the water they provide.
Customers start switching from Coca-Cola to Nestle in droves. Soon, Coca-Cola’s monopolistic profits are disappearing, and the company comes to the brink of losing money on their operation. In order to win back Nestle converts, Coca-Cola offers a similar quality guarantee, undercuts Nestle’s prices by 10%, and hires the same Virginia Tech team (which has by now become the Underwriters Laboratories of private water supply).
Pepsico, having chosen to forgo the large initial investment of installing new water supply infrastructure, instead markets home delivery of drinking/cooking water in 5-gallon containers. Their prices are significantly less than Coca-Cola’s and Nestle’s, but since they are unable to supply toilet, shower, and bath water their market share doesn’t become large enough to truly threaten Nestle and Coca-Cola. Still, their low prices convert a number of individuals over to using Pepsico for drinking and cooking water. Pepsico, with its small market share, is still able to earn significant profits.
Over the next few years, Coca-Cola and Nestle enter into a fierce competition to steal customers away from each other in their desire to increase profits. They decrease internal business inefficiencies, improve the quality of customer service, and lower prices all in the name of winning customers and increasing profits. Pepsico is greedy, though; and dreams of winning a larger share of NYC’s massive market. While Nestle and Coca-Cola compete amongst themselves, Pepsico hires a team of the finest engineers that MIT, Tsinghua University, UC Berkely, RPI, and other top universities have to offer. They vigorously pursue an efficient and cost-effective method of water desalination.
After much hard work and investment, Pepsico’s engineers achieve a breakthrough in desalination technology. Using the capital they had saved from forgoing water supply piping infrastructure along with profits from their water delivery service, Pepsico purchases land on Long Island’s north shore and constructs a first-of-its-kind desalination facility on the banks of the Atlantic Ocean. With an unlimited supply of water to provide, Pepsico couples their desalination plant construction with the installation of supply-line infrastructure in a portion of the Queens Borough. Now competing directly with Nestle and Coca-Cola, Pepsico slashes the price of water supply to never before seen levels, and quickly steals customers away from their competitors. As their profits increase, they expand their supply line infrastructure into the rest of NYC. Before long, Pepsico has gained a market share of nearly 90%.
In order for Nestle and Coca-Cola to compete, they hire their own desalination engineers, poach existing engineers from Pepsico, and copy Pepsico’s business model of providing desalinated ocean water at ever decreasing costs.
Less than five years is what it took for NYC’s water supply system to be completely transformed, and less than ten for life-changing technological breakthroughs to take place. Residents of the city are now drinking water directly out of the tap without having to first run it through filtration devices. They have the highest possible quality water, and are able to purchase it at ever decreasing costs. They have the peace of mind of knowing that if one company stops living up to their expectations, they are free to take their business elsewhere.
People all over the country, seeing the transformation of NYC’s water supply system demand that their own local governments do the same. The problems that came to light through the Flint Water Crisis become a distant memory.