Singapore's Water Market — Scarcity, Market Structure and Nationalisation
Case
Figure 1: Population and water demand in Singapore (millions). (Presented in the source as a figure plotting Singapore’s population and total water demand from 1960 to 2015. Both rise over the period, with water demand rising faster than population, and the rate of population increase tapering in later years.)
Extract 1: Singapore’s water pricing strategy
Often, the price of water reflects its market value. On one hand, this price is indicative of the utility consumers accord to it; hence upward revision of Singapore’s water price is an effective mechanism to reflect the scarcity value of water. On the other hand, water is priced to incorporate the higher cost of producing water from unconventional sources, specifically NEWater and desalinated water. The rising water price goes towards meeting the cost of water treatment, reservoir operations, NEWater production, desalination, used-water collection and treatment, and the maintenance and expansion of the island-wide network of water pipelines. It is estimated that a rise in the price of water by 30% will lead to higher water bills for the average household, from $37.50 to $50 a month.
Adapted: Public Utilities Board, Water Price Revision, 2017
Extract 2: Singapore’s water crisis
Singapore is one of the most water-scarce countries in the world — the fifth most likely country to face extremely high water stress by 2040. She is heavily dependent on rainfall due to a lack of natural water resources. Prolonged dry spells cause or threaten to cause water shortages, as limited land is available for water-storage facilities. Coupled with rising demand for industrial and residential purposes, the pressure is on to find alternative sources of water. Unfortunately, the nature of water production necessitates long-term heavy investment in infrastructure, such as the network of pipes and water-treatment facilities, so producers may not be able to respond quickly to changes in demand.
Source: Centre for Liveable Cities, accessed 2022, and Reuters, 7 June 2019
Extract 3: Water industry in different countries
Water management is the control and movement of water resources. The nature of the industry necessitates heavy investment in infrastructure, such as the network of pipes and water-treatment facilities, so a substantial part of the cost of supplying water services is a fixed cost.
Singapore. Singapore’s entire water cycle is managed by the Public Utilities Board (PUB), the national water agency — one of the best-run utilities in East Asia and the world. Clear and measurable targets are set for water quality, customer service and financial performance. The Public Utilities Act states that PUB’s total revenues must be sufficient to meet its obligations, including depreciation, interest on capital and a reasonable proportion of the cost of infrastructure development.
England. Decades of underinvestment by successive governments led to poor water quality, polluted rivers and beaches affected by sewage — the water industry competed for funding with schools, hospitals and police. Since privatisation, investment of nearly £160 billion has driven steady improvement, with customers now enjoying world-class drinking water; there are currently 23 private regional water companies in England and Wales, including Thames Water and United Utilities. Yet research shows privatisation also brought higher prices and lower investment in infrastructure, and at times disregard for environmental damage — Thames Water was fined £20.3m in 2017 for a series of significant pollution incidents on the River Thames.
Adapted from various sources
Questions
(a) Compare the changes shown in Figure 1 and explain why the changes suggest an increase in per capita water usage in Singapore from 1960 to 2015. (compare, [2])
(b) Explain how a rational consumer will decide on the quantity of water to consume. (explain, [2])
(c) With reference to Figure 1 and Extract 1, discuss whether demand or supply factors have a greater impact on the market for water. (discuss, [8])
(d) ‘Singapore is one of the most water-scarce countries… Prolonged dry spells cause or threaten to cause water shortages…’ (Extract 2). Explain what is meant by ‘scarcity’ and ‘shortage’ in the market for water. (explain, [4])
(e)(i) Identify and explain the type of market structure operating in the Singapore water industry. (identify/explain, [4])
(e)(ii) ‘With water scarcity looming, governments throughout the world have prioritised water management.’ Discuss why some countries choose to nationalise water management while others have chosen to privatise it. (discuss, [10])
[Total: 30]
Essay practice (b). Sembcorp Solar Singapore manufactures solar energy equipment. In 2021, the firm embarked on building solar-panel systems across 1,154 rooftops in Singapore. With Singapore’s commitment towards sustainability, the firm’s emphasis on process innovation has positioned it well to further boost its profits. Discuss whether process innovation is the best strategy for Sembcorp Solar Singapore to increase its profits. (discuss, [15])
Answers
(a) — compare [2].
Both demand for water and population generally increased from 1960 to 2015. However, water demand increased at a faster rate than population, which implies an increase in per capita water usage. (Marks: general trend of both series [1]; difference in rate of increase [1].)
(b) — explain [2].
A rational consumer’s objective is to maximise utility. To do so, the consumer consumes water up to the quantity where the marginal benefit (the additional utility from each extra unit) equals the marginal cost (the additional price paid for each extra unit). (Marks: consumer’s objective [1]; MB = MC equilibrium [1].)
(c) — discuss [8].
Thesis — demand factors. From Figure 1, rising water demand is driven by a growing population. This non-price determinant — changing demographics — shifts the demand curve right. At the original price a temporary shortage arises (quantity demanded exceeds quantity supplied), exerting upward pressure on price; by the law of demand and law of supply, price rises to a new equilibrium with a higher quantity traded, and total expenditure on water rises.
