Water price to almost double? You bet

Such a predictable outcome in the evolving water crisis.  The Water Affairs acting director-general Trevor Baltzer is quoted as saying in News24 today:

“that cheap water is a thing of the past and that government is looking at ways to fund new developments that will provide security of supply in the coming years.

Yip, we know. However, sadly the decreed prices government now envisions are still way below the market clearing price. From News24 again:

“Currently most municipalities charge between R3,80 and R4,70 per kilolitre of water. He says that once the municipal infrastructure needs are included, the charges should rise by an additional amount of between R3,00 and R4,00 providing base charges of between R6,80 and R7,40.

South Africa currently needs to spend at least R1,3-billion to fix infrastructure backlogs and undertake specific maintenance work. Moreover, many cities and towns are unable to account for the significant water losses.

Statistics show that Johannesburg ‘lost’ between 35% and 40% of its water last year. The losses were attributed to household wastage and a crumbling and aged infrastructure. Cape Town was unable to account for about 83,4-million kilolitres of water in 2009.

Municipalities currently owe South Africa’s water boards R1,7-billion.”

What would be a price closer to the free-market rate, not the one set by the economic calculation-defunct commies in government? As we argued back in April 2010:

What would you be willing to pay for a 10 minute shower? R5? R10?  Is it more important than having that chocolate or extra beer?  Or more important than tipping that car guard twice?

According to the USGS a 10-minute shower uses about 80 litres. Assuming you’d be willing to pay R5 for a 10 minute shower, the ‘fair value’ water price would be somewhere in the region of 6.5 cents per litre, which would require a tariff hike of nearly 1,000%.  6.5 cents per litre is still a huge discount of 99% to premium retail water.  At the moment you pay about 50 cents for a 10 minute shower.

Looked at another way, in the UK you’ll probably pay around 13 cents per litre (in rand terms) for tap water.  Just like electricity prices, so water prices in SA will have to play catchup to offshore prices after years of mismanagement.  If SA prices were to gravitate toward UK prices, after adjusting for purchasing power parity, local water prices would need to rise to about 6-10 cents per litre.

Assuming then that SA water prices rise from 0.65 cents per litre to, say, 8 cents per litre, we are likely to see nearly 1200% water price increase in the years ahead.  That is of course if the politicians can stomach it.  If not we’ll probably see the makings of a classic market failure and water shortages.

Now we are not arguing that the the money price you are willing to pay for a shower will be the final market price set for water on the market. However, contrasting this with the price of private water relative to public water gives some idea as to which direction the water price is headed in the future.

The implications of a spiking water price relative to the cost of other factors holds serious implications for our economy, deeper than meets the eye.  The price of water has been suppressed to levels well below its marginal value productivity that would have resulted in the factor of production – water – only drawn into those productive or consumptive sectors which consumers value the most and are willing to pay the highest prices for.  In other words, it has resulted in overconsumption and the utilisation of water in certain lines of production that may never have seen the light of day had the price of water been priced on a free-market, and at its marginal value product, as any other scarce economic resource.

For instance, one dishwashing cycle uses in the region of 30 litres, which costs roughly 20 cents.  What happens to consumer demand for dishwashers when the price of water jumps to, say R1/litre? With the cost of water now significantly higher it was before it is likely that households prefer to rather wash dishes by hand that uses significantly less water, and hence, costs less.

But with the consumer now having given the market signal of lower demand, sending the ripple of lower prices through the production structure to capital goods owners and manufacturers of dishwashers, the prices of both specific and non-specific factors will fall in response to lower consumer demand.  Wage rates of dishwashing mechanics or the capital goods used in the production process must also fall.

It will expose malinvestments in the local economy, and may very well show up in industries such as household irrigation that uses as an input the public water supply, as well as many other production processes that rely heavily on the use of water for cooling or even in the final product, etc.  This is how government mismanagement can also result in a boom and bust of an industry by failing to let the market dictate the allocation of resources.