Social contract theory and water industry resilience* Dr Ron Ben-David Chairperson Essential Services Commission The Essential Services Commission is the economic regulator of the Victorian water industry. It has determinative powers in relation to the pricing of water and sewerage services and it administers a state-wide performance monitoring framework. In this paper, Dr Ben-David applies an analytic framework based on social contract theory, to the events of June 2012, to explore the meaning of ‘resilience’ for the water industry. Dr Ben-David argues that it would be wrong to define ‘resilience’ solely in terms of the robustness of a water authority’s assets, systems, operations or people. He concludes that the true measure of ‘resilience’ for the water industry resides with the community’s faith and trust that its interests are being upheld by the industry. Presented at: VicWater Annual Conference 2012 – 13 September 2012 * The opinions expressed in this presentation are those of the author alone. They do not represent the views of the Essential Services Commission, its staff or the Victorian Government. The author takes full responsibility for any errors, omissions or conjectures made herein. 1 [blank page] 2 We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. This must surely be one of the most remarkably crafted statements in the English language. I cannot really tell you what makes this statement so remarkable. Maybe it has something to do with its poetic lyricism, its uncanny cadence; or maybe there is something about its semantic or syntactic construction that calls to us subconsciously. Or perhaps, it is something else altogether. Perhaps it is the absolute authority and perfect certainty that the words project into the world; the complete absence of any hint of self-doubt in the minds of the authors. Or perhaps there is something more profound yet. Maybe this statement’s power derives from an extraordinary symmetry between the words of which it comprises and the thoughts to which those words give expression — the thoughts of those giants of American history: Thomas Jefferson, John Adams and James Madison. Of course, this sentence comes from the United States Declaration of Independence of 1776; a declaration that had a revolutionary impact we can barely conceive today. Some years later, the Constitution of the United States came into effect. The first ten amendments to that Constitution comprise what has come to be known as the US Bill of Rights. Perhaps the most famous (or is it infamous?) provision in the Bill of Rights comes from the second amendment which states: …the right of the people to keep and bear Arms, shall not be infringed. 3 To us, in Australia, there is something incongruous, or even incomprehensible, about an uninfringeable right to bear arms. Social order and lethal weaponry do not seem to go hand-in-hand. * You might be wondering: What is the relevance of these US documents for a conference about resilience in the Victorian water industry? Answering that question will involve a whirlwind tour through Europe in the Age of Enlightenment, America in the eighteenth century, Victorian in the nineteenth and twentieth centuries, and Melbourne in the twenty first century. I will then draw some conclusions that, I hope, challenge your discussions about the idea of water industry resilience over the next day or so. * Let us begin in seventeenth century Europe where brilliant thinkers like Hugo Grotius, Thomas Hobbes and John Locke (followed by Jean Jacques Rousseau in the eighteenth century) are trying to understand the origins of political authority. These were extraordinary times. European society and the nature of authority were undergoing rapid change. Old orders were being displaced. The basis of power was shifting away from brute force and inheritance; drifting towards the people; a Parliament and primordial forms of representative executive government. The philosophers just mentioned were seeking answers to questions like: From where do the powers of monarchs, parliaments and governments originate? What is the basis of their legitimacy? 4 In different ways, and starting from very different assumptions about the initial conditions that describe humanity, these thinkers contributed to the development of a body of ideas collectively known as Social Contract Theory. There is no way I can do justice today to this corpus of political philosophy; therefore, I will focus on just a couple of its most salient features. I am sure that many of you will have heard statements such as: “we have a social contract with our customers to [do such-and-such]” or “we have a social contract to maintain the environment for [this-or-that reason]”. In other words, reference to the social contract is often taken to mean an organisation’s (usually a public entity) duty to deliver something to do with a broader public benefit. This is not what the term ‘social contract’ means in the political philosophy tradition. The social contract of Hobbes, Locke and Rousseau is one that is struck among citizens. It is struck among citizens in order to establish a political society and delegate authority to a monarch or a government. Social contract theory conceives of political power as arising from individuals who want to live in peaceful coexistence in order that they may be free to pursue the things that maximise their own well-being. However, in order to achieve the ‘freedom’ to purse their own