15 Key Pros and Cons of Water Privatization

The World Bank estimates that by the year 2025, up to two-thirds of the global population could have reduced access to the fresh drinking water they need for survival. That reason is one of many that causes water to be described as a commodity that will be like oil was in the 20th century.

There are numerous ideas being floated about that attempt to solve this future problem. We could work on concentrating our energy and resources to protect the current supply, enhance our conservation efforts, and improve pollution control initiatives that work to destroy some of the access we already have. One of the more controversial ideas under consideration is to privatize the water supply.

Billions of lives are at stake since water is such a necessity. Proponents argue that the efficiencies built into the private sector could inspire innovation and encourage more access to this resource in the future. Critics suggest that placing the fate of the human race in government offices and corporate boardrooms creates a world where only those who can pay-to-play will have a chance at survival.

List of the Pros of Water Privatization

1. It creates more opportunities to build efficiencies into the system.
The primary argument for water privatization is similar to what you’ll find for any other industry. Private companies have a profit incentive to pursue, which means they’ll look for ways to cut costs and work more efficiently. Governments don’t have the same incentive because they can always look to the taxpayer to generate more income. The profit acts as an incentive, especially if the managers and owners have a shareholder’s interest in the outcome of the company. Workers in the public sector only feel motivated if they feel like the company belongs to them.

2. Privatization can reduce political influences.
Governments make for poor economic managers. Their motivations are usually influenced by political pressures instead of sound economy advice or common-sense business practices. The public sector will sometimes employ surplus workers under a variety of justification arguments, which leads to cost inefficiency. There can be a reluctance to remove workers because of the negative publicity that would occur from those circumstances. When the water industry goes to the private sector, then it can operate more freely since there aren’t as many political influences in the boardroom.

If anything, private water companies can exert more influence on the government because of their role in society.

3. It can lead to infrastructure investments.
Governments can sometimes think in short-term cycles, looking at only the next election instead of what the country or community needs over a longer term. Some officials might be unwilling to make infrastructure investments because they are more concerned about the projects and costs that could give them a benefit before the next election. CEOs and private boards don’t face the same troubles, which means there is a greater chance that they will improve delivery systems.

This advantage does require households to pay more for water, but it can improve the quality of the supply and provide other benefits that wouldn’t be available to them if it stayed in the public sector. Shareholders provide pressure to ensure an efficient performance occurs.

4. Privatization increases the levels of competition in the water industry.
The privatization of state-owned utilities or services, such as freshwater distribution and wastewater treatment, occurs alongside deregulation under most circumstances. This change in policy allows more businesses to enter the industry so that there is an increase in the competitiveness of the market. When there are more providers trying to obtain customers in a limited market, the expected result is an increase in features while rates decrease. Although this advantage does not always apply when considering tap water since it’s a natural monopoly, the effort of bulk exporting can generate some market play that wouldn’t be available in the public sector.

5. It allows governments to raise revenues from the sale of assets.
Governments can make money when they sell assets that they own in the public sector. This advantage might be a one-off benefit, but it can be advantageous when there are expensive improvements or construction projects on the horizon. Customers will still pay for the upgrades through increased rates or higher taxes, but it can prevent unexpected expenses from hurting the other utilities that families need every day.

Critics argue that privatization causes the government to lose out on future dividends since they’re no longer in control of the infrastructure. Public companies can distribute profits so that they trickle down through a community to help everyone. Private firms tend to keep all of the profits internalized, handing them out to their shareholders based on the overall performance of the agency.

List of the Cons of Water Privatization

1. Privatization almost always leads to rate increases.
Rate hikes are the easiest way for companies to maximize their profits. The government doesn’t need to make money off of water, but a private organization does if they want to stay in business. These agencies are under no obligation to provide water to those who can’t pay since it becomes a marketable commodity in this type of market. If someone can’t afford their monthly payment, then the supply gets shut off. Between 1989-1988, the privatization of the water system in England and Wales led to rate increases of 102% and shutoffs rising by 200%.

2. It can undermine the quality of the water.
The small community of Walkerton in Ontario, Canada had 7 people die and 2,300 others become ill due to E. Coli contamination in the drinking water. A private company contracted to test the supply knew that it was contaminated, but it was not required to alert the government because of the regulations that encouraged privatization at the time.

The motive for profit that comes with privatization means that the corporate agenda gets served more often than the public interest. That is why there is a constant battle over the regulations that govern the water industry on a national level. The National Association of Water Companies often lobbies Congress and the EPA in the United States to stop higher water quality standards from being approved.

