immediate stay requested of order requiring counsel to take down

167

WATER PRIVATIZATION OVERVIEW: A PUBLIC INTEREST PERSPECTIVE ON FOR-PROFIT,

PRIVATE SECTOR PROVISION OF WATER AND SEWER SERVICES IN THE UNITED STATES

MARY GRANT1

Table of Contents

I. INTRODUCTION ...............................................................................167 II. BACKGROUND.................................................................................169 A. The Parlance of Privatization....................................................169 B. The Myth of Efficiency ...............................................................171 1. No Cost Savings ....................................................................171 2. Lack of Competition..............................................................172 3. Transaction Costs .................................................................173 C. The Financing of Last Resort.....................................................175 D. An Expensive Loan ....................................................................176 III. CONSUMER CONSEQUENCES...........................................................178 A. High Rates .................................................................................178 B. Poor Performance .....................................................................179 1. Investment Levels ..................................................................179 2. Service Quality......................................................................180 3. Cutting Corners ....................................................................181 4. Asset Deterioration ...............................................................181 5. Keeping the Difference .........................................................182 C. Loss of Local, Public Control ....................................................183 IV. SOLUTIONS......................................................................................185 A. Preserving Local, Public Control ..............................................185 B. Remunicipalization ....................................................................187 C. Public-Public Partnerships........................................................188 D. Renewed Federal Commitment ..................................................190 V. CONCLUSION...................................................................................191

I. INTRODUCTION

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

1. Mary Grant is a reasearcher for Food & Water Watch. Her work focuses on water privatization in the United States. She received a B.S. in Environmental Sciences from Duke University. Food & Water Watch is a nonprofit consumer advocacy organization that works to ensure that everyone has access to safe and reliable food and water.

168 THE JOURNAL OF LAW IN SOCIETY [Vol. 14

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

2. U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-12-523SP, STATE AND LOCAL GOVERNMENTS’ FISCAL OUTLOOK: APRIL 2012 UPDATE 1-2 (2012). 3. See, e.g., Barry M. Horstman, Privatizing Government Assets a Growing Trend,CINCINNATI ENQUIRER, Mar. 18, 2012, available at http://news.cincinnati.com/article/ 20120317/NEWS0108/303180009/Privatizing-government-assets-growing-trend; Judy Keen, Cities Consider Selling Water, Sewer Systems for Cash, USA TODAY, Apr. 21, 2010, available at http://www.usatoday.com/money/economy/2010-04-20-states-water-woes-utilities-sales_N.htm; Amy Merrick, Cash Flows in Water Deals, WALL ST. J., Aug. 12, 2010, available at http://online.wsj.com/article/SB10001424052748704216804575 423633799731128.html. 4. See, e.g., JANICE A. BEECHER ET AL., NAT’L REGULATORY RESEARCH INST.,REGULATORY IMPLICATIONS OF WATER AND WASTEWATER UTILITY PRIVATIZATION 71-72 (1995); COMM. ON PRIVATIZATION OF WATER SERVICE IN THE U.S., NAT’L RESEARCH COUNCIL, PRIVATIZATION OF WATER SERVICES IN THE UNITED STATES: AN ASSESSMENT OF ISSUES AND EXPERIENCE 3, 10 (2002). 5. See, e.g., Giovanna Fabiano, Should Towns Control the Tap? Officials Weigh Service Vs. Costs, THE RECORD (BERGEN CNTY, N.J.), Jan. 5, 2009, at A01; Keen, supra note 3; Merrick, supra note 3. 6. FOOD & WATER WATCH, TRENDS IN WATER PRIVATIZATION: THE POST-RECESSION ECONOMY AND THE FIGHT FOR PUBLIC WATER IN THE UNITED STATES (2010), available at http://documents.foodandwaterwatch.org/doc/PrivatizationTrends.pdf. 7. Sammis B. White, The Midwest’s Liquid Gold, CHICAGO COUNCIL ON GLOBAL AFFAIRS GLOBAL MIDWEST POLICY BRIEF, Sept. 2010.

2013] WATER PRIVATIZATION OVERVIEW 169

II. BACKGROUND

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.8Privatization 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

8. David Utz, Presentation at the Joint Legislative and Executive Commission on Oversight of Public-Private Partnerships, Md. 9 (Aug. 30, 2011), available at http:// mlis.state.md.us/other/public-privatepartnerships/110830-GoldmanSachs-DavidUtz.pdf. 9. EMANUEL S. SAVAS, PRIVATIZATION AND PUBLIC-PRIVATE PARTNERSHIPS 3-4 (2000). 10. E.g., WATER P’SHIP COUNCIL, AN EVALUATION OF PUBLIC-PRIVATE PARTNERSHIPS FOR WATER AND WASTEWATER SYSTEMS 7 (2005); Veolia Water North America, Myths About Public-Private Partnerships, available at http://www.veoliawaterna.com/ media/myths/. 11. See, e.g., U.S. GEN. ACCOUNTING OFFICE, GAO-02-764, WATER INFRASTRUCTURE:INFORMATION ON FINANCING, CAPITAL PLANNING, AND PRIVATIZATION 17, 49-50 (2002); BEECHER ET AL., supra note 4, at 46; NAT’L RESEARCH COUNCIL, supra note 4, at 76. Note that some researchers and entities classify divestitures as a type of public-private partnership, while others do not. Compare, e.g., DELOITTE, CLOSING AMERICA’SINFRASTRUCTURE GAP: THE ROLE OF PUBLIC-PRIVATE PARTNERSHIPS 8 (2007) (including “divestiture” in a list of the “most common PPP [public-private partnership] models”), with Rui Cunha Marques & Sanford Berg, Public-Private Partnership Contracts: A Tale of Two Cities with Different Contractual Arrangements, 89 PUB. ADMIN. 1585, 1586 (2011) (“Note that outright divesture is not considered a PPP [public-private partnership].”). 12. See generally, DAVID HALL ET AL., PUB. SERVS. INT’L RESEARCH UNIT,TERMINOLOGY OF PUBLIC-PRIVATE PARTNERSHIPS 2 (2003); Graeme A. Hodge & Carsten Greve, Public-Private Partnerships: An International Performance Review, 67 PUB.ADMIN. REV. 545, 547 (2007).


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.14

Generally, in the water service sector, a public-private partnership refers to a type of privatization, in which a public sector entity contracts with a private sector entity for the operation of all or part of a drinking water or wastewater system. These arrangements can take a number of forms,15 such as a 5-year operation and maintenance contract or a 20-year design-build-operate contract. In order for the utility to retain tax-exempt status on its municipal bonds, the contract must be structured in accordance with certain IRS rules so that the arrangement does not constitute private business use for federal income tax purposes.16 As a result, water privatization contracts in the United States rarely exceed 20 years.17 In 2011, the average length of the privatization contracts of the four largest private water operators ranged from 4.5 years to 10 years,18

13. Mildred E. Warner & Germà Bel, Competition or Monopoly? Comparing Privatization of Local Public Services in the US and Spain, 86 PUB. ADMIN. 723 (2008). 14. NAT’L RESEARCH COUNCIL, supra note 4, at 1. 15. See, e.g., DELOITTE, PPPS AND THE WATER SECTOR: PLUGGING THE INFRASTRUCTURE HOLE 6-7 (2009); NAT’L RESEARCH COUNCIL, supra note 4, at 56-77; U.S. CONFERENCE OF MAYORS URBAN WATER COUNCIL, MAYOR’S GUIDE TO WATER AND WASTEWATER PARTNERSHIP SERVICE AGREEMENTS: TERMS AND CONDITIONS (2005), available at www.ncppp.org/councilinstitutes/MayorsGuidetoContracts.pdf. 16. See, Rev. Proc. 97-13, 1997-1 C.B. 632. 17. See, e.g., U.S. ENVTL. PROT. AGENCY, EPA 832-R-001A, RESPONSE TO CONGRESS ON PRIVATIZATION OF WASTEWATER FACILITIES 16, 21-22 (1997); U.S. GEN. ACCOUNTING OFFICE (2002), supra note 11 at 49-50; U.S. CONFERENCE OF MAYORS URBAN WATER COUNCIL, supra note 15 at 2, 18. 18. Public Works Financing’s 16th Annual Water Partnerships Report, PUB. WORKS FIN., March 2012, at 26 [hereinafter PWF’s 16th Annual Report].


