Frequently Asked Questions

Q. What is privatization?

A. Privatization is an umbrella term that encompasses a broad range of private sector participation in public services. Partnerships between the public and private sectors in the water industry range from providing basic services and supplies to the design, construction, operation, and ownership of public utilities. The following are three models of water privatization:

• Outsourcing - Private contracting for water utility plant operation and maintenance (O&M) and private provision of various services and supplies such as laboratory work, meter reading, and supplying chemicals.
• Design, build, and operate (DBO) - Negotiating a contract with a private firm for coupling design and construction services with comprehensive operating agreements for new, expanded, or upgraded facilities.
• Asset sale - The sale of government-owned water assets to private water companies.

Q. What environmental concerns have been raised regarding the privatization of water utilities?

A. The private operator has few economic incentives to promote water conservation because a corporation’s chief goal is to maximize profits, which often means encouraging increased consumption. Private water companies also have little reason to leave sufficient water for ecological needs, endangered species, and other downstream uses. Privatization agreements may also result in reduced water quality because private water companies make decisions based on profitability rather than public health. Especially in the case of asset sales, there is concern about land that may be subject to development. When a private operator purchases a municipality’s water-related assets, they may include the municipality’s watershed areas as well as industrial equipment. Since preservation of watershed lands does not generate revenue, the operator may either want to develop the watershed area or sell it off to others for development.

Q. What other concerns have been raised regarding the privatization of water utilities?

A. In many U.S. communities where water has been privatized, there has been an increased risk of rate hikes, inadequate customer service, and reduced local control. In Pekin, Illinois, rates increased 204 percent over the 18 years Illinois-American ran the water system. Atlanta, Georgia, recently canceled water management contracts with United Water Resources Inc. because of their poor customer service. Lack of proper monitoring progress by a public agency can lead to ineffective service provision, discriminatory behavior, violations of water quality protections, and lack of access to information.

Q. Who are major corporate players and what have they been doing concerning the privatization of water utilities?

A. The French water giants, Suez and Vivendi, and a German utility conglomerate, RWE, are the major corporate players in the U.S. water service market. They have purchased America’s largest private water utilities and spent millions of dollars on campaign contributions to sway Congressional votes on privatization laws. In particular, private water companies are pushing for legislation to require cash-poor municipal governments to consider privatizing their waterworks in exchange for federal money. European-based utility giants have been bidding aggressively for new contracts to run American water systems, and have secured 10- to 20-year billion dollar contracts in big cities from coast to coast.

Q. What has been done at the state level concerning the privatization of water utilities?

A. From 1988 to 1997, the rate of privatization in the states increased by more than half. Reluctant to raise rates, local officials seek partners to share the financial burdens of upgrading treatment plants and monitoring for a growing list of regulated contaminants. While most cities have viewed privatization as an option for many years, Illinois, Missouri, and Rhode Island sought to develop or integrate their privatization policy by introducing, in the 2003 session, the Public Services Accountability Act, which monitors privatization contracts and ensures high quality of public services. In Stockton, California, voters passed Measure F in the March 4, 2003, special election, which requires voter approval for any contract over $5 million related to their municipal water utility. Similarly, in June 2003, Louisiana enacted new legislation that requires referendum approval of any water privatization contract in excess of $5 million in any municipality with a population in excess of 475,000.

Q. What should be done to deal with the privatization of water utilities?

A. Solutions to the problems of water privatization include employing clear and consistent standards, strong public oversight, and strict scrutiny of any deals by independent organizations. The sample bills and other model legislation in this package address these issues and can help your state effectively deal with water privatization issues.