Privatization of Water Services in the United States: An Assessment of Issues and Experience (2002)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

A Privatization of Water Services in England and Wales The transfer of nearly all of the water supply and wastewater-related assets in England and Wales, serving some 50 million people, from public to private ownership in 1989 represents the largest and highest level of privatization in the world. It has had strong endorsement by advocates of privatization and by officials of the World Bank. Current evaluations of this privatization range from highly favorable to highly negative. This case deserves special attention because it is the largest available case study of water industry privatization. Its lessons must not be ignored. Experience with water supply management in England, and particu- larly London, deserves special attention because private water service began there in the late sixteenth century and continued for some 300 years. Over time all water supply and sewerage services, except for 28 private water supply companies, became the responsibility of local gov- ernments. In 1973, a revolutionary change in water services management occurred when virtually all 1,500 public water-related services in England and Wales were integrated into 10 regional public water authorities un- der the 1973 Water Act (Okun, 1977). Five years later, with a new Conser- vative government, almost all of the country’s public services were being privatized. The water authorities and all their holdings were put up for sale to private entrepreneurs in 1989, the largest, most comprehensive public conversion to private ownership in the world. 121 

122 APPENDIX A THE EARLY YEARS: THE NINETEENTH CENTURY The nineteenth century saw the extensive growth of piped water ser- vices in cities, accompanied by the introduction of flush toilets that were responsible for the heavy pollution of the rivers in the cities. An example is London, where the tidal Thames River received household wastes via sewers initially introduced to carry off rainwater from city streets. Private water companies were furnishing piped water to various parts of the city, several taking their water from the heavily polluted Thames River. Peri- odic cholera epidemics were responsible for high death rates among rich and poor alike, with a quarter of a million people, mostly in London, dying of cholera between 1848 and 1854 (Harrison, 1961). One of the companies elected to filter Thames River water (it was one of the first to do so) while others took the water without treatment. The source of the cholera had not then been established; it had been attributed to inhala- tions from the foul air arising from the putrid Thames River. Two private water companies had been serving households in the same area on the south side of the Thames when one elected to improve the taste and odor of its supply by moving its intake upstream of the city while the other continued to draw from its original intake. Dr. John Snow, physician to Queen Victoria and possibly the world’s first epidemiologist, established that the cholera fatality rate associated with the latter com- pany in the summer of 1854 was 315 per 10,000 households, almost 9-fold greater than the rate among the customers of the company that had moved its intake. That study and his study of the cholera outbreak that occurred among people who carried water from a hand-pump on a well on Broad Street were the first studies to establish that water was the source of cholera outbreaks (Okun, 1996). This was decades before the germ theory of disease had been recognized. Not all of London’s water companies were as assiduous in improving their water supplies; most drew from springs and wells and enjoyed mo- nopolies with little regulation from the city. Complaints about the service, and an increasing appreciation that contamination of the source water was responsible for the spread of disease, led many cities to take over responsibility for water supply. In London, the problems led to the estab- lishment of the Metropolitan Water Board in 1902, an independent public body created to serve water to all of the metropolitan area of greater London. London remains the only large city in England that takes run-of- river water from unprotected watersheds, and it has continued to have problems with pollution from upstream cities and industry. 

