WATER PRIVATIZATION OVERVIEW:
A PUBLIC INTEREST PERSPECTIVE ON FOR-PROFIT,
PRIVATE SECTOR PROVISION OF WATER AND
SEWER SERVICES IN THE UNITED STATES
MARY GRANT1
Table of Contents
I. INTRODUCTION ...............................................................................167
II. BACKGROUND .................................................................................169
A. The Parlance of Privatization....................................................169
B. The Myth of Efficiency ...............................................................171
1. No Cost Savings ....................................................................171
2. Lack of Competition..............................................................172
3. Transaction Costs .................................................................173
C. The Financing of Last Resort.....................................................175
D. An Expensive Loan ....................................................................176
III. CONSUMER CONSEQUENCES...........................................................178
A. High Rates .................................................................................178
B. Poor Performance .....................................................................179
1. Investment Levels ..................................................................179
2. Service Quality......................................................................180
3. Cutting Corners ....................................................................181
4. Asset Deterioration ...............................................................181
5. Keeping the Difference .........................................................182
C. Loss of Local, Public Control ....................................................183
IV. SOLUTIONS ......................................................................................185
A. Preserving Local, Public Control..............................................185
B. Remunicipalization ....................................................................187
C. Public-Public Partnerships........................................................188
D. Renewed Federal Commitment..................................................190
V. CONCLUSION ...................................................................................191
I. INTRODUCTION
In 2012, although tax revenues had rebounded to pre-recession
levels, state and local governments continued to experience serious fiscal
1. Mary Grant is a reasearcher for Food & Water Watch. Her work focuses on water
privatization in the United States. She received a B.S. in Environmental Sciences from
Duke University. Food & Water Watch is a nonprofit consumer advocacy organization
that works to ensure that everyone has access to safe and reliable food and water.
167
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challenges. The U.S. Government Accountability Office warned,
“[A]bsent any intervention or policy changes, state and local
governments would face an increasing gap between receipts and
expenditures in the coming years.”2 The desire to reduce these growing
deficits without increasing taxes compelled a number of cash-strapped
localities to explore new, and often complex privatization schemes,
including monetizing one of their most basic public resources: water.3
During the 1990s and early 2000s, a primary driver for the
privatization of water and sewer services was the cost of the
improvements necessary to update aging systems and comply with
increasingly stringent water quality regulations.4 Since the late-2000s,
although infrastructure needs still played a role in many cases, financial
stress became an increasingly important factor in why cities and counties
explored water privatization.5 Dozens of cash-strapped localities
proposed privatizing their water and sewer services through long-term
concessions, among other arrangements, to generate revenue to fill
budget shortfalls. Although a nationwide phenomenon, prospective deals
were concentrated in the Rust Belt and the Great Lakes region,6 whose
water resources have been called “the Midwest’s liquid gold.”7
2. U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-12-523SP, STATE AND LOCAL
GOVERNMENTS’ FISCAL OUTLOOK: APRIL 2012 UPDATE 1-2 (2012).
3. See, e.g., Barry M. Horstman, Privatizing Government Assets a Growing Trend,
CINCINNATI ENQUIRER, Mar. 18, 2012, available at http://news.cincinnati.com/article/
20120317/NEWS0108/303180009/Privatizing-government-assets-growing-trend; Judy
Keen, Cities Consider Selling Water, Sewer Systems for Cash, USA TODAY, Apr. 21,
2010, available at http://www.usatoday.com/money/economy/2010-04-20-states-waterwoes-utilities-sales_N.htm; Amy Merrick, Cash Flows in Water Deals, WALL ST. J., Aug.
12, 2010, available at http://online.wsj.com/article/SB10001424052748704216804575
423633799731128.html.
4. See, e.g., JANICE A. BEECHER ET AL., NAT’L REGULATORY RESEARCH INST.,
REGULATORY IMPLICATIONS OF WATER AND WASTEWATER UTILITY PRIVATIZATION 71-72
(1995); COMM. ON PRIVATIZATION OF WATER SERVICE IN THE U.S., NAT’L RESEARCH
COUNCIL, PRIVATIZATION OF WATER SERVICES IN THE UNITED STATES: AN ASSESSMENT OF
ISSUES AND EXPERIENCE 3, 10 (2002).
5. See, e.g., Giovanna Fabiano, Should Towns Control the Tap? Officials Weigh
Service Vs. Costs, THE RECORD (BERGEN CNTY, N.J.), Jan. 5, 2009, at A01; Keen, supra
note 3; Merrick, supra note 3.
6. FOOD & WATER WATCH, TRENDS IN WATER PRIVATIZATION: THE POST-RECESSION
ECONOMY AND THE FIGHT FOR PUBLIC WATER IN THE UNITED STATES (2010), available at
http://documents.foodandwaterwatch.org/doc/PrivatizationTrends.pdf.
7. Sammis B. White, The Midwest’s Liquid Gold, CHICAGO COUNCIL ON GLOBAL
AFFAIRS GLOBAL MIDWEST POLICY BRIEF, Sept. 2010.
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II. BACKGROUND
A. The Parlance of Privatization
“Describe it as a ‘Partnership’ or a ‘Lease’, not a ‘Sale’ or
‘Privatization,’” a Goldman Sachs vice president advised Maryland
officials, when approaching the public with privatization proposals.8
Privatization advocates often will refer to a privatization contract as a
“public-private partnership,” which is considered “a less contentious term
than ‘privatization.’”9 Some companies and industry groups even insist
that these partnerships do not constitute privatization when the public
sector continues to own the assets.10 This is misleading: although there are
various interpretations of the word “privatization,” it generally refers to
the transfer of any government function or responsibility to the private
sector, whereas a transfer of ownership is more precisely called a
“divestiture” or an “asset sale.”11 It appears to be an attempt to evade the
public opposition associated with privatization.12 As one paper explained,
“Contracting out is a form of privatization because the private firm gets
residual gains from the service delivery process, even though government
8. David Utz, Presentation at the Joint Legislative and Executive Commission on
Oversight of Public-Private Partnerships, Md. 9 (Aug. 30, 2011), available at http://
mlis.state.md.us/other/public-privatepartnerships/110830-GoldmanSachs-DavidUtz.pdf.
9. EMANUEL S. SAVAS, PRIVATIZATION AND PUBLIC-PRIVATE PARTNERSHIPS 3-4
(2000).
10. E.g., WATER P’SHIP COUNCIL, AN EVALUATION OF PUBLIC-PRIVATE PARTNERSHIPS
FOR WATER AND WASTEWATER SYSTEMS 7 (2005); Veolia Water North America, Myths
About Public-Private Partnerships, available at http://www.veoliawaterna.com/
media/myths/.
11. See, e.g., U.S. GEN. ACCOUNTING OFFICE, GAO-02-764, WATER INFRASTRUCTURE:
INFORMATION ON FINANCING, CAPITAL P LANNING, AND PRIVATIZATION 17, 49-50 (2002);
BEECHER ET AL., supra note 4, at 46; NAT’L RESEARCH COUNCIL, supra note 4, at 76. Note
that some researchers and entities classify divestitures as a type of public-private
partnership, while others do not. Compare, e.g., DELOITTE, CLOSING AMERICA’S
INFRASTRUCTURE GAP: THE ROLE OF PUBLIC-PRIVATE PARTNERSHIPS 8 (2007) (including
“divestiture” in a list of the “most common PPP [public-private partnership] models”),
with Rui Cunha Marques & Sanford Berg, Public-Private Partnership Contracts: A Tale
of Two Cities with Different Contractual Arrangements, 89 PUB. ADMIN. 1585, 1586
(2011) (“Note that outright divesture is not considered a PPP [public-private
partnership].”).
12. See generally, DAVID HALL ET AL., PUB. SERVS. INT’L RESEARCH UNIT,
TERMINOLOGY OF PUBLIC-PRIVATE PARTNERSHIPS 2 (2003); Graeme A. Hodge & Carsten
Greve, Public-Private Partnerships: An International Performance Review, 67 PUB.
ADMIN. REV. 545, 547 (2007).
