Imagined Enemies
Review by Gary L. Sturgess
Click here for PDF version

WaterÕs Fall: Running the Risks with Economic Rationalism
by Chris Sheil
Pluto Press 2000, AU$32.95, 209pp ISBN 1 86403 115 8

The argument that water is such a precious resource that only bureaucrats and politicians can be trusted to allocate it is hard to swallow.

After heavy rains, a local water system in an OECD country is heavily contaminated with pathogens. Years of mismanagement have resulted in a treatment plant that is unable to cope with the infestation. Managers ignore the evidence of contamination threatening the health of thousands of people in the community. Health authorities eventually intervene and impose a community-wide boil water alert, which continues for many months.

This is not Sydney during the Cryptosporidium scare of 1998, but the small Canadian town of Walkerton, Ontario in May 2000. Years of mismanagement resulted in a
system unable to respond to E. coli contamination. Six people died and 40% of the small community suffered illness as a result.

According to Chris Sheil, the failings in SydneyÕs water system, which emerged during 1998, are to be laid at the feet of commercialisation. Under-investment in water treatment by successive generations of managers has placed public health at risk. In recent years, this obsession with commercial returns has reached a crescendo with corporatisation, privatisation and outsourcing.

Sheil will no doubt be interested to hear that in Ontario, the Progressive Conservative government has been looking at the privatisation of the provinceÕs community water treatment plants, and the managers at Walkerton have blamed inadequate staffing for their failure to comply with the law and the subsequent falsification of tests.

The problem is that Walkerton is a municipal plant and the mismanagement has stretched back over many decades. And the complaints about inadequate staffing relate to the imposition of higher standards, not to budget cuts. A columnist in the Globe and Mail recently observed:

Some critics have maintained that allowing municipalities to contract out their water systems to private operators, or permitting private labs to conduct tests could be endangering water safety. [Foreman] Frank KoebelÕs testimony demonstrates the opposite: Government-run water operations can kill their citizens as easily as private ones.

To Sheil, this is a foreign concept. It never seems to occur to him that bureaucratic mismanagement can kill just as easily as commercial mismanagement. In 200 pages of condemnation, Sheil never discusses his alternative to commercialisation, but fragmentary passages throughout the book suggest that it is a traditional government department working within a traditional Westminster frameworkÑin short, bureaucracy. Nowhere does he admit the possibility that governments around the world have increasingly turned away from bureaucratic management because of its repeated failings.

There is not space here to respond to SheilÕs interpretation of the Cryptosporidium crisis, which lies at the heart of his attack. His first difficulty, of course, is that Sydney had no Cryptosporidium problem. No one died as a result of the contamination. No one became ill. It is not clear that the high readings were Cryptosporidium at all, let alone C. parvum, the only form that poses health problems for human beings. If they were, then it is entirely possibleÑgiven that 40% of Sydney residents ignored the boil water alert in whole or in part and no one became illÑthat the treatment plant worked and all of the organisms were dead. Current testing technologies do not enable us to know.

In spite of some management failings in the early stages of the affair, the simple fact is that SydneyÕs early warning system worked. In every other example of Cryptosporidium contamination around the world, the authorities became aware when people died or reported illness. In SydneyÕs case, the problem was identified through routine monitoring. In fact, the major difficulty was that Sydney WaterÕs testing abilities were not up to the challenge, and (as it turned out) health authorities jumped at a shadow.

Much of the difficulty lies in the fact that water engineers are working at the limits of known science. Cryptosporidium was only discovered in water systems in 1984, and it has been estimated that the worldÕs understanding of the organism doubled as a result of the Sydney crisis. And as the commissioner appointed by the NSW Government to investigate the problem (Peter McClennan QC) reported, ÔIt is clear that the developing science has advanced beyond the capacity of the health authorities to provide an effective response.Õ

In 1998, Sydney did face a loss of public confidence in its water system. But there was no public health crisis. Nor was there any significant management failure. There was a political crisis, brought about by advances in scientific monitoring and the difficult interaction between science and the mass
media.

For critics of the new public sector management, much of the interest in the Sydney crisis lies in the fact that the water treatment facility at the heart of the affair was privately designed, built and operated. It has become part of the folklore of the Left in Australia and overseas that this contributed to the crisis. In fact, there is no evidence that the contractor failed to meet its contractual obligations, and Sheil is careful to blame the process rather than the operator.

But from McClellanÕs reports, it is clear that there was no failure in the contracting process either. The contractor was not obliged to treat for Cryptosporidium and Giardia, but McClellan found that if the acknowledged standard of 99.9% (3 log) removal or inaction had been imposed under the contract, Ôit would have been difficult to audit complianceÕ because of the state of scientific knowledge and testing equipment at the time. ÔThe levels chosen [in the contract] were appropriate having regard to the contemporary circumstances.Õ

In any case, McClellan reported that it was likely that the plant was removing or inactivating 99.9%
(3 log) of the organisms in most circumstances. The commissioner arranged for the prototype plant to replicate the conditions at the time of the crisis. He reported that Ôthese tests demonstrate high levels of efficiency of pathogen removed up to 99.999% (5 log).Õ

If there was management failure, it lay in under investment in catchment management. This was a problem that had developed over many decades, and there is little evidence that commercialisation or corporatisation had much to do with this failure. Indeed, it had more to do with the engineering culture that had dominated the Water Board for many years and which, as McClellan reported, had resulted in clashes between the engineers and the environmental scientists.

Politicians and bureaucracts donÕt know best

Much of SheilÕs argument is built around the claim that water has a special status among the worldÕs resources (although it turns out at the end of the book that, for Sheil, electricity and telecommunications have similar properties). He places a great deal of emphasis on waterÕs life-giving qualities. It is a scarce resource and for that reason questions of allocation must be placed in the hands of politicians (who in SheilÕs world are unaffected by private interest). Water must be kept well away from the world of commerce. Of course, he might equally have written about foodÕs miraculous life-giving qualities, and the logical conclusion is that the system for food production and distribution should likewise be placed in the hands of politicians and bureaucrats.