APPENDIX A 123 THE POST WORLD WAR II ERA: THE BEGINNING OF REGIONALIZATION During the height of the Battle of Britain, a Central Advisory Water Committee was created to address the inadequacy of the capabilities of many small water systems to maintain service, especially in fighting fires resulting from the bombing. The committee initiated the Water Act of 1945, which called on the government to promote the “regrouping” of water supply services. Large water systems were to take over service to smaller communities in their vicinity, and in the absence of a large sys- tem, the small systems were to establish regional systems. From an origi- nal 1,186 water systems serving about 40 million people in 1945, the num- ber of separate systems fell to 187 systems serving about 50 million people in 1974. Although sewerage service had been extended to more than 95 per- cent of the population of the country, little attention had been given to wastewater treatment. Wastewater treatment for a few large cities was state of the art, but the management of water supply was almost entirely separate from the management of wastewater. Some 1,400 separate mu- nicipal wastewater systems existed, but the treatment by the smaller com- munities was generally unsatisfactory. Regionalization and Integration of Water Management Full regionalization was established by the Water Act of 1973. Not only did this act reduce the number of public bodies responsible for water supply from 187 to 10 water authorities (WAs) (the statutory private wa- ter companies were allowed to continue as agents for the water authori- ties in which they were located), but it integrated all water-related activi- ties of government. The 10 water authority service areas were based on hydrologic boundaries, with some covering one river basin and others serving several river basins. The authorities were given ownership of all publicly owned facilities and land and were given the responsibility for the ownership, planning, design, construction, operation, and financing of facilities for water supply, sewerage, ambient water quality, water- based recreation, drainage and flood control, inland fisheries, and naviga- tion. The financing of water supply facilities in England has traditionally been by rates on properties; residential services were not metered. Fi- nancing wastewater treatment had been difficult, requiring subsidies from the national government. Water authorities were to be self-sustaining, and grants previously required from the national exchequer would no longer be forthcoming. With basinwide authorities, investments in reduc- 

124 APPENDIX A ing contaminants could be based on the most economical approach to maintaining river water quality. Treatment to remove pollutants could be concentrated on the larger cities on the watershed, where economies of scale make it unnecessary to provide removals at the smaller cities. The reorganization obliged many middle management technical people to take early retirement as the staff requirements were signifi- cantly reduced. A test of the water authorities came a year after their inauguration. The 16 months from May 1975 to August 1976 were the driest in England and Wales since data were first collected in 1727. How- ever, where serious water shortages would have been expected in the smaller communities, the economic impact was minimal because of the better management of resources; few physical interconnections had yet been made. The promise of the early years of the regionalization was great both in performance and in efficiency. The Road to Privatization The Water Act of 1973 had been passed under a Conservative govern- ment, but when the Labour party came into power in 1974 when the reorganization took place, little changed. However, with a Conservative return to power in 1979 under the leadership of Margaret Thatcher, major changes began to be introduced, codified in the 1983 Water Act. The period was characterized in a book, Troubled Waters, by David Kinnersley (1988), who entitled one chapter “The Undoing of All-Purpose Authori- ties.” The membership of the water authority governing boards was changed, initially to reduce their number, and then to reduce and finally eliminate local government membership entirely. Chairmen (there were no female chairs) and members came from industry with little background in public management or environmental affairs, let alone knowledge of water-related issues. Meetings, previously hospitable to public participa- tion, were closed to the press and the public. Any hopes the local govern- ments had entertained of receiving compensation for their assets that had been transferred to the water authorities were dashed. The two major problems faced by the water authorities were finance and water quality in the rivers, and these were aggravated by the policies of the government. The rates were adequate for operation and mainte- nance, but funds for capital construction were not available. The govern- ment limited external borrowing by the water authorities. One reason later given for privatization was the need for capital to replace and build infrastructure. Although responsibility for the safety of drinking water continued to rest with local government health agencies, the water au- thorities were charged with responsibility for pollution control, creating a 