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retains control over aspects of service delivery.”13 The National Research
Council also described water privatization in broad terms:
The term “privatization” covers a wide spectrum of water utility
operations, management, and ownership arrangements. The four
major classes of privatization options can be characterized as (1)
private provision of various services and supplies such as
laboratory work, meter reading, and supplying chemicals; (2)
private contracting for water utility plant operation and
maintenance (both 1 and 2 are often referred to as
“outsourcing”); (3) negotiating a contract with a private firm for
the design, construction, and operation of new facilities (this
option is referred to as design, build, and operate, or DBO); and
(4) outright sale of water utility assets to a private company.14
Generally, in the water service sector, a public-private partnership
refers to a type of privatization, in which a public sector entity contracts
with a private sector entity for the operation of all or part of a drinking
water or wastewater system. These arrangements can take a number of
forms,15 such as a 5-year operation and maintenance contract or a 20year design-build-operate contract. In order for the utility to retain taxexempt status on its municipal bonds, the contract must be structured in
accordance with certain IRS rules so that the arrangement does not
constitute private business use for federal income tax purposes.16 As a
result, water privatization contracts in the United States rarely exceed 20
years.17 In 2011, the average length of the privatization contracts of the
four largest private water operators ranged from 4.5 years to 10 years,18
13. Mildred E. Warner & Germà Bel, Competition or Monopoly? Comparing
Privatization of Local Public Services in the US and Spain, 86 PUB. ADMIN. 723 (2008).
14. NAT’L RESEARCH COUNCIL, supra note 4, at 1.
15. See, e.g., DELOITTE, PPPS AND THE WATER SECTOR: PLUGGING THE
INFRASTRUCTURE HOLE 6-7 (2009); NAT’L RESEARCH COUNCIL, supra note 4, at 56-77;
U.S. CONFERENCE OF MAYORS URBAN WATER COUNCIL, MAYOR’S GUIDE TO WATER AND
WASTEWATER PARTNERSHIP SERVICE AGREEMENTS: TERMS AND CONDITIONS (2005),
available at www.ncppp.org/councilinstitutes/MayorsGuidetoContracts.pdf.
16. See, Rev. Proc. 97-13, 1997-1 C.B. 632.
17. See, e.g., U.S. ENVTL. PROT. AGENCY, EPA 832-R-001A, RESPONSE TO CONGRESS
ON PRIVATIZATION OF WASTEWATER FACILITIES 16, 21-22 (1997); U.S. GEN. ACCOUNTING
OFFICE (2002), supra note 11 at 49-50; U.S. CONFERENCE OF MAYORS URBAN WATER
COUNCIL, supra note 15 at 2, 18.
18. Public Works Financing’s 16th Annual Water Partnerships Report, PUB. WORKS
FIN., March 2012, at 26 [hereinafter PWF’s 16th Annual Report].
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but a number of localities were considering longer and more extensive
privatization arrangements.19
B. The Myth of Efficiency
1. No Cost Savings
Government support for water privatization is often predicated on the
assumption that private operation of water utilities will increase
efficiency and reduce costs.20 In Nassau County, N.Y., for example, the
county executive proposed leasing the wastewater treatment system to a
private operator, who claimed to be able to operate the facilities 30
percent to 40 percent more efficiently than the county.21 However,
George Marlin, head of a state board that oversees the county’s finances,
was much more skeptical:
Potential financial investors who invest money to Public Private
Partnerships (P3s) expect annual returns of 10 percent to 15
percent. To suggest that a private operator will achieve enough
efficiencies to cover most of that cost and that assessment or
user-fees will increase no more than the rate of inflation—well,
anyone who believes that, I have a coliseum in Hempstead I
would like to sell to them.22
Public officials should not expect privatization to reduce the cost of
water and sewer services. Research has found no significant difference in
19. Id. at 3.
20. See, Mildred E. Warner & Amir Hefetz, Cooperative Competition: Alternative
Service Delivery, 2002-2007, INT’L CITY CNTY. MGMT. ASS’N, MUNICIPAL YEAR BOOK
2009 11, 16 (2009) (“Regarding factors underlying privatization, the primary reason cited
is still internal attempts to decrease costs…”); Germà Bel et al., Is Private Production of
Public Services Cheaper Than Public Production? A Meta-Regression Analysis of Solid
Waste and Water Services, 29 J. POL’Y ANALYSIS & MGMT 553, 553 (2010) (“One of the
promises of privatization is that it offers efficiency gains and reduces the costs of public
service delivery.”).
21. Christopher Twarowski & Spencer Rumsey, Mangano Vows to Forge Ahead with
Nassau Sewer Privatization, LONG ISLAND PRESS, May 31, 2012, available at
http://www.longislandpress.com/2012/05/31/mangano-vows-to-forge-ahead-with-nassausewer-privatization.
22. George J. Marlin, Nassau Interim Finance Authority, On the County Sewer Debt
Plan, May 17, 2012, available at http://streetcornerconservative.com/2012/05/21/nifastatement-on-the-county-sewer-debt-plan-may-17-2012-by-george-j-marlin/, reprinted in
George J. Marlin, On the County Sewer Debt Plan, ROSLYN NEWS (NY), May 25, 2012,
available at http://www.antonnews.com/roslynnews/opinion/22997-on-the-county-sewerdebt-plan.html.
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efficiency between public and private operation of water systems.23 A
2008 review of every econometric study about water privatization and
costs found, “While some studies found public production more efficient,
most found no significant difference in costs or efficiency between
public and private production.”24 A 2010 analysis of a subset of those
studies similarly found, “Our meta-regression analysis does not reveal a
systematic relationship between cost savings and private production.”25
Cost savings were less likely to be found in more recent studies,
including those from the United States.26
2. Lack of Competition
One explanation for why privatization has failed to enhance
efficiency is the lack of competition in the water sector.27 In theory,
competition would lead to cheaper contracts, but in practice, the water
service market is “rarely competitive.”28 There are only a small number
of private sector water service companies,29 and two French
multinationals, Veolia Water North America and Suez-owned United
Water, dominate the market, controlling 61% of the water privatization
23. MERIEM AÏT OUYAHIA, POLICY RESEARCH INITIATIVE, PUBLIC-PRIVATE
PARTNERSHIPS FOR FUNDING MUNICIPAL DRINKING WATER INFRASTRUCTURE: WHAT ARE
THE CHALLENGES? 2, 10-12 (2006); Edouard Pérard, Water Supply: Public or Private? An
Approach Based on Cost of Funds, Transaction Costs, Efficiency and Political Costs, 27
POL’Y & SOC’Y 193, 197-99, 214 (2009); Steven Renzetti & Diane Dupont, Ownership
and Performance of Water Utilities, GREENER MGMT. INT’L, Summer 2003, at 9, 12-16;
Osmo T. Seppäla et al., Public-Private Partnerships in Water and Sewerage Services:
Privatization for Profit or Improvement of Service and Performance? 6 PUB. WORKS
MGMT. POL’Y 42, 45-46 (2001).
24. Germà Bel & Mildred Warner, Does Privatization of Solid Waste and Water
Services Reduce Costs? A Review of Empirical Studies, 52 RESOURCE, CONSERVATION &
RECYCLING 1337, 1341 (2008).
25. Bel et al., supra note 20, 554.
26. Id. at 554, 568-73.
27. See, e.g., OUYAHIA, supra note 23, at 5, 22-27; JUDITH A. REES, GLOBAL WATER
P’SHIP, REGULATION AND PRIVATE PARTICIPATION IN THE WATER AND SANITATION SECTOR
18, 28 (1998); MILDRED E. WARNER, THE CENTURY FOUND., LOCAL GOVERNMENT
INFRASTRUCTURE AND THE FALSE PROMISE OF PRIVATIZATION 11-13 (2009).
28. Germà Bel & Mildred Warner, Challenging Issues in Local Privatization, 26
ENV’T PLANNING C: GOV’T & POL’Y 104, 105 (2008). See also Atsushi Iimi, Optimizing
the Size of Public-Private Partnership Contracts in the Water Sector: Implications from
an Estimated Cost Function of Private Operators, 10 J. PUB. PROCUREMENT 1, 3, 7-9, 2324 (2010).
29. DELOITTE, supra note 15, at 14 (2009). See generally David Hall & Emanuele
Lobina, International Actors and Multinational Water Company Strategies in Europe,
1990-2003, 15 UTILS. POL’Y 64, 68 (2007).
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market.30 The increasing cost of necessary infrastructure improvements
could inspire further consolidation in the industry.31 A lack of
competition is associated with excessive private profits and corruption.32
3. Transaction Costs
Establishing public-private partnerships for water systems is
complicated, expensive, and time-consuming. Because water systems
have high asset specificity, long-term water contracts can be especially
complicated and expensive to set up, not to mention the transaction costs
can be considerable.33 One study estimated that transactions costs could
range from 2 percent to 10 percent of total project costs, although it
noted, “…consistent and comparable data on transactions costs are rare
(because of the proprietary nature of the data).”34 Because transaction
costs can be prohibitively high for small municipalities, the U.K.’s
Treasury considers public-private partnerships “not suitable” for projects
with a capital value of less than £20 million (approximately US $31
million).35 At the other end of the spectrum, according to the U.S.