but a number of localities were considering longer and more extensive privatization arrangements.19

B. The Myth of Efficiency

1. No Cost Savings

Government support for water privatization is often predicated on the assumption that private operation of water utilities will increase efficiency and reduce costs.20 In Nassau County, N.Y., for example, the county executive proposed leasing the wastewater treatment system to a private operator, who claimed to be able to operate the facilities 30 percent to 40 percent more efficiently than the county.21 However, George Marlin, head of a state board that oversees the county’s finances, was much more skeptical:

Potential financial investors who invest money to Public Private Partnerships (P3s) expect annual returns of 10 percent to 15 percent. To suggest that a private operator will achieve enough efficiencies to cover most of that cost and that assessment or user-fees will increase no more than the rate of inflation—well, anyone who believes that, I have a coliseum in Hempstead I would like to sell to them.22

Public officials should not expect privatization to reduce the cost of water and sewer services. Research has found no significant difference in

19. Id. at 3. 20. See, Mildred E. Warner & Amir Hefetz, Cooperative Competition: Alternative Service Delivery, 2002-2007, INT’L CITY CNTY. MGMT. ASS’N, MUNICIPAL YEAR BOOK 2009 11, 16 (2009) (“Regarding factors underlying privatization, the primary reason cited is still internal attempts to decrease costs…”); Germà Bel et al., Is Private Production of Public Services Cheaper Than Public Production? A Meta-Regression Analysis of Solid Waste and Water Services, 29 J. POL’Y ANALYSIS & MGMT 553, 553 (2010) (“One of the promises of privatization is that it offers efficiency gains and reduces the costs of public service delivery.”). 21. Christopher Twarowski & Spencer Rumsey, Mangano Vows to Forge Ahead with Nassau Sewer Privatization, LONG ISLAND PRESS, May 31, 2012, available at http://www.longislandpress.com/2012/05/31/mangano-vows-to-forge-ahead-with-nassau-sewer-privatization. 22. George J. Marlin, Nassau Interim Finance Authority, On the County Sewer Debt Plan, May 17, 2012, available at http://streetcornerconservative.com/2012/05/21/nifa-statement-on-the-county-sewer-debt-plan-may-17-2012-by-george-j-marlin/, reprinted in George J. Marlin, On the County Sewer Debt Plan, ROSLYN NEWS (NY), May 25, 2012, available at http://www.antonnews.com/roslynnews/opinion/22997-on-the-county-sewer-debt-plan.html.


efficiency between public and private operation of water systems.23 A 2008 review of every econometric study about water privatization and costs found, “While some studies found public production more efficient, most found no significant difference in costs or efficiency between public and private production.”24 A 2010 analysis of a subset of those studies similarly found, “Our meta-regression analysis does not reveal a systematic relationship between cost savings and private production.”25

Cost savings were less likely to be found in more recent studies, including those from the United States.26

2. Lack of Competition

One explanation for why privatization has failed to enhance efficiency is the lack of competition in the water sector.27 In theory, competition would lead to cheaper contracts, but in practice, the water service market is “rarely competitive.”28 There are only a small number of private sector water service companies,29 and two French multinationals, Veolia Water North America and Suez-owned United Water, dominate the market, controlling 61% of the water privatization

23. MERIEM AÏT OUYAHIA, POLICY RESEARCH INITIATIVE, PUBLIC-PRIVATE PARTNERSHIPS FOR FUNDING MUNICIPAL DRINKING WATER INFRASTRUCTURE: WHAT ARE THE CHALLENGES? 2, 10-12 (2006); Edouard Pérard, Water Supply: Public or Private? An Approach Based on Cost of Funds, Transaction Costs, Efficiency and Political Costs, 27 POL’Y & SOC’Y 193, 197-99, 214 (2009); Steven Renzetti & Diane Dupont, Ownership and Performance of Water Utilities, GREENER MGMT. INT’L, Summer 2003, at 9, 12-16; Osmo T. Seppäla et al., Public-Private Partnerships in Water and Sewerage Services: Privatization for Profit or Improvement of Service and Performance? 6 PUB. WORKS MGMT. POL’Y 42, 45-46 (2001). 24. Germà Bel & Mildred Warner, Does Privatization of Solid Waste and Water Services Reduce Costs? A Review of Empirical Studies, 52 RESOURCE, CONSERVATION &RECYCLING 1337, 1341 (2008). 25. Bel et al., supra note 20, 554. 26. Id. at 554, 568-73. 27. See, e.g., OUYAHIA, supra note 23, at 5, 22-27; JUDITH A. REES, GLOBAL WATER P’SHIP, REGULATION AND PRIVATE PARTICIPATION IN THE WATER AND SANITATION SECTOR18, 28 (1998); MILDRED E. WARNER, THE CENTURY FOUND., LOCAL GOVERNMENT INFRASTRUCTURE AND THE FALSE PROMISE OF PRIVATIZATION 11-13 (2009). 28. Germà Bel & Mildred Warner, Challenging Issues in Local Privatization, 26 ENV’T PLANNING C: GOV’T & POL’Y 104, 105 (2008). See also Atsushi Iimi, Optimizing the Size of Public-Private Partnership Contracts in the Water Sector: Implications from an Estimated Cost Function of Private Operators, 10 J. PUB. PROCUREMENT 1, 3, 7-9, 23-24 (2010). 29. DELOITTE, supra note 15, at 14 (2009). See generally David Hall & Emanuele Lobina, International Actors and Multinational Water Company Strategies in Europe, 1990-2003, 15 UTILS. POL’Y 64, 68 (2007).


market.30 The increasing cost of necessary infrastructure improvements could inspire further consolidation in the industry.31 A lack of competition is associated with excessive private profits and corruption.32

3. Transaction Costs

Establishing public-private partnerships for water systems is complicated, expensive, and time-consuming. Because water systems have high asset specificity, long-term water contracts can be especially complicated and expensive to set up, not to mention the transaction costs can be considerable.33 One study estimated that transactions costs could range from 2 percent to 10 percent of total project costs, although it noted, “…consistent and comparable data on transactions costs are rare (because of the proprietary nature of the data).”34 Because transaction costs can be prohibitively high for small municipalities, the U.K.’s Treasury considers public-private partnerships “not suitable” for projects with a capital value of less than £20 million (approximately US $31 million).35 At the other end of the spectrum, according to the U.S. Environmental Protection Agency, “In the case of extremely large

30. Based on governmental outsourcing revenues. PWF’s 16th Annual Report, supra note 17, at 32. Another global survey found that in 2011 Veolia and Suez individually served ten times more people than their next top competitor, with “some 27% of the global market.” PINSENT MASONS, PINSENT MASONS WATER YEARBOOK 2011-2012 xii, 22, 248, 290 (13th ed., 2011). 31. Press Release, Fitch Ratings, Fitch: Escalating Capital Costs May Lead to Consolidation for U.S. Water Utilities (Jan. 23, 2008). 32. Bel & Warner, supra note 23, at 1342 (“[W]ithout competition property rights theory predicts excess profits or corruption in private production…”); Hall & Lobina, supra note 29, at 71-73 (describing the strategies of major water companies and corruption in the water industry and noting that the length of concession contracts “acts to increase the opportunity and incentive for corruption”). 33. See, e.g., OUYAHIA, supra note 23, at 23-24, 36; Bel et al., supra note 20, at 554, 556-58, 568-69; Pérard, supra note 23, at 202; Seppäla et al., supra note 23, at 47-48. See generally, e.g., Aidan R. Vining et al., Public-Private Partnerships in the US and Canada: “There are No Free Lunches”, 7 J. COMPARATIVE POL’Y ANALYSIS: RESEARCH & PRACTICE 199, 199, 203-04, 212-14 (2005) (describing contracting costs for public-private partnerships broadly). 34. JIM JOE ET AL., WALKERTON INQUIRY, GOVERNANCE AND METHODS OF SERVICE DELIVERY FOR WATER AND SEWAGE SYSTEMS 48 (2002). 35. HM TREASURY, STANDARDISATION OF PFI CONTRACTS VERSION, 2007, ¶1.4.3, at2-3 (U.K.). See also HM TREASURY, PFI: STRENGTHENING LONG-TERM PARTNERSHIPS,2006, ¶2.21, at 21, ¶3.15, at 32 (U.K.); ELISABETTA IOSSA & DAVID MARTIMORT, THE SIMPLE MICRO-ECONOMICS OF PUBLIC-PRIVATE PARTNERSHIPS 20 (Ctr. Econ. & Int’l Studies Research Paper No. 139, 2008), available at http://ssrn.com/abstract=1271082.


