Affordable Housing Institute : US

[The original post may be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and Part 7.]

 

We saw yesterday that cities grow when they have more clean water, and that increasing water supply means mastering technology, law and government, and finance. It’s almost as if the physical difficulties of managing water compelled humanity to learn how to create cities.  But beyond that, as far as I can tell, there’s only one approach to financing water infrastructure that has ever worked at any scale.  I call it the Basic Model, and it has evolved in every urban environment I’ve yet encountered.

 

Continuing from yesterday’s post:

 

5.         In general, the capital costs of water infrastructure are non-recoverable

 

The emperors paid for aqueducts out of general revenues, not user fees. 

 

Aqueduct construction was obviously a major public works project, funded primarily by the emperor and private donations. 

 

As I previously explored a bit in Meta-finance, Part 1 and Part 2, this is the Basic Model of infrastructure finance.

 

 

Having spent the vast sums to create the infrastructure, the emperors were then able to offer a citizenship subsidy – free public water.

 

Lacus water was, in modern parlance, a completely subsidized municipal service – free for the taking.  Excavations in Pompeii have uncovered their spacing of about 150 feet from one another throughout the city. 

 

Use of lacus water was limited by the physical effort of carrying water from the basin to the home, use of water in the home was limited by the cost of paying the vectigal. 

 

Like the English window tax or the Colonial roof tax, the assessors taxed the indirect indicator of consumption, not the hard-to-measure consumption itself.

 

Tax was assessed by the size of the supply pipe nozzle rather than the amount consumed.  A major black market arose in what Frontinus called “puncturing” – attaching secret pipes to main lines in order to draw water illicitly into private residences. 

 

Those who live in a slum may come to see ‘dipping in a little’ as their collective social fiddle against the rich formal outside world, making the resulting utility theft rampant.

 

This became such a problem that a section of the Roman law code was dedicated specifically to this type of offense, made punishable by a 100,000 sesterces fine.

 

The ultimate solution is legalize and tax.  When an informal settlement or spontaneous community is large enough so that its consumption is leaching away free utilities, the locality gains revenue by incorporating and taxing the slum.  If so, slums turn into normal communities through a process of post hoc formalization when their scale, longevity, and civility have collectively legitimized them politically.  This may be the missing link in De Soto’s theories of formalizing property.

 

6.         Private finance works better … if the public-private incentives are properly aligned

 

The story of New York’s drinking water provides an instructive contrast with Rome.  

 

Though I’m a confirmed Bostonian and birthright citizen of Red Sox Nation, I’ve posted many times about New York, as it is the cradle of apartment living, the birthplace of the co-operative, the last holdout of pernicious and metastasizing rent control, and the inventor of air rights.

 

A yellow fever epidemic struck New York in 1795 and many blamed the disease on the city’s foul water and fouler streets.  In an alliance that would seem unthinkable years later, Aaron Burr joined with Alexander Hamilton and other prominent politicians of the day to drive through a public/private solution. 

 

My partner is a Burr under my saddle

 

As I’ve written in many contexts, government makes an excellent funder and regulator, but a less effective service provider.

 

In an argument that would echo 200 years later in privatization debates, “Hamilton used his considerable influence to persuade the City Council that the municipality should not build its own water works because it could not raise sufficient capital through loans and taxes.” 

 

Hamilton had in mind what we would now recognize as the municipal water company, a public utility.  Burr was financially more ambitious.

 

[Burr] directed only 10% of the Manhattan Company’s $2 million assets toward investments in water works, relying on the Collect as the water source. 

 

I guess this means we’re not partners any more?

 

This is more or less stealing, or to use the more polite term, ‘conversion of public moneys to private profit,’ the more reprehensible since the Collect had been overused.

 

The remainder was invested more profitably in local businesses.   The company did the bare minimum to maintain its charter, laying only 23 miles of pipe in its first 32 years.  Over time, this drinking water company gave up all pretence and developed into the powerful Chase Manhattan Bank.

 

7.         Public-private requires strong legal powers

 

In 1828 a large fire caused extensive property damage and a severe cholera epidemic in 1832 killed 3,500 people in New York but only 900 in Philadelphia, which enjoyed reliable public water supply and streets washed down daily. 

 

Following the recommendations of a state-appointed commission, a permanent Board of Water Commissioners was created and authorized [x] to raise infrastructure capital and [y] to condemn land in order to supply water to the city. 

 

Not only is this eminent domain for economic development, it’s acquisitive eminent domain, with the city over-reaching its boundaries.  A hundred years hence, the Commonwealth of Massachusetts would dam the Swift River to create the Quabbin Reservoir, in the process drowning several towns.

 

House being trucked out of the soon-to-be-flooded Swift River Valley

 

By 1838, condemnation of 35 acres of land in the Croton watershed had been completed.  The Croton Reservoir was a massive project, supplying 95 million gallons daily, yet only satisfied the city’s water needs for a decade.  The city then looked even farther north, to the Catskills and Delaware watersheds. 

 

In echoes of the lacus:

 

As a history of Croton water relates, “Two years after it opened, Croton was primarily a public amenity of great fountains and thousands of fire and free street hydrants; most homeowners and landlords had little inclination to install the costly service pipe.” 

 

As in Rome, we have legalize and tax replacing the informal settlement; or, said in capital terms, the massive public investment in non-recoverable infrastructure costs (the Basic Model) created a valuable network whose incremental hookup costs were small enough that everybody wanted to join.

 

Formalization, meet municipal utility.

 

This changed over the next 25 years as private pipes became more common, but the net result bore a fascinatingly strong resemblance to the Roman system of cross-subsidization from private pipes to lacus at the time of Caesar.

 

8.         All channels lead to the Basic Model

 

Between 1650 and 1850, New York went through three or four different phases.

 

The four phases of man?

 

Pre-urban communal use (”always ask, always give”) model.

When that was over-stressed – a consequence of urbanization – private pushcart-style water vendors.

Fully private monopoly, inadequately policed and inconsistent with the Basic Model (that government pays the non-recoverable cost).

Public-private partnership using the Basic Model.

 

Only when the [Manhattan] company notably failed to provide even the most basic services for drinking water or fire protection did the city step in and occupy the field. 

 

Rome got to the Basic Model through imperialism. 

New York got there through desperate necessity. 

Cities in the global south are getting there through voter pressure.

 

When I started reading Professor Salzman’s article, I thought of water and sanitation as an important sideline relative to housing.  Now I see it as core.  Without water, shelter must be a slum.  More importantly for cities, however, the efforts to manage water compel municipal leadership to master technology, law, and finance with systems that are economically viable over the long term.

 

Clean water takes piping

 

Water, then technology, law and government, and finance.  The path by which humanity has advanced all over the globe.

 

No financial liquidity, no aquatic liquidity

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