Environmental Protection Agency, “In the case of extremely large
30. Based on governmental outsourcing revenues. PWF’s 16th Annual Report, supra
note 17, at 32. Another global survey found that in 2011 Veolia and Suez individually
served ten times more people than their next top competitor, with “some 27% of the
global market.” PINSENT MASONS, PINSENT MASONS WATER YEARBOOK 2011-2012 xii,
22, 248, 290 (13th ed., 2011).
31. Press Release, Fitch Ratings, Fitch: Escalating Capital Costs May Lead to
Consolidation for U.S. Water Utilities (Jan. 23, 2008).
32. Bel & Warner, supra note 23, at 1342 (“[W]ithout competition property rights
theory predicts excess profits or corruption in private production…”); Hall & Lobina,
supra note 29, at 71-73 (describing the strategies of major water companies and
corruption in the water industry and noting that the length of concession contracts “acts to
increase the opportunity and incentive for corruption”).
33. See, e.g., OUYAHIA, supra note 23, at 23-24, 36; Bel et al., supra note 20, at 554,
556-58, 568-69; Pérard, supra note 23, at 202; Seppäla et al., supra note 23, at 47-48. See
generally, e.g., Aidan R. Vining et al., Public-Private Partnerships in the US and
Canada: “There are No Free Lunches”, 7 J. COMPARATIVE POL’Y ANALYSIS: RESEARCH
& PRACTICE 199, 199, 203-04, 212-14 (2005) (describing contracting costs for publicprivate partnerships broadly).
34. JIM JOE ET AL., WALKERTON INQUIRY, GOVERNANCE AND METHODS OF SERVICE
DELIVERY FOR WATER AND SEWAGE SYSTEMS 48 (2002).
35. HM TREASURY, STANDARDISATION OF PFI CONTRACTS VERSION, 2007, ¶1.4.3, at
2-3 (U.K.). See also HM TREASURY, PFI: STRENGTHENING LONG-TERM PARTNERSHIPS,
2006, ¶2.21, at 21, ¶3.15, at 32 (U.K.); ELISABETTA IOSSA & DAVID MARTIMORT, THE
SIMPLE MICRO-ECONOMICS OF PUBLIC-PRIVATE PARTNERSHIPS 20 (Ctr. Econ. & Int’l
Studies Research Paper No. 139, 2008), available at http://ssrn.com/abstract=1271082.
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regional facilities with many participating communities the process may
become so complex that it would be difficult to implement.”36
Other hidden expenses, including government guarantees and
renegotiations, can further inflate the cost of private service.37
Renegotiations can be particularly costly. For example, an amendment to
the water privatization contract in Indianapolis, Indiana, would have cost
the city more than $144 million had the city not exited the arrangement
early.38 Contract amendments and renegotiations are fairly common,
especially in long-term water contracts. A World Bank review of more
than 1,000 concession agreements in Latin America and the Caribbean
from 1985 to 2000 found that renegotiations occurred in three-quarters of
the water and sanitation contracts.39 It also noted that the private operator
typically benefited from renegotiation; the three most common outcomes
of renegotiation were delays on company investment obligations (in 69
percent of renegotiations), tariff increases (62 percent) and reductions of
investment obligations (62 percent).40
A government’s lack of bargaining power and financial resources
adds to these problems. Many municipalities lack the necessary technical
expertise to negotiate a complex water privatization contract, particularly
a long-term deal. The resulting disparity in bargaining power between
the local government and the water company, which is often a large
multinational, can increase risks and costs for the public.41 When local
36. U.S. ENVTL. PROT. AGENCY, supra note 17, at 20.
37. See generally IOSSA & MARTIMORT, supra 35, at 28-30 (modeling the costs and
risks of renegotiation); Ellen Dannin, Crumbling Infrastructure, Crumbling Democracy:
Infrastructure Privatization Contracts and Their Effects on State and Local Governance,
6 NW. J.L. & SOC. POL’Y 47, 54-73 (2011); Marques & Berg, supra note 11, at 1588,
1600.
38. See Office Util. Consumer Counselor, OUCC’s Proposed Order, IND. UTIL.
REGULATORY COMM’N No. 43645, June 22, 2010, at 1, 3, 20-22. See also, e.g., Jon
Murray, Citizens Energy to Replace Veolia, INDIANAPOLIS STAR, Oct. 29, 2010.
39. J. LUIS GUASCH, WORLD BANK INST., GRANTING AND RENEGOTIATING
INFRASTRUCTURE CONCESSIONS: DOING IT RIGHT 12-13 (2004).
40. Id. at 18.
41. See, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-10-728, WASTEWATER
INFRASTRUCTURE FINANCING: STAKEHOLDER VIEWS ON A NATIONAL INFRASTRUCTURE
BANK AND PUBLIC-PRIVATE PARTNERSHIP 32 (2010); Pamela Bloomfield, The
Challenging Business of Long-Term Public-Private Partnerships: Reflections on Local
Experience, 66 PUB. ADMIN. REV. 400, 406-08 (2006); Violeta Petrova, At the Frontiers
of the Rush for Blue Gold: Water Privatization and the Human Right to Water, 31
BROOK. J. INT’L L. 577, 590 (2006). See generally, e.g., WORLD BANK, PUBLIC-PRIVATE
PARTNERSHIP UNITS: LESSONS FOR THEIR DESIGN AND USE IN INFRASTRUCTURE 33 (2007)
(“PPP procurement requires specialized skills that often are lacking in government…”);
Vining et al., supra note 33, at 204, 214 (“A lack of contracting expertise is a common
problem for governments with limited P3 experience. Many public agencies cannot
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governments explore water privatization under fiscal duress, they are
especially vulnerable to being misled by private interests. A cashstrapped municipality can also have difficulty affording adequate legal
and other assistance necessary to evaluate and negotiate a deal.42
C. The Financing of Last Resort
Public-private partnerships have been touted as a way to access
private sector capital for water and sewer system improvements.43 In
some cases, local governments use privatization as if it were a “megacredit card” for financing infrastructure projects.44 As Masamitsu Onishi
and Graham Winch said in a 2012 report for the Association of Chartered
Certified Accountants, “Just as with a credit card, however, the interest
rates have been relatively high and at some point the debts have to be
paid off.”45
In the United States, private sector financing is typically much more
expensive than government borrowing.46 The National Research Council
determined that, “[e]xcept for short-term cash flow purposes, or the rare
circumstances of low public credit, municipal debt will remain the most
practical and least expensive form of financing.”47 Publicly owned
utilities can issue municipal bonds that are tax-exempt, which means that
bondholders do not have to pay federal income taxes on their earned
interest. As a result, investors are willing to buy government bonds with
a lower interest rate than that of a comparable taxable corporate bond.48
achieve relevant economies of scale … the result is higher unit cost. This lack of
experience tends to encourage opportunism by private sector firms.”).
42. See, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 32; Kirk Victor,
Big Deals, GOVERNING, Mar. 2012, at 40.
43. See, e.g., BLACK & VEATCH, 2012 STRATEGIC DIRECTIONS IN THE U.S. WATER
UTILITY INDUSTRY 13, 17, 35 (2012); ERNST & YOUNG, INVESTING IN GLOBAL
INFRASTRUCTURE 2007: AN EMERGING ASSET CLASS 7-8, 12, 68-69 (2007); KPMG INT’L,
DELIVERING WATER INFRASTRUCTURE USING PRIVATE FINANCE 8 (2011). See generally
U.S. ENVTL. PROT. AGENCY, GUIDEBOOK OF FINANCING TOOLS: PAYING FOR
ENVIRONMENTAL SYSTEMS 4-1 (2008); NAT’L RESEARCH COUNCIL, supra note 4, at 51.
44. Hodge & Greve, supra note 12, at 552.
45. Masamitsu Onishi & Graham Winch, Cross-country case analysis, in ASS’N
CHARTERED CERTIFIED ACCOUNTANTS, TAKING STOCK OF PPP AND PFI AROUND THE
WORLD 16, 22 (Graham Winch et al. eds., 2012).
46. See, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 30; NAT’L
RESEARCH COUNCIL, supra note 4, at 51; HAROLD J. SMITH, NAT’L RURAL WATER ASS’N,
PRIVATIZATION OF SMALL WATER SYSTEMS 18 (2003); John J. Boland, Editorial, The
Business of Water, J. WATER RESOURCE PLAN. & MGMT. May/June 2007 at 189, 190.
