Removing the Political Shortage of Water

Commentary by H. Sterling Burnett

Source: Georgia Public Policy Foundation

About 82 percent of Americans receive drinking water via publicly owned water systems, according to the federal Environmental Protection Agency (EPA). Many of these municipal and regional systems operate at a loss, meaning users' fees don't cover the cost of treating and delivering the water. Many water authorities are critically behind on maintenance. They lack the capital to update their water purification and wastewater treatment plants or to secure additional water supplies to meet expected growth in demand.

Privatization could solve these water supply problems. The majority of drinking water supply and treatment facilities and wastewater treatment plants in the United States are owned and operated by the government. According to the EPA, many need to be upgraded or replaced, at an estimated cost of nearly $350 billion over the next two decades. Georgia alone will need $2.35 billion to control wastewater pollution for up to a 20-year-period, the EPA reported in 2008, based on 2004 data.

These projects cannot be funded from monthly municipal water fees, which don't even cover operating expenses. In 2002, the Government Accountability Office found that 29 percent of drinking water and 41 percent of wastewater systems did not raise enough revenue to cover the cost of water distribution, much less the maintenance of capital equipment. Furthermore, it found that nearly 30 percent of all water systems had deferred water infrastructure projects due to a lack of funds. A 2002 EPA report projected a $222 billion shortfall in capital spending for needed drinking and wastewater infrastructure renovation between 2000 and 2019.

Local governments often contract with private firms to replace infrastructure and provide financing. For example, a 1993 outbreak of cryptosporidium parasites forced a $90 million overhaul of Milwaukee's water purification system. In response, the city's Metropolitan Sewerage District contracted with United Water to renovate the infrastructure and temporarily operate the wastewater treatment system. United Water's upgrades came in below cost and the city's water supply exceeded all federal, state and local quality standards. As a result, United Water was allowed to take over the system entirely and saved the district about $170 million over 10 years.

Private companies also provided capital financing in Buffalo, N.Y. The city saved $21 million from a public-private agreement. In British Columbia, Canada, private firms partnered with local governments to finance $5 billion (Canadian dollars) of  $9 billion in water-related construction costs.

Often cited as an example of why not to privatize is the city of Atlanta's privatization with United Water and the "deprivatization" four years later. The largest deal in the country, it involved United Water pledging to save Atlanta $20 million a year and improve service. Service improved and savings were evident, but not to the extent promised. Atlanta residents got a better deal than through the municipality, but the private company, hamstrung by city requirements and eagerness to win the contract, still could not fulfill its contractual obligations.

Instead of serving as an example of why not to privatize, Atlanta should serve as an example of how not to privatize. As Geoff Segal concluded in a 2003 Reason Foundation analysis of Atlanta's agreement with United Water, "It's important to note that even after some additional payments the city will still be saving a tremendous amount of money when compared to previous in-house operation."

According to the Rio Grande Foundation, private systems are more efficient than government-run systems:

  • Operating expenses are 21 percent lower for privately run systems than comparable government-run water systems.
  • Maintenance costs for privately run water suppliers are on average half that of public water systems.
  • Private water companies require less than half as many employees as public water systems and spend one-third less of water sales revenue on employee salaries.
  • The public officials who manage water systems often receive especially large salaries. For example, the superintendent of the Great Neck Water Authority outside New York City earns more money than the governor of New York.
  • Lower Rates. Consumers benefit when private suppliers are allowed to manage water supplies:
  • Water fees are slightly lower -  an average of $14 less per household per year -  in counties where water is provided solely by private companies, according to the AEI-Brookings study.

The AEI-Brookings study found ratepayers saved about 10 percent or $33 per year, on average, in counties served by a number of private companies. The Rio Grande Foundation found even higher savings, an average of 25 percent, on water rates in areas where a number of private companies provide water and sewage treatment.

In contrast to the United States, private companies dominate the market for water delivery and wastewater treatment in Europe. In order to ensure safe, sufficient and relatively inexpensive water supplies in the future, the U.S. water delivery system must change. Historically, municipal water authorities have been underfunded and many have been unable to keep water delivery systems operating safely and efficiently. The gap between needed resources and investments could grow due to the recession. Accordingly, the move to private financing and private water suppliers already taking place should be encouraged and expedited. 

For the complete study, go to http://www.ncpa.org/pub/ba659

For the Reason Foundation's analysis of the Atlanta water privatization, go to http://reason.org/news/show/122661.html