Academic journal article The Journal of Law in Society

Water Privatization Overview: A Public Interest Perspective on For-Profit, Private Sector Provision of Water and Sewer Services in the United States

Academic journal article The Journal of Law in Society

Water Privatization Overview: A Public Interest Perspective on For-Profit, Private Sector Provision of Water and Sewer Services in the United States

Article excerpt

Table of Contents  I.   INTRODUCTION II.  BACKGROUND      A. The Parlance of Privatization      B. The Myth of Efficiency         1. No Cost Savings         2. Lack of Competition         3. Transaction Costs      C. The Financing of Last Resort      D. An Expensive Loan III. CONSUMER CONSEQUENCES      A. High Rates      B. Poor Performance         1. Investment Levels         2. Service Quality         3. Cutting Corners         4. Asset Deterioration         5. Keeping the Difference      C. Loss of Local, Public Control  IV. SOLUTIONS      A. Preserving Local, Public Control      B. Remunicipalization      C. Public-Public Partnerships      D. Renewed Federal Commitment   V. CONCLUSION 


In 2012, although tax revenues had rebounded to pre-recession levels, state and local governments continued to experience serious fiscal 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)


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 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. … 
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