interests in an orderly and safe fashion, they must surrender some of their individual freedoms. The mutual agreement to surrender one set of freedoms in return for another guaranteed set of freedoms is the basis of the social contract. As with any agreement or contract between two or more parties, a mechanism is needed in order to enforce the contract. In social contract theory, that mechanism is created through the surrender of individual rights to a monarch or 5 government. It is the role of the monarch or government to ensure that those delegated rights are enforced for the general good. The legitimacy of the monarch or the government’s authority is solely a function of its ability to enforce those rights for the common weal. It is important to appreciate that the social contract is not between the ruling authority and its citizens. It is not about a legal or moral obligation that the citizens impose on the ruling authority. It is entirely comprised of a set of agreements or consents between individuals. Likewise, it is important to appreciate that the social contract is not about democracy and the voting of political parties in-and-out of power. Democracy alone is too benign an interpretation of the social contract. In fact, under the social contract, the reserved and inalienable right of individuals is to dismantle the entire form of political authority: to overthrow and behead a king; to burn down a parliament; to execute a dictator and hang his body on a meat-hook; to take the managing director of a water authority and… …but I am jumping ahead of myself. I will return to the matter of water authorities shortly. * Let’s briefly return to the US Declaration of Independence. I have already highlighted how it expresses an endowment of certain inalienable rights; and I proceeded to juxtapose that statement with the Constitutional right to bear arms — as though the right to bear arms were one of those inalienable rights. This is how most people seem to understand the so-called ‘right to bear arms’. The 6 freedom to bear arms seems to be considered in equal terms to other preserved freedoms, such as: freedom of religion, freedom of speech and freedom of peaceable assembly (all of which are preserved in the Constitution’s first amendment). But this view is wrong and we can see why if we go back to the Declaration of Independence. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government… When you see the fuller text, it becomes amply clear that the founding fathers of the United States, were completely in the thrall of social contract theory. The great new republic would indelibly acknowledge, and thrive on the acknowledgement, that all political power originates with the people. That power is vested in government by those individuals only for so long as government continues to act to preserve their inalienable rights. Where it becomes contemptuous of those rights, the people may seize back that delegation; and if necessary, they may do so by exercising lethal force.1 1 Indeed, the full text of the Second Amendment reads: A well-regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed. 7 Viewed in this light, the so-called ‘right to bear arms’ can be seen to be derivative. Unlike, say, the freedom of religion, which exists axiomatically, the ‘right to bear arms’ is not self-evident. Rather, it is only codified in the Constitution in order to protect those other rights which are indeed axiomatic. * We have nothing in this country that compares to the American Declaration of Independence. Although our federal Constitution draws on the mechanics of its US counterpart, it expresses none of the latter’s sublime conceptions about rights and freedoms and powers. There is no time today to explore all the reasons for, and consequences of, these differences in our respective national histories. Nonetheless, we should give some consideration to the emergence of political authority in Australia and Victoria. Most interestingly for our purposes is the emergence of political authority at a local level. Elsewhere, I have written about the emergence of local government in Victoria in the nineteenth century.2 Quite obviously, that history shares none of the romanticism or rhetoric of the upheavals overseas. Nonetheless, it is an important story; and it is an important story for the water industry because you share, what I have previously called, “a common ancestry” with local government. Sometimes local government was established in order to provide water (and other) services to the surrounding community. At other times, local government found itself having to assume this responsibility; and at other times, water 2 Ben-David, Ron (2010) Why is reporting on service delivery so challenging when it comes to local government? Public Administration Today, Issue 25. 