regional facilities with many participating communities the process may become so complex that it would be difficult to implement.”36

Other hidden expenses, including government guarantees and renegotiations, can further inflate the cost of private service.37

Renegotiations can be particularly costly. For example, an amendment to the water privatization contract in Indianapolis, Indiana, would have cost the city more than $144 million had the city not exited the arrangement early.38 Contract amendments and renegotiations are fairly common, especially in long-term water contracts. A World Bank review of more than 1,000 concession agreements in Latin America and the Caribbean from 1985 to 2000 found that renegotiations occurred in three-quarters of the water and sanitation contracts.39 It also noted that the private operator typically benefited from renegotiation; the three most common outcomes of renegotiation were delays on company investment obligations (in 69 percent of renegotiations), tariff increases (62 percent) and reductions of investment obligations (62 percent).40

A government’s lack of bargaining power and financial resources adds to these problems. Many municipalities lack the necessary technical expertise to negotiate a complex water privatization contract, particularly a long-term deal. The resulting disparity in bargaining power between the local government and the water company, which is often a large multinational, can increase risks and costs for the public.41 When local

36. U.S. ENVTL. PROT. AGENCY, supra note 17, at 20. 37. See generally IOSSA & MARTIMORT, supra 35, at 28-30 (modeling the costs and risks of renegotiation); Ellen Dannin, Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance, 6 NW. J.L. & SOC. POL’Y 47, 54-73 (2011); Marques & Berg, supra note 11, at 1588, 1600. 38. See Office Util. Consumer Counselor, OUCC’s Proposed Order, IND. UTIL.REGULATORY COMM’N No. 43645, June 22, 2010, at 1, 3, 20-22. See also, e.g., JonMurray, Citizens Energy to Replace Veolia, INDIANAPOLIS STAR, Oct. 29, 2010. 39. J. LUIS GUASCH, WORLD BANK INST., GRANTING AND RENEGOTIATING INFRASTRUCTURE CONCESSIONS: DOING IT RIGHT 12-13 (2004). 40. Id. at 18. 41. See, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-10-728, WASTEWATER INFRASTRUCTURE FINANCING: STAKEHOLDER VIEWS ON A NATIONAL INFRASTRUCTURE BANK AND PUBLIC-PRIVATE PARTNERSHIP 32 (2010); Pamela Bloomfield, The Challenging Business of Long-Term Public-Private Partnerships: Reflections on Local Experience, 66 PUB. ADMIN. REV. 400, 406-08 (2006); Violeta Petrova, At the Frontiers of the Rush for Blue Gold: Water Privatization and the Human Right to Water, 31 BROOK. J. INT’L L. 577, 590 (2006). See generally, e.g., WORLD BANK, PUBLIC-PRIVATE PARTNERSHIP UNITS: LESSONS FOR THEIR DESIGN AND USE IN INFRASTRUCTURE 33 (2007) (“PPP procurement requires specialized skills that often are lacking in government…”); Vining et al., supra note 33, at 204, 214 (“A lack of contracting expertise is a common problem for governments with limited P3 experience. Many public agencies cannot


governments explore water privatization under fiscal duress, they are especially vulnerable to being misled by private interests. A cash-strapped municipality can also have difficulty affording adequate legal and other assistance necessary to evaluate and negotiate a deal.42

C. The Financing of Last Resort

Public-private partnerships have been touted as a way to access private sector capital for water and sewer system improvements.43 In some cases, local governments use privatization as if it were a “mega-credit card” for financing infrastructure projects.44 As Masamitsu Onishi and Graham Winch said in a 2012 report for the Association of Chartered Certified Accountants, “Just as with a credit card, however, the interest rates have been relatively high and at some point the debts have to be paid off.”45

In the United States, private sector financing is typically much more expensive than government borrowing.46 The National Research Council determined that, “[e]xcept for short-term cash flow purposes, or the rare circumstances of low public credit, municipal debt will remain the most practical and least expensive form of financing.”47 Publicly owned utilities can issue municipal bonds that are tax-exempt, which means that bondholders do not have to pay federal income taxes on their earned interest. As a result, investors are willing to buy government bonds with a lower interest rate than that of a comparable taxable corporate bond.48

achieve relevant economies of scale … the result is higher unit cost. This lack of experience tends to encourage opportunism by private sector firms.”). 42. See, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 32; Kirk Victor, Big Deals, GOVERNING, Mar. 2012, at 40. 43. See, e.g., BLACK & VEATCH, 2012 STRATEGIC DIRECTIONS IN THE U.S. WATER UTILITY INDUSTRY 13, 17, 35 (2012); ERNST & YOUNG, INVESTING IN GLOBAL INFRASTRUCTURE 2007: AN EMERGING ASSET CLASS 7-8, 12, 68-69 (2007); KPMG INT’L,DELIVERING WATER INFRASTRUCTURE USING PRIVATE FINANCE 8 (2011). See generally U.S. ENVTL. PROT. AGENCY, GUIDEBOOK OF FINANCING TOOLS: PAYING FOR ENVIRONMENTAL SYSTEMS 4-1 (2008); NAT’L RESEARCH COUNCIL, supra note 4, at 51. 44. Hodge & Greve, supra note 12, at 552. 45. Masamitsu Onishi & Graham Winch, Cross-country case analysis, in ASS’NCHARTERED CERTIFIED ACCOUNTANTS, TAKING STOCK OF PPP AND PFI AROUND THE WORLD 16, 22 (Graham Winch et al. eds., 2012). 46. See, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 30; NAT’LRESEARCH COUNCIL, supra note 4, at 51; HAROLD J. SMITH, NAT’L RURAL WATER ASS’N,PRIVATIZATION OF SMALL WATER SYSTEMS 18 (2003); John J. Boland, Editorial, The Business of Water, J. WATER RESOURCE PLAN. & MGMT. May/June 2007 at 189, 190. 47. NAT’L RESEARCH COUNCIL, supra note 4, at 51. 48. STEVEN MAGUIRE, CONG. RESEARCH SERV., PRIVATE ACTIVITY BONDS: ANINTRODUCTION 4 (2006); NAT’L RESEARCH COUNCIL, supra note 4, at 51; SMITH, supra


Private for-profit water utilities can sometimes access private activity bonds that are exempt from federal income taxes, but unlike municipal revenue and general obligation bonds, they are subject to a state volume cap and their interest is usually subject to the alternative minimum income tax.49

Because of the public sector’s lower cost of capital, privatization has been called the “financing of last resort.”50 Indeed, a 2012 survey by Black & Veatch found that U.S. water and sewer utilities had “little interest in pursuing private financing”51 and “very limited interest in any form of public-private partnerships.”52

D. An Expensive Loan

Water privatization has been used as a one-shot trick to fill budget gaps.53 The government’s primary objective in these arrangements is to obtain a sizable upfront payment, often a concession fee, from the company or consortium that takes over the system. This is not free money but an expensive loan.54 In a 2000 report about wastewater privatization, the U.S. Environmental Protection Agency explained that repaying this upfront fee could require sizable rate increases:

In summary, any non-operation payment a local government receives from its privatization of a wastewater infrastructure asset represents a loan from the private entity which must be repaid with interest by the wastewater treatment users in the form of additional user fees. Therefore, the value of any private

note 46, at 16-18; Jeffrey W. Jacobs & Charles W. Howe, Key Issues and Experience in US Water Services Privatization, 21 WATER RESOURCE DEV. 89, 91 (2005). 49. MAGUIRE, supra note 48, at 1-2, 4-6, 9-10 (2006). But see, e.g., AM. WATER WORKS ASS’N, STUDY ON PRIVATE ACTIVITY BONDS AND WATER UTILITIES 1 (2009) (explaining that the American Recovery and Reinvestment Act of 2009 removed PABs from the alternative minimum tax during 2009 and 2010). 50. Gregory Millman, Financing of Last Resort, INFRASTRUCTURE FIN., Sept. 1997 at 17-20. 51. BLACK & VEATCH, supra note 43, at 13. 52. Id. at 17. 53. THOMAS P. DINAPOLI, N.Y. COMPTROLLER, CONTROLLING RISK WITHOUT GIMMICKS: NEW YORK’S INFRASTRUCTURE CRISIS AND PUBLIC-PRIVATE PARTNERSHIPS11-12 (2011) (explaining that New York State is considering public-private partnerships, not specifically in the water sector, for “‘one-shot’ revenues and other short-term budget expedients”); Dannin, supra note 37, at 51 (“States and cities are also using the up-front payments that are part of many infrastructure privatization deals to address their budget deficits.”). 54. See, e.g., U.S. ENVTL. PROT. AGENCY, supra note 17, at 7, 15-16.


entity payments which exceed the current debt on the wastewater infrastructure represents additional debt the wastewater treatment users must repay.

