Thoughts on “beneficiary pays”.

John Bass wrote a real interesting post raising questions about “beneficiaries pay”, which is essentially the concept that the direct beneficiaries of a project should be the ones to finance and pay for it.  He asks two questions, to which I’ll give my answers, probably not satisfactorily.    First, though, I want to muse on ‘beneficiaries pay’ a bit.  ‘Beneficiaries pay’ is pretty much the orthodoxy these days; the Sacramento Bee op-ed goes on to make the case for it:

California needs to invest in its water future, but it must make smart investments – and equitable ones. Before voters are asked to authorize more general fund debt on top of existing debt, the beneficiaries of water projects need to be identified and obligated to pay for their fair share.

And here’s Dr. Michael talking about it:

The most valuable water supply projects will still be constructed if the bond fails. Financially feasible projects will be appropriately paid for by the water users who benefit.

I hear the concept taken for granted in a number of venues and I hadn’t heard it questioned until my recent post and Prof. Bass’s linked post.  But I don’t think that “beneficiaries pay” should be so accepted that it is assumed to be the default.

  • So far as I can tell, “beneficiaries pay” is a signal detection problem.  The two extremes are uninteresting cases.  If we were taxing everyone in the state to give the City of Beverly Hills a shiny new local reservoir behind marble gates, this would be conspicuously unjust, and we would be right to tell people in Beverly Hills to pay for their own damn reservoir if they want one and are going to keep us out.  Beneficiaries pay is a great idea!  At the other end of the spectrum, it would be unjust to tell an economically disadvantaged community to pony up for a expensive wetlands project for their wastewater that was going to be the key to cleansing the entire San Francisco Bay and growing beautiful migratory butterflies that land on the cheeks of small children in San Diego and give them kisses.  Beneficiaries (of the narrowly bracketed wetland project) pay is a terrible idea!

Beneficiary pays is not intrinsically great or terrible.  Rather, most cases are in the middle, and what you see is a lot of wrangling about whether any particular project is closer to the Beverly Hills example or is providing wider benefits that have gotten overlooked.  Rather than dispute the concept, most people are saying that their project happens to be just over some undefined threshold where, yeah, basically everyone should chip in for it.  But people believe in that threshold, and have different ideas about whether false positives (paying for too many Beverly Hills reservoirs) or false negatives (paying for too few wetlands in poor communities) are the real failures of the system.

  • Environmentalists have gotten behind ‘beneficiaries pay’ because it is a good way to stop projects.  Want a new dam, farmers in the SJV?  Offer to pay for it first, and we’ll fight over it second.  It puts off a lot of fights when the people who want a project don’t even offer to pay for it.  When MWD offered to pay for the Peripheral Canal, it brought the project into the fighting stage. Since I’m hesitant about some types of projects, I do like that aspect of “beneficiaries pay”.  But I’m not hesitant about local watershed projects, so I’m listing arguments against it next.
  • I don’t know what the opposite of “beneficiaries pay” is; “collectively pay”?  But I know this.  “Collectively pay” gets projects in the ground.  It works.  Basically the entire country’s wastewater treatment capacity was built in the ’50’s through 70’s with free federal moneys.  Cities that missed that round of federal hand-outs for their wastewater treatment plants often still don’t have a wastewater treatment plant; they are facing costs of hundreds of millions of dollars to put one in now.  They say their citizens can’t afford it, and there’s some truth to that.  Given that the next round of state water infrastructure management is going to be relatively expensive local projects everywhere in the state, maybe it will take a huge push of state monies to get those built.  Maybe bonds aren’t the cheapest way for the state to finance those.  If I thought the state were going to use cheaper financing mechanisms, like taxation or a water finance charge, I would support those over bonds.   If I think the alternative to bonds is doing very few of those local projects (and those only in rich communities who choose to tax themselves), then I’m for whatever funding mechanism gets those projects going.
  • Finally, I think that given that the state needs to undertake local water infrastructure projects (unglamorous ones, like efficiency retrofits, and mountain meadow restoration, and putting tertiary treatment into sewage plants) throughout the state, and given that everyone is going to be arguing that their project generates butterflies that kiss us all, jesus fuck.  Do we really want to keep track of who subsidized what, and who came out slightly ahead, and which community was the slight loser?  Really?  Are we a state, a collective entity, or not?  Maybe that attitude is a luxury of a richer community, and is one of the things we lose as we become poorer and stingier with each other.