8 provision was imposed on local government by greater Colonial or State authorities. And even when local government was not involved in the provision of water services — for example, when hundreds of trusts operated as stand-alone entities alongside their local councils or shires — the dynamics that gave rise to those trusts were effectively the same as those that bore us local governments. That is, people coming together and agreeing to delegate responsibility to a separate authority so that it may pursue the common good on their behalves. In the twentieth century, particularly in its latter decades, the auspices of the State gradually expanded to encompass the provision of water services. The many waves of reform and restructuring that ensued have given rise to the industry represented in this room today. In Melbourne the story was a different; but not that different. The pressures of a rapidly growing population just meant that this history was played out more quickly than elsewhere. Clearly the establishment, empowerment and ultimate dismemberment of the mighty Melbourne Metropolitan Board of Works (MMBW), derived from the authority of the State. And that authority can be conceptualised in the terms of social contract theory. So we have two alternative starting points. We could start with the observation about the direct participation of the people in creating local water providers. Alternatively, we could take as our starting point the aegis of the State in legitimating the water businesses as they exist today. In either case, the authority delegated to those water businesses can usefully be conceptualised in terms of a social contract. 9 * Before I turn to the final part of this story, I need to stress one very important feature of social contract theory. The social contract is a completely abstract construct. None of the great philosophers to whom I referred earlier, remotely suggested that individuals ever came together to ‘sign on the dotted line’ of a social contract. Even the US Declaration of Independence and Constitution are never argued to represent a social contract. These documents only sought to give expression to some of the ideas and consequences that emerge from social contract theory. The social contract is not a written document — rather, social contract theory represents a set of ideas that can help us conceptualise the origins of political society and political authority; nothing more, nothing less. But in helping us conceptualise the origins of authority, these ideas can help us to understand how authority ought to be exercised by those in whom it is vested. * The final destination on this short tour through history takes us to Melbourne in the twenty first century. On 13 June 2012, we woke to the headlines shown in Figure 1. This was an extraordinary moment in the history of the Victorian water industry. The story ran for over a week. For three days, it appeared on the front page of The Age. It drew editorial comment from both The Age and the Herald 10 Sun; and it was given extensive radio and television coverage. It even received mention in the two national newspapers. Figure 1: The Age (13 June 2012, page 1) The events of these few days ought not be quickly forgotten. As I will suggest in a moment, their significance is quite profound. So what led to this moment; this outburst of wrath? Briefly recapping events:3 3 For a more detailed exposition see: Essential Services Commission (2012) Monitoring the return of the unrequired desalination payments (July). Available at: www.esc.vic.gov.au 11 In 2009, the Melbourne water businesses proposed, and the Essential Services Commission accepted, that tariffs for the period 2009 to 2013 ought to include a component for the desalination plant. At the time, the best available information about the likely costs of the project came from a departmental feasibility study which also foreshadowed that the plant would be available midway through the 2011-12. As a result, from the commencement of that year, Melbourne customers’ water bills would include a component relating to the costs of the plant. And, indeed, from 1 July 2011 this is precisely what happened. Then, in early 2012, it became apparent that the plant would not commence operations on schedule. Delays were announced. Nonetheless, the water businesses were continuing to collect desal-related payments from customers and were expecting to continue doing so. This became apparent when the water businesses released their draft water plans at the end of May showing that, over the two years between 2011 and 2013, customers would be paying about $300 million more than was needed for payments to the desal-operator in the same period. The draft water plans proposed ‘returning’ these funds (with interest) to customers over the period 2013 to 2018 in the form of slightly lower prices than would have otherwise been the case. Within two weeks of those water plans being published, we witnessed the headlines of 13 June 2012 and the community indignation that erupted in ensuing days. * 12 Since June, I have spent a great deal of time reflecting on these events. Not the mechanics of the overpayment; that is relatively easy to explain; but rather, the real insights to be gained from what we observed in the community reaction. What lies beneath the surface of the relationship between the community and the water industry? What in that relationship can explain the profound sense of indignation that we witnessed? After all, if it erupted once, it can erupt again; and possibly with far more abject consequences. Yes, we could dismiss the reaction to the so-called “water bill bungle” as ‘just one of those things’. Life and business are full of failings and misfortunes. Things go wrong. That’s life. Get over it. I would caution otherwise. This was not ‘just one of those things’. Of course, in any business, stuff-ups come and stuff-ups go. A couple of years ago, Toyota recalled millions of vehicles worldwide due to a potential failure in the braking system of its cars. I have no idea how many hundreds of thousands of Australians Toyota put at risk