Listener: 17 September, 2011.
Keywords: Environment & Resources; Governance;
The cinema may give a good idea about the sewers of Paris and Vienna, but I have little idea what goes on underneath the city in which I live. I just pull the plug or chain and the waste magically disappears.
For the citizens of Christchurch, it did that until the earthquakes, when the drains broke. Permanent portaloos are hardly a pleasure. They also had to pour washing machine and bath wastewater onto their gardens because the sewage plant was not fully functioning, and give up swimming at their beaches.
And not just the drains and sewers were ruptured. Freshwater pipes were also broken, roads that previously took minutes to travel were taking hours and underground and overhead power lines failed.
Telecommunications cables went too, although the airwaves stayed open. (The advice, by the way, was to text, not call, loved ones and ask them to reply promptly by the same means.) Suddenly we were confronted with the fact that our lives and comfort depended on otherwise unnoticed infrastructure.
We get concerned over proposals to privatise suppliers of infrastructure. But that is about ownership, with surprisingly little attention paid to the engineering. We just have an expectation that it will remain of high quality. Sometimes commercial imperatives overrule the engineers. Recall the Auckland blackout of 1998: the cables were not properly managed; they overheated and failed. Those living and working in the CBD were disrupted while the rest of the world laughed at us.
Infrastructure is a natural monopoly. Because of economies of scale, you want only one drain, water supply, stormwater pipe, power wire and telecommunications cable for your home. One road is enough. There are natural national monopolies, too, including the spreading broadband network, and Transpower, which operates the national electricity grid.
A sole provider means market competition does not work effectively. Traditionally monopolies were closely regulated by an external authority or by public ownership. Two decades ago the ideological fashion said privatised monopolies did not need external regulation, that self-regulation would give best economic outcomes. (I was involved in a Commerce Commission case where the dominant firm’s economist was happily stating this as an eternal truth, while my client was collecting unequivocal examples that told the opposite story.)
We’ve largely backed away from this sort of nonsense and accepted it is better to remove publicly owned infrastructure from direct political control and impose a regulatory framework over it. Room for improvement remains. My guess is we still have not got the structure of electricity generation right. Until we are sure it is, it will be suicidal to partially or fully privatise it. (Such common sense won’t stop an ideological privatisation, though.)
One of the reasons natural monopolies exist is that they have high fixed costs (investing in the connection can be very expensive), although the marginal cost of providing the service may be trivial. Standard economic theories of how to price are limited because they ignore that it costs money to charge users.
It may also lead to socially unacceptable responses. Put a meter on your wastewater and you have an incentive to dump it into the stormwater drain or on your neighbour’s garden.
A lot of infrastructure is paid for through local authority rates. Even so, there is a case for charging for use. Water meters are likely to become more prevalent. Why charge the frugal water user the same as the neighbour with a swimming pool?
I yearn for a cheap and effective way to charge for road usage. Such charges do not mean your costs will rise, just that you will pay for them differently – and use the resources you are paying for more efficiently. Meanwhile, we expect those who run the various bits of infrastructure to get on with it, confident they will do the job we want. Canterbury was luckier than it might have been, because although some areas lost power when the underground cables failed, the breakdown was limited by Orion’s earthquake-proofing of electricity substations since the 1990s.
The lines company’s engineers deserve to be given the freedom of Christchurch City. But like the infrastructure they and other committed workers look after, they are usually invisible.