Two recent government decisions – on postcodes and the ongoing Irish Water rollout- show the lack of basic economic logic at the heart of policy making. This is worrying. As I have noted many times before, while some macroeconomic approaches have been shown to have failed, and how, in the last decade, the basic precepts of supply and demand, of how firms and consumers interact, of market failure and so forth, these remain unchallenged for the main. The unwillingness of governments to adhere to the implications of these fundamentals is as worrying in its field as would be the case of a government persistently and wilfully ignoring the advice of medical professionals on matters of public health. Not that t that would ever happen…
Both of these share the same malaise. In both Irish water and postcodes the government have created monopolies where none existed. In the case of Irish Water they have mismanaged the monopoly that does exist. This is entirely unconscionable, a willful waste of public (read, taxpayer) money and the creation of an ongoing burden on the user (read, taxpayer). The reasons defy economic logic and thus must perforce be the outcome of political logic. Whether this is the logic of being unwilling to engage with (seemingly but not really) complex issues and be seen as less than omniscient, the logic of not upsetting constituencies of moneymen, mates and mandarins more important than the mere peons of voters, or the logic of not wanting to spend time on dull technocratic efficiency when something more telegenic and soundbite friendly looms, that logic remains shrouded.
Monopolies typically produce less at a higher price than competitive markets. That is nothing to do with market versus non market ideology – it is a feature of the structure of monopolies. We might then consider whether or not it is a good idea to encourage not to mind create them,
Take postcodes. The logic of postcodes is simple – to assist in delivery of goods and services. London has had postcodes since 1857. A mere 158y later we are catching up with this new fad. Ireland is unique in the developed and almost in all the world in NOT having an official postcode. In the intervene of course companies have designed and implemented their own. This is the first failure – there is an arguable public need for an official postcode, even though it may not fulfill the official definition of a public good. The main issue is whether it is excludable – can you prevent people using it. While the government have decided that they will, like the UK, have a system that requires a fee to use the database, thus making it excludable via the creation of an artificial monopoly, this is not in fact needed. There have been many criticisms of the proposed new system. These are detailed in excoriating detail on OpenPostcode and in a devastating article on Broadsheet . The creation of the postcode nobody wants is going to cost tens of millions. This is the second failure – there is no need for a monopoly, artificial or otherwise. We have postcodes, openly available, more logical and useful. All that is needed is the adoption of one of them, not the reinvention of a very expensive wheel.
And then there is Irish Water. Lets leave aside the mess that is the charging system. In passing, let me just note that there are two elements to any capital investment – paying for the capital and paying for the ongoing running costs. In public utilities a standing charge pays for the installation, a metered charge for the usage. We have no standing charge (except, bizarrely, where one has no usage where one has..) so the capital costs will be either met by someone else or the usage costs will rise to amortize these. For political reasons, none other, a logical business/economic decision was let go. Again we see shortterm electoral politics trumping longterm economic planning. Here we need to think about what it is that it is supposed to do. You can dig a well, or install a rainwater capture system, or you can use some public supply. Its costly.Water needs to be collected, treated, and delivered to point of use. Arguably only the latter is a natural monopoly – the cost of installing pipelines is a huge capital burden which no company would take on. It is also inarguably a public good to have good clean water supplies. Rather than transfer the entire natural monopoly of treatment and distribution to the new entity, instead we have a HSE approach where the existing staffing infrastructure is to be retained and a new duplicate one installed. We have learned nothing from the HSE. Having decided, for a variety of reasons, to introduce metered public water, the government then have a fourth and fifth element – monitoring and billing. Again, an unnecessary monopoly was created in the installation of the monitoring equipment. Rather than producing minimum specifications for meters and letting people arrange for them to be installed and in the process providing a boost for small local companies, or if a monopoly installer was deemed necessary to go for the lowest cost installer offer from Seimens, instead selected a more expensive option. The economic logic was trumped by what must be political logic. A timeline of the whole SiteServ/IrishWater/Denis O’Brien saga is available here, The business of installing water meters is proceeding at a snails pace, with the result that when bills come out they will be in large part based on guesswork. The monopoly inefficiency is a partial cause of that. Irish Water is shaping up to be a HSE lite it seems.
Monopolies are sometimes inevitable. But where they are not, then governments should not seek to create them, no matter how seductive the sirens sing. We need a clear logical explanation as to why when we have at least three perfectly good, logical, cheap, national systems of postcodes provided by state and market forces we are spending 24m we do not have on one of lesser quality. We need an explanation as to why we are spending upwards of €1b on installing meters in an inefficient (but oh so lucrative for the installer) manner. As a state, as a people, we are still struggling with a large debt burden arising from decades of profligacy. We seem to have learned nothing about efficient use of resources.
This is a version of my column in the Irish Examiner of 9 August 2014