but we did not see the community rise indignantly against Toyota. Last October, Qantas grounded its entire fleet: inconveniencing tens of thousands of travellers and greatly jeopardising its future custom. While there was heated debate about whether it had acted wisely, we did not see the community rise in fury against Qantas. What then makes the water industry so different? Why did one seemingly inopportune action by the water industry unleash such wrathful sentiments 13 about the industry’s competence — and, indeed, its legitimacy? And, how is this relevant to this year’s VicWater conference on ‘water industry resilience’? I submit that if we fail to explore and understand the eruption of indignation that we witnessed in June, then no matter what is discussed over the next two days, and no matter what mitigation strategies you implement in your businesses — none of that will properly ensure your ‘resilience’. As I will argue, upholding the ‘resilience’ of your business — indeed, your very existence — is a far more complex challenge than just buttressing your systems against operational failure. * In June, the water industry’s legitimacy came into question more quickly than anyone had thought remotely possible. And this was despite the industry having spent the last decade investing extensively in developing its ‘brand’ as a socially responsible sector leading the community through the disruptions of a horror-drought. But all that goodwill seemed to evaporate in an instant; ten years of investment written-off by one headline. How could it be? This is where social contract theory proves insightful. From social contract theory we learn that we ought to think about authority — your authority to exist — as something that arises from an agreement between the people. In other words, you exist not because governments have created you but because the people have agreed amongst themselves that you should exist. Five million Victorians have come together, in this theoretical construct, and agreed that you should exist in order to provide them with certain services. 14 Again, I must stress, that this is a hypothetical exercise only. Social contract theory is only a model for thinking about the source of authority and the responsibilities that accompany it. But one important consequences of this hypothetical way of thinking about your authority, is to realise that the water industry is not a party to the social contract that governs it. This contract is struck, and continues to be struck and re-struck, amongst individual members of society. As far as the industry is concerned, its legitimacy is sustained only insofar as it continues to uphold its delegated authority in accordance with the social contract between the citizens. It is also worth noting that there is a marked difference between the social contact, to which water businesses are not a party, and service contracts, to which they are a party. I will return to the issue of social contracts versus service contracts in a moment. Perhaps a more tangible way of thinking about the social contract is to ask: What would a social contact look like if five million Victorians chose to enter into it? But how many individual agreements would a social contract between five million Victorians entail? One early thinker, Jean Jacques Rousseau, envisaged that there would be one social contract and all the citizens would gather, as required from time-to-time, to exercise the contract. But then, he lived in the city-republic of Geneva, where such idyllic outcomes seemed at least plausible. 15 Five million Victorians could not plausibly come together, even hypothetically, in the way envisaged by Rousseau. Therefore, we need to think about the social contract in somewhat different terms. Let us suppose that each Victorian interacts during the course of their day-today lives with one thousand other Victorians. This might include family members, friends and acquaintances, work colleagues, a child’s school teacher, a gym instructor, the nice young man at the fruit shop, etc, etc. So the social contract involves five million Victorians entering into agreements with one thousand other Victorians. Of course, people are continuously moving in and out of each other’s agreements. New work colleagues arrive and others depart. Kids change schools. We stop attending the gym despite paying a year’s subscription; etc, etc. So how many potential agreements comprise the social contract if we have five million Victorians constantly engaging and re-engaging with one thousand other Victorians? The answer is astounding. The number of potential agreements into which five million Victorians might enter with one thousand other Victorians is: 2 x 104,131 (or two followed by 4,131 zeros). This number is inconceivably large. It has no place in nature. There are nowhere near that many atoms in the entire universe. Despite this, this is the number that provides the Victorian water industry with its legitimacy to operate; to exist. Conversely, this is the number that will be unleashed against the water industry if it does not act in accordance with the rights delegated to it by the citizens. This is the potential number of agreements that will have failed; will 16 have been betrayed; will have been voided — if the industry fails to uphold the rights delegated to it under the social contract. * Returning to the events of mid-June… It might be the case that the public indignation that we witnessed was no more than the outburst that would have accompanied any business that had been ‘outed’ for overcharging its customers. Perhaps. Perhaps. I submit, though, that it would be a gross error of judgement by all those associated with the water industry (including its regulators4) to dismiss these events as just an episode about overcharging customers. Recall the US Constitution and the right of Americans to bear arms. That right was based on social contract theory and the premise that the people can seize back the delegation of authority when the party of that authority has failed to exercise it dutifully. When authority fails to protect the rights of individuals, those individuals can terminate the delegation; and they can do so using lethal force. The events of June 2012 ought to be seen in this light. 