tions. Although there is no inherent reason why either the public or private sector should be the preferred sector for delivering water services, public and private sector operations often face different constraints and incentives. For example, on one hand, privately owned and operated water utilities may be less tied to local politics than publicly owned utilities and they may have greater flexibility to make staffing changes. On the other hand, public systems may be more responsive to public input and more amenable to conservation objectives. The issues are complicated and dynamic, and vary greatly across communities and regions.

Public and private water utility management organizations are guided by different sets of incentives. Some of these differ between the public and private sector, while some incentives are common in both. Whatever the mix, public and private utilities operate best with clear lines of authority and responsibility, with technical competence, and with the ability to make long-term investments. Given appropriate incentives, authorities, and responsibilities, water utility privatization will represent a viable option to public ownership or operations. But according to industry financial consultant George Raftelis, “Privatization is not an all-encompassing panacea for water and wastewater facility financing and construction. Rather, it is one of several approaches to solve the capital infrastructure problems facing local government utilities” (Raftelis, 1989).

This report reviews key issues and experience with water services privatization in the United States and examines privatization’s economic, fiscal, regulatory, and other implications. It is intended to help the reader make informed judgments about which situations represent good candidates for privatization and which do not, and should therefore be of interest to water utility managers, urban government officials, and concerned citizen groups.

STRUCTURE OF THE WATER AND WASTEWATER INDUSTRY

Historically, water services were initially delivered by private providers in many cities in the United States, such as Boston, New York, and Philadelphia. As these and other larger U.S. cities grew, water services became a core function of local government. This trend accelerated largely because of a legislative change after World War I, when Congress exempted interest payments on municipal bonds from federal income tax. This assured that municipalities could issue bonds at lower interest rates than those for taxable bonds.

The U.S. water industry today is highly diversified. As of 1999, there were nearly 54,000 community water systems in the United States (the U.S. Environmental Protection Agency defines community water systems as systems serving more than 25 people, regardless of ownership). The



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