If a local or state government wants to recoup all of its investment in a facility and sets a concession fee or sales price to reflect that amount, the resulting annual costs to the private entity could be very large and may result in significant increases in user fees for all the wastewater users [emphasis added].55

Privatizing a water system to balance the budget is fiscally irresponsible. It fails to address the underlying fiscal problems that created the deficit in the first place and could increase long-term costs for households and local businesses.56 Such off-balance-sheet financing interferes with transparency and accountability.57 Reliance on “one shots” can increase long-term borrowing costs, and credit rating agencies typically disapprove of the practice.58 The New York State Comptroller’s Office called this use of privatization “budget gimmickry” because it “provides a short-term cash benefit while pushing costs to the future and potentially increasing public debt.”59 Similarly, officials from the Massachusetts’ Office of the Inspector General said, “Using privatization to generate short-term government revenue generally produces a transfer of costs to future taxpayers rather than any real savings.”60

55. OFFICE OF WATER, U.S. ENVTL. PROT. AGENCY, EPA-832-B-00-002, GUIDANCE ON THE PRIVATIZATION OF FEDERALLY FUNDED WASTEWATER TREATMENT WORKS 15(2000). 56. See, e.g., N.Y. COMPTROLLER, supra note 53, at 11-12; PUB. FIN. MGMT.,GOVERNOR’S CTR. FOR LOCAL GOV’T SERVS., PA., MUNICIPALITIES FINANCIAL RECOVERY ACT: RECOVERY PLAN. READING, BERKS CNTY., PA. 219-20 (2010). 57. David Heald & George Georgiou, Accounting for PPPs in a Converging World,in INTERNATIONAL HANDBOOK ON PUBLIC-PRIVATE PARTNERSHIPS 237, 258 (Graeme A. Hodge et al. eds., 2010); WORLD BANK, supra note 41, at 23 (“The consequences of pushing commitments off-budget are reduced incentives and ability to control costs, and the risk that the government will accumulate more liabilities than it can manage.”). 58. See, e.g., N.Y. COMPTROLLER, supra note 53, at 11; Freeman Klopott & Brian Chappatta, Government One-Shot Raising Taxpayers’ Debt Costs: Muni Credit,BLOOMBERG (Apr. 20, 2012), available at http://www.bloomberg.com/news/2012-04-20/government-one-shots-raising-taxpayers-debt-costs-muni-credit.html. 59. N.Y. COMPTROLLER, supra note 53, at 2. 60. JACQUES ROGOZINSKI, HIGH PRICE FOR CHANGE: PRIVATIZATION IN MEXICO (Inter-American Development Bank ed. 1998).


III. CONSUMER CONSEQUENCES

A. High Rates

On average, private sector companies charge higher water and sewer rates than local government utilities.61 In 2009, Food & Water Watch compiled state surveys of water and sewer rates to compare the typical residential bills of privately-owned and publicly-owned systems.62 It found that investor-owned utilities typically charged 33 percent more for water and 63 percent more for sewer service than local governments.63

Similarly, a 2010 survey of the largest water utilities in the Great Lakes region found that privately owned systems charged more than twice as much as municipal systems.64 The researchers attributed this difference to private companies’ taxes, profits, higher overall service costs, and ratemaking practices.65

For many communities, frequent and massive rate increases are the most pronounced consequence of privatization. In 2011, Food & Water Watch examined how water prices changed under private ownership following the ten largest known sales of municipal water or sewer systems to for-profit companies in the preceding two decades.66 The study found that typical household water bills had nearly tripled on average since privatization, and under private ownership, water bills grew at an average of about three times the rate of inflation, adding hundreds of dollars unto annual household bills.67 This trend was even more drastic in Illinois, where ten communities that sold their water systems to investor-owned utilities saw the typical annual household

61. See, e.g., U.S. ENVTL. PROT. AGENCY, EPA 815-R-09-001, 2006 COMMUNITY WATER SYSTEM SURVEY. VOLUME I: OVERVIEW 21-23 (2009); Petrova, supra note 41, at 588-590; Janice A. Beecher, Private Water and Economic Regulation in the United States, in HANDBOOK UTILITY MANAGEMENT 779, 788-90 (Andreas Bausch & Burkhard Schwenker eds., 2009); NAT’L RESEARCH COUNCIL, supra note 4, at 5, 87-88. 62. FOOD & WATER WATCH, QUESTIONS & ANSWERS: A COST COMPARISON OF PUBLIC AND PRIVATE WATER UTILITY OPERATION (2009), available at www.documents. foodandwaterwatch.org/doc/A-Cost-Comparison-of-Public-and-Private-Water.pdf. 63. Id. 64. JANICE A. BEECHER & JASON A. KALMBACH, GREAT LAKES COMM’N, 2010 GREAT LAKES WATER SURVEY 14-15 (2011). 65. Id. at 15-16. 66. FOOD & WATER WATCH, SELLING OUT CONSUMERS: HOW WATER PRICES INCREASED AFTER 10 OF THE LARGEST WATER SYSTEM SALES (2011), available at http://www.foodandwaterwatch.org/factsheet/selling-out-consumers/. 67. Id.


water bill grow at an average compound rate of 18 percent a year.68 In comparison, national surveys have found that water and sewer bills generally increase by about 5 percent a year,69 so customers of these privatized systems saw their water bills grow much faster than typical.

Evidence from France suggests similar rate impacts with public-private partnerships. Private sector participation in public water services is much more prevalent in France than in the United States,70 and further, France’s information about contract operations is more readily available.71 An analysis of several thousand local water authorities in France found that every type of public-private partnership was associated with significant increases in water prices.72 Depending on the contract type, privatization increased the typical annual water bill by 22 to 40 €, or 15 to 26 percent.73

B. Poor Performance

1. Investment Levels

The higher prices of private service do not translate into greater investments in water system improvements. In a 2006 survey of community water systems, the EPA found, “Publicly owned systems tended to invest more than privately owned ones.”74 In addition, private

68. FOOD & WATER WATCH, ILLINOIS AMERICAN WATER AND AQUA ILLINOIS:COMMUNITY EXPERIENCES WITH THE LARGEST INVESTOR-OWNED WATER UTILITIES IN ILLINOIS 18 (Oct. 2011), available at http://www.foodandwaterwatch.org/briefs/illinois-american-water-and-aqua-illinois/. 69. See, e.g., JANICE A. BEECHER, MICH. STATE UNIV., INST. PUB. UTILITIES REGULATORY RESEARCH & EDUC., TRENDS IN CONSUMER PRICES (CPI) FOR UTILITIES THROUGH 2010 6 (2011); BLACK & VEATCH, 2009/2010 50 LARGEST CITIES WATER/WASTEWATER RATE SURVEY 2 (2010); NAT’L ASS’N OF CLEAN WATER AGENCIES,2010 SERVICE CHARGE INDEX (2011). 70. PINSENT MASONS, supra note 30, at 39, 41. (In 2011, the private sector served 67 percent of the French population and 15 percent of the U.S. population to some extent). 71. See U.S. ENVTL. PROT. AGENCY, INFORMATION AVAILABLE FROM THE SAFE DRINKING WATER INFORMATION SYSTEM (EPA 816 F 98 006,1998). (In the Safe Drinking Water Information System, the EPA maintains information about the ownership type but not the operating structure of every public water system). 72. Eshien Chong et al., Public-Private Partnerships and Prices: Evidence from Water Distribution in France, 29 REV. INDUS. ORG. 149, 163 (2006). 73. Id. at 158-66. Prices were based on an annual consumption of 120 cubic meters or 31,700 gallons of water. After correcting for endogeneity of organizational choice, the price premium associated with public-private prices was 11€, an eight percent increase. 74. U.S. ENVTL. PROT. AGENCY, supra note 61, at 28.