47. NAT’L RESEARCH COUNCIL, supra note 4, at 51.
48. STEVEN MAGUIRE, CONG. RESEARCH SERV., PRIVATE ACTIVITY BONDS: AN
INTRODUCTION 4 (2006); NAT’L RESEARCH COUNCIL, supra note 4, at 51; SMITH, supra
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Private for-profit water utilities can sometimes access private activity
bonds that are exempt from federal income taxes, but unlike municipal
revenue and general obligation bonds, they are subject to a state volume
cap and their interest is usually subject to the alternative minimum
income tax.49
Because of the public sector’s lower cost of capital, privatization has
been called the “financing of last resort.”50 Indeed, a 2012 survey by
Black & Veatch found that U.S. water and sewer utilities had “little
interest in pursuing private financing”51 and “very limited interest in any
form of public-private partnerships.”52
D. An Expensive Loan
Water privatization has been used as a one-shot trick to fill budget
gaps.53 The government’s primary objective in these arrangements is to
obtain a sizable upfront payment, often a concession fee, from the
company or consortium that takes over the system. This is not free
money but an expensive loan.54 In a 2000 report about wastewater
privatization, the U.S. Environmental Protection Agency explained that
repaying this upfront fee could require sizable rate increases:
In summary, any non-operation payment a local government
receives from its privatization of a wastewater infrastructure
asset represents a loan from the private entity which must be
repaid with interest by the wastewater treatment users in the
form of additional user fees. Therefore, the value of any private
note 46, at 16-18; Jeffrey W. Jacobs & Charles W. Howe, Key Issues and Experience in
US Water Services Privatization, 21 WATER RESOURCE DEV. 89, 91 (2005).
49. MAGUIRE, supra note 48, at 1-2, 4-6, 9-10 (2006). But see, e.g., AM. WATER
WORKS ASS’N, STUDY ON PRIVATE ACTIVITY BONDS AND WATER UTILITIES 1 (2009)
(explaining that the American Recovery and Reinvestment Act of 2009 removed PABs
from the alternative minimum tax during 2009 and 2010).
50. Gregory Millman, Financing of Last Resort, INFRASTRUCTURE FIN., Sept. 1997 at
17-20.
51. BLACK & VEATCH, supra note 43, at 13.
52. Id. at 17.
53. THOMAS P. DINAPOLI, N.Y. COMPTROLLER, CONTROLLING RISK WITHOUT
GIMMICKS: NEW YORK’S INFRASTRUCTURE CRISIS AND PUBLIC-PRIVATE PARTNERSHIPS
11-12 (2011) (explaining that New York State is considering public-private partnerships,
not specifically in the water sector, for “‘one-shot’ revenues and other short-term budget
expedients”); Dannin, supra note 37, at 51 (“States and cities are also using the up-front
payments that are part of many infrastructure privatization deals to address their budget
deficits.”).
54. See, e.g., U.S. ENVTL. PROT. AGENCY, supra note 17, at 7, 15-16.
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entity payments which exceed the current debt on the wastewater
infrastructure represents additional debt the wastewater treatment
users must repay.
If a local or state government wants to recoup all of its
investment in a facility and sets a concession fee or sales price to
reflect that amount, the resulting annual costs to the private
entity could be very large and may result in significant increases
in user fees for all the wastewater users [emphasis added].55
Privatizing a water system to balance the budget is fiscally
irresponsible. It fails to address the underlying fiscal problems that
created the deficit in the first place and could increase long-term costs for
households and local businesses.56 Such off-balance-sheet financing
interferes with transparency and accountability.57 Reliance on “one
shots” can increase long-term borrowing costs, and credit rating agencies
typically disapprove of the practice.58 The New York State Comptroller’s
Office called this use of privatization “budget gimmickry” because it
“provides a short-term cash benefit while pushing costs to the future and
potentially increasing public debt.”59 Similarly, officials from the
Massachusetts’ Office of the Inspector General said, “Using privatization
to generate short-term government revenue generally produces a transfer
of costs to future taxpayers rather than any real savings.”60
55. OFFICE OF WATER, U.S. ENVTL. PROT. AGENCY, EPA-832-B-00-002, GUIDANCE
PRIVATIZATION OF FEDERALLY FUNDED WASTEWATER TREATMENT WORKS 15
(2000).
56. See, e.g., N.Y. COMPTROLLER, supra note 53, at 11-12; PUB. FIN. MGMT.,
GOVERNOR’S CTR. FOR LOCAL GOV’T SERVS., PA., MUNICIPALITIES FINANCIAL RECOVERY
ACT: RECOVERY PLAN. READING, BERKS CNTY., PA. 219-20 (2010).
57. David Heald & George Georgiou, Accounting for PPPs in a Converging World,
in INTERNATIONAL HANDBOOK ON PUBLIC-PRIVATE PARTNERSHIPS 237, 258 (Graeme A.
Hodge et al. eds., 2010); WORLD BANK, supra note 41, at 23 (“The consequences of
pushing commitments off-budget are reduced incentives and ability to control costs, and
the risk that the government will accumulate more liabilities than it can manage.”).
58. See, e.g., N.Y. COMPTROLLER, supra note 53, at 11; Freeman Klopott & Brian
Chappatta, Government One-Shot Raising Taxpayers’ Debt Costs: Muni Credit,
BLOOMBERG (Apr. 20, 2012), available at http://www.bloomberg.com/news/2012-0420/government-one-shots-raising-taxpayers-debt-costs-muni-credit.html.
59. N.Y. COMPTROLLER, supra note 53, at 2.
60. JACQUES ROGOZINSKI, HIGH PRICE FOR CHANGE: PRIVATIZATION IN MEXICO (InterAmerican Development Bank ed. 1998).
ON THE
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III. CONSUMER CONSEQUENCES
A. High Rates
On average, private sector companies charge higher water and sewer
rates than local government utilities.61 In 2009, Food & Water Watch
compiled state surveys of water and sewer rates to compare the typical
residential bills of privately-owned and publicly-owned systems.62 It
found that investor-owned utilities typically charged 33 percent more for
water and 63 percent more for sewer service than local governments.63
Similarly, a 2010 survey of the largest water utilities in the Great Lakes
region found that privately owned systems charged more than twice as
much as municipal systems.64 The researchers attributed this difference
to private companies’ taxes, profits, higher overall service costs, and
ratemaking practices.65
For many communities, frequent and massive rate increases are the
most pronounced consequence of privatization. In 2011, Food & Water
Watch examined how water prices changed under private ownership
following the ten largest known sales of municipal water or sewer
systems to for-profit companies in the preceding two decades.66 The
study found that typical household water bills had nearly tripled on
average since privatization, and under private ownership, water bills
grew at an average of about three times the rate of inflation, adding
hundreds of dollars unto annual household bills.67 This trend was even
more drastic in Illinois, where ten communities that sold their water
systems to investor-owned utilities saw the typical annual household
61. See, e.g., U.S. ENVTL. PROT. AGENCY, EPA 815-R-09-001, 2006 COMMUNITY
WATER SYSTEM SURVEY. VOLUME I: OVERVIEW 21-23 (2009); Petrova, supra note 41, at
588-590; Janice A. Beecher, Private Water and Economic Regulation in the United
States, in HANDBOOK UTILITY MANAGEMENT 779, 788-90 (Andreas Bausch & Burkhard
Schwenker eds., 2009); NAT’L RESEARCH COUNCIL, supra note 4, at 5, 87-88.
62. FOOD & WATER WATCH, QUESTIONS & ANSWERS: A COST COMPARISON OF PUBLIC
AND PRIVATE WATER UTILITY OPERATION (2009), available at www.documents.
foodandwaterwatch.org/doc/A-Cost-Comparison-of-Public-and-Private-Water.pdf.
63. Id.
64. JANICE A. BEECHER & JASON A. KALMBACH, GREAT LAKES COMM’N, 2010 GREAT
LAKES WATER SURVEY 14-15 (2011).
65. Id. at 15-16.
66. FOOD & WATER WATCH, SELLING OUT CONSUMERS: HOW WATER PRICES
INCREASED AFTER 10 OF THE LARGEST WATER SYSTEM SALES (2011), available at
http://www.foodandwaterwatch.org/factsheet/selling-out-consumers/.
67. Id.
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water bill grow at an average compound rate of 18 percent a year.68 In
comparison, national surveys have found that water and sewer bills
generally increase by about 5 percent a year,69 so customers of these
privatized systems saw their water bills grow much faster than typical.
Evidence from France suggests similar rate impacts with publicprivate partnerships. Private sector participation in public water services
is much more prevalent in France than in the United States,70 and further,
France’s information about contract operations is more readily
available.71 An analysis of several thousand local water authorities in
France found that every type of public-private partnership was associated
with significant increases in water prices.72 Depending on the contract
type, privatization increased the typical annual water bill by 22 to 40 €,
or 15 to 26 percent.73
B. Poor Performance
1. Investment Levels
The higher prices of private service do not translate into greater
investments in water system improvements. In a 2006 survey of
community water systems, the EPA found, “Publicly owned systems
tended to invest more than privately owned ones.”74 In addition, private
68. FOOD & WATER WATCH, ILLINOIS AMERICAN WATER AND AQUA ILLINOIS:
COMMUNITY EXPERIENCES WITH THE LARGEST INVESTOR-OWNED WATER UTILITIES IN
ILLINOIS 18 (Oct. 2011), available at http://www.foodandwaterwatch.org/briefs/illinoisamerican-water-and-aqua-illinois/.
