The Trend toward Privatization of Water Utilities

The service of providing safe drinking water includes some aspects that are typically handled by the private sector, some that are typically handled by government entities, and some that are just as likely to be handled by either.

Examples of typically private-sector functions include designing and building water treatment plants, and supplying chemicals needed in the treatment process. Examples of typically public-sector functions are usually related to the monopolistic aspect of drinking water: due to the heavy investment in a network of water transport and distribution lines, it is difficult to infuse market competition into the drinking water industry. Examples of these monopolistic functions include building and servicing the network of canals and pipelines. Other functions that may go either way include operating treatment plants and running the business operations of the utility. As a result, there is a wide mix of private- and public-sector involvement in the water industry, and the mix changes from time to time as a result of changes in market conditions and government policies. Frequently the swing of the pendulum from private to public and back has come in response to failures in management and operation.

In the U.S., most early water utilities were private enterprises. Boston, New York, Philadelphia, Denver, San Francisco, and Los Angeles are just a few examples of cities where early water service was in the hands of private companies. Rapid urban growth in the late 19th century, frequently accompanied by the failure of water companies to keep up with the demand, led to decisions to create public utilities to consolidate and take over systems to obtain, treat, and distribute safe drinking water. This move toward public control accelerated in 1913 when Congress passed the Revenue Act, which granted tax-exempt status to municipal bonds, ensuring city governments a competitive advantage over private corporations in raising this type of revenue. Municipal utilities such as the Los Angeles Department of Water and Power, Denver Water, and the Philadelphia Water Department are examples of the result of this process of assuming public control over water systems. Since the 1990s, however, momentum has been building for a return to privatization in many cities. This momentum results from a combination of shifting political philosophy, some failures of municipal utilities to maintain effective systems, mounting debt load of municipal governments, and the rise of corporations that specialize in managing water utilities. Geographically, privatization of municipal water supplies has been prevalent in the “rust belt” of old industrial cities in the northeast and Midwest. During the period 1991-2009 between 1 and 19 public water supplies in the U.S. were sold or leased to private companies each year, and this trend is continuing.

A similar story unfolded in the United Kingdom. In 1989, the government of Margaret Thatcher sought to privatize many publicly owned assets and functions, including water supply. The arguments used to justify privatization included increased competition, greater efficiency, and stronger ability of the private sector to finance needed capital improvements. Accordingly, in a single move, the ten regional water and sewerage authorities were converted to private water companies. Existing debt was written off and the new companies were given monopoly rights over water operations in their respective service areas.

In France, a large part of the impetus for privatization was the inability of public utilities to operate efficient systems that could meet the strict quality requirements of the European Union. Unlike the UK, in France ownership usually continued to reside with the government, while operations were contracted out to private companies.

Similar stories unfolded in other countries. In the republics that formerly were members of the Soviet Union, there was a strong move to privatize government assets following the dissolution of the Soviet Union in 1989. This included the water industry. In Japan, which has a post-WWII law specifying that water utilities will remain in public ownership, private water companies such as Kurita have flourished based on public-private partnerships.