for-profit water companies may try to avoid spending money on improvement projects that they find less profitable.75

2. Service Quality

“Because the overriding objective of the private partner is to maximize profit, quality might hold a lower priority for the private partner than for the government (for whom service delivery objectives might hold the highest priority).”76 Indeed, there is ample evidence that maintenance backlogs, wasted water, sewage spills, and service problems often follow privatization.77 In fact, poor performance is the primary reason that local governments reverse the decision to privatize and resume public operation of previously contracted services.78

75. See, e.g., DAVID HALL & EMANUELE LOBINA, PUB. SERVS INT’L RESEARCH UNIT,PIPE DREAMS: THE FAILURE OF THE PRIVATE SECTOR TO INVEST IN WATER SERVICES IN DEVELOPING COUNTRIES 50 (2006); SMITH, supra note 46, at 18 to 19; Jessica Budds & Gordon McGranahan, Are the Debates on Water Privatization Missing the Point? Experiences from Africa, Asia and Latin America, 15 ENV’T & URBANIZATION 87, 100-104 (2003). 76. Philippe Burger & Ian Hawkesworth, How to Attain Value for Money: Comparing PPP and Traditional Infrastructure Public Procurement, 11 OECD J. ON BUDGETING 91, 131 (2011). 77. See, e.g., FOOD & WATER WATCH, FAULTY PIPES: WHY PUBLIC FUNDING – NOT PRIVATIZATION—IS THE ANSWER FOR U.S. WATER SYSTEMS 14-21 (2008), available at http://documents.foodandwaterwatch.org/doc/FaultyPipesSeptember2008-web.pdf; FOOD & WATER WATCH, MONEY DOWN THE DRAIN: HOW PRIVATE CONTROL OF WATER WASTES PUBLIC RESOURCES 9-23 (2009), available at http://documents.foodandwaterwatch. org/doc/ MoneyDownDrain.pdf.; DAVID HALL ET AL., PUBL. SERVS. INT’L RESEARCH UNIT, REPLACING FAILED PRIVATE WATER CONTRACTS 3-5 (2010); See generally, e.g.,Rhys Andrews & Tom Entwistle, Does Cross-Sectoral Partnership Deliver? An Empirical Exploration of Public Service Effectiveness, Efficiency, and Equity, 20 J. PUB.ADMIN. RESEARCH & THEORY 679, 689 (2010) (“[O]ur data suggest that public-private partnership is negatively associated with effectiveness. … Our finding may therefore mirror research which suggests … contracting with the private sector may lead to lower service quality.”); Craig Anthony Arnold, Water Privatization Trends in the United States: Human Rights National Security, and Public Stewardship, 33 WM. & MARY ENVTL. L. & POL’Y REV. 785, 799-804 (2009) (describing privatization failures); Marques & Berg, supra note 11, at 1588 (“In addition, service quality could be low due to underinvestment and to the inability of the contract to specifically address all quality issues.”); Frank L.K. Ohemeng & John K. Grant, Has the Bubble Finally Burst? A Comparative Examination of the Failure of Privatization of Water Services Delivery in Atlanta (USA) and Hamilton (Canada), 13 J. COMPARATIVE POL’Y ANALYSIS: RESEARCH & PRACTICE 287, 298 (2011) (detailing customer services issues in Atlanta and a major sewage spill in Hamilton under privatization). 78. WARNER, supra note 27, at 9-10; WARNER & HEFETZ, supra note 20, at 19-20.


3. Cutting Corners

When private operators attempt to cut costs to boost their income, the practices they employ can have a negative effect on service.79 For example, they may use shoddy construction materials, delay needed maintenance, cut labor costs by scaling back compensation packages or downsizing the workforce, or pursue “quality-shading” investments.80 On average, more than one-third of public water utility jobs are lost after privatization,81 which can impair customer service and slow responses to emergencies.82 Atlanta is a telling example. Over the four years that United Water managed Atlanta’s water system, it cut the work force by more than half.83 The company fell behind on maintenance, accumulating a backlog of more than 13,000 service requests.84 Residents complained of brown water and low pressure, and a city’s review board published a four-inch thick report documenting the company’s alleged failures, including inadequate meter installation and bill collection.85 The city exited the contract four years into the 20-year deal.86

4. Asset Deterioration

Inadequate upkeep can precipitate equipment breakdowns and capital replacements, which can increase public sector costs.87 Many water

79. SMITH, supra note 46, at 17. 80. Id. (discussing examples of cost-cutting measures); See generally, e.g., Oliver Hart, Incomplete Contracts and Public Ownership: Remarks, and An Application to Public-Private Partnerships, 113 ECON. J. C69, C71-C74 (2003) (explaining that incomplete contracts and private ownership encourage “quality-shading investment” or “an unproductive investment that reduces total costs and quality”); David McKenzie & Dilip Mookherjee, The Distributive Impact of Privatization in Latin America: Evidence from Four Countries, 3 ECONOMÍA 161, 199-206 (2003) (describing employment trends after privatization). 81. See, e.g., FOOD & WATER WATCH, WATER PRIVATIZATION THREATENS WORKERS,CONSUMERS AND LOCAL ECONOMIES (2009), available at http://documents.foodandwater watch.org/doc/unionJobsFinal-web.pdf; Adrian Moore, Long-Term Partnerships in Water and Sewer Utilities: Economic, Political and Policy Implications, U. COUNCIL ON WATER RESOURCES, October 2000 at 21, 22. 82. Id. See, e.g., SMITH, supra note 46, at 17; Seppäla et al., supra note 23, at 46. 83. D.L. Bennett & Julie B. Hairston, Atlanta May Throw Out Private Water Utility Operator, ATL. J. CONST., Jan. 13, 2003, at 8Cz. 84. Id. 85. Id. 86. See Ernie Suggs, Council Agrees to End Water Deal, Rejects Gag Rule, ATL. J.CONST., Mar. 4, 2003, at 2D (explaining that the city and the company entered into a mutual dissolution agreement). 87. ASS’N OF METRO. SEWERAGE AGENCIES & ASS’N OF METRO. WATER AGENCIES,EVALUATING PRIVITIZATION II: AN AMSA/AMWA CHECKLIST 27 (2002).


privatization contracts specify that the local government is responsible for capital improvements, while the private operator is responsible for routine maintenance and repairs.88 This gives the private operator “an incentive to promote capital solutions,” and in some cases, companies can technically comply with their contracts while effectively shifting upkeep costs to the local government.89 Since 70 to 80 percent of water and sewer assets are underground, a municipality cannot easily monitor a contractor’s performance.90 As a result, “the effects of shoddy work may not become evident during the contract period.”91 Further, as stated by Harold Smith, “Asset deterioration can be particularly problematic under the long-term contract operations and asset lease models.”92

5. Keeping the Difference

Customers generally do not see benefits from a private operator’s reductions in labor and maintenance costs. Unless contractually required to do so, a private operator is unlikely to pass on the savings to the public through reduced fees.93 For example, upon receiving a 20-year wastewater contract for the Lynn Water and Sewer Commission, a private operator planned to reduce the plant’s workforce by 20 percent, even though it was to receive an increase in income.94 The Inspector General of the Commonwealth of Massachusetts concluded, “This indicates that any cost savings achieved through future staff reductions will produce increased profits for U.S. Filter [the private operator] rather than lowering rates for Commission ratepayers.”95