69. See, e.g., JANICE A. BEECHER, MICH. STATE UNIV., INST. PUB. UTILITIES
REGULATORY RESEARCH & EDUC., TRENDS IN CONSUMER PRICES (CPI) FOR UTILITIES
THROUGH 2010 6 (2011); BLACK & VEATCH, 2009/2010 50 LARGEST CITIES
WATER/WASTEWATER RATE SURVEY 2 (2010); NAT’L ASS’N OF CLEAN WATER AGENCIES,
2010 SERVICE CHARGE INDEX (2011).
70. PINSENT MASONS, supra note 30, at 39, 41. (In 2011, the private sector served 67
percent of the French population and 15 percent of the U.S. population to some extent).
71. See U.S. ENVTL. PROT. AGENCY, INFORMATION AVAILABLE FROM THE SAFE
DRINKING WATER INFORMATION SYSTEM (EPA 816 F 98 006,1998). (In the Safe Drinking
Water Information System, the EPA maintains information about the ownership type but
not the operating structure of every public water system).
72. Eshien Chong et al., Public-Private Partnerships and Prices: Evidence from
Water Distribution in France, 29 REV. INDUS. ORG. 149, 163 (2006).
73. Id. at 158-66. Prices were based on an annual consumption of 120 cubic meters or
31,700 gallons of water. After correcting for endogeneity of organizational choice, the
price premium associated with public-private prices was 11€, an eight percent increase.
74. U.S. ENVTL. PROT. AGENCY, supra note 61, at 28.
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for-profit water companies may try to avoid spending money on
improvement projects that they find less profitable.75
2. Service Quality
“Because the overriding objective of the private partner is to
maximize profit, quality might hold a lower priority for the private
partner than for the government (for whom service delivery objectives
might hold the highest priority).”76 Indeed, there is ample evidence that
maintenance backlogs, wasted water, sewage spills, and service problems
often follow privatization.77 In fact, poor performance is the primary
reason that local governments reverse the decision to privatize and
resume public operation of previously contracted services.78
75. See, e.g., DAVID HALL & EMANUELE LOBINA, PUB. SERVS INT’L RESEARCH UNIT,
PIPE DREAMS: THE FAILURE OF THE PRIVATE SECTOR TO INVEST IN WATER SERVICES IN
DEVELOPING COUNTRIES 50 (2006); SMITH, supra note 46, at 18 to 19; Jessica Budds &
Gordon McGranahan, Are the Debates on Water Privatization Missing the Point?
Experiences from Africa, Asia and Latin America, 15 ENV’T & URBANIZATION 87, 100104 (2003).
76. Philippe Burger & Ian Hawkesworth, How to Attain Value for Money: Comparing
PPP and Traditional Infrastructure Public Procurement, 11 OECD J. ON BUDGETING 91,
131 (2011).
77. See, e.g., FOOD & WATER WATCH, FAULTY PIPES: WHY PUBLIC FUNDING – NOT
PRIVATIZATION—IS THE ANSWER FOR U.S. WATER SYSTEMS 14-21 (2008), available at
http://documents.foodandwaterwatch.org/doc/FaultyPipesSeptember2008-web.pdf; FOOD
& WATER WATCH, MONEY DOWN THE DRAIN: HOW PRIVATE CONTROL OF WATER WASTES
PUBLIC RESOURCES 9-23 (2009), available at http://documents.foodandwaterwatch.
org/doc/ MoneyDownDrain.pdf.; DAVID HALL ET AL., PUBL. SERVS. INT’L RESEARCH
UNIT, REPLACING FAILED PRIVATE WATER CONTRACTS 3-5 (2010); See generally, e.g.,
Rhys Andrews & Tom Entwistle, Does Cross-Sectoral Partnership Deliver? An
Empirical Exploration of Public Service Effectiveness, Efficiency, and Equity, 20 J. PUB.
ADMIN. RESEARCH & THEORY 679, 689 (2010) (“[O]ur data suggest that public-private
partnership is negatively associated with effectiveness. … Our finding may therefore
mirror research which suggests … contracting with the private sector may lead to lower
service quality.”); Craig Anthony Arnold, Water Privatization Trends in the United
States: Human Rights National Security, and Public Stewardship, 33 WM. & MARY
ENVTL. L. & POL’Y REV. 785, 799-804 (2009) (describing privatization failures); Marques
& Berg, supra note 11, at 1588 (“In addition, service quality could be low due to
underinvestment and to the inability of the contract to specifically address all quality
issues.”); Frank L.K. Ohemeng & John K. Grant, Has the Bubble Finally Burst? A
Comparative Examination of the Failure of Privatization of Water Services Delivery in
Atlanta (USA) and Hamilton (Canada), 13 J. COMPARATIVE POL’Y ANALYSIS: RESEARCH
& PRACTICE 287, 298 (2011) (detailing customer services issues in Atlanta and a major
sewage spill in Hamilton under privatization).
78. WARNER, supra note 27, at 9-10; WARNER & HEFETZ, supra note 20, at 19-20.
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3. Cutting Corners
When private operators attempt to cut costs to boost their income,
the practices they employ can have a negative effect on service.79 For
example, they may use shoddy construction materials, delay needed
maintenance, cut labor costs by scaling back compensation packages or
downsizing the workforce, or pursue “quality-shading” investments.80 On
average, more than one-third of public water utility jobs are lost after
privatization,81 which can impair customer service and slow responses to
emergencies.82 Atlanta is a telling example. Over the four years that
United Water managed Atlanta’s water system, it cut the work force by
more than half.83 The company fell behind on maintenance, accumulating
a backlog of more than 13,000 service requests.84 Residents complained
of brown water and low pressure, and a city’s review board published a
four-inch thick report documenting the company’s alleged failures,
including inadequate meter installation and bill collection.85 The city
exited the contract four years into the 20-year deal.86
4. Asset Deterioration
Inadequate upkeep can precipitate equipment breakdowns and capital
replacements, which can increase public sector costs.87 Many water
79. SMITH, supra note 46, at 17.
80. Id. (discussing examples of cost-cutting measures); See generally, e.g., Oliver
Hart, Incomplete Contracts and Public Ownership: Remarks, and An Application to
Public-Private Partnerships, 113 ECON. J. C69, C71-C74 (2003) (explaining that
incomplete contracts and private ownership encourage “quality-shading investment” or
“an unproductive investment that reduces total costs and quality”); David McKenzie &
Dilip Mookherjee, The Distributive Impact of Privatization in Latin America: Evidence
from Four Countries, 3 ECONOMÍA 161, 199-206 (2003) (describing employment trends
after privatization).
81. See, e.g., FOOD & WATER WATCH, WATER PRIVATIZATION THREATENS WORKERS,
CONSUMERS AND LOCAL ECONOMIES (2009), available at http://documents.foodandwater
watch.org/doc/unionJobsFinal-web.pdf; Adrian Moore, Long-Term Partnerships in
Water and Sewer Utilities: Economic, Political and Policy Implications, U. COUNCIL ON
WATER RESOURCES, October 2000 at 21, 22.
82. Id. See, e.g., SMITH, supra note 46, at 17; Seppäla et al., supra note 23, at 46.
83. D.L. Bennett & Julie B. Hairston, Atlanta May Throw Out Private Water Utility
Operator, ATL. J. CONST., Jan. 13, 2003, at 8Cz.
84. Id.
85. Id.
86. See Ernie Suggs, Council Agrees to End Water Deal, Rejects Gag Rule, ATL. J.
CONST., Mar. 4, 2003, at 2D (explaining that the city and the company entered into a
mutual dissolution agreement).
87. ASS’N OF METRO. SEWERAGE AGENCIES & ASS’N OF METRO. WATER AGENCIES,
EVALUATING PRIVITIZATION II: AN AMSA/AMWA CHECKLIST 27 (2002).
