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Form of Privatization and Profit Motives

In this article, Dr. Glenn Patterson explores forms of privatization in the water industry and how profit motive is used to control water.
© Colorado State University

Let us now explore forms of privatization in the water industry and how profit motive is used to control water.

Forms of Privatization in the Water Industry

Privatization in the water industry typically takes one of four forms: (1) Contracting to provide specialized services such as supply of chemicals and reading meters, (2) Contracting to design and construct treatment plants, (3) Contracting to operate government-owned water systems, and (4) Complete private-sector ownership and operation of the water system. Each step represents increasing private-sector involvement, and each successive step is less prevalent. Levels (3) and (4) combined now represent about 20% of U.S. water utilities.

Examples of the first form of privatization include a company such as LennTech that provides chemicals such as flocculants, coagulants, corrosion inhibitors, disinfectants, ion exchange resins, and filtration media to water treatment plants in many countries, and a company such as Water Watch that provides meter reading services in 25 U.S. states. Examples of the second form include moderate-sized companies such as Franklin-Holwerda Company, which designs and builds treatment plants in four U.S. states, and large companies such as Veolia, which designs and builds treatment plants worldwide. Examples of the third form include companies such as Accionia Agua, a Spanish company that designs, builds, and operates treatment plants on 5 continents. The best example of the fourth type is the network of water companies created in the 1990s when the Margaret Thatcher government privatized the regional water authorities in the United Kingdom. These companies, such as Severn-Trent and Thames Water, own and operate the systems that serve their traditional regions in the UK.

Private corporations are obligated to meet the contract commitments specified by their contracts with government agencies, but they are also beholden to their stockholders and investors, and they must show a profit in order to thrive. One reason for the growth of multi-national corporations specializing in water services is the large profits they are able to generate under the terms of their contracts. Market analysts typically describe stocks in water service companies as outperforming the rest of the market, with the expectation that they will continue to do so. One of the ways in which companies secure these profits is by raising water rates. A study by Food and Water Watch found that, of the instances of water system sales and concessions surveyed, the 10 largest experienced average water rate increases of 15 percent per year over an average of 12 years following privatization It is well known that municipal governments, beholden to voters, are often reluctant to raise water rates, and are prone to charge rates that are insufficient to generate the revenue needed for efficient system operation and required maintenance. However, under privatization it seems clear that some of the water rate increases go to ensuring generous profits.

Using the profit motive to control water

Private corporations are obligated to meet the contract commitments specified by their contracts with government agencies, but they are also beholden to their stockholders and investors, and they must show a profit in order to thrive. One reason for the growth of multi-national corporations specializing in water services is the large profits they are able to generate under the terms of their contracts. Market analysts typically describe stocks in water service companies as outperforming the rest of the market, with the expectation that they will continue to do so. One of the ways in which companies secure these profits is by raising water rates. A study by Food and Water Watch found that, of the instances of water system sales and concessions surveyed, the 10 largest experienced average water rate increases of 15 percent per year over an average of 12 years following privatization. It is well known that municipal governments, beholden to voters, are often reluctant to raise water rates, and are prone to charge rates that are insufficient to generate the revenue needed for efficient system operation and required maintenance. However, under privatization it seems clear that some of the water rate increases go to ensuring generous profits.

© Colorado State University
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