The Privatization of Water
The involvement of the private sector in the provision of water supplies is a highly controversial topic. Typically, water supplies across the United States are handled and managed by not-for-profit entities which are overseen by state and local municipalities, meaning the public sector, and more specifically the government. With the public sector at the helm of water provisions, citizens can typically expect to see reasonable prices and clean water. Most have not considered the possibility of their local water supplies being privatized, but the US economy is currently being battered by exogenous effects that are unabating. It is during these times, where cash flows are diminishing, that companies and individuals alike begin to explore ways to cut costs. State and local municipalities face the same set of issues. In some cities and towns, the burden of debt becomes too heavy to bear, and the municipal governing boards have to make hard decisions. The sale of a city’s water system can shift a substantial debt burden over to a private sector company all while providing the city a monetary windfall. Multiple cities in Indiana have gone through this (Douglas, Elizabeth). This can be more likely to occur in small towns that are highly levered who are not able to raise funds as quickly compared to bigger, well-capitalized towns.
Many are not fond of transferring water supply ownership to private sector companies, and with great reason. Part of the unease with transferring ownership of water supplies to private sector companies is that, technically speaking, they are accountable to their shareholders. Therefore, a distinction is evident between investors in a company (shareholders), and those utilizing services rendered (stakeholders). This places the locals who depend on those water supplies at risk of being unheard since these private sector companies may not be accountable to them. Also, citizens in municipalities that have privately run water utilities may be at risk of paying more than citizens in municipalities with public run water utilities. The reason for that is simple. The private sector is “for-profit,” not “not-for-profit.” By charging higher rates, these companies not only cover their costs and enjoy a healthy return, but they are capable of raising money quickly enough to allocate towards potential water supply acquisitions in other municipalities.
The way I see it though, there could potentially be one true benefit to having a private sector water company manage water utilities. Proper handling of this endeavor is dependent on a sound, reasonable, and ethical management team as well as proper regulation. Private sector companies, given that there is less potential for bureaucratic bottlenecks relative to the government, have the ability to act quicker in times of crisis. Here is why I mention this: the Flint Water Crisis in Michigan was caused by the state’s desire to build a new pipeline in 2014. While they built the new pipeline, they needed to tide the city over with water from a nearby water source. Enter the Flint River. After the switch, citizens complained of negative changes to the water quality and studies thereafter discovered that there was lethal amounts of lead. The cause: water officials failed to treat the new water supply with anti-corrosive agents. This failure caused a breakdown in the iron water mains, which caused lead to leach into the water supply (Denchak, Melissa). In 2017, three years later, with funding from the state and federal government, citizens were guaranteed free bottled water and the city was provided with the necessary funding to replace the damaged water mains. To this day, not all of the infrastructure has been repaired. My point here is that the government took years to get a plan in place and respond. Not only would the private sector have been able to act quicker, but it is in their interest given that they are profit driven. A private sector water company’s investors would flee if they caught wind that the company was not successfully doing the one thing they are tasked to do...provide clean water. In this case a private sector company can likely replace the infrastructure quicker than a not-for-profit entity, but rates may rise to cover the costs. We can get technical and argue that the financing costs of new water infrastructure for private sector companies is materially more expensive than the financing costs for a not-for-profit entity due to their ineligibility for tax-free muni bonds (Polycarpou, Lakis), but each choice comes with its own hurdles. Low costs with a potentially slow response in times of crisis, or high costs with a potentially quick response in times of crisis. But the key being that it is all hypotheticals.
Although the topic of water privatization has a bad connotation, there are examples of towns that utilize the services of private sector companies in the handling of their utilities today in what appears to be an appropriate manner. Whether these companies are successful or not is largely subjective as everyone tends to have a different opinion based on their own set of unique circumstances. One example of a private sector company that provides public utility services is The York Water Company. This is a publicly traded company on the NASDAQ exchange that is responsible for setting up and maintaining the infrastructure that they utilize to supply the water that they source to 49 municipalities in the state of Pennsylvania. They have been active since the 1800s, and are regulated by the Pennsylvania Public Utility Commission in areas such as billing and rate setting (The York Water Company). A second example is the Middlesex Water Company, which has been around since the late 1800s. This company is publicly traded on the NASDAQ exchange, and provides water and wastewater services to areas in New Jersey, Delaware, and Pennsylvania. The rates that they charge are regulated by each respective state’s utility commission (Middlesex Water Company).
We should not be quick to rule out the option of our water utilities being controlled by the private sector, but we should read the fine print very carefully so that we can make an informed decision. With water having the potential to become scarce in the coming years, the subject of the privatization of water utilities may gain more attention. It is important to note that it may not be so easy to revert the ownership of public utilities to the public sector once they have been handed over to the other side.
References
“About Us.” Middlesex Water Company, October 31, 2018. https://www.middlesexwater.com/about-us/.
“About Us.” York Water Company. Accessed May 8, 2020. https://www.yorkwater.com/about/.
Denchak, Melissa. “Flint Water Crisis: Everything You Need to Know.” NRDC, November 8, 2008. https://www.nrdc.org/stories/flint-water-crisis-everything-you-need-know.
Douglass, Elizabeth. “Towns Sell Their Public Water Systems - and Come to Regret It.” The Washington Post. WP Company, July 8, 2017. https://www.washingtonpost.com/national/health-science/towns-sell-their-public-water-systems--and-come-to-regret-it/2017/07/07/6ec5b8d6-4bc6-11e7-bc1b-fddbd8359dee_story.html.
Polycarpou, Lakis. “What Is the Benefit of Privatizing Water?” State of the Planet. Columbia University - Earth Institute, September 2, 2010. https://blogs.ei.columbia.edu/2010/09/02/what-is-the-benefit-of-privatizing-water/.