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privatization contracts specify that the local government is responsible
for capital improvements, while the private operator is responsible for
routine maintenance and repairs.88 This gives the private operator “an
incentive to promote capital solutions,” and in some cases, companies
can technically comply with their contracts while effectively shifting
upkeep costs to the local government.89 Since 70 to 80 percent of water
and sewer assets are underground, a municipality cannot easily monitor a
contractor’s performance.90 As a result, “the effects of shoddy work may
not become evident during the contract period.”91 Further, as stated by
Harold Smith, “Asset deterioration can be particularly problematic under
the long-term contract operations and asset lease models.”92
5. Keeping the Difference
Customers generally do not see benefits from a private operator’s
reductions in labor and maintenance costs. Unless contractually required
to do so, a private operator is unlikely to pass on the savings to the public
through reduced fees.93 For example, upon receiving a 20-year
wastewater contract for the Lynn Water and Sewer Commission, a
private operator planned to reduce the plant’s workforce by 20 percent,
even though it was to receive an increase in income.94 The Inspector
General of the Commonwealth of Massachusetts concluded, “This
indicates that any cost savings achieved through future staff reductions
will produce increased profits for U.S. Filter [the private operator] rather
than lowering rates for Commission ratepayers.”95
88. Id.
89. Id. See also SMITH, supra note 46, at 18-19.
90. See OUYAHIA, supra note 23, at 8.
91. Accord REES, supra note 27, at 21.
92. SMITH, supra note 46, at 19.
93. Hulya Dagdeviren, Political Economy of Contractual Disputes in Private Water
and Sanitation: Lessons from Argentina, 82 ANNALS OF PUB. & COOP. ECON. 25, 33
(2011); Isabelle Fauconnier, The Privatization of Residential Water Supply and
Sanitation Services: Social Equity Issues in the California and International Contexts, 13
BERKELEY PLAN. J. 37, 48 (1999); (“This [unethical dealings in the French water sector]
provides an apt illustration [of] how efficiency gains can amount to rents extracted
through corrupt business and political dealings rather than being passed on to consumers
in the form of lower prices.”); Aidan R. Vining et al., Public-Private Partnerships in the
U.S. and Canada: Case Studies and Lessons, 3 INT’L PUB. PROCUREMENT CONF. PROC.
31, 35 (2004); Aidan R. Vining & Anthony E. Boardman, Public-Private Partnerships:
Eight Rules for Governments, 13 PUB. WORKS MGMT. POL’Y 149, 152 (2008).
94. ROBERT A. CERASOLI, OFFICE OF THE INSPECTOR GEN., MASS., PRIVATIZATION OF
WASTEWATER FACILITIES IN LYNN, MASSACHUSETTS 59 (2001).
95. Id.
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C. Loss of Local, Public Control
Water systems are essentially natural monopolies. They are so
capital-intensive that it is generally cost-prohibitive to have multiple
providers serve the same area, resulting in a captive customer base.96
While public control of a natural monopoly can help ensure that service
is widely available and that prices are economically efficient, according
to the Congressional Budget Office and Joint Committee on Taxation, “a
private firm in such a position would be expected to try to maximize
profits by restricting supply and raising prices.”97
Profit potential is the private sector’s primary consideration when
making decisions.98 This has important equity implications beyond the
price and quality of services. For example, private sector water utilities
are unlikely to adopt the same criteria as municipalities when deciding
where to extend services.99 Instead, private sector water companies tend
to cherry-pick service areas.100 John Boland noted, “Typically, operators
will avoid low-income neighborhoods where use will be low and bill
collection problems high.”101 A private operator may also be unwilling to
respond to certain issues and developments unless required by its
contract.102 Donald Featherstun et al. explained, “Whereas a public entity
easily shifts emphasis and direction to meet the needs of its constituency,
a private contractor, obligated only to perform to the contract
requirements as reflected in the specifications, may not be so
inclined.”103
Because the primary objectives of a private sector water company
can differ substantially from those of a public sector entity, privatization
96. See, e.g., CONG. BUDGET OFFICE & JOINT COMM. ON TAXATION, NO. 4005,
SUBSIDIZING INFRASTRUCTURE INVESTMENT WITH TAX-PREFERRED BONDS 3-4 (2009);
NAT’L RESEARCH COUNCIL, supra note 4, at 92, 112; Beecher, supra note 61, at 791-92,
798-99. Warner & Bel, supra note 13, at 724-25.
97. CONG. BUDGET OFFICE & JOINT COMM. ON TAXATION, supra note 96, at 3-4. See
generally Jonas Prager, Contracting-Out: Theory and Policy, 25 N.Y.U. J. INT’L L. &
POL. 73, 96 (1993) (“Indeed, the static theory of monopoly justifies nationalizing an
industry that is a natural monopoly because a public monopoly will actually be more
efficient than a private monopoly.”).
98. See, e.g., U.S. GEN. ACCOUNTING OFFICE (2002), supra note 11, at 49; OUYAHIA,
supra note 23, at 29; SMITH, supra note 46, at 17-18.
99. SMITH, supra note 46, at 17-18.
100. See, e.g., U.S. GEN. ACCOUNTING OFFICE (2002), supra note 11, at 52; OUYAHIA,
supra note 23, at 34-35; Karen J. Bakker, A Political Ecology of Water Privatization, 70
STUD. POL. ECON. 35, 41 (2003); Boland, supra note 46, at 191.
101. Boland, supra note 46, at 191.
102. Donald G. Featherstun et al., State and Local Privatization: An Evolving Process,
30 PUB. CONT. L.J. 643, 649 (2001).
103. Id.
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can create conflict and interfere with government policies and economic
development plans.104 According to Vining and Boardman, “This
divergence of goals is likely to raise transaction costs and lead to
negative externalities or reductions in quality.”105 Privatization can also
hamper a government’s ability to adapt to changing circumstances. In
some arrangements, a local government and private operator can be
bound to the terms of a single contract for decades.106 This inflexibility
restricts innovation and responsiveness to new developments.107 Because
no one can predict all the changes that occur over decades, long-term
privatization contracts invariably are incomplete, which can result in
costly renegotiations and reduce transparency and accountability.108
Ellen Dannin detailed how certain clauses in transportation
privatization contracts could impede government responses to a number
of issues:
Thus, for the life of an infrastructure privatization contract,
government obligations to insure a contractor’s revenues
complicate—and even eliminate—options for addressing
challenges, such as reducing air pollution, environmental
degradation, and urban and suburban congestion; mitigating
greenhouse gases connected with global climate change;
promoting public health; and tackling other problems related to
car-focused transportation.109
104. See, e.g., OUYAHIA, supra note 23, at 17, 29-30; SMITH, supra note 46, at 17-18.
See generally U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 31 (noting that
officials expressed concern about loss of municipal control over rate setting and system
growth); Boland, supra note 46, at 191 (“…a private firm … has no particular
responsibility to cooperate with government agencies in [integrated water
management].”).
105. Vining & Boardman, supra note 93, at 152.
106. IOSSA & MARTIMORT, supra note 35, at 28-30, 43.
107. Id.
108. See generally OUYAHIA, supra note 23, at 17, 28; IOSSA & MARTIMORT, supra 35,
at 28-30, 43 (describing the costs and risks of renegotiation); REES, supra note 27, at 1819; Bloomfield, supra note 41, at 407 (describing the risks and costs of long-term
contracts).
109. Dannin, supra note 37, at 64.
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IV. SOLUTIONS
A. Preserving Local, Public Control
Public opposition to water privatization is formidable and has stopped
a number of transactions from occurring.110 In 2008, Akron, Ohio, voters
rejected the mayor’s scheme to lease their sewers and passed a charter
amendment requiring a voter approval of the sale, lease, or transfer of city
utilities.111 The next year, public opposition thwarted a proposal to lease
the water utility in Milwaukee, Wisconsin, to a private company for up to
99 years.112 As another example, voters in Cincinnati amended the city’s
charter amendment to require voter approval of any sale or transfer of city
assets to a regional water district, which was viewed as a possible step
toward privatization.113 Public opposition has also stopped many other
privatizations, including a proposed sale of the water and sewer systems
in Marion, Indiana,114 and a proposed public-private partnership for the
sewer plant in Grand Island, Nebraska.115 “The people do not want us to
do this,” Grand Island Councilmember Bob Niemann told the Grand
110. U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 29; FOOD & WATER
WATCH, supra note 6, at 5 (summarizing a number of failed privatizations); STEVE
MAXWELL, 2012 WATER MARKET REVIEW: A CONCISE REVIEW OF CHALLENGES AND
OPPORTUNITIES IN THE WORLD WATER MARKET 9 (2012).
111. See AKRON, OHIO, CHARTER § 64 (2011); Ohio City Rejects Sewers-Scholarships
Plan, ASSOCIATED PRESS, Nov. 5, 2008, available at LexisNexis. See generally FOOD &
WATER WATCH (2009), supra note 77, at 1 (providing background information about the
public campaign against the privatization).