Anti-thesis — supply factors. Extract 1 notes the “higher cost of producing water from unconventional sources” (NEWater, desalination). Higher production cost makes firms less willing and able to supply at every price, shifting supply left. Extract 1 also implies water’s demand is price-inelastic — a 30% price rise lifts bills from $37.50 to $50 yet water is a necessity with no close substitutes — so the leftward supply shift raises price sharply while quantity demanded falls less than proportionately.
Judgement. Supply factors have the greater impact. The rate of population increase in Figure 1 is tapering, so the demand effect weakens in the long run. Meanwhile, as a water-scarce country Singapore cannot turn away from costly unconventional sources, so it is difficult to reduce the cost of water production — making supply-side cost pressure the more persistent driver of the water price.
(d) — explain [4].
Scarcity is the condition where limited resources cannot satisfy unlimited wants; in the water market, scarcity is always present, since the want for water exceeds the water naturally available. A shortage, by contrast, is the situation where quantity demanded exceeds quantity supplied at a given price. Here, “prolonged dry spells” reduce Singapore’s water supply while population growth raises demand, creating a shortage at the prevailing price. The distinction: scarcity is permanent and absolute; a shortage is a price-specific, market disequilibrium that price adjustment can clear. (Marks: explain scarcity [1]; contextualise to water [1]; explain shortage [1]; contextualise to water [1].)
(e)(i) — identify/explain [4].
The Singapore water industry is best described as a monopoly. Extract 3 states that one dominant firm, the Public Utilities Board, manages the entire water cycle. PUB operates as a monopoly because of high natural barriers to entry: the “network of pipes” and “water-treatment facilities” impose very high start-up fixed costs, which give rise to significant internal economies of scale. A potential entrant would have to reach a very large output to match PUB’s average cost, which deters entry — the hallmark of a natural monopoly. (Marks: identify monopoly [1]; reason — high barriers to entry [1]; elaborate on the barriers [2].)
(e)(ii) — discuss [10].
This part is worked in prose; the original answer’s “nationalisation of a monopoly” figure is a firm-level cost/revenue (AR/MC) diagram outside the 9570 diagram set (see scope note below).
Definition. Nationalisation is the government’s takeover of the production or provision of a good; privatisation is the transfer of provision to private firms.
Thesis — why some countries nationalise. Nationalisation, as with Singapore’s PUB, lets the government produce at the socially optimal output (where ) rather than the profit-maximising output (MC = MR), because the government aims to maximise societal welfare, not profit. It can therefore set a lower price and a higher quantity than a private monopolist would. Since water is a necessity, this avoids the underconsumption that market dominance would cause, and the lower price improves equity, letting lower-income households obtain the water they need. Limitation: direct provision is capital-intensive, so a government with budget constraints may struggle to fund the treatment facilities and pipelines.
Anti-thesis — why some countries privatise. A non-profit-maximising state provider may suffer X-inefficiency — weak incentives to minimise cost — raising long-run average cost and causing productive inefficiency. Private firms, facing competition, minimise costs and can price lower; their supernormal profit can fund R&D and process and product innovation, improving water quality and cutting unit cost over time. Limitation: heavy fixed-capital requirements create high barriers to entry, so the privatised industry tends toward a natural monopoly that may exploit consumers with high prices, given water’s price-inelastic demand — as the English experience of “higher prices and lower investment” illustrates.
Judgement. The choice depends chiefly on country size and the government’s budget position. In a large country the water market can support several firms, so market dominance is less of a concern and privatisation is viable; in a small country like Singapore, privatisation would yield a natural monopoly and allocative inefficiency, favouring nationalisation. A government with large reserves can afford to nationalise; one facing budget constraints may have no option but to privatise.
Essay practice (b) — discuss [15].
Definitions and scope. Process innovation raises productivity or cuts cost; to raise profit a firm can pursue cost-cutting strategies like this or revenue-raising strategies such as product innovation and diversification. Stand: process innovation is a strong but not unconditionally best strategy for Sembcorp Solar.
Requirement 1 — process innovation can raise profit. By investing in better capital and technology, Sembcorp Solar lowers its average cost of producing and installing solar systems. With Singapore’s sustainability drive sustaining demand, lower unit cost widens the margin on each installation, raising profit — and reinforces dynamic efficiency as cost falls further over time. Evaluation: process innovation is costly and R&D-intensive, with a long lead time before the cost saving materialises.
Requirement 2 — alternative strategies may be better. Profit is revenue minus cost, so Sembcorp could instead raise revenue through product innovation or diversification — new product lines (e.g. energy storage, maintenance services) that differentiate its offering, raise demand and make demand more price-inelastic, increasing average revenue and price-setting power. Evaluation: entering new markets is itself risky and may not pay off.
Judgement. Process innovation is the best strategy when the firm faces strong cost pressure in a competitive, price-sensitive segment and has the financial capital to fund R&D — which Sembcorp, a large established firm, plausibly does, and which the firm’s own “emphasis on process innovation” reflects. Where demand is the binding constraint rather than cost, however, revenue-raising product innovation would dominate. On balance, given Singapore’s stable, policy-supported demand for solar, cost reduction through process innovation is the higher-return lever — but it is best paired with selective product innovation rather than pursued in isolation.
Note: in the original worksheet part (c) and the essay-practice answer used demand–supply diagrams (in-scope, reproduced above as supply_demand archetypes), while (e)(ii) used a firm-level “nationalisation of a monopoly” AR/MC cost/revenue diagram, which is outside the 9570 syllabus and is presented as prose here.