Privatization of Water Management

Privatization is the expansion of the private-sector role in water utility ownership, management, or operations. In some respects, privatization can be understood as moving along a continuum of options from "completely public" to "completely private."

Public versus Private

Some of the basic privatization arrangements are operations assistance, contract management or operations, full-service contracts, turnkey facilities, build-own-transfer and build-own-operate arrangements, concessions, joint ventures, merchant facilities, and asset sales.

A relevant dichotomy exists, however, between the public and private models based on asset ownership. In the United States, municipal ownership is the predominant organizational structure of water utilities. Many cities prefer to maintain control over assets and engage in more limited forms of privatization. Some privatization arrangements involve capital investment by the private contractor. Asset sales to private companies occur on a limited basis, in part because of disincentives associated with taxation and financing policies.

Private or "investor-owned" water utilities account for about 15 percent of total water sales and revenues. Many investor-owned utilities operate multiple water systems. The largest private holding companies in the United States are the American Water Works Company, Azurix, United Water Resources, Philadelphia Suburban Water, and California Water Services (see box on page 4).

As monopolies, private water systems are subject to economic regulation by the state public utility commissions in addition to all applicable environmental and public health regulations. Economic regulation balances the interests of investors with the interests of rate-payers and ensures compliance with standards related to capital investments, prices, profits, and terms of service. Publicly owned water utilities are regulated in a few states, but private contractors generally are not regulated.

Considerations in Privatizing

The decision to privatize is complex and can involve significant trade-offs. The interest in privatization is linked to the mounting pressures on water utilities in terms of replacing the aging infrastructure , complying with stringent regulations, and meeting needs associated with growth.

Safeguards for Cities.

Local officials can implement a variety of safeguards to protect the interests of their cities and their citizens in the privatization process. When considering privatization, city officials should perform a series of analyses to evaluate water system needs, review current technologies, assess vendor interest, compare risks and benefits, consider inventory financing alternatives, and appraise legal and regulatory considerations. Information sources on how to contract for municipal services are fairly well developed. For example, cities can draw on a wealth of information about competitive bidding processes.

Effective Design.

Proper design of the privatization arrangement is essential for the success of the implementation process. Parties to an agreement must address several critical and complex issues before signing contracts. With a poorly designed arrangement, any efficiency gains could be more than offset by administrative and other costs, including the cost of dispute resolution. In addition, the contract must ensure that adequate performance and efficiency incentives will be maintained over time. Successful privatization can make the initial investment in analyzing alternatives and designing agreements well worthwhile.

Potential Barriers.

Despite their potential benefits, public-private partnerships are not always pursued. A number of barriers to implementation can be identified, including public policy barriers. Many communities do not know that partnerships can be a viable option for their water or wastewater

projects; many others have neither the technical expertise nor the financial resources needed to conduct a sound analysis of public-private financing options. Persistent concerns exist about the potential monopoly power of unregulated private contractors and the capacity of many local governments to protect their interests and those of their constituents over the long term.

see also Markets, Water;Pricing, Water;Utility Management.

Janice A. Beecher

Bibliography

Lee, Terence Richard. Water Management in the 21st Century: The Allocation Imperative. Northampton, MA: Elgar, 1999.

Spulber, Nicolas, and Asghar Sabbaghi. Economics of Water Resources: From Regulation to Privatization, 2nd ed. Boston, MA: Kluwer Academic, 1998.