In SheilÕs world, water is for drinking and bathing and, for that reason, demand management through pricing is a wicked thing. In SheilÕs world, water is never used by the rich for watering their spacious lawns and filling their swimming pools. It is never flushed down the drain by irresponsible industrialists. It is not capable of being bought and sold in bottles, with brand names, quality assurance and product differentiation. Nor are environmentally-conscious city-dwellers like Michael Mobbs (of SydneyÕs Ôsustainable houseÕ) capable of using their roofs as a catchment and recycling ÔgreyÕ water.

As it turns out, water is nothing more than a metaphor for a much wider attack on economic rationalism and, indeed, the economics discipline itself. In a single chapter, Sheil seeks to repudiate neoclassical economics in its entirety by revealing that the entire profession is trapped in a metaphysical circle. The management revolution that has taken place in the public sector over the past 25 years (on both sides of politics) is dismissed as a plot by economic rationalists to maximise rate-of-return at the expense of public service. As he meanders through the works of some of his favourite authorsÑMarc Bloch, Eric Hobsbawm, John Maynard Keynes and John Ralston SaulÑit becomes clear that Chris Sheil is no economist.

But nor is he a public sector manager. This is not a book about the practical difficulties faced by public administrators in managing government monopolies in a highly charged political environment. Sheil is fascinated by ideology, and the dreadful monster against which he struggles so bravely throughout the book is a straw man of his own creation called Ôeconomic rationalismÕ.

Sheil constructs his mythical enemy by conjuring up his own bizarre interpretation of neoclassical economics and dressing it in selective quotations from Hayek and Friedman. By then asserting (but never establishing) that public sector managers have been worshipping this fanciful creature for the past quarter of a century, he has little difficulty in making the entire reform effort look rather silly.

And, in spite of his present position with the School of History in a major Australian university, Sheil is not much of an historian. He asserts that the first corporatisation in NSW was the Hunter Water Board (when it was the third). He seems to be unaware of the fact that much of the work on rate-of-return analysis for government business enterprises was undertaken by a left-wing Labor government in Victoria in the mid-1980s. And he is entirely unfamiliar with the long debates that went on within the NSW government throughout the 1980s and 1990s about the appropriate rate-of-return for water infrastructure and the suitability of Sydney Water for corporatisation.

This is a highly parochial (and somewhat selective)
history of the water industry. It fails to mention that in many parts of the world, modern water storage and treatment
systems were developed by private companies. At the beginning of the 20th century, 60% of water in urban districts throughout Britain was still supplied by private firms. In the United States, 50% of water was privately supplied
at this time. In France and in some parts of the United
States, Britain, Germany and Spain, the water companies were never nationalised. They remained as private utilities, and had a relationship with government not very different from that enjoyed by the private gas utility, AGL, in New South Wales.

If not commercialisation, then what?

SheilÕs reconstruction of former NSW Premier Nick GreinerÕs contribution to the commercialisation agenda is also distorted. Contrary to what Sheil assumes, corporatisation is not a step on the path to privatisation, and the fact that contracting out has occurred at the same time is no proof of a causal connection. In fact, the two models have competed for attention. Nick Greiner was not a great privatiser, and businessmen who would later applaud Jeff Kennett for his sell-off criticised Greiner for what little he had privatised.

Greiner was a manager. He believed that ownership didnÕt particularly matter. In fact, it might be argued that Nick Greiner was the greatest friend that state-owned enterprises ever hadÑhe set about to prove that they could be run efficiently without privatisation, and many would argue that he nearly succeeded. Nick Greiner was not the first of a new generation of political leaders concerned with taking government back to its core business. It might be argued that he was the last (and one of the best) of the old schoolÑa manager who tried to make a traditional public sector work.

Sheil makes some telling criticisms of corporatisation. The weaknesses he identifies are ones only too familiar to those of us who invented it and tried to make it work. He is right when he tells us that there are major difficulties in measuring the performance of state-owned monopolies, and providing appropriate incentives to managers.

What he does not tell us is what he would put in its place. Sheil is opposed to corporatisation as much as privatisation and contracting, and in several passages he reveals that he is opposed to any commercialisation of public utilities. In one place he appears to suggest that his preferred option would be for government business enterprises to be managed as departments.

This has the merit of being an entirely new position, since most governments around the worldÑeven socialist governmentsÑhave recognised that public enterprises require some kind of commercial framework. When the first Labour government in NSW began nationalising enterprises prior to WWI, it established them within a commercial rather than a bureaucratic regime. In fact, SheilÕs preferred model has probably never existed in this country. Corporatisation was built on the statutory authority model, which was itself built on the ÔboardsÕ inherited from 18th century England.

Surprisingly, Sheil does little to defend the statutory authority model, since it had many of the failings of corporatisation with few of its benefits. Government reports from the past two decades document the billions of dollars wasted every year through mismanagement.

Conclusion

Chris Sheil has a bright mind, which won him the respect of his colleagues when he worked in the NSW government throughout the late 1980s and 1990s. But in recent years he has rediscovered the socialism of his youth and almost alone, he has taken upon himself the responsibility of rehabilitating a discredited system. In this book he reveals that he has still not found the way.

Author

Gary L. Sturgess is a lawyer and not an economist. He was Director General of The NSW Cabinet Office from 1988 to 1992 and authored many of the microeconomic reforms of the Greiner government, including corporatisation and electricity markets. He is presently based in London, working for a British multinational engaged in outsourcing.Ê

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