What is the Benefit of Privatizing Water?

by |September 2, 2010

A recent Wall Street Journal article reports on what seems to be an accelerating trend: cities privatizing their water supplies. According to the article, the Indianapolis city-county council voted last month to sell its water and sewer utilities to a charitable trust; San Jose and Pittsburgh are considering selling their water systems as well, while Sacramento is now allowing Nestle, SA to bottle and sell “excess” tap water.

Privatization: Half-full or half-empty?

Worldwide, private ownership of water utilities has been growing for a number of years. According to a 2004 editorial by Gary H. Wolff in the Journal of Water Resources Planning and Management the number of people served by private water companies worldwide grew from 51 million in 1990 to nearly 300 million in 2002.

The reason for the most recent uptick is trend financial: in the current economic climate, municipalities across the country are strapped for cash and will, it seems, take any measure to shore up finances.

But is privatizing water good for the public?

Wolff takes a balanced view of what he calls the “Gordian Knot” of the public/private water debate, suggesting, “we do not need to decide if private or public ‘players’ are superior, in the abstract. We need to implement and enforce the ‘rules of the game’ under which private or public utilities or operators are efficient and responsive to social needs and desires.”

Wolff further points out that worldwide, the greatest water problems occur in places where the government is too weak to either provide adequate services or to regulate private companies—no doubt true.

But leaving aside the very real problems of water access, quality and accessibility that must be addressed in the developing world, what is the case for private water ownership in a place like the United States?

Chicago Water Tower. Source: Melissa Gasser on Wikimedia

Privatization advocates point out that private water companies must still comply with local and federal regulations on water safety, and argue that privatizing water saves the consumer money.

However, when the non-profit water advocacy group Food and Water Watch looked at average water rates charged by utilities in California, Illinois, Wisconsin, and New York, it found that private utilities charged consumers “significantly higher water rates” than public ones did—as much as 50 percent more.

The group listed several reasons that private companies charge more for water. First, corporate utilities are required to provide returns to shareholders, not the community. While regulations in theory limit profit margins to approximately 10 percent, companies can get around this requirement by leveraging their assets. “In other words, instead of using money they had borrowed for needed improvements to water operations and infrastructure, the companies invest in side businesses or other activities that diversify their operations to increase profits.”

In addition, Food and Water Watch says, financing is also more expensive for private companies, which are not eligible for tax-free bonds, and private water companies are usually less efficient at water delivery. And because there is no effective competition to provide water in a given area (private water utilities are essentially local monopolies) there is no market incentive to cut costs.

According to the Wall Street Journal article, Atlanta privatized its water service in the late 1990s, but had to retake control four years later because of poor water quality and cost overruns. And there was a public uproar in Illinois last year when the largest private water company, Illinois American Water Co., requested a 30 percent rate increase, which it said was needed for infrastructure improvements.

Given that access to clean water is among the most basic human needs, shouldn’t we think twice before selling it off for a short-term financial fix?

11 thoughts on “What is the Benefit of Privatizing Water?

  1. I agree. I think selling off water could get out of hand and ugly. We all need clean water to survive, and should work to keep our water clean. However, I don’t think we need to allow ‘money hungry greed mongers’ control it.
    Kind regards.

  2. Clarice Jacobson says:

    Privatized water service is unwise. Do not approve of privatized water service. Thank you for this information.

  3. Bob B says:

    I’ve been in the water business for years, as a consumer advocate and a private utility advocate. The bottom line is government-supplied water service is held to lower standards than private water service. Municipal water utilities are, literally, slush funds for local politicians. Private ownership drives waste out and forces accountability in- accountability to customers, regulators, shareholders and employees. Municipal ownership does none of this. Nor does government accounting make the movement of money transparent. Our children and grandchildren are already paying for our roads and other infrastructure- shouldn’t we be in a “user pays” system for water and wastewater, rather than a “bonding, taxing, keep rates low today and let the next generation pay” system? Because that’s what F&W Watch and organizations like that would have you do. Punt your problems to your grandchildren, like they won’t have enough problems already.

  4. PS says:

    In response to Bob B’s comments:
    “The bottom line is government-supplied water service is held to lower standards than private water service.”
    If that is the case, than the solution is to raise government standards.
    “Private ownership drives waste out and forces accountability in- accountability to customers, regulators, shareholders and employees.” Private sector employees are only accountable to their company and the companies are accountable to their shareholders. Where do the consumers (the community) come in? Not to mention that all companies and their shareholders don’t have 200-year contracts. Thus, they are after short-term profit maximization, not the long-term well-being of the community or protection and sustainbility of their natural resources. If the government is in-charge, the public can pressure them into improving services in many ways. If the community is dissatisfied with the services of a private company, they have to buy back their own water rights which is quite costly which isn’t even an option in some contracts.
    “Nor does government accounting make the movement of money transparent.” Do private companies make their financial resources fully transparent? They BID on contracts. I don’t know about you, but I wouldn’t want my right to water to be on put on auction. Once the company acquires the 30- to 50-yr contract, it effectively creates a monopoly and can raise prices as much as it wants since water isn’t a luxury, but a necessity.
    Perhaps the solution lies in a decentralized tripartite approach, involving the community, the private sector and the government.

