Russell Lamberti says the Cape Town water crisis is what happens when you shut out the free market

Water Socialism Puts South Africa at Existential Risk

The Cape water crisis has been blamed on a freak drought, a lack of adequate municipal planning and resource management, and on Capetonians who “use too much water.”

But these are either proximate or faux causes of the water shortages. The real reason for the water crisis is South Africa’s water socialism which considers water a human right and a resource to be wholly controlled and managed by the state. Under a system of water socialism, we should not be at all surprised that South Africa faces water shortages. Shortages are, after all, one of the defining features of socialism.

The “human right” and “state control” features of South Africa’s water system render water one of the most wasted and mismanaged resources of all. This is particularly unfortunate since water is a critical ‘foundation’ resource in the survival chain and production structure. Even a small child can grasp that without water every system on earth collapses. The adage that some resources are too critical to be left to profit-seeking entrepreneurs has it precisely backwards – instead, some resources are too critical to be left to state bureaucrats.

South Africans have ample examples of this. State-managed education, healthcare and even electricity supply (to name but a few sectors) are marred by declining supply and quality, not to mention escalating costs.

Declaring an economic resource to be a human right is bogus and should not possibly be legally permitted to reside as a clause in the constitution. Stipulating that someone has a right to “sufficient water” implies that everyone has a property right in water resources. But since almost everyone does not, in fact, have their own exclusive access to or control of water, this implies a general claim on unspecified water resources. This cannot be a rational basis for any property rights at all. It is tantamount to no one owning any water resources, except, of course, the state who stipulates itself as the sole rightful custodian of it.

So South Africa has in effect a single owner of water – the state – that is bound constitutionally to act as though everyone owned it. It is a monopoly system in which the monopolist is forced to ensure everyone gets “enough water” whether they can pay for it or not. This system is the worst of all worlds, resulting in three core features that render the system highly prone to potentially ruinous supply shortages.

No market prices: There is no proper functioning water market, and so prices cannot form properly to reflect the real scarcity in the system. Water prices in South Africa are determined politically and bureaucratically with a focus on “cost recovery” rather than on marginal value in a free market which signals relative scarcity. Without prices to indicate real scarcity and make profit and loss calculations, it is impossible to know how to allocate resources to water production appropriately.

State monopoly inefficiency: Even if prices could be formed and fluctuate in a way that reflects scarcity, a monopolist producing a highly demand-inelastic good (i.e. a good that is such a necessity that its rising price reduces demand for it by a lesser proportion than the price increase) would have little incentive to increase production. Why invest money in raising supply when you can just maintain existing capital to milk higher profits with no competitors allowed to enter the market? Worse, since water management bureaucrats are neither owners themselves nor accountable to shareholders and are merely temporary caretakers while in office, there is practically no incentive even to maintain infrastructure capital. As infrastructure capital deteriorates, so water supply output falls further.

Excessive demand due to under-pricing: Not only is a proper price system impossible under a state monopoly system (point 1), but that pricing mechanism is distorted further by the constitutional ‘water right’ mandate which causes water prices to be set artificially low, and in many cases free. Excessively low prices only worsen shortages since consumers have no economic incentive to conserve water when it’s so cheap.

These three factors are disastrous to the goal of preserving and growing the supply of quality consumable water. In the end, you can only do play-play economics for so long before reality asserts itself. Water socialism might sound good on paper but leads to perilous shortages and costs inevitably rising to reflect this scarcity. In arrogantly distrusting profit-seeking entrepreneurs to deliver a range of different water supply services to various customers, the state is ensuring that, far from supplying water to all, it runs the risk of supplying water to none.

This is the state of affairs in Cape Town where water supplies have run precariously low, forcing the municipality to institute harsh water restrictions. The local government has scrapped the first-five-kilolitres-free policy in all but the least affluent suburbs, but even these new prices amount to a near-free R25 for 5,000 litres.

We know this is a dramatic under-pricing compared to the free market since according to various news reports people are marking up and selling municipal water in secondary black markets and some buyers are willing to pay around R3,000 for 5000 litres of privately delivered water in Cape Town. Water fetching these prices on the free market also makes a mockery of the oft-repeated trope that ocean desalination is “too expensive.” Instead, it is obvious that reticulated municipal water is too cheap.

Moreover, the system of water socialism means that government officials keep trying to bar entrepreneurs from supplying and selling water to buyers in need. The department of water and sanitation says it is illegal to sell water aside from retailed bottled water, and that doing so can lead to a prison sentence of up to 5 years! This threat is utterly ridiculous, yes, but also unbelievably tyrannical. Western Cape farmers tapping groundwater on their properties, trucking it into Cape Town suburbs and selling it to willing buyers is precisely how the free market begins to solve a water shortage crisis.

The same can be said of urban entrepreneurs capturing otherwise lost run-off and selling it. The more private buyers purchase privately produced water, the less pressure on dwindling municipal supplies, and the more market participants create economic value. Since the government also gets to confiscate the proceeds of economic value creation through taxes, one would think to allow such activity would be a no-brainer, but the technocratic socialists in charge are not renowned for economic literacy.

The Democratic Alliance (DA), the party that governs Cape Town and the Western Cape is now scrambling to fix the mess it has presided over along with the national government. It is commissioning fast-tracked ocean desalination plants and rigs and aiming to tap some aquifers in and around Cape Town. It is also on a haughty moral crusade to shame people into using less water and fining them for ‘overuse’.

Despite winning the municipal election by a landslide, the DA lacks the political courage to raise prices to those obtainable in the prohibited free market, fearing it will lose votes. It’s amazing how higher prices and adequate supply, not fascist-style rationing, shaming and penalties on your customers, is seen as “politically tricky.” And with price increases, the government can still provide ‘free water’ to impoverished households via the use of basic water vouchers.

And so Cape Town sits with a half-baked solution to its acute water problems. The local government is finally taking steps to invest in new water capacity while cowing consumers into using less water and heavily rationing farm irrigation. As a result, the city will probably just survive long enough without running out of water to make it to the next rainy season in winter 2018. But what of 2019 and beyond?

Will the drought break and lull overconfident bureaucrats into another complacent stupor until the next inevitable crisis? Efforts by state officials to date in no way diminish the urgency with which the city, province and country need to end water socialism by allowing water resources to be owned and sold and proper market competition and prices to form. The state also needs to erase the impossible and dangerous constitutional provisions that scarce resources are “human rights” before even more people are forced to go without.