Water services privatization takes many forms, and no one type fits all situations, complicating the choices that communities face if they consider reorganizing their water and wastewater utilities. The range of choice extends from (1) “outsourcing” of various services such as provision of supplies and meter reading; (2) private contract operation and maintenance of existing plants; (3) contracts for the integrated design, construction, and subsequent operation of new facilities (DBO contracts); and (4) sale of public utility assets to investor-owned companies that take responsibility for all operations, maintenance, and expansion of services. Outright sale of public assets has been infrequent in the United States except for “regionalization” of small utilities. Nonetheless, investor-owned companies have historically played and continue to play an important role in providing water services in the United States.
Private contractors are often large companies with extensive experience and expertise that they can bring to bear on local operations. Contractual arrangements usually give them greater freedom in dealing with the workforce, which is often the greatest single source of cost savings. Large operating savings have, indeed, been achieved under existing contracts. Under some circumstances, private companies can provide needed capital. Also, private operators, being under contract or owning the utility, are often farther removed from local politics. This has the advantage of less political intervention in matters of technical management, but can lead to less transparency and accountability.
The largest gains from the new water utility privatization environment in the United States are likely to come from improved operations of the majority of water utilities that will remain publicly owned. The presence of private alternatives has clearly motivated improved performance on the part of public utilities. “Contestability” for public utilities has been ratcheted up by the existence of attractive private alternatives. Some larger public systems are actively working with smaller suburban utilities to provide better water sources and better management. This form of regionalization promises to yield large benefits.
Small- to medium-sized utilities face the greatest challenges and problems and are prime candidates for availing themselves of private services. Small and medium-sized utilities often lack needed expertise to meet today’s high standards for drinking water and wastewater treatment. Consolidation and regionalization of small-to-medium sized utilities holds great promise for improved performance. New management, communication, and monitoring technologies create opportunities for economies of scale and scope. The small water utilities that comprise 85 percent of all water utilities could benefit from physical consolidation or provision of services through regionalization. Both are being provided by leading public utilities as well as by private companies specializing in assistance to small utilities.
Procurement processes through which private services are solicited are increasingly standardized, reducing uncertainty on both the public and private sides. The challenge is to find ways of standardizing procedures to reduce costs while not infringing on the freedom of municipalities or contractors to propose innovative approaches.
Communities often express concerns when considering privatization options, which include possible impacts on public goods such as environmental protection, water quality protection, transparency of decision processes, and openness to public input. The capacity to take over operations in case of contractor failure to perform is an issue, as is the need for the municipality to develop the capability to monitor the work of the contractor—a set of skills that differs from those needed for ordinary municipal operation. Concern for the continued employment and welfare of the utility workforce is often expressed. Possible loss of services provided by the water utility for other municipal departments (e.g., snow removal, flood-control measures, drainage systems) is a concern at times. In a longer time perspective, there are concerns about maintenance of watershed lands, protection of raw water sources, and provision of recreational opportunities, as well as public health, under privatization. Reservoir and watershed lands are often highly valuable, and there may be pressure to develop these lands if privately owned. However, privatization of opera-
tions and maintenance need not imply turning over ownership of land and water rights.
Another concern is that water rates charged to customers following privatization have in some instances gone up. But rates can move in either direction, depending on the financial condition of the utility, the cost savings realized, and near-term improvements and investments called for under the contract. Historically, public utility water rates have been only loosely tied to costs, while public officials have sometimes been unwilling to charge appropriate prices because of a tradition of underpricing. However, customers appear to highly value reliability and quality, and surveys have shown customers have a significant willingness to pay for high-quality services.
The term “privatization” tends to evoke the presence of a competitive environment with the attendant advantages of competitive markets, especially in the U.S. setting of markets that are frequently quite competitive. However, the “natural monopoly” attributes of water services (capital intensity, high costs of duplicating infrastructure) make competition of the usual type unlikely or impossible. Strong competition is likely to exist at the point in time when private proposals are submitted, and competition may continue along the boundaries of the service area. But during the contract period, continued monitoring of performance is needed to protect against failures to perform according to the contract. Conditions of the contract must substitute for active year-to-year competition. Investor-owned utilities (assets privately owned) are subject to regulation by state commissions but these commissions frequently lack the resources to oversee all utilities, especially under newer forms of ownership. In the case of publicly owned utilities, the supposition is that city government will monitor performance and prevent abuses.
There are elements of an “uneven playing field” in the competition between public utilities and private operators, especially relating to the availability of capital funds. Municipalities can issue tax-free bonds that carry lower interest rates than private bonds or loans. They often have access to “state revolving funds” not available to private firms. Until recently, there have been legal constraints on the private operation of physical plants that have been financed through public funds. As noted in Chapter 1, Congress initiated these financial arrangements shortly after World War I and has maintained them to the present. It is thus a major public policy debate whether the subsidies to public utilities thus provided are justified by public good advantages of public ownership and operation or whether they constitute an economically inefficient and unfair financial framework. Several financial reforms are now being debated that would tend to level the financial playing field.
The use of water markets to effect transfers of water from lower-valued to higher-valued uses is a different form of privatization that has long existed in the western United States but that is becoming increasingly important in all parts of the country. Utility managers, public or private, will have to learn to deal with these institutional innovations. These transfers can be temporary or permanent and are usually from agriculture to urban uses. The use of systems of water ownership and marketing that were developed in western states is expanding to other parts of the United States to allow the voluntary transfer of established water rights or contracts to new permanent or emergency uses. Water markets are subject to some degree of state supervision to protect other water users and various social and environmental values that can be impacted by changes in water use. Acquisition of water supplies through water markets will require collaboration of utility managers with state regulatory agencies.
The backgrounds and training of water system managers have been changing to prepare managers for the new privatization environment. Water utility managers today often have educational backgrounds not only in traditional civil engineering curricula, but also in fields such as public administration, law, and economics. Utility managers are also acquiring the skills needed for broader interaction with the public and with politicians, and they are more aware of the social and environmental dimensions of water utility operations.