  5. daroo says:

    Privatization of water is among the worst ideas of modern human happenings. The American-Capitalist system is, without doubt, the most ecologically destructive human apparatus this planet has ever seen. When profit motive (by route of privatization) dominate philosophy, approach, and decision making – we commodify living creatures, human labor, and vital (priceless) resources and ecosystem services.

    Such mis-use of renewable resources (water, topsoil, forests, etc …) by humans turns them quickly into non-renewable resources. Can privatization help to conserve fresh water resources? Historical example tells us very plainly that the answer is no – at least, not without strong government regulation and enforcement to protect the well-fare of workers, the integrity of ecological systems, and the diversity of the biological community. Though, in reality, such regulations are often weakened by the infiltration of corporate persons into our system of governance. And, enforcement of such regulations (CWA, ESA, CAA, etc …) is lacking severely.

    Remember – we, the people (in theory) in the USA have access to our government. In theory, governments are accountable to the people (though, corporate persons have a much stronger financial voice than us real persons). Private corporations are accountable only to their boards and shareholders – and their purpose is to squeeze financial profit out of our living planet by any means possible – most often resulting in the destruction of the very systems their profits depend upon. A sad irony, really. And, historically, private corporations seek to clean their spreadsheets by externalizing costs to our shared environment and to the public at large.

    Let us also remember, water has been recognized by the UN as a basic human right.

  6. Wes Strickland says:

    In response to PS’s comment, yes, perhaps there would be some value in raising standards for government-owned utilities. In addition, there are many well-run government-owned utilities, so the problem is not universal. But neither of those points gets away from the reality that government regulators and government-owned utilities are on the same side of the fence, and there will always be political pressures within the government not to enforce certain standards against itself.

    For the privately-owned utilities, in the US they are comprehensively regulated by the state public utility commissions. Thus, their monopoly status does not allow them to hold the community at their mercy. (All water utilities are monopolies, in any case, and this is not a feature unique to private utilities.) There is some variance, but the commissions normally give the water companies quite a thorough vetting. The rather modest return on shareholder investments of about 10% is compared to tax-free bonds from government-owned utilities (read: taxpayer-subsidized) at roughly 5% now, and the difference is typically more than offset by the efficiencies in the private company. The higher prices cited by F&WW are factually not true, especially when you consider the hidden tax-funded subsidies of the government-owned utilities. Full-cost comparisons typically show government-owned utilities being more expensive.

    Wes Strickland

  7. Andy Pritchard says:

    What seems most concerning is the Nestle-style “bottling excess tap water.” It’s one thing if a private corp. holds the deed to a water treatment plant. It does seem a little sketchy, but regulations and enforcement can ensure fair pricing, etc. But it’s another if a private company leverages that ownership to start bottling/shipping millions of gallons of water to who-knows-where. That kind of behavior has the potential to do real damage to water systems. When municipalities are negotiating these arrangements, they’d be wise to make sure they aren’t giving away more than they bargained for.

    daroo, to your point, I’d also include the notion of corporations-as-people among the worst ideas of modern human happenings!

  8. Laura Debt says:

    Giving the option to privatize water would be a huge mistake. Another way to drive people below poverty even further into poverty. Also another way to make the rich, richer. I have no problem with people gaining money, especially at increased rates but when it is at the expense of others I have a problem with it.

  9. Thank you for sharing this information on the benefits of privatizing water. I never knew that certain cities were privatizing their water supplies. There are also potable water services that deliver water to certain places that request this. This can either be for swimming pools, permit potable water, or even emergency water supplies. Thank you again for sharing this article, it has been very informative.

  10. Cynthia Bushnell says:

    From the CDC: “Private water companies, in contrast, have no responsibility to promote public health and wellbeing. They are accountable first and foremost to their owners and make their investment decisions based on profitability.27 Because water service is a natural and often legal monopoly,28 if a private water company charges high rates or provides bad service, customers cannot simply switch to another provider. Rather, they are stuck with the company unless they are able to move to another community, which is neither realistic nor desirable for most people.”

    “Private Ground Water Wells.” Cdc.gov. Centers for Disease Control and Prevention. Drinking Water Dec 2014. Web. 3 Mar.2016.

    Michigan is a state trying to be run like a private for-profit enterprise, and Flint is the result.

  11. I would like to play the devil’s avocate, not because it is my position, but because there is some advantages with water supply privatisation. Indeed, due to the competition and importance of the market, companies will have to improve their service (technologies used, hiring high skilled designers and operators, reactivity in case of problem etc.) and still ask for a reasonable price to the municipality if they want to keep the opportunity, this is a good thing for customers. Most of the time the companies does not own the water supply network which is a state property, but just operate it. This limits the ways of making profit for the private firm, they have to optimize operational efficiency, which is a good thing because it can not be done on the back of customers.

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