Background

Water privatization efforts have been growing rapidly both in the United States and abroad without strong public scrutiny and supervision of these deals. Although there has been much effort to promote private-sector involvement by relaxing financial constraints and government oversight, governments have failed to establish clear guidelines for public access and supervison, monitor the public interest, and ensure public participation and transparency with regard to water privatization contracts or agreements.(1) Private contract arrangements under public ownership are not even subject to state economic regulation that oversees rates charged, evaluates infrastructure investments, and controls profits, while investor-owned or private water utilities are subject to this regulation. Thus, the private sector has favored public-private relationships that are not affected by state economic regulation.(2)

The move toward the privatization of water services raises many concerns as well as strenuous opposition in some places. Opposition arises partly because of a fundamental distrust of corporate players and worries about the transfer of profits and assets outside of a community or even a country, and mostly because of doubts about whether purely private markets can address the many different social aspects of water.(1) There is little doubt that the rapid pace of water privatization in recent years has failed to address some of the most critical issues and concerns about water, including protection of the environment and public participation in decision-making efforts.

The profit motive may provide private water companies with incentives to avoid conservation and efficiency measures since profits depend upon volumes of water sold. Also, the privatization of water utilities has posed risks of rate hikes, inadequate customer service, and reduced local control. Rates have increased as a way for private water companies to maximize profits in many U.S. communities where water has been privatized. Since the company is under little pressure to respond to consumer concerns, this may result in poor customer service. Private water suppliers by nature are beholden to their stockholders rather than to the public, and may not have economic incentives to make long-term investments in infrastructure and water quality monitoring. Further, once water rights have been signed over, very little can be done to ensure that the private company will work in the best interest of the community. After being exposed to these risks, major cities in Georgia, Indiana, Illinois, Kentucky, and Louisiana have canceled water management contracts with private companies or taken steps to buy back the assets of privately-owned water utilities.

There have been continuous conflicts between opposing groups and private interests that promote the privatization of water services. For example, a coalition of municipal water companies and public interest groups formed an anti-privatization lobby that called on Congress to increase grants and loans to $57 billion over five years to improve public utilities’ infrastructure. However, private companies objected to the expanded grants because they would remove the incentive to privatize.(3)

State Legislation and Actions

States are equipped to formulate and implement essential regulation on privatization contracts. State laws and regulations often have significant impacts on the form and conditions of privatization agreements, like the type of service, term of contract, and contracting entity.(4) Because of private water suppliers’ lack of economic incentives to address long-term health problems associated with low levels of some pollutants in drinking water, there is widespread agreement that maintaining strong regulatory oversight is a necessary component of protecting water quality. When strong regulatory oversight exists, privatization can lead to improvements in water quality.(1)

Statewide privatization policy has been developed and integrated in the form of the Public Services Accountability Act. While the public supports the concept of improving the delivery of government services, Americans also support laws to ensure the continuity of quality public services. In a national poll, three out of four voters favored enacting the policies of the act. Support was equally strong among Republicans, Democrats, and Independents, with more than 60 percent of each group favoring the policy model.(5)

The Center for Policy Alternatives (CPA) provided the model Public Services Accountability Act in 2001. Missouri HB 354 and Rhode Island HB 5774 were both introduced in the 2003 session, and the actual language in both bills is identical to that of the CPA’s model act in many parts. The text of the Public Services Accountability Act in this package is based on the language in the CPA’s model act and Missouri HB 354, both of which are considered good examples of monitoring privatization contracts and ensuring high quality of public services. Our bill text includes provisions specifically addressing the issues of public access to safe and affordable drinking water.

Some states have sought to regulate the privatization of municipal water utilities by requiring voter approval of any such privatization contracts or agreements. Both Louisiana SB 781 and HB 1726, introduced in the 2003 session, require referendum approval of any contract in excess of $5 million for the privatization of any public sewerage and water board, drainage, disposal, or treatment facility in New Orleans or any municipality with a population in excess of 475,000. These bills were signed into law by the governor with the referendum language in HB 1726 deleted in the final version. The text of the Water Privatization Referendum Act in this package integrates Louisiana SB 781 and HB 1726. In addition, it includes the language in Measure F requiring voter approval for any contract over $5 million related to their municipal water utility, which passed with 60 percent of the vote on the March 4, 2003, ballot in Stockton, California.

