Water Privatization: Debating Merits for Public Water Systems

The Environmental Protection Agency estimates a shortfall (gap) of approximately $224 billion in the funding required to repair and replace aging water and wastewater infrastructure in the U.

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The Environmental Protection Agency estimates a shortfall (gap) of approximately $224 billion in the funding required to repair and replace aging water and wastewater infrastructure in the U.S. over the next 20 years. The prospects for increased federal funding are dim.

EPA’s Assistant Administrator for Water wrote in 2003, “While Federal subsidies for investment in drinking water and wastewater infrastructure would help finance needed investment, Federal support will not address the entire need.”

To avoid dramatic increases in water and sewer rates, communities would do well to conduct a serious debate on the question, “Can we take advantage of the technical expertise, operational efficiency, and financial resources of the private sector without compromising the quality of service, and if so, how?” No single answer will apply to every community.

Water is essential to life. The responsibility for ensuring clean water rests with the public sector and cannot be delegated. How that responsibility can best be met is a matter for debate. The choices that have been and that continue to be re-examined by U.S. communities are:

• Public ownership and operation,

• Private ownership and operation (privatization), and

• Public ownership and private operation (pubic-private partnership).

Communities that have opted for private involvement have done so for two principal reasons - to reduce operating costs and to improve compliance with environmental regulations. For the most part, both objectives have been met.

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Many of the privatized facilities (privately owned and operated) were never under public ownership. They have been providing clean affordable water to the communities they serve for many years. The change in the tax law in 1997 made privatization less attractive than public-private partnerships. Nonetheless, Aqua America (formerly Philadelphia Suburban Corporation) has had continued success in acquiring publicly owned and operated facilities serving very small communities.

Public-private partnerships have two advantages over privatization: The public retains ownership and control over the system, and private involvement can be cancelled more easily if desired.

The public entity retains responsibility for ensuring that the private partner operates the facility in the public’s interest. It also sets the rates charged to consumers for water or sewer services. The private partner is contractually obligated to provide specified services at an agreed upon price. Revenues earned by the private partner do not depend in any way on the rates set by the public partner.

Under privatization, rates must be approved by a state public utilities commission (PUC). Revenues earned by the private owner depend very importantly on the rates set by the PUCs.

Cancellation of private involvement, if desired, is easier under public-private partnerships since the public entity never relinquishes ownership of the assets. The private partner operates the facility under a contract that typically allows the public entity to take over the operations at any time for any reason. Few have done so. According to the 2004 Public Works Financing survey, 96 percent of public entities in public-private partnerships elected to continue to use private operators when contracts came up for renewal. One exception is the City of Atlanta which took over operations from United Water. Negotiations took less than four months and the courts were never involved.

Privatization, by definition, involves transfer of ownership to a private firm. Return to public ownership is difficult, although far from impossible. In December 2004, the City of Geneva, OH, repurchased its water system from Aqua America, the largest publicly traded water utility in the U.S. Negotiations took more than five years, including litigation. The principal difficulty was establishing a fair market price for the assets. Interestingly, Aqua America will continue to operate and maintain the system under a two-year public-private partnership with the City of Geneva.

Stringent and stringently enforced environmental regulations have contributed significantly to the success of both privatization and public-private partnerships in the United States. The regulations apply regardless of who owns the system.

In a public-private partnership, the private partner is contractually obligated to operate the facility in compliance with all applicable environmental regulations and to pay fines and penalties for non-compliance. Many public-private partnerships have been formed because the facility was not meeting environmental standards under public operation.

The City of Richmond, CA, is one example. In 2002, Richmond contracted with a private firm to improve environmental compliance and odor control at its wastewater treatment facility. The firm “performed so well,” according to Mayor Irma Anderson, “that the City Council had the confidence to award them a contract to operate the collection system. Under this contract, (they) will work with Richmond to start us down the road toward an improved collection systems, just like they did with the treatment plant.”

The debate over whether water is a social good or an economic good is moot in a public-private partnership. Public ownership of the assets, public control over rates, and public oversight of the operations contract recognize water as a social good. Water is also an economic good and private operation through a public-private partnership can bring about efficiencies and cost savings to ensure that water can be supplied to all sectors of the community at affordable rates.

The U.S. can enjoy the benefits of both public-private partnerships and privatization because of the strength and oversight of the public sector. Failures are very rarely due to the nature of private involvement, but to weaknesses in the government organization and the regulatory infrastructure.

The number of public-private partnerships more than doubled from 1997 to 2001 and has been fairly static since. The low rate of attrition suggests the reason is not dissatisfaction with public-private partnerships. More likely reasons are lack of political will among communities that might benefit from partnerships, and reduced marketing by firms in the industry as they re-examine the characteristics of communities that are most likely to benefit.

With the impending need for increased capital spending to upgrade water and wastewater systems, more communities are likely to draw on the experience of others by involving the private sector in their planning for the future.

About the Author:

Dr. Berkowitz is Managing Director of Farkas Berkowitz & Company and an adjunct professor in the Environmental Management Program in the graduate school of University of Maryland University College. Farkas Berkowitz & Company assists environmental and infrastructure firms in developing profitable growth strategies.

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