4 In this context, the term “regulator” should be read as widely as possible. 17 In that middle week of June, the community exercised a metaphoric right to bear arms under the social contract. The community reached for its metaphoric muskets and fired some warning shots over the heads of the industry. In doing so, the community was reminding the industry that it existed by virtue of the community’s authority. The community was reminding the industry that it has no authority in its own right; it only has delegated authority. The actions of the industry had led individuals across the community to question whether the water industry had properly exercised the powers delegated to it; had exercised those powers in pursuit of the common weal. On this occasion, the industry and its regulators walked away intact and, I trust, equally chastened. But that is not to say that they will do so again next time. * What of ‘resilience’ then? From these events, what can we learn about water industry resilience? To answer these questions, we first need to distinguish between social contracts and service contracts. Service contracts are those agreements you have with your customers to deliver specified services at an agreed price and subject to certain terms and conditions. In many regards, your service contracts are not that different from the service contracts that exist everywhere else in the economy. To the extent that they do differ, it is because you operate as local-monopolies and your service contracts 18 are implicit and non-voluntary. (I have discussed that special status in my previous presentations to VicWater.5,6) When I look at the excellent agenda for this conference, I cannot help but observe its focus on the resilience of operations; or what I have called ‘service contracts’ — that is, the capacity to maintain service delivery despite the many unknowns that confront the industry. Importantly, this includes maintaining organisational capacity in the wake of change, disruption or adversity. Let me state without equivocation that buttressing your systems against operational failure is a very significant challenge confronting the water industry. I commend the conference organisers for drawing attention to these issues. But I also posit that framing a discussion about the water industry’s ‘resilience’ solely in terms of its ongoing capacity to fulfil its service contracts, is to miss the very challenge that is particular to this industry. All industries face risks and all industries confront uncertainty. All industries face the perils of misjudging these risks, making bad decisions or taking the wrong actions; and, in so doing, damaging the integrity of their service contracts; present and future. I have already mentioned the two examples of Toyota and Qantas. When firms in a competitive market ‘blow’ their services contracts, that market will extract its revenge ruthlessly and dispassionately — for example, through loss of sales and market share; reduced earnings, profits and stock prices. For these firms, ‘resilience’ is defined solely in terms of their capacity to endure these losses and rebound. Their punishment is exacted by the market; their penance is served in the market; and their rehabilitation is 5 Ben-David, Ron (2011) Economic regulation of the water sector. How can we know the dancer from the dance? VicWater Annual Conference (8 September 2011) 6 Ben-David, Ron (2010) Governance and the water industry: The challenge of defining, creating and delivering value. VicWater 2010 Annual Conference (2 September 2010) 19 manifested through the market. In other words, the market is the only medium within which their resilience is given expression. Nothing lies beyond. The water industry also has service contracts. But unlike firms in a competitive market, if your service contracts fail, then punishment cannot be exacted by the market; your penance cannot be served in the market; and your rehabilitation cannot be manifested through the market. Therefore, something must lie beyond. There must be another medium within which you, as entities, exist and your resilience is expressed. Something else must be out there that provides the medium within which your resilience can be defined; there must be something else beyond your service contracts with customers. But what is that medium? The answer, I suggest, is: the Social Contract. The social contract is the medium within which you exist. It is the medium within which you succeed or you fail. And if you fail, it is the medium within which you are punished. And if that punishment is not lethal, then the social contract is the medium within which your penance is served and your rehabilitation can be manifested. In other words, it is only through the social contract that you express your ‘resilience’. * I know this theorising is all rather abstruse. But I also have no doubt that, if we are to really learn from the events of June and what they can tell us about water industry resilience, then we cannot dismiss those events as ‘just one of those things’. 