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Tax Hikes vs. Privatization For Water Infrastructure

Leonard Gilroy
September 2, 2008, 10:24am

In a Carlsbad Current-Argus op-ed last week, Rio Grande Foundation president Paul Gessing comments on a Carlsbad, NM ballot measure seeking a 0.5 percentage point increase their gross receipts tax to fund water infrastructure. He raises an important question Carlsbad taxpayers should be asking: why isn't the city looking at privatization and public-private partnerships?
The City expects to raise approximately $45 million from the tax hikes with the money to be allocated for a several water-related projects around town. Carlsbad is not alone in struggling with the expense of maintaining its water system. According to the U.S. Conference of Mayors, capital expenditures on water and wastewater services are the largest issues facing local governments today. Perhaps, with the City's water system in such dire need of repair, voters, by saying "no" to this tax increase, could force Carlsbad's political establishment to consider privatization? [. . .] Across the country privately provided water saves customers an average of 25 percent over government-operated water. Inefficiencies of government-owned water companies go beyond cost to consumers. Their operating expenses per connection are 21 percent higher and the public utilities required more than double the number of employees per connection. Accordingly, salaries of public water companies ate up almost three times as much of the operating revenue as the private companies. Public companies also spent nearly double their private counterparts on maintenance. While water privatization has traditionally focused on construction and operations, we're starting to see private sector companies coming to the table with financing as well. Over $100 billion has been raised in the global capital markets to invest in infrastructure assets like roads, ports, and water systems. In Pima County, Arizona, officials are currently pursuing a $300 million upgrade of the county's 50-year-old sewage treatment system using private financing. Prescott-area officials are currently exploring private financing to build a state-of-the-art, multi-jurisdictional water transmission system. The truth is that politicians – even in relatively taxpayer-friendly cities like Carlsbad – will often choose the path of least resistance (higher taxes) over more fundamental and ultimately better reforms that use free market principles to reduce costs. After all, though privatization has been used across the nation to improve service and cut costs, it is "new" to Carlsbad. Fortunately, Carlsbad taxpayers have a say in this issue at the ballot box. Rather than blindly going along with a big tax hike that will ultimately harm Carlsbad's economic competitiveness, voters should demand that their elected officials carefully consider options like privatization.
Gessing makes an excellent point. Raising general taxes to fund water infrastructure should be a last resort, not the first go-to option. Rather than the people in Carlsbad today paying for water assets that benefit many people now and into the future, it makes more sense to finance long-lived, big-ticket infrastructure assets so that those who benefit from the improvements pay for them as they use them over the asset's useful life. And with literally hundreds of billions available in the private capital markets to invest in infrastructure, it is irresponsible for policymakers to not even explore the innovative finance options that other cities have taken advantage of through privatization. » Rio Grande Foundation » Reason's Annual Privatization Report 2008: Water & Wastewater update » Reason's Water/Wastewater Research and Commentary

Leonard Gilroy is Director of Government Reform


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