3. Private companies are not accountable to the consumer.
The contracts that private water companies make with the government included exclusive distribution access for a period of up to 30 years. That means an effective monopoly takes place in each community under the guise that the service is a utility. The reason why private monopolies are discouraged is that it leads to poor customer service, undermined accountability, and little pressure to make changes. Since they are the only choice, households get whatever the firm is willing to provide.

4. The act of privatization can foster corruption.
The checks and balances that are in place in the government do not exist in the private corporate world. Water contracts are worked out behind closed doors, with executives and elected officials free to make deals that satisfy their own best interests instead of considering what the public requires. Some water companies, such as Suez Lyonnaise de Eaux, have even been charged and convicted for bribing government officials to obtain contracts for this industry.

Aqua Alliance Inc. admitted to giving over $70,000 in bribes to a member of the New Orleans Water and Sewage Board in exchange for a recommendation that the city renews its wastewater treatment contract. Three company executives and the local government official were eventually indicted on conspiracy, interstate travel in aid of bribery, and mail fraud because of their actions.

5. It reduces the amount of local control over the water supply.
When water services move from the public to the private sector, then the control gets transferred to a corporation. It might be a transnational or foreign company. Once the water rights are gone, there is little that can be done to ensure that the agency works for the best interesting of the community. Protecting consumers is often a secondary concern for private firms in this industry. This issue has even led to some companies using public infrastructure as a way to maximize profits even though they aren’t paying taxes to support the system.

6. Privatizing water costs more than government financing.
The idea that the financial burden shifts from the general public to a private company is false. Companies might promise to make repairs or upgrade the infrastructure, but the work gets paid for through the monthly premiums that customers must pay to continue with their services. Public financing is free from taxes because the government initiates the project, so that means it can be completed at a lower overall cost. Private financing is taxable, so it brings around higher interest rates that customers must pay.

When you add in the higher costs of executive salaries in the private sector, the expenses can be significantly higher when privatizing water. Almost 20 years ago, the Chief Executive officer of American Water Works was making over $2 million per year. For FY 2018, the CEO made $4.98 million.

7. Water privatization often leads to employment losses.
Labor costs can be up to 50% of the budgetary expenses that a private water company manages each year. Reducing staffing levels in the community is an easy way to increase profits and reduce costs at the same time. Following the privatization efforts in England, the number of workers in just 10 major companies in this sector who lost jobs over the next decade exceeded 10,000. Whenever customers demanded lower rates, the companies laid off more workers. A similar outcome occurred in Indianapolis when the wastewater treatment system in the city was privatized as well.

8. Once privatization occurs, it is challenging to reverse.
When municipalities sign over some or all of its water systems to a private company, then withdrawing from that contract can be almost impossible. Even if a company fails to live up to the stipulations found in the agreement, communities have found that it is very challenging, costly, and complex to prove that a breach of contract occurred. When a transnational company is responsible for service, there are multinational trade agreements that further complicate the issue too, with private firms using closed tribunals as a way to save their contract and profits.

The city of Chattanooga, TN found this out the hard way as well. When Tennessee-American raised fire hydrant rates to $301 per month, the city tried to reclaim their system from the private sector. The private water firm spent over $5 million on attorneys and PR, which the city was unable to keep up with over time. An out-of-court settlement agreed to lower the rate to $50 per month over a two-year period, but the city couldn’t reclaim its water system.

9. The poor have less access to clean water through privatization.
When Bolivia had its public water system go into private hands because of the conditions of a loan through the World Bank, the firm immediately doubled the water prices. Thousands of families had their water bills account for 25% of their monthly budget overnight. Those who couldn’t pay had their water turned off. It caused hundreds of thousands of protestors to fill the streets, which eventually led to violence. The company finally backed out of the process, but then threatened to sue the country for $40 million in losses because of expropriation.

10. It would create the possibility of bulk water exports.
Many private companies are expanding their freshwater assets so that they can sell them in the future for huge profits. These holdings, which include easements and full ownership, allow them to work with municipalities to request permission to export water outside of the home region. Bulk water exports can have disastrous consequences, extracting water to the point that it upsets the ecological balance. The Colorado River no longer makes it to the Gulf of California except in rare instances, like in 2014 when a high tide and extra moisture connected them for the first time in 16 years.

Conclusion

The problem with water privatization is that it creates a natural monopoly. Only one agency can provide tap water service to a community. You can only have one provider of wastewater treatment services. There are significant fixed costs, which means there is no scope for having competition. That’s why there are so many issues with high prices and customers feeling like they are being exploited with this effort.

When companies perform an important public service, then the profit motive must become a secondary objective. That’s why the pros and cons of water privatization must be carefully considered before proceeding. It might temper some pending expenses, but taxpayers will be paying for the switch for far longer than they would be if the public sector stayed in control of this resource.