Every community needs infrastructure. Governments have traditionally supplied most of it as it tends to be a natural monopoly. The provision of roads, ports, electricity, water, land, law enforcement, the judiciary, social services, health, communications, finance, defence and education, are all areas where governments have and continue to have a significant role.
The economic experiments over the past forty years of governments selling off public assets and relinquishing control to private interests have lead to increased inefficiency and rising costs.
The most inefficient industry in the world today is the finance sector. The finance industry profits in most countries are now higher than the profits from supplying goods and services. With modern technologies, we can reduce the size of the banking and finance sector to one tenth its current size. The funds saved will go to the productive economy.
This post describes how the loans system works. It shows the costs associated with borrowing money to build a water supply system for a community by calculating the funding costs for building a dam with a conventional loan.
It then describes an alternative way a community can fund the construction of a dam without using the banking sector. It compares the cost of non-bank funding and calculates the savings. It then describes Water Rewards, a practical way to implement the alternative method and distribute the savings across the whole community.
An Overview of Water Rewards versus Debt
Taking out a loan versus discounts
Let us assume a dam costs $400M to build, the interest rate on loans is 5%, and the loans are repaid over 100 years life of the dam. If the loan is repaid in equal instalments each year, the total cost of interest is $1,615M or four times the cost of the dam.
Instead of a loan, the water authority can sell IOUs that would be used, in the future, to pay for water at a discount. If the discount was 5% for each year the IOUs were held, then if the IOUs were used equally over the 100 years, the discounts would be $1000M. IOUs are 61% the cost of a loan. To be the same cost the discount offered to customers could be 8% per year.
The price of water is set to control demand to match the available supply so the extra profit can go to those who purchase IOUs. The water authority can ensure that its customers are the ones able to invest in IOUs.
Comparing Customer Investments
Customers can invest in bank annuities and deposits, or they can invest in the water authority IOUs. Investing in a bank deposit means that if the bank lends at 5% is likely to return a compound interest rate of 3% to the investor in a bank deposit. If customers invest in IOUs, they will receive a flat 10% discount. Customers pay tax on the 3%, and they pay no tax on the IOU discount. Because the price of water increases with inflation, so the IOUs can rise in value to match inflation. The return on IOUs is at least three times the return on deposits.
Customers could invest in fixed-term annuities. A typical 15-year annuity from a bank provides $8,377 fixed per year for each $100,000. 10% IOUs provide an inflation-adjusted annuity of $11,667 for 15 years. The bank annuity earns an extra $25,655 while the IOUs provide $75,000.
The only difference in the two approaches is in the organisation of funding. There is no change to the pricing or operations of the water authority.
Distributing IOUs to customers
IOUs are an attractive investment and should be made available to the consumers of water. However, water is a public resource, and those who consume less should get more IOUs as the users of water get a benefit from the use. We can distribute IOUs and call them Water Rewards.
Instead of distributing Water Rewards directly the water authority distributes the right to buy Water Rewards. The number of Rights each customer receives could be inversely related to their consumption in the previous year. To purchase Water Rewards a person must have a Right to Buy. As the Water Rewards are an attractive investment the Right to Buy has a value. It means those who do not have the funds to purchase Rewards can sell the Rights. Alternatively, they can borrow money at a lower rate than the discount and convert their Rights to Rewards. The loan can be paid off using the money to pay their Water Invoices.
A holder of Water Rewards can sell them at any time at slightly less than their face value to anyone who wishes to pay for their water with Rewards.
To see how a customer would get and buy Water Rewards try this mockup of a Water Rewards app. https://marvelapp.com/44bjb8j
What is the benefit to the Water Authority
With debt Water Authorities do not set the price of water. Because water supply is a monopoly there is a pricing regulator that reviews prices and sets them periodically. The Water Authority cannot set prices to control demand. In times of shortage of supply, they resort to water restrictions that are costly to administer and do not help public relations. With Water Rewards there is no need for a pricing regulator because the windfall profits can go back to the consumer.
Water Authorities normally have to get permission from their owners to raise extra revenue. Raising money by issuing Rights is simpler and requires less negotiation and administration.
The Customers of the Water Authority get a financial benefit when the price increases and this makes for a close customer relationship. This relationship can reduce operating costs through finding leaks, cheaper meter reading and funding of local water reuse.
Withholding Rights and taking back Rewards is a low-cost enforcement measure for customers who abuse the system.
The Water Authority controls how many Rights are issued and adjusts the number to meet capital needs. If the Authority issues too many then they can, as a last resort, increase the price of water so that the service continues to pay for itself.
The owner of the Water Authority does not have to raise funds from banks and does not go into debt. The Water Authority does not have to pay interest, and this improves the cash flow of the authority. The Water Authority can issue as many Water Rewards as its cash flow can support. The funds make it easier to bring improvements and more efficiencies to the system. If the Water Authority does not use the funds for water, the Community can use them for other Capital works.