Privatization of Water Treatment in the U.S.

by Elisa Meyer on 2017-05-26 5:09pm

Privatization of Water Treatment in the U.S.

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Elisa Meyer

 

Water services are expensive to operate and maintain; more expensive than other utilities such as electric and gas services. The huge cost of building and maintaining the infrastructure the system requires is significant enough that many cities, looking for a way to cut costs, are turning to the idea of private contractors.

 

Many people see this as a turn for the worse. They believe that the privatization of water treatment will have a negative impact on the overall system, and therefore American citizens, due to profit motives. Others counter that the issue is not public versus private, it’s finding a unique solution for every city’s needs. As we saw in Flint, Michigan, public administration of water systems is no guarantee for quality and safety.

 

There are four types of privatization that are generally considered as options in the US:

 

  1. Outsourcing public utility support services to private companies

  2. Private companies operate and manage public treatment works

  3. Design-build-operate contracts

  4. Sale of government-owned water assets to private companies

 

The first three options are arrangements of private participation to run and maintain publicly owned facilities. The fourth option is the only option which fully transfers all risk and responsibility to the private company, and away from the government.

 

In order to understand the potential impact that privatizing water systems can have on countries, we’ll discuss the pros and cons, and look at two examples of nations similar to America: France, and Great Britain.

 

Against Privatization

Opponents of privatization generally cite as concerns the cost to citizens, as well as the impact to water treatment operators and other employees. According to research conducted on U.S. cities that have made the switch, privatization of water treatment results in a loss of benefits for workers in the water industry across the board.

 

In France, water treatment was privatized from 1985 to 2008. This ended when private contracts expired, and were not renewed largely due to scandal involving the water contractors Suez Lyonnaise des Eaux and Vivendi, who were investigated for illegal commissions to political parties, fraudulent accounting, inadequate management, lack of competition, collusion, and other corrupt practices. The Water Union also claimed that bills for water service had increased 100% in 11 years. However, during the time the water contracts were operative, these private contractors invested a large amount of money in the infrastructures and systems used for water treatment. This investment will benefit France for some time to come.

 

Concerns Regarding Privatization:

 

  • Reduction of public accountability: private companies may be so “profit-driven” that they do not act in the best interests of the public.

  • Impact to low income households: inability to afford water services and lack of government involvement could impact low income homes the most.

  • Higher rates: data from countries and states who have privatized water treatment tends to support the idea that privatized water comes at a higher utility cost to citizens.

  • Lack of concern about local issues: Companies with the capital to invest in water operations are often national or international, with corresponding interests. The companies cited for scandal in France are both worldwide operators.

  • Reduction in benefits for workers: A 2009 report published by the Food and Water Watch found that benefits, health insurance coverage, and union membership dropped or were significantly lower in privately-run water treatment plants than in those publicly-run. They argue that these changes affect the overall economy, impacting us all.

 

The National Academies Press also points out that public ownership of water treatment services allows for benefits that private ownership cannot take advantage of:

 

“A benefit of public ownership of water assets in the United States is the ability of governments to fund capital improvements with 100 percent debt financing. Investors in the large and highly liquid U.S. municipal bond market are exempt from federal and state income taxes on interest earnings, which substantially lowers the interest rate governments pay for borrowed capital as long as they retain full ownership control of the asset being financed.”

 

Water privatization has had a rough track record in America, with Atlanta’s move to do so resulting in the city taking back control of the water treatment after only four years. Additionally, there has been a trend in private water operators raising the cost of water services, such as the 30% price hike announced in Illinois in 2009. So what are the benefits?

 

WaterTreatmentPrivatization.jpg

Pixabay

 

In Favor of Privatization

In an report for the Hudson Institute, Edwin S. Rubenstein asserts that privately operated water treatment plants are required to use “the best available technology”, something public plants are not required to do. Additionally, they have an interest in reducing costs that the government does not have: profit.

 

“The equivalence between private and public water services despite the higher operating costs of the former is possible because of the stronger incentives for cost reduction in the privately owned companies. The profit motive provides a reward structure for managers that operate in the best interest of the general public.”

Possible Benefits of Privatization

  • Efficiency: private water contractors are motivated to maximize efficiency in order to maximize profit, while government-run operations have no such concern.

  • Water safety: since private companies bear liability for the safety and quality of the water, they are motivated to ensure safety.

  • Financial benefits: depending on the arrangement, upfront payment from companies leasing city assets can be an excellent source of funds for the government to reinvest.

  • Reduction of public sector costs: contracting water services to private companies reduces the amount of wages, benefits, workers’ compensation, and other expenses that must be paid to or for public employees.

  • Specialization: some advocates argue that private contractors bring more specialized employees and knowledge to water operations than public operators can.

  • Less bureaucracy: government can be slow, bureaucratic, and inefficient, due to regulations and a lack of direct accountability. This is generally not the case with private contractors.

 

Great Britain privatized their water treatment systems in 1989 when Margaret Thatcher arranged for the sale of public assets and the creation of regulatory authority Ofwat. As a result, tariffs increased by nearly 50% in the nine years following privatization - however so did the overall investment in the water systems, nearly doubling in the six years after privatization (from £9.3 billion to £17 billion). Additionally, water improved in quality, pressure, and service responsiveness, while interruptions and leakage were reduced. Currently, there are proposals to introduce measures to increase competition in the water treatment sector and therefore save consumers money.

Where That Leaves America

 

Water treatment systems are costly and complicated to maintain. Weighing both sides of the argument, it seems that while water privatization may not lead to less expensive water, it does have the potential to improve the water quality, infrastructure, and the service associated with it.

 

One suggestion for taking advantages of the pros and minimizing the cons is to create an organization responsible for oversight and regulation of private contractors in the water treatment industry. Rubenstein points out that some regulation will always be necessary in the industry, and that changes to tax exemptions and other policies can make it the most beneficial system for America.

 

Private companies have money to invest in the water systems we need. Ultimately, whether or not the U.S. can make privatization work well may depend on the requirements, regulations, and incentives that the private companies have to ensure high quality service and maintenance, at a reasonable cost.