Seems to me, though, that some of the motivation behind “beneficiaries pay” is the conservative fear that somewhere, some community is getting a project they don’t deserve.  That maybe, somewhere in all this pork, it is unfair for the people of the state of California to pay for a dam removal in a well-off community.  One argument is that we all get some benefit from the dam removal.  But my argument is, so what?  So what if it is unfair?  Then what?  Will tornadoes come to punish us?  Will it rain frogs?  Will we go blind?  Besides the aggravation of unfairness, what bad thing will happen?  Again, I might be wrong.  We might genuinely be so poor that if we accidentally pay for a rich community’s dam removal, school children elsewhere will go without textbooks.  In that case, things are dire.  I understand that the state government is more than broke, mostly because of fucking Howard Jarvis a hopelessly tangled state budgeting process.  But I cannot believe that there is not enough wealth within the boundaries of the state to build the next round of water infrastructure projects (even if they don’t look like the gleaming canals of the last round).

The arguments for economists are different, and below the fold.  Prof. Bass, I didn’t even get to your questions, although I want to.

You hear different arguments from economists.  First, that having Other People’s Money makes people overconsume things.  This is (mostly) true for consumer goods, but less straightforward for infrastructure like wastewater treatment plants and stormwater collection systems.  It will not rain more and streets become more slope-y, causing more stormwater run-off, if someone else is funding the permeable concrete.  A city will need the stormwater collection system that it needs whether locals or the state pay for it.  People will not shit more if someone else funds their wastewater treatment plant; it can be sized the same no matter who pays for it.

Second, economist say that locals will pay for projects that give good returns, which I do not observe.  Some communities (usually those with high social capital and longterm vision) will pay for their infrastructure.  Others let negative environmental externalities ride for generations, even in the face of raw sewage in their water and birth defects.  Others are too poor to pay for infrastructure development.  Saying that you believe that “beneficiaries pay” would get you to the right level of local investment in infrastructure is a remarkably optimistic view of human decision-making capacity; it is easily contradicted by the existence of communities on fractured rock wells, communities whose septic tanks leak into their drinking water aquifer, …the list is nigh infinite.

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2 responses to “Thoughts on “beneficiary pays”.

  1. Thank you for taking the time to flesh out the problem with the “beneficiaries pay” position. Things are complicated, even for pragmatists, as much as I admire them. And I truly do.

    Exceptions (we think we know who they are) notwithstanding, It is an oversimplification to think that beneficiaries are possible to (politically and meaningfully) isolate.

    The more one considers and finer one dissects the ethics of who pays what, the more complicated it gets.

    This is a matter of civic burden, of scarcity, of good will and as Eastwood would say, “knowing your limitations.”

  2. This is a good post that brings up many issues.

    So many, in fact, that I cannot take the time to systematically respond, point-by-point :(

    In lieu, let me say this:

    1) Your wetland example has significant externalities to the poor community, and these justify outside payment — since outsiders are also beneficiaries. That logic leads many farmers (and DWR, eg) to suggest that dams be funded by the general public. The amount is calculated based on the percentage of “general” benefits, a number that DWR and farmers tend to inflate. (Marc Reiser pointed this out long ago.)

    2) Federal wastewater subsidies WERE NOT free. They were in a cheap, revolving account, but they came out of general tax revenues. Someone paid. I do not support renewing this account unless cheap $ can ALSO go to privcately-run utilities.

    3) Places that are “doing nothing” may be doing so as a form of brinksmanship, trying to get subsidies from elsewhere. Many projects that were going to be funded by the bond fall into this category. They were not good enough (cost/benefit) for local funding, and they were only considered viable due to political calculus.

    4) OPM surely DOES result in overinvestment in infrastructure. Read up on Japan’s “paving the island” or our own “bridge to nowhere.”

    Bottom Line: Beneficiary pays is correct but make sure you get all the beneficiaries.