88. Id. 89. Id. See also SMITH, supra note 46, at 18-19. 90. See OUYAHIA, supra note 23, at 8. 91. Accord REES, supra note 27, at 21. 92. SMITH, supra note 46, at 19. 93. Hulya Dagdeviren, Political Economy of Contractual Disputes in Private Water and Sanitation: Lessons from Argentina, 82 ANNALS OF PUB. & COOP. ECON. 25, 33(2011); Isabelle Fauconnier, The Privatization of Residential Water Supply and Sanitation Services: Social Equity Issues in the California and International Contexts, 13 BERKELEY PLAN. J. 37, 48 (1999); (“This [unethical dealings in the French water sector] provides an apt illustration [of] how efficiency gains can amount to rents extracted through corrupt business and political dealings rather than being passed on to consumers in the form of lower prices.”); Aidan R. Vining et al., Public-Private Partnerships in the U.S. and Canada: Case Studies and Lessons, 3 INT’L PUB. PROCUREMENT CONF. PROC.31, 35 (2004); Aidan R. Vining & Anthony E. Boardman, Public-Private Partnerships: Eight Rules for Governments, 13 PUB. WORKS MGMT. POL’Y 149, 152 (2008). 94. ROBERT A. CERASOLI, OFFICE OF THE INSPECTOR GEN., MASS., PRIVATIZATION OF WASTEWATER FACILITIES IN LYNN, MASSACHUSETTS 59 (2001). 95. Id.


C. Loss of Local, Public Control

Water systems are essentially natural monopolies. They are so capital-intensive that it is generally cost-prohibitive to have multiple providers serve the same area, resulting in a captive customer base.96

While public control of a natural monopoly can help ensure that service is widely available and that prices are economically efficient, according to the Congressional Budget Office and Joint Committee on Taxation, “a private firm in such a position would be expected to try to maximize profits by restricting supply and raising prices.”97

Profit potential is the private sector’s primary consideration when making decisions.98 This has important equity implications beyond the price and quality of services. For example, private sector water utilities are unlikely to adopt the same criteria as municipalities when deciding where to extend services.99 Instead, private sector water companies tend to cherry-pick service areas.100 John Boland noted, “Typically, operators will avoid low-income neighborhoods where use will be low and bill collection problems high.”101 A private operator may also be unwilling to respond to certain issues and developments unless required by its contract.102 Donald Featherstun et al. explained, “Whereas a public entity easily shifts emphasis and direction to meet the needs of its constituency, a private contractor, obligated only to perform to the contract requirements as reflected in the specifications, may not be so inclined.”103

Because the primary objectives of a private sector water company can differ substantially from those of a public sector entity, privatization

96. See, e.g., CONG. BUDGET OFFICE & JOINT COMM. ON TAXATION, NO. 4005,SUBSIDIZING INFRASTRUCTURE INVESTMENT WITH TAX-PREFERRED BONDS 3-4 (2009); NAT’L RESEARCH COUNCIL, supra note 4, at 92, 112; Beecher, supra note 61, at 791-92, 798-99. Warner & Bel, supra note 13, at 724-25. 97. CONG. BUDGET OFFICE & JOINT COMM. ON TAXATION, supra note 96, at 3-4. See generally Jonas Prager, Contracting-Out: Theory and Policy, 25 N.Y.U. J. INT’L L. &POL. 73, 96 (1993) (“Indeed, the static theory of monopoly justifies nationalizing an industry that is a natural monopoly because a public monopoly will actually be more efficient than a private monopoly.”). 98. See, e.g., U.S. GEN. ACCOUNTING OFFICE (2002), supra note 11, at 49; OUYAHIA,supra note 23, at 29; SMITH, supra note 46, at 17-18. 99. SMITH, supra note 46, at 17-18. 100. See, e.g., U.S. GEN. ACCOUNTING OFFICE (2002), supra note 11, at 52; OUYAHIA,supra note 23, at 34-35; Karen J. Bakker, A Political Ecology of Water Privatization, 70STUD. POL. ECON. 35, 41 (2003); Boland, supra note 46, at 191. 101. Boland, supra note 46, at 191. 102. Donald G. Featherstun et al., State and Local Privatization: An Evolving Process,30 PUB. CONT. L.J. 643, 649 (2001). 103. Id.


can create conflict and interfere with government policies and economic development plans.104 According to Vining and Boardman, “This divergence of goals is likely to raise transaction costs and lead to negative externalities or reductions in quality.”105 Privatization can also hamper a government’s ability to adapt to changing circumstances. In some arrangements, a local government and private operator can be bound to the terms of a single contract for decades.106 This inflexibility restricts innovation and responsiveness to new developments.107 Because no one can predict all the changes that occur over decades, long-term privatization contracts invariably are incomplete, which can result in costly renegotiations and reduce transparency and accountability.108

Ellen Dannin detailed how certain clauses in transportation privatization contracts could impede government responses to a number of issues:

Thus, for the life of an infrastructure privatization contract, government obligations to insure a contractor’s revenues complicate—and even eliminate—options for addressing challenges, such as reducing air pollution, environmental degradation, and urban and suburban congestion; mitigating greenhouse gases connected with global climate change; promoting public health; and tackling other problems related to car-focused transportation.109

104. See, e.g., OUYAHIA, supra note 23, at 17, 29-30; SMITH, supra note 46, at 17-18. See generally U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 31 (noting that officials expressed concern about loss of municipal control over rate setting and system growth); Boland, supra note 46, at 191 (“…a private firm … has no particular responsibility to cooperate with government agencies in [integrated water management].”). 105. Vining & Boardman, supra note 93, at 152. 106. IOSSA & MARTIMORT, supra note 35, at 28-30, 43. 107. Id. 108. See generally OUYAHIA, supra note 23, at 17, 28; IOSSA & MARTIMORT, supra 35, at 28-30, 43 (describing the costs and risks of renegotiation); REES, supra note 27, at 18-19; Bloomfield, supra note 41, at 407 (describing the risks and costs of long-term contracts). 109. Dannin, supra note 37, at 64.


IV. SOLUTIONS

A. Preserving Local, Public Control

Public opposition to water privatization is formidable and has stopped a number of transactions from occurring.110 In 2008, Akron, Ohio, voters rejected the mayor’s scheme to lease their sewers and passed a charter amendment requiring a voter approval of the sale, lease, or transfer of city utilities.111 The next year, public opposition thwarted a proposal to lease the water utility in Milwaukee, Wisconsin, to a private company for up to 99 years.112 As another example, voters in Cincinnati amended the city’s charter amendment to require voter approval of any sale or transfer of city assets to a regional water district, which was viewed as a possible step toward privatization.113 Public opposition has also stopped many other privatizations, including a proposed sale of the water and sewer systems in Marion, Indiana,114 and a proposed public-private partnership for the sewer plant in Grand Island, Nebraska.115 “The people do not want us to do this,” Grand Island Councilmember Bob Niemann told the Grand

110. U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 41, at 29; FOOD & WATER WATCH, supra note 6, at 5 (summarizing a number of failed privatizations); STEVE MAXWELL, 2012 WATER MARKET REVIEW: A CONCISE REVIEW OF CHALLENGES AND OPPORTUNITIES IN THE WORLD WATER MARKET 9 (2012). 111. See AKRON, OHIO, CHARTER § 64 (2011); Ohio City Rejects Sewers-Scholarships Plan, ASSOCIATED PRESS, Nov. 5, 2008, available at LexisNexis. See generally FOOD &WATER WATCH (2009), supra note 77, at 1 (providing background information about the public campaign against the privatization). 112. See Larry Sandler, Milwaukee Alderman Halt Study of Privatizing Water Utility,MILWAUKEE WIS. J. SENTINEL, May 29, 2009, available at http://www. jsonline.com/news/milwaukee /46510077.html; See generally FOOD & WATER WATCH,MORTGAGING MILWAUKEE’S FUTURE: WHY LEASING THE WATER SYSTEM IS A BAD DEAL FOR CONSUMERS (2009), available at http://documents.foodandwaterwatch.org/ doc/milwaukeeLease.pdf (providing background information about the proposed lease arrangement). 113. See CINCINNATI, OHIO, CHARTER, art. XV (2009); Horstman, supra note 3; Jane Prendergast, City Pulls Plug on Regional Waterworks, CINCINNATI ENQUIRER, Dec. 9, 2010, available at http://news.cincinnati.com/article/20101209/NEWS0108/12100325/ City-pulls-plug-regional-waterworks. 114. See Maribeth Vaughn, Utility Sale Nixed, CHRON. TRIB. (Marion, IN), July 25, 2010, available at http://www.chronicle-tribune.com/archives/chronicle-tribune/utility-sale-nixed/article_ec53b747-c5c4-59c0-952d-203ddeb67ba1.html. 115. See Tracy Overstreet, Council Rejects Private Management of Sewer Plant,GRAND ISLAND INDEP. (Neb.), Feb. 15, 2012, available at http://www. theindependent.com/news/local/council-rejects-private-management-of-sewer-plant/article _8094c728-579d-11e1-91b6-001871e3ce6c.html.