APPENDIX A 125 “poacher-gamekeeper” problem. The water-quality problem was more a result of financial constraints than of the conflict of interest. With the change in character of the water authority governance, the lack of com- mitment to improved water quality was subject to deserved criticism. Privatization In the May 1987 announcement of its intention to privatize the water authorities, the government gave as the only reason its being “increas- ingly concerned by the role of the water authorities as both poachers and gamekeepers in this field.” There was strong opposition from a wide range of individuals and groups (Jeffery, 2000). People who had had few reservations about the privatization of competitive industries such as Brit- ish Airways often seemed to see water as “different.” In one way this was understandable, given the monopoly nature of the industry. Some of the opposition came from the trades unions, which were concerned about job losses and/or worsening terms and conditions of service. There was also a common feeling that water ought not to be a vehicle for generation of profits. The government proposed a new method of economic regulation, that was a complex mixture of control of price increases, environmental regulation, and control of drinking water quality. Many were suspicious of this system. The government argued that the ability to make profits within such a regulatory system would spur new companies to improve efficiency, which otherwise would be lacking. In addition, it was agreed that some £24 billion would need to be invested in water and sewerage facilities over the next 10 years to catch up on arrears after years that the government itself had limited the capac- ity of the water authorities to obtain funds for capital construction. By privatizing, not only would the exchequer not be strained, but it would receive a tidy bounty from the sale of the authorities, whose assets had been accrued from investments over generations by the citizens through their local authorities. The intent of the privatization thus was not to improve the lot of the people in England and Wales, other than those who are shareholders in the water companies. The perception of the people of England and Wales about the privatization has been anything but favorable. The prices of the shares had been set low to assure their quick purchase, and their value immedi- ately jumped considerably. The salaries of government water executives were modest by comparison with the salaries of captains of industry who had taken over the water companies. A combination of increasing rates, poorer service, and a perception of the “high life” of the private water managers did not endear the companies to their customers. Also, much of 

126 APPENDIX A the water company energy was devoted to investments abroad. In addi- tion to being active in the developing world, private water firms have become major players in the United States. The Conservative government exchequer had made a killing in the sale of its “crown jewels” to the water companies, but none of these funds found their way back to the people or their local governments that had made the initial investments. Much of what was being accomplished could have been done without privatizing the water authorities. On the other hand, some positive results have been achieved. The Office of Water Regu- lation (OFWAT, 2000) has published its 1999-2000 reports on levels of service and financial performance and expenditure for the water industry in England and Wales. In the first of these reports, the director general, Sir Ian Byatt, wrote, “The water industry is serving its customers and the environment, well. The performance of companies in supplying water, dealing with waste water and responding to customer contact has im- proved significantly over the ten years since privatisation.” In the same report, Michael Rouse, the chief inspector of the Drinking Water Inspec- torate, writes, “My annual reports, which provide the detailed informa- tion, have demonstrated significant improvements in water quality since the start of the regulatory system in 1990” (quoted in Jeffery, 2000). In the report on finance, Sir Ian notes that “the Environment Agency is satisfied that, as a whole, the industry’s delivery of environmental im- provements over the past five years is generally in line with the Agency’s expectations. In the few cases where shortfalls have been experienced it can usually be attributed to problems in obtaining planning permission or other reasons not within the direct control of companies.” He continues, “Capital expenditure in the year totals £3.6 billion, bringing investment to £17.5 billion in the last five years and nearly £35 billion since privatisation. This is approximately double the average level of expenditure in the 1980s.” On operating costs, Sir Ian reports, “Total operating expenditure (excluding restructuring and other provisions) in 1999-2000 was £247 mil- lion lower than in 1994-1995, around 9% in real terms” (quoted in Jeffery, 2000). So capital investment in the water industry has doubled since privatization, enabling an extremely high level of compliance with de- manding water-quality regulations and improved security of service. Lev- els of service to customers have improved, and companies have improved their efficiency. 

APPENDIX A 127 References Harrison, M. 1961. London Beneath the Pavement. London: Peter Davies. Jeffery, J. 2000. Water privatization in England and Wales-A retrospective view. Photocop- ied paper. Kinnersley, D. 1988. Troubled Water: Rivers, Politics and Pollution. London: Hilary Shipman. Kinnersley, D. 1994. Coming Clean: The Politics of Water and the Environment. London: Penguin Books. OFWAT (Office of Water Regulation). 2000. The Changing Structure of the (British) Water Industry. Information Notes 29 (revised May 2000). Okun, D. A. 1977. Regionalization of Water Management: A Revolution in England and Wales. London: Applied Science Publishers. Okun, D. A. 1996. From cholera to cancer to cryptosporidiosis. Journal of Environmental Engineering 122(6):453-458.