Does it really matter who owns the water works?

Long-term concessions of water utilities illustrate that higher user rates result from public sector under-investment in infrastructure, not exorbitant profiteering by the private sector. By Richard G. Little.

With the economic downturn continuing to cut deeply into municipal tax receipts and political bodies loathe to cut services, tapping into the equity frozen in public assets as a means of balancing the books is looking increasingly attractive. Because there are a number of well-established private firms with the experience and capacity to operate municipal water works, concessions for publicly-owned water systems have become extremely popular.

Over the nation’s history, ownership of water systems has cycled back and forth between the public and private sectors. The early 20th Century saw a dramatic upturn in public acquisition and consolidation of privately-owned systems as a means of reducing water-borne disease through improved disinfection and sanitation standards. As a public health initiative, this was spectacularly successful. Death from diseases such as cholera, typhoid fever, and dysentery were practically eliminated in the US.

Equally significant, public water systems provided a means for municipalities to justify annexation of adjacent unincorporated areas and also hold an ironclad monopoly on what is, after the air we breathe, mankind’s greatest necessity of life.  As a result, during most of the past century, rapid growth and the relatively low marginal cost of serving new customers turned municipal water works into remarkably productive cash cows. In addition to low rates for customers, this provided an opportunity to increase public sector employment and political support, and most importantly, the ability to spin off excess revenues into the general fund. Therein lies the rub.

Many of these municipalities were only able to achieve this trifecta of favorable outcomes by not investing in the sort of long range planning and capital replacement programs we would expect of any well run business enterprise. As we roll forward into this century, the bills for underfunded public pensions and long-neglected asset management are coming due.

Continuing to milk a now-matronly bovine – while making up for millions in shortfalls and still maintaining politically acceptable rates – has proven challenging for even the best public sector budgeteers. Not surprisingly, the monetisation of revenue-producing public assets has been shoved into the breach.

Quite simply, in exchange for a large up-front payment, usually tens to hundreds of millions of dollars, the municipality turns over the physical plant, customer base, and its established monopoly to a private sector entity along with a mandate to operate and maintain the water works and collect the fees for doing so.

Richard G. Little

Not only are private sector operators subject to the same safety standards and regulatory controls as the municipal owner but, as a condition of the concession agreement, they are also usually obligated to address the long-avoided maintenance and repair backlog. From the standpoint of the municipality, this should be almost as good as a new cow. But there are many who oppose the practice purely on principle.

Setting aside the notion that an asset monetisation is tantamount to Esau selling his birthright, a common assumption is that customers will pay more to a concessionaire simply because private enterprise needs to earn a positive return on its investment. While it is true that rates tend to rise following the execution of a concession agreement, this is more often because the new operator must finally address decades of disinvestment rather than its booking of unconscionable profits.

Arguably, if the public sector had operated the system with the same focus on efficiency and long-term financial responsibility as it had on social and political goals, rates would have risen to much the same level. This basic point seems to be lost on those congenitally opposed to the private provision of water who somehow see the private sector as conspiring to take over the nation’s water works.

Arguably, if the public sector had operated the system with the same focus on efficiency and long-term financial responsibility as it had on social and political goals, rates would have risen to much the same level

Richard G. Little

Although there are definitely social and moral questions that can be raised regarding what constitutes equitable charges for the basic building blocks of civil society and, in some instances, the necessities of life itself, these questions do not obviate the fundamental reality that projects and services must be paid for; if not directly by some or all of the users, then by the larger “public” in their stead. There is no way to finesse this issue over the long term. 

Water systems and other “public works” must be supported by revenue streams generated either by taxes or fees that are paid to a service provider. Whether this provider is in the public or private sector should be less a matter of ideology than whether the customers receive good value for their money.

If these water concessions have a downside, it is that they allow governments to avoid the question of how they are going to climb out of the seemingly bottomless financial holes they have dug for themselves. An upfront concession payment for the water works (or a toll road or parking meters for that matter) will forestall hard choices for a few years at best.

Ultimately though, the piper must be paid. If governments focused on this more fundamental issue, the question of who should own the water works could be fairly settled on the basis of who could provide the best service at the lowest price; no fiscal wizardry required.

Richard G. Little is Director of The Keston Institute for Public Finance and Infrastructure Policy, a non-partisan research center at the University of Southern California.