The Center for Study of Responsive Law also provides A Model Act To Create A Citizens’ Utility Board, which can be an alternative approach to encourage active citizen participation in utility matters and solve the problems associated with the privatization of water utilities.

For more information on state actions, see SERC’s Water Privatization State Activity Page.

Federal Legislation and Actions

In the 1980s, the availability of tax incentives for private investment in public utilities – including tax-exempt debt, accelerated depreciation, and investment tax credits – stimulated interest in the privatization of publicly-owned water utilities.(4)

In 1986, the Tax Reform Act removed many of the tax incentives for public-private partnerships and reduced interest in certain types of privatization. Specifically, the amendment eliminated the investment tax credit, scaled back accelerated depreciation, and limited the use of tax-exempt debt financing. These changes virtually eliminated several “lease-buy” privatization arrangements and severely restricted the duration of management contracts to 5 years.(4)

In 1994, President Clinton issued Executive Order 12893, which established infrastructure investment as a priority for the administration. Executive Order 12893 also directed federal agencies to establish programs for more effective investment from current federal funds. Executive Order 12893 encourages agencies to seek public-private partnerships and, in conjunction with state and local governments, to remove regulatory and legal barriers to privatization.(4)

In 1996, the U.S. Environmental Protection Agency first warned of a looming water infrastructure crisis. Since then, private water companies, led by French and German multinationals and their associations, have increased spending in the political arena, allocating millions to influence and support lawmakers.(3)

In 1997, IRS Revenue Procedure 97-13 on Qualified Tax-Exempt Bonds allowed management contracts for up to 20 years instead of the 5-year period previously allowed. This change provides a longer recovery period for any private investments in public water utilities.(4)

In 2002, Senator Bob Graham introduced the new Water Investment Act, S 1691, which, for the first time in federal water law, specifically endorses public-private partnerships as a cost-effective option for municipal infrastructure projects. Labor unions and the watchdog group Public Citizen heavily lobbied Congress to excise from the act language that makes federal assistance conditional on the recipient’s consideration of private partnerships. The Senate version made a moderate concession, changing the phrase that explained funding conditions from “considering public-private partnerships” to “forming cooperative partnerships.” However, the House version remained the same.(3)

Sources:
(1) Gleick, Peter, et al. “The New Economy of Water: The Risk and Benefits of Globalization and Privatization of Fresh Water.” February 2002. Pacific Institute. 4 September 2003 <http://www.pacinst.org/reports/new_economy_overview.htm>.
(2) Water Science and Technology Board, Committee on Privatization of Water Services in the United States and the National Research Council. “Privatization of Water Services in the United States: An Assessment of Issues and Experience.” Washington, D.C.: National Academy Press, 2002. The National Academies Press website. 4 September 2003 <http://books.nap.edu/books/0309074444/html/index.html>.
(3) Hobbs, Erika. “Low Rates, Needed Repairs Lure ‘Big Water’ to Uncle Sam’s Plumbing.” The Center for Public Integrity. 12 February 2003. 4 September 2003 <http://www.icij.org/water/report.aspx?sid=ch&rid=54&aid=54>.
(4) “Guidance on the Privatization of Federally Funded Wastewater Treatment Works.” August 2000. U.S. Environmental Protection Agency. 4 September 2003 <http://www.epa.gov/owmitnet/pdfs/prigud.pdf>.
(5) “Privatizing Public Services.” The Center for Policy Alternatives. 4 September 2003 <http://www.stateaction.org/issues/privatization/index.cfm>. (quoting Lake, Snell, Perry, and Associates, Public Opinion Support for Public Services Accountability Act, April 1999)