In California, Innovation Ends at the Water Tap

By Marc Joffe
December 26, 2016

Despite being the home to many of the world’s great startups, California’s approach to its water shortage has been anything but entrepreneurial. The triumph of bureaucracy over entrepreneurship is epitomized by the December 22 release of the state’s Bay Delta Conservation Plan Environmental Impact Review (EIR). The document, characterized by the San Francisco Chronicle as a “snooze-inducing tome,” contains 80,000 pages of bureaucratic box-checking intended to justify the Governor’s $15.7 billion WaterFix project. Rather than increase water supplies, WaterFix focuses on more efficiently and reliably allocating California’s insufficient stock of potable water.

In addition to this EIR, the state maintains “The California Water Plan”, described as “a strategic plan for managing and developing water resources statewide for current and future generations”. New versions of the plan are rolled out once every five years or so: the last update appeared in 2013 and a new version is scheduled for 2018. The idea of centrally produced five-year plan has been tried before, in the Soviet Union and other Communist countries, and proved to be a tremendous failure.

The deficiencies of central planning are not necessarily the fault of the planners. Indeed, the California Water Plan appears to have been written by well-meaning and knowledgeable officials. Indeed, it contained so much valuable information that we used it as a major source for our recent infrastructure study.

Central planning usually fails due to knowledge and incentive problems. As Nobel Laureate F. A. Hayek argued, central planners cannot know the preferences of everyone in the economy they are attempting to control. Without that information, they cannot determine the appropriate quantities of goods and services to produce to best satisfy consumer demand given limited resources. Such information is best generated through a market process in which unregulated prices communicate and coordinate the desires of producers and consumers.

State planners also lack the incentive to develop and implement truly innovative solutions to California’s water shortage. In California, entrepreneurs have proven time and again, that given the freedom to innovate and the ability to profit from their innovations, they can overcome complex challenges and transform industries.

Just within the last few years, Uber has become a large company by solving  daunting mobility challenge. For all too many of us, taxicabs were totally unavailable. For others, they were slow to arrive, expensive and/or provided poor service. Now with a few taps on a smartphone, riders can summon a clean vehicle with a polite driver within a few minutes and at a reasonable price. Uber follows in the footsteps of Intel (which gave us personal computing), Google (which revolutionized the way we find information) and Facebook (which transformed the way we communicate with friends and family). Instead of producing ponderous central planning documents, California should unleash its entrepreneurs to solve the challenge of providing the state with sufficient potable water.

Critics of laissez faire might argue that these companies succeeded because government provided the necessary prerequisites for them to operate.  And, it is certainly true that enabling technologies such as microprocessors, the internet and Global Positioning Systems were the product of defense research. But government researchers could not have been expected to adopt these basic technologies to the needs of consumers.

In today’s mixed economy, it is unrealistic to expect major innovations to occur without some government involvement. For this reason, I would hesitate to criticize Tesla, which has done much to advance electric vehicle technology, while benefiting from tax credits and other forms of government support. That said, there is a thin line between leveraging government support to create beneficial innovations and cronyism, under which private companies feast at the public trough without creating consumer value. Scrutiny by the media and other third parties is an admittedly imperfect way to distinguish between socially beneficial public private partnerships and corporate rent-seeking.

When it comes to applying a mixed economy approach to entrepreneurial innovation in water, Israel has proven to be the gold standard. That nation has turned a water shortage into a surplus by leveraging private sector innovation and management. Israel’s water industry include Emefcy, which develops solutions for treating wastewater, IDE Technologies, a global leader in desalination and Water-Gen, which extracts drinking water from the air. These companies have worked with Israel’s central and local governments to radically increase Israel’s water supply, turning the arid country into a net exporter of water.

California also has water innovators. For example, Lawrence Livermore labs has developed a new flow-through electrode capacitive desalination technology that can remove salt from seawater with minimal energy use. Santa Barbara-based Baswood offers technologies to cost-effectively treat agricultural and industrial wastewater.

Rather than micro-manage customer water consumption and borrow more money to transport insufficient water resources, the state’s efforts would be better directed toward working with innovators to commercialize and apply new water supply technologies.

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Marc Joffe is the director of policy research at the California Policy Center.