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Water Investment Bill Wrongly Promotes Privatization of Critical Public Resource

Feb. 28, 2002

Water Investment Bill Wrongly Promotes Privatization of Critical Public Resource

Pending Legislation Promotes Industry Interests by Requiring Recipients of
Federal Funds to “Consider” Privatization

WASHINGTON, D.C. – The Water Investment Act of 2002 (S. 1961) jeopardizes public access to safe and affordable drinking water and adequate wastewater treatment by making federal assistance conditional on the recipient?s consideration of privatization, the national consumer advocacy group Public Citizen said today.

Public Citizen applauds the leadership of the bill?s authors, Sens. Bob Graham (D-Fla.), James Jeffords (I-Vt.), Michael Crapo (R-Idaho) and Robert Smith (R-N.H.) for introducing legislation designed to address the water infrastructure needs of communities across the country. However, the bill contains a bad provision that encourages the transfer of public water system operations and ownership to private companies. The bill is to be heard today by the Senate Subcommittee on Fisheries, Wildlife and Water, which is part of the Environment and Public Works Committee.

The bill requires communities to “consider” a public-private partnership before it receives federal money to upgrade water systems or create water conservation projects. However, it does not define the word “consider,” which could mean anything from an informal meeting with a consultant to going through a bidding process, which would be so costly that it would be difficult to justify not privatizing.

Privatization of water and wastewater services is a relatively recent phenomenon in the United States. Since the early 1900s, water service generally has been regarded as a public responsibility, and public providers have served most of the United States. Today, private water utilities serve only 15 percent of the population. But a 1997 change in law opened the door for long-term contracts to operate and maintain water and wastewater systems by extending federal loans to municipalities that have privatization contracts of more than five years. Consequently, an increasing number of communities have entered into 10- and 20-year privatization contracts.

Privatization proponents argue that public-private partnerships, a euphemism for privatization, can foster savings and improve service. However, because not one of these long-term contracts has been in place for more than five years, it is impossible to determine whether these claims are sound.

Also, there are potential pitfalls to privatization. The promised cost savings could be neutralized by change orders ? reimbursement requests for services not enumerated in the contract. Public utilities, on the other hand, often absorb these additional costs without asking for a budget increase or a rate hike.

And in the pursuit of lower operational costs and higher profits, private companies could neglect maintenance, especially if a contract is close to expiration. Further, when the city officials who were closely involved in the original contract negotiations are no longer in office, disputes over contract language could end up in court. In the end, the city may not receive what it paid for. Even industry consultants admit that privatization isn?t problem-free.

Finally, as private share in the water services grows, water companies will have an incentive to pressure policymakers to amend environmental and water quality regulations that cut into profits, thereby promoting an agenda counter to the interests of public health and environment.

“Privatization is a dangerous gamble ? one with questionable benefits and great risks,” said Wenonah Hauter, director of Public Citizen?s Energy and Environment Program. “Instead of just extending a helping hand to communities with crumbling water infrastructure, this bill forces vulnerable communities to gamble with their most critical resource.”

While some local governments have had positive experiences with contracting out water systems? operation and maintenance, others have not. Lee County in Florida reclaimed control of its water and sewer systems in 2000 after an audit found that the company hired to run the systems failed to maintain equipment in an acceptable condition, handled hazardous waste poorly, did not perform preventive maintenance in a timely manner, and failed to perform some contracted tasks. After public control was restored, the county?s utility director estimated that the company?s failure to properly maintain the infrastructure had cost citizens more than $8 million.

A recent audit of a water privatization contract in Atlanta ? the largest such contract in the United States ? reported a growing maintenance backlog, failure by the company to meet its financial obligations, and significantly lower training hours than required by the contract. The company took longer than it had promised to install meters and respond to meter leaks. At the same time, the company has been seeking additional payments from the city.

So far, the federal government has not made a systematic assessment of water privatization?s benefits and liabilities. The Senate bill disregards substantial risks a community assumes when it privatizes water, arguably the most essential service.

“With water, it?s not only our pocketbooks that are at stake, but also our health,” Hauter said. “We shouldn?t put an essential resource in the hands of profit-oriented corporations.”