Island Independent explaining why the city council rejected the privatization contract. “It’s all about representative government.”116

Public organizing efforts, however, face new challenges, as some states exploit the financial crisis to usurp local decision-making power. In 2011, Michigan passed the Local Government and School District Fiscal Accountability Act, giving the state considerable power over cash-strapped municipalities.117 If the state decides that a local government’s fiscal situation warrants intervention, the governor can appoint an emergency financial manager who has broad jurisdiction over city functions.118 This person — who serves at the discretion of the governor, not the voters119 — has the authority to privatize public services,120

regardless of the wishes of elected officials.121 For example, Pontiac’s emergency manager privatized the water and sewer department by laying off workers and turning over the utility’s operation and management to United Water (a subsidiary of French multinational Suez Environnement).122 In Michigan, an emergency financial manager can even unilaterally sell off entire water and sewer systems,123 despite any local laws or charter provisions to the contrary.124 Overall, this act severely restricts local public accountability and input into the fate of community water resources. It is an affront to our democratic system and one that we all must commit to fight.

116. Id. 117. Local Government and School District Fiscal Accountability Act, Mich. Pub. Act No. 4 (2011) (codified as amended at MICH. COMP. LAWS §§141.1501-141.1531 (2012)). 118. Id. at §141.1515(4). 119. Id. at §141.1515(5)(d). 120. Id. at §141.1519(1)(r); §141.1519(1)(y). 121. See Id. at §141.1519(1)(ee) (“The power of the emergency manager shall be superior to and supersede the power of any of the foregoing officers or entities.”). 122. See Shaun Byron, Pontiac Dissolves Planning Commission, Layoffs Hit City,OAKLAND PRESS (Mich.), May 21, 2011, available at http://www.theoaklandpress.com/ articles/2011/05/20/news/local_news/doc4dd6cef521e18350343159.txt?viewmode=fullstory. See also Press Release, United Water, United Water and Pontiac, MI Sign Professional Services Agreement for Management of Water and Wastewater Systems (July 5, 2011), available at http://www.unitedwater.com/newscenter.aspx?id=6836. 123. MICH. COMP. LAWS §141.1519(1)(r). See also §141.1517(1) (“An order issued under this section is binding on the local elected and appointed officials and employees, agents, and contractors of the local government to whom it is issued.”). 124. Id. at §141.1519(1) (“An emergency manager may take 1 or more of the following additional actions with respect to a local government which is in receivership, notwithstanding any charter provision to the contrary” (emphasis added)). See also id.§141.1519(4) (explaining that an emergency manager would need voter approval only for the sale of light, heat, or power utilities). See generally FOOD & WATER WATCH, KEEP SOUTHEAST MICHIGAN’S WATER IN PUBLIC HANDS (2011), available at http://www.foodandwaterwatch.org/factsheet/keep-southeast-michigan-water-in-public-hands/ (explaining how this could affect Detroit).


B. Remunicipalization

A growing number of localities have remunicipalized their water and sewer services by exiting privatization arrangements and bringing the systems under public control and operation.125 Mildred Warner and Germà Bel analyzed the local public service delivery methods of more than a thousand U.S. municipalities and found that from 1997 to 2002, twice as many municipalities remunicipalized water systems as privatized water systems.126 Warner and Bel concluded, “This suggests that a large proportion of municipalities experimented with privatization and found the results unsatisfactory.”127

The fiscal crisis appeared to give new momentum to this trend. According to Public Works Financing’s annual survey of the U.S. water outsourcing market, four of the largest private water operators entered into 14 new privatization contracts in 2011, while they lost 27 contracts that reverted to municipal control.128 The renewal rate for water privatization contracts was at an “all-time low.” 129 Indeed, a number of local governments reexamined the efficacy and efficiency of continuing to contract out their water and sewer services to private for-profit entities, and found that they could save millions of dollars by running their water utilities with public employees instead of private contractors.130 Food & Water Watch reviewed 18 communities that reclaimed public management of water or sewer services between 2007 and 2010, and found that public operation was an average of 21 percent less expensive than private operation.131

Public operation can reduce costs by eliminating the profit requirement needed by a private contractor as well as the overhead expenses associated with negotiating and monitoring complicated contracts.132 Unlike private sector operators who transfer profits out of local communities to owners around the world, publicly run utilities

125. See HALL & LOBINA., supra note 75, at 9; DAVID A. MCDONALD,REMUNICIPALISATION: PUTTING WATER BACK INTO PUBLIC HANDS 8 (Martin Pigeon et al. eds., 2012); Joyce Valdovinos, The Remunicipalization of Parisian Water Services: New Challenges for Local Authorities and Policy Implications, 37 WATER INT’L 107, 114 (2012); Warner & Hefetz, supra note 20, at 19. 126. Warner & Bel, supra note 13, at 731. 127. Id. 128. PWF’s 16th Annual Report, supra note 18, at 24-30. 129. Id. at 24. 130. FOOD & WATER WATCH, THE PUBLIC WORKS: HOW THE REMUNICIPALIZATION OF WATER SERVICES SAVES MONEY (2010), available at http://www.foodandwaterwatch.org /factsheet/public-works/. 131. Id. 132. Id.


reinvest into their communities through infrastructure projects and their workforce.133 For example, both Fairfield-Suisun Sewer District and Petaluma, California, brought the operation of their sewer treatment systems in-house to save money while offering better compensation packages, which were necessary to attract qualified personnel.134 It is unsurprising then that in several localities, public operation was able to simultaneously cut costs and improve performance. For example, Cave Creek, Arizona, said in its 2009 financial report, “During the fiscal year the Town managed and operated its water system eliminating an operating contract with a private company and improving operations while reducing operating expenses.”135

C. Public-Public Partnerships

Public-public partnerships are another way that localities can reduce costs and improve the performance of water services. In a public-public partnership two or more public sector entities join together, on a not-for-profit basis, to pool resources, increase buying power and enhance technical expertise.136 These public sector partnerships promote public-service delivery through sharing best practices.137 They employ three basic strategies to leverage the capacity of cooperating public entities to save money and enhance service quality:138 (1) bulk purchasing agreements or purchasing cooperatives;139 (2) shared service agreements

133. Id. 134. Agenda, Petaluma, Cal., Presentation, Discussion and Possible Action Regarding Plan for Operation and Maintenance of the Ellis Creek Water Recycling Facility 5 (Oct. 1, 2007) (on file with author); Minutes, Petaluma, Cal., Regular City Council/PCDC Meeting (Nov. 19, 2007) (on file with author); Memorandum from O&M Ad Hoc Comm. to Bd. Dirs., Fairfield-Suisun Sewer Dist., Cal. (Jan. 22, 2008) (on file with author); FAIRFIELD-SUISUN SEWER DIST., CAL., COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2009, 5-6 (2009). 135. CAVE CREEK, ARIZ., COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR ENDED JUNE 30, 2009 18 (2010). 136. See, e.g., FOOD & WATER WATCH & GLOBAL LABOR INST., PUBLIC-PUBLIC PARTNERSHIPS: AN ALTERNATIVE MODEL TO LEVERAGE THE CAPACITY OF MUNICIPAL WATER UTILITIES 3 (2012); DAVID HALL ET AL., PUB. SERVS. INT’L & TRANSNATIONAL INST., PUBLIC-PUBLIC PARTNERSHIPS (PUPS) IN WATER 2-5 (2009); Gemma Boag & David McDonald, A Critical Review of Public-Public Partnerships in Water Services, 3 WATER ALTERNATIVES 1, 4-6 (2010). 137. Id. 138. See FOOD & WATER WATCH & GLOBAL LABOR INST., supra note 136, at 5-6. 139. See, e.g., Josh Cable, Teaming Up for Discounts, GOV’T PROCUREMENT, Apr.-May 2009, at 18-19; Marc Flake, Purchasing Co-op Stretches Dollars, AM. CITY &COUNTY, Sept. 2000, at 10.