20 For now, then, I will set aside the high theory and I will conclude this discussion by drawing a picture that, I hope, will challenge you to think quite differently about your ‘resilience’; to think about your ‘resilience’ in terms of the social contract, rather than in the more familiar terms of a service contract. To do so, I will draw on some imagery from the work of a twentieth century social contract theorist. John Rawls sought to identify a set of universal principles that would govern society. To help him with this endeavour, he imagined something called a 'veil of ignorance' — a hypothetical device that conceals all personal details about individuals: their characteristics and their abilities, their preferences and their social status. And though we know nothing about these individuals, Rawls asks us to imagine the kind of society in which they would choose to live. Let me apply a similar technique to our problem about ‘resilience’ by asking you to imagine two individuals; each is cloaked beneath his-or-her own ‘veil of ignorance’. We know nothing about them or what they care about; and we never will. We can make no assumptions about who they might be. Whether they are young or old? Male or female? Rich or poor? Working or retired? Employed or unemployed? Single or family bound? Owner-occupiers or tenants? Ablebodied or disabled? Informed or unaware? Generous or belligerent? Forthright or reserved? Optimistic or pessimistic? etc, etc. There is no way even to determine whether the two individuals under the veils are similar or different in their characteristics. (Moreover, in this thought experiment, the two individuals also know nothing about each other.) 21 Within this thought experiment, we know only one thing about the two veiled individuals — and that is: they are discussing you, the water industry; and you, as individual water authorities. And in that discussion, they are trying to decide whether they should delegate to you the responsibility for delivering water services to them. Think about it like this: Your fate rests entirely in the hands of two completely anonymous individuals. Your fate is completely in their hands but you know nothing about them or what they care about. All you can ever know is that they must come to an agreement; and in order to reach an agreement each person must trust his-or-her own judgement and each person must trust the other person’s judgement — these are judgements about you and your worthiness of their trust. And that is the critical implication of social contract theory. It relies on mutual trust and mutual confidence between the citizens. In delegating authority to you (as water authorities), each person has to take responsibility not just for the services they receive, but also for the outcomes produced for the other person. But remember, as water authorities, you are not part of this discussion; you are not a party to the social contract. You have no say over the content or design of the social contract. You are merely the consequence of a social contract among members of the community. The only matter that rests within you bailiwick is to prove or disprove the success of the social contract agreed by the citizens; and you do so by your decisions and your actions. Under such circumstances, how do you ensure that the discussion between two anonymous individuals — a discussion about your future — is favourable? What do you need to do to ensure that two completely anonymous individuals will agree that you ought to continue to exist? How do you ensure that they 22 continue to express confidence and faith in you: the Victorian water industry? How do you ensure that they continue to have confidence in each other’s judgement about your competence? While this might only be a thought experiment, the answers to these questions go to the very core of my alternative definition of ‘resilience’ for the water industry. If by your decisions and actions you fail to uphold the faith and trust that members of the community have placed not just in you, but also in each other, in agreeing to delegate certain responsibilities to you, then they may withdraw that authority. If by your decisions and your actions you fail to uphold the social contract that underpins your existence, then you will eventually fail the only true test of your resilience. And so, it all boils down to this: Irrespective of whether you are a water authority that is urban or rural, regional or metropolitan, retail or wholesale — the events of June should be understood as follows. Ultimately, your resilience is not about the robustness of your assets (built and natural), your systems, your operations or your people. Your true resilience is, and will be, forever measured by the robustness of the community’s faith and trust in you; the community’s faith and trust that you are exercising your delegated authority properly; that you have not forgotten that your authority comes from them; that you are upholding their interests: not your own. — END — 23
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