112. See Larry Sandler, Milwaukee Alderman Halt Study of Privatizing Water Utility,
MILWAUKEE WIS. J. SENTINEL, May 29, 2009, available at http://www.
jsonline.com/news/milwaukee /46510077.html; See generally FOOD & WATER WATCH,
MORTGAGING MILWAUKEE’S FUTURE: WHY LEASING THE WATER SYSTEM IS A BAD DEAL
FOR CONSUMERS (2009), available at http://documents.foodandwaterwatch.org/
doc/milwaukeeLease.pdf (providing background information about the proposed lease
arrangement).
113. See CINCINNATI, OHIO, CHARTER, art. XV (2009); Horstman, supra note 3; Jane
Prendergast, City Pulls Plug on Regional Waterworks, CINCINNATI ENQUIRER, Dec. 9,
2010, available at http://news.cincinnati.com/article/20101209/NEWS0108/12100325/
City-pulls-plug-regional-waterworks.
114. See Maribeth Vaughn, Utility Sale Nixed, CHRON. TRIB. (Marion, IN), July 25,
2010, available at http://www.chronicle-tribune.com/archives/chronicle-tribune/utilitysale-nixed/article_ec53b747-c5c4-59c0-952d-203ddeb67ba1.html.
115. See Tracy Overstreet, Council Rejects Private Management of Sewer Plant,
GRAND ISLAND INDEP. (Neb.), Feb. 15, 2012, available at http://www.
theindependent.com/news/local/council-rejects-private-management-of-sewer-plant/article
_8094c728-579d-11e1-91b6-001871e3ce6c.html.
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Island Independent explaining why the city council rejected the
privatization contract. “It’s all about representative government.”116
Public organizing efforts, however, face new challenges, as some
states exploit the financial crisis to usurp local decision-making power.
In 2011, Michigan passed the Local Government and School District
Fiscal Accountability Act, giving the state considerable power over cashstrapped municipalities.117 If the state decides that a local government’s
fiscal situation warrants intervention, the governor can appoint an
emergency financial manager who has broad jurisdiction over city
functions.118 This person — who serves at the discretion of the governor,
not the voters119 — has the authority to privatize public services,120
regardless of the wishes of elected officials.121 For example, Pontiac’s
emergency manager privatized the water and sewer department by laying
off workers and turning over the utility’s operation and management to
United Water (a subsidiary of French multinational Suez
Environnement).122 In Michigan, an emergency financial manager can
even unilaterally sell off entire water and sewer systems,123 despite any
local laws or charter provisions to the contrary.124 Overall, this act
severely restricts local public accountability and input into the fate of
community water resources. It is an affront to our democratic system and
one that we all must commit to fight.
116. Id.
117. Local Government and School District Fiscal Accountability Act, Mich. Pub. Act
No. 4 (2011) (codified as amended at MICH. COMP. LAWS §§141.1501-141.1531 (2012)).
118. Id. at §141.1515(4).
119. Id. at §141.1515(5)(d).
120. Id. at §141.1519(1)(r); §141.1519(1)(y).
121. See Id. at §141.1519(1)(ee) (“The power of the emergency manager shall be
superior to and supersede the power of any of the foregoing officers or entities.”).
122. See Shaun Byron, Pontiac Dissolves Planning Commission, Layoffs Hit City,
OAKLAND PRESS (Mich.), May 21, 2011, available at http://www.theoaklandpress.com/
articles/2011/05/20/news/local_news/doc4dd6cef521e18350343159.txt?viewmode=fullst
ory. See also Press Release, United Water, United Water and Pontiac, MI Sign
Professional Services Agreement for Management of Water and Wastewater Systems
(July 5, 2011), available at http://www.unitedwater.com/newscenter.aspx?id=6836.
123. MICH. COMP. LAWS §141.1519(1)(r). See also §141.1517(1) (“An order issued
under this section is binding on the local elected and appointed officials and employees,
agents, and contractors of the local government to whom it is issued.”).
124. Id. at §141.1519(1) (“An emergency manager may take 1 or more of the
following additional actions with respect to a local government which is in receivership,
notwithstanding any charter provision to the contrary” (emphasis added)). See also id.
§141.1519(4) (explaining that an emergency manager would need voter approval only for
the sale of light, heat, or power utilities). See generally FOOD & WATER WATCH, KEEP
SOUTHEAST MICHIGAN’S WATER IN PUBLIC HANDS (2011), available at
http://www.foodandwaterwatch.org/factsheet/keep-southeast-michigan-water-in-publichands/ (explaining how this could affect Detroit).
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B. Remunicipalization
A growing number of localities have remunicipalized their water and
sewer services by exiting privatization arrangements and bringing the
systems under public control and operation.125 Mildred Warner and
Germà Bel analyzed the local public service delivery methods of more
than a thousand U.S. municipalities and found that from 1997 to 2002,
twice as many municipalities remunicipalized water systems as
privatized water systems.126 Warner and Bel concluded, “This suggests
that a large proportion of municipalities experimented with privatization
and found the results unsatisfactory.”127
The fiscal crisis appeared to give new momentum to this trend.
According to Public Works Financing’s annual survey of the U.S. water
outsourcing market, four of the largest private water operators entered
into 14 new privatization contracts in 2011, while they lost 27 contracts
that reverted to municipal control.128 The renewal rate for water
privatization contracts was at an “all-time low.” 129 Indeed, a number of
local governments reexamined the efficacy and efficiency of continuing
to contract out their water and sewer services to private for-profit
entities, and found that they could save millions of dollars by running
their water utilities with public employees instead of private
contractors.130 Food & Water Watch reviewed 18 communities that
reclaimed public management of water or sewer services between 2007
and 2010, and found that public operation was an average of 21 percent
less expensive than private operation.131
Public operation can reduce costs by eliminating the profit
requirement needed by a private contractor as well as the overhead
expenses associated with negotiating and monitoring complicated
contracts.132 Unlike private sector operators who transfer profits out of
local communities to owners around the world, publicly run utilities
125. See HALL & LOBINA., supra note 75, at 9; DAVID A. MCDONALD,
REMUNICIPALISATION: PUTTING WATER BACK INTO PUBLIC HANDS 8 (Martin Pigeon et al.
eds., 2012); Joyce Valdovinos, The Remunicipalization of Parisian Water Services: New
Challenges for Local Authorities and Policy Implications, 37 WATER INT’L 107, 114
(2012); Warner & Hefetz, supra note 20, at 19.
126. Warner & Bel, supra note 13, at 731.
127. Id.
128. PWF’s 16th Annual Report, supra note 18, at 24-30.
129. Id. at 24.
130. FOOD & WATER WATCH, THE PUBLIC WORKS: HOW THE REMUNICIPALIZATION OF
WATER SERVICES SAVES MONEY (2010), available at http://www.foodandwaterwatch.org
/factsheet/public-works/.
131. Id.
132. Id.
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reinvest into their communities through infrastructure projects and their
workforce.133 For example, both Fairfield-Suisun Sewer District and
Petaluma, California, brought the operation of their sewer treatment
systems in-house to save money while offering better compensation
packages, which were necessary to attract qualified personnel.134 It is
unsurprising then that in several localities, public operation was able to
simultaneously cut costs and improve performance. For example, Cave
Creek, Arizona, said in its 2009 financial report, “During the fiscal year
the Town managed and operated its water system eliminating an
operating contract with a private company and improving operations
while reducing operating expenses.”135
C. Public-Public Partnerships
Public-public partnerships are another way that localities can reduce
costs and improve the performance of water services. In a public-public
partnership two or more public sector entities join together, on a not-forprofit basis, to pool resources, increase buying power and enhance
technical expertise.136 These public sector partnerships promote publicservice delivery through sharing best practices.137 They employ three
basic strategies to leverage the capacity of cooperating public entities to
save money and enhance service quality:138 (1) bulk purchasing
agreements or purchasing cooperatives;139 (2) shared service agreements
133. Id.
134. Agenda, Petaluma, Cal., Presentation, Discussion and Possible Action Regarding
Plan for Operation and Maintenance of the Ellis Creek Water Recycling Facility 5 (Oct.
1, 2007) (on file with author); Minutes, Petaluma, Cal., Regular City Council/PCDC
Meeting (Nov. 19, 2007) (on file with author); Memorandum from O&M Ad Hoc Comm.
to Bd. Dirs., Fairfield-Suisun Sewer Dist., Cal. (Jan. 22, 2008) (on file with author);
FAIRFIELD-SUISUN SEWER DIST., CAL., COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR
THE YEAR ENDED JUNE 30, 2009, 5-6 (2009).
135. CAVE CREEK, ARIZ., COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR
ENDED JUNE 30, 2009 18 (2010).