or joint capital projects;140 and (3) reengineering or labor cooperation, wherein public entities work with labor unions, nongovernmental organizations, or other public bodies to help address inefficiencies or make system improvements.141

Research has found that compared to public-private partnerships, “public-public partnerships are more effective, efficient and equitable.”142 Public-public partnerships are more effective at meeting performance objectives and improving public services,143 and they are associated with increased efficiency and lower costs.144 By involving the entire community, public-public partnerships increase the accountability and equity of water services, delivering services to everyone, including people and communities that are often excluded, underrepresented, or disadvantaged.145

In the United States, public-public partnerships are more prevalent than public-private partnerships for water and sewer service delivery.146

A large survey of U.S. cities and counties found that there were three to four times as many intergovernmental partnerships as public-private partnerships for water and sewage services.147 Additionally, since the early 2000s, the prevalence of public sector collaboration has grown

140. See, e.g., MARC HOLZER ET AL., LOCAL UNIT ALIGNMENT, REORGANIZATION &CONSOLIDATION COMM., RUTGERS UNIV., LITERATURE REVIEW AND ANALYSIS RELATED TO COSTS AND BENEFITS OF SERVICE DELIVERY CONSOLIDATION AMONG MUNICIPALITIES1, 16, 19 (2009). 141. See, e.g., ALLYNE BEACH & LINDA KABOOLIAN, WORKING FOR AM. INST., AFL-CIO & PUB. SECTOR LABOR MGMT. COMM, HARVARD UNIV., WORKING BETTER TOGETHER: A PRACTICAL GUIDE TO HELP UNIONS, ELECTED OFFICIALS AND MANAGERS IMPROVE PUBLIC SERVICES 5, 8 13, 47-52 (2005); HALL ET AL., PUB. SERVS. INT’LRESEARCH UNIT ET AL., PUBLIC-PUBIC PARTNERSHIPS IN HEALTH AND ESSENTIAL SERVICES5-7 (2005); HALL ET AL., supra note 136, at 5. 142. FOOD & WATER WATCH & GLOBAL LABOR INST., supra note 136, at 4-5; See, e.g., Andrews & Entwistle, supra note 77, at 689-93; Josephine Tucker et al., Pol’y Dept., Eur. Parl. Directorate-General for External Policies, A Comparative Evaluation of Public-Private and Public-Public Partnerships for Urban Water Services in ACP Countries, 37, EUR. PAR. DOC. EXPO/B/DEVE/FWC/2009-01/Lot5/01 (May 2010). 143. See, e.g., Andrews & Entwistle, supra note 77, at 689; Tucker et al., supra note 142, at 13-17. 144. See, e.g., Id. at 691; Tucker et al., supra note 142, at 14, 17, 33. 145. See, e.g., Id. at 692; Tucker et al., supra note 142, at 15, 17, 19, 37; Mildred Warner & Amir Hefetz, Rural-Urban Differences in Privatization: Limits to the Competitive State, 21 ENV’T & PLANNING C: GOV’T & POL’Y 703, 714-15 (2003). 146. FOOD & WATER WATCH, RENEW AMERICA’S WATER: PUBLIC-PUBLIC PARTNERSHIPS: AN ALTERNATIVE MODEL TO LEVERAGE THE CAPACITY OF MUNICIPAL WATER UTILITIES (2011), available at http://documents.foodandwaterwatch.org/ doc/PUPsFactSheet.pdf/. 147. Warner & Hefetz, supra note 20, at 14.


while the rate of for-profit private contracting has declined.148

Interestingly, a survey of New Jersey municipalities found that the use of shared service agreements was the leading strategy to address budget shortfalls in 2011,149 with 82 percent of respondents participating in a shared service arrangement.150 In comparison, only 18 percent of respondents privatized services that year, citing citizen opposition and increased costs as the primary deterrents to privatization.151

D. Renewed Federal Commitment

Government assistance is an important source of water infrastructure funding, particularly for small systems.152 Unfortunately, the federal contribution to the Drinking Water and Clean Water State Revolving Funds has fallen dramatically in recent years.153 A dedicated source of federal funding would protect water system funding from yearly political decisions and help municipalities renovate their water infrastructure.154

Such an investment would relieve overburdened state and municipal governments, create hundreds of thousands of good jobs, and help ensure universal access to clean drinking water for every person in the country.155

In addition, the federal government can support water infrastructure by reauthorizing the Build America Bonds program. Under the previous program, a state or local government issued a taxable bond and received a 35 percent direct subsidy from the federal government to offset borrowing costs.156 Build America Bonds funded more than $180 billion of new public infrastructure projects in 2009 and 2010, saving states and

148. Id. at 11, 14, 19. 149. LEILA SADEGHI & KATHE CALLAHAN, N.J. STATE LEAGUE OF MUNICIPALITIES WITH RUTGERS CTR.FOR EXEC. LEADERSHIP IN GOV’T: 2011 MUNICIPAL MANAGEMENT SURVEY7 (2011). 150. Id. at 3. 151. Id. at 6. 152. See, e.g., CLAUDIA COPELAND & MARY TIEMANN, CONG. RESEARCH SERV., WATER INFRASTRUCTURE NEEDS AND INVESTMENT: REVIEW AND ANALYSIS OF KEY ISSUES 20-21(2010); Warner & Hefetz, supra note 145, at 709-10, 714-15. 153. See OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, FISCAL YEAR 2013 BUDGET OF THE UNITED STATES GOVERNMENT178-80 (2012); COPELAND &TIEMANN, supra note 152, at 21; CLAUDIA COPELAND, CONG. RESEARCH SERV., WATER INFRASTRUCTURE FINANCING: HISTORY OF EPA APPROPRIATIONS 1-4 (2000). 154. FOOD & WATER WATCH, RENEW AMERICA’S WATER: WHY OUR COMMUNITIES NEED FEDERAL INVESTMENT IN OUR PUBLIC WATER SYSTEMS TO PROVIDE SAFE WATER FOR GENERATIONS TO COME (2010), available at http://www.foodandwaterwatch.org /factsheet/renew-americas-water/. 155. Id. 156. U.S. TREASURY DEP’T, TREASURY ANALYSIS OF BUILD AMERICA BONDS AND ISSUER NET BORROWING COSTS 3 (2010).


local governments a total of $20 billion in borrowing costs.157 The Treasury Department called this program “highly successful at stimulating infrastructure investment.”158

V. CONCLUSION

As public officials determine how to address growing budget deficits, they must avoid superficial solutions and budget gimmicks, such as auctioning off water assets. These efforts can instead result in greater long-term public costs and saddle generations of consumers with debt that must be repaid through rate hikes. Water privatization is not a viable solution for fiscal constraints or water infrastructure needs. It can result in high rates, poor customer service, and a loss of local control. In the worst cases, it can even jeopardize public access to safe water because water companies may shut off the water service of struggling households that cannot afford the increased water prices.

Given the experiences of other communities, public officials should consider public sector solutions before pursuing risky and potentially costly privatization deals. Public-public partnerships are a practical and responsible way for communities to address their water and sewer needs while minimizing costs, maximizing services, and maintaining local control. With effective local oversight and public involvement, publicly run water systems can achieve cost savings not possible under private operation. Public control eliminates overhead expenses associated with profits and taxes, allows revenue to be fully reinvested into the local community, and provides good jobs for residents. With responsible public management and a renewed federal commitment to our country’s water resources, we can best ensure safe and affordable water and sewer service for all.

157. U.S. TREASURY DEP’T WITH COUNCIL OF ECON. ADVISORS, A NEW ECONOMIC ANALYSIS OF INFRASTRUCTURE INVESTMENT 2, 15 (2012). 158. Id.

immediate stay requested of order requiring counsel to take down

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