Why “Publicly Owned” Resources Get Neglected

IS YOUR LOCAL GOVERNMENT DOING A GREAT JOB
OF MAINTAINING PUBLIC INFRASTRUCTURE? IF NOT . . . 

The Nerve recently reported on a lawyer who is simultaneously serving as a board member of the environmental group Congaree Riverkeeper and defending the City of Columbia against a lawsuit alleging neglect and improper diversion of funds from its sewer system. According to the federal government, Columbia’s neglect of its sewer system has contributed to river pollution. The attorney’s conflict of interest is obvious

What’s less obvious, however, is the conflict created by public ownership and management of important resources and infrastructure.

The conflicts of public ownership/management can be difficult to see because of status quo bias. In cities that have long provided services such as water supply and wastewater management, the idea of private firms managing sewer system services can be pretty hard to imagine. Won’t private firms be interested merely in profits and therefore cut corners to the detriment of the public and the environment?

Well, hold on.

Government bodies face far greater incentives to neglect and abuse the infrastructure and resources under their control than the private sector does – as the Columbia sewer case demonstrates. The problem has to do with accountability. Although the city may technically own a sewer system, decisions about its funding and maintenance are made by politicians who come and go. Those politicians have every incentive to raid the sewer system fund in order to pay for more flashy items such as economic development projects – precisely what’s happened in Columbia. Later on in their political careers, former city council members can tout the jobs they supposedly created; a neglected sewer system and polluted rivers will have become someone else’s problem.

The name economists have given to this phenomenon is “the tragedy of the commons.” The theory is simple: when a resource is owned/managed by a private entity or actor, it is in the interest of that entity/actor to maintain the resource in order to enjoy the profits or other benefits produced by that resource to the maximum extent possible in the future. In contrast, when a resource is publicly owned/managed, or owned by no one, its temporary overseers (in this case, politicians) will tend to exploit that resource as much as possible in the present, since there is no guarantee of any future personal benefits from proper resource maintenance.

City council members have no long-term financial stake in the well-being of the city’s sewer system; they cannot personally enjoy any profits from well-functioning sewers. Council members also bear little to no cost for a poorly functioning sewer system. If the sewer system becomes degraded to the point that a large infusion of funds is needed to repair it, the city can simply raise taxes or water rates on citizens. The city has these options because it owns wastewater services. A private actor who owned the sewer system would wish to keep it well maintained in order to ensure its profitability. If the system became severely degraded, the private actor, lacking permanent legal monopoly status and the power to tax, would endure a loss of profits or even go out of business altogether.

Government can try and mitigate the problem of the negative incentives it faces by passing laws requiring upkeep or a certain level of funding for resources and infrastructure maintenance. But the only entity that can enforce these laws is the government itself. Even if the law were enacted and enforced by different branches of government, the branches can – and often do — collude to skirt the law, either because one branch fears reprisal from the other if it enforces the law, or because both branches can expand their power by ignoring inconvenient statutes. Thus it should come as no surprise that last September a circuit court judge issued a ruling stating that Columbia’s raiding of the sewer fund is neither illegal (state law notwithstanding) or uncommon among municipalities.

All of these incentive problems can be addressed by allowing either outright private ownership of infrastructure (in this case sewers), or through a public private partnership in the form of contractual private management of publicly owned infrastructure. A private owner or manager of infrastructure will have to face an impartial third party in the event it violates its contractual agreement or other existing law. A private entity will also be far more responsive to punitive actions such as fines or threats to rescind a management contract – it can’t simply recoup its losses through taxes and rate hikes on captured customers. And most importantly the profit motive will encourage a private owner/manager to maintain infrastructure in expectation of future benefits.

Private management of wastewater would not be a radical policy. The EPA endorses private management of wastewater service as a viable option, and as far back as 2001 almost 1,300 local governments had privatized wastewater management.

None of this is to say that private enterprise is perfect. But the dynamics of private-sector ownership and management encourage healthy stewardship of resources, while those of the public-sector equivalent too often encourage the opposite.

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