136. See, e.g., FOOD & WATER WATCH & GLOBAL LABOR INST., PUBLIC-PUBLIC
PARTNERSHIPS: AN ALTERNATIVE MODEL TO LEVERAGE THE CAPACITY OF MUNICIPAL
WATER UTILITIES 3 (2012); DAVID HALL ET AL., PUB. SERVS. INT’L & TRANSNATIONAL
INST., PUBLIC-PUBLIC PARTNERSHIPS (PUPS) IN WATER 2-5 (2009); Gemma Boag &
David McDonald, A Critical Review of Public-Public Partnerships in Water Services, 3
WATER ALTERNATIVES 1, 4-6 (2010).
137. Id.
138. See FOOD & WATER WATCH & GLOBAL LABOR INST., supra note 136, at 5-6.
139. See, e.g., Josh Cable, Teaming Up for Discounts, GOV’T PROCUREMENT, Apr.May 2009, at 18-19; Marc Flake, Purchasing Co-op Stretches Dollars, AM. CITY &
COUNTY, Sept. 2000, at 10.
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or joint capital projects;140 and (3) reengineering or labor cooperation,
wherein public entities work with labor unions, nongovernmental
organizations, or other public bodies to help address inefficiencies or
make system improvements.141
Research has found that compared to public-private partnerships,
“public-public partnerships are more effective, efficient and
equitable.”142 Public-public partnerships are more effective at meeting
performance objectives and improving public services,143 and they are
associated with increased efficiency and lower costs.144 By involving the
entire community, public-public partnerships increase the accountability
and equity of water services, delivering services to everyone, including
people and communities that are often excluded, underrepresented, or
disadvantaged.145
In the United States, public-public partnerships are more prevalent
than public-private partnerships for water and sewer service delivery.146
A large survey of U.S. cities and counties found that there were three to
four times as many intergovernmental partnerships as public-private
partnerships for water and sewage services.147 Additionally, since the
early 2000s, the prevalence of public sector collaboration has grown
140. See, e.g., MARC HOLZER ET AL., LOCAL UNIT ALIGNMENT, REORGANIZATION &
CONSOLIDATION COMM., RUTGERS UNIV., LITERATURE REVIEW AND ANALYSIS RELATED
TO COSTS AND BENEFITS OF SERVICE DELIVERY CONSOLIDATION AMONG MUNICIPALITIES
1, 16, 19 (2009).
141. See, e.g., ALLYNE BEACH & LINDA KABOOLIAN, WORKING FOR AM. INST., AFLCIO & PUB. SECTOR LABOR MGMT. COMM, HARVARD UNIV., WORKING BETTER
TOGETHER: A PRACTICAL GUIDE TO HELP UNIONS, ELECTED OFFICIALS AND MANAGERS
IMPROVE PUBLIC SERVICES 5, 8 13, 47-52 (2005); HALL ET AL., PUB. SERVS. INT’L
RESEARCH UNIT ET AL., PUBLIC-PUBIC PARTNERSHIPS IN HEALTH AND ESSENTIAL SERVICES
5-7 (2005); HALL ET AL., supra note 136, at 5.
142. FOOD & WATER WATCH & GLOBAL LABOR INST., supra note 136, at 4-5; See, e.g.,
Andrews & Entwistle, supra note 77, at 689-93; Josephine Tucker et al., Pol’y Dept.,
Eur. Parl. Directorate-General for External Policies, A Comparative Evaluation of PublicPrivate and Public-Public Partnerships for Urban Water Services in ACP Countries, 37,
EUR. PAR. DOC. EXPO/B/DEVE/FWC/2009-01/Lot5/01 (May 2010).
143. See, e.g., Andrews & Entwistle, supra note 77, at 689; Tucker et al., supra note
142, at 13-17.
144. See, e.g., Id. at 691; Tucker et al., supra note 142, at 14, 17, 33.
145. See, e.g., Id. at 692; Tucker et al., supra note 142, at 15, 17, 19, 37; Mildred
Warner & Amir Hefetz, Rural-Urban Differences in Privatization: Limits to the
Competitive State, 21 ENV’T & PLANNING C: GOV’T & POL’Y 703, 714-15 (2003).
146. FOOD & WATER WATCH, RENEW AMERICA’S WATER: PUBLIC-PUBLIC
PARTNERSHIPS: AN ALTERNATIVE MODEL TO LEVERAGE THE CAPACITY OF MUNICIPAL
WATER UTILITIES (2011), available at http://documents.foodandwaterwatch.org/
doc/PUPsFactSheet.pdf/.
147. Warner & Hefetz, supra note 20, at 14.
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while the rate of for-profit private contracting has declined.148
Interestingly, a survey of New Jersey municipalities found that the use of
shared service agreements was the leading strategy to address budget
shortfalls in 2011,149 with 82 percent of respondents participating in a
shared service arrangement.150 In comparison, only 18 percent of
respondents privatized services that year, citing citizen opposition and
increased costs as the primary deterrents to privatization.151
D. Renewed Federal Commitment
Government assistance is an important source of water infrastructure
funding, particularly for small systems.152 Unfortunately, the federal
contribution to the Drinking Water and Clean Water State Revolving
Funds has fallen dramatically in recent years.153 A dedicated source of
federal funding would protect water system funding from yearly political
decisions and help municipalities renovate their water infrastructure.154
Such an investment would relieve overburdened state and municipal
governments, create hundreds of thousands of good jobs, and help ensure
universal access to clean drinking water for every person in the country.155
In addition, the federal government can support water infrastructure
by reauthorizing the Build America Bonds program. Under the previous
program, a state or local government issued a taxable bond and received
a 35 percent direct subsidy from the federal government to offset
borrowing costs.156 Build America Bonds funded more than $180 billion
of new public infrastructure projects in 2009 and 2010, saving states and
148. Id. at 11, 14, 19.
149. LEILA SADEGHI & KATHE CALLAHAN, N.J. STATE LEAGUE OF MUNICIPALITIES WITH
RUTGERS CTR.FOR EXEC. LEADERSHIP IN GOV’T: 2011 MUNICIPAL MANAGEMENT SURVEY
7 (2011).
150. Id. at 3.
151. Id. at 6.
152. See, e.g., CLAUDIA COPELAND & MARY TIEMANN, CONG. RESEARCH SERV., WATER
INFRASTRUCTURE NEEDS AND INVESTMENT: REVIEW AND ANALYSIS OF KEY ISSUES 20-21
(2010); Warner & Hefetz, supra note 145, at 709-10, 714-15.
153. See OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, FISCAL YEAR
2013 BUDGET OF THE UNITED STATES GOVERNMENT178-80 (2012); COPELAND &
TIEMANN, supra note 152, at 21; CLAUDIA COPELAND, CONG. RESEARCH SERV., WATER
INFRASTRUCTURE FINANCING: HISTORY OF EPA APPROPRIATIONS 1-4 (2000).
154. FOOD & WATER WATCH, RENEW AMERICA’S WATER: WHY OUR COMMUNITIES
NEED FEDERAL INVESTMENT IN OUR PUBLIC WATER SYSTEMS TO PROVIDE SAFE WATER
FOR GENERATIONS TO COME (2010), available at http://www.foodandwaterwatch.org
/factsheet/renew-americas-water/.
155. Id.
156. U.S. TREASURY DEP’T, TREASURY ANALYSIS OF BUILD AMERICA BONDS AND
ISSUER NET BORROWING COSTS 3 (2010).
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local governments a total of $20 billion in borrowing costs.157 The
Treasury Department called this program “highly successful at
stimulating infrastructure investment.”158
V.CONCLUSION
As public officials determine how to address growing budget
deficits, they must avoid superficial solutions and budget gimmicks, such
as auctioning off water assets. These efforts can instead result in greater
long-term public costs and saddle generations of consumers with debt
that must be repaid through rate hikes. Water privatization is not a viable
solution for fiscal constraints or water infrastructure needs. It can result
in high rates, poor customer service, and a loss of local control. In the
worst cases, it can even jeopardize public access to safe water because
water companies may shut off the water service of struggling households
that cannot afford the increased water prices.
Given the experiences of other communities, public officials should
consider public sector solutions before pursuing risky and potentially
costly privatization deals. Public-public partnerships are a practical and
responsible way for communities to address their water and sewer needs
while minimizing costs, maximizing services, and maintaining local
control. With effective local oversight and public involvement, publicly
run water systems can achieve cost savings not possible under private
operation. Public control eliminates overhead expenses associated with
profits and taxes, allows revenue to be fully reinvested into the local
community, and provides good jobs for residents. With responsible
public management and a renewed federal commitment to our country’s
water resources, we can best ensure safe and affordable water and sewer
service for all.
157. U.S. TREASURY DEP’T WITH COUNCIL OF ECON. ADVISORS, A NEW ECONOMIC
ANALYSIS OF INFRASTRUCTURE INVESTMENT 2, 15 (2012).
158. Id.