Massachusetts' Misguided Attempt to Ban Water Privatization

Testimony to Massachusetts Joint Committee on Environment, Natural Resources and Agriculture

Mr. Chairman and members of the committee, my name is Geoffrey Segal and I am the director of government reform at Reason Foundation a non-profit research and education "think tank" based in Los Angeles. I respectfully submit the following for the record.

For over 35 years Reason has conducted research on various policy issues focused on how to make governments work better and smarter – focusing on policy tools that enable them to be more effective and efficient in their mission.

The question before the committee is whether or not Massachusetts should outlaw the private operation of water and wastewater systems in the Commonwealth. House Bill 1333 states that it would "prevent the privatization of public water supplies and sewer systems in the Commonwealth," essentially reversing three decades of public administration trend and experience.[1]

This in itself is misguided; however, the bill is dangerous. Essentially this bill would require privately owned or operated systems to immediately divest all assets, at cost, to the host communities. This likely violates the Takings Clause in the U.S. Constitution and seriously threatens all private property in the Commonwealth.

What the bill dismisses the vital role private water and wastewater companies play in the Commonwealth and the country at large. More than 40 percent of drinking water systems in the United States are private, regulated utilities—more than 25,000. Of the remaining systems, more than 1,100 local governments have entered into a public-private partnership and contracted out the operations and maintenance (O&M) to a private company. In addition, another 1,300 communities have contracted out wastewater operations.

Several factors have been driving the shift toward private operation of water and wastewater systems. A 1998 survey found that public officials' greatest operational concern is meeting environmental regulations and that capital improvements are driven by[2]:

  • Growth 40%
  • Age 30%
  • Regulations 27%
  • Other 3%

These top concerns are embedded in a context of change.

  • Growth. This is a fairly self-evident challenge. Extending systems either to cover more area or to handle increased demand is costly and complicated. Local governments must be proactive in anticipating stresses that growth places on systems rather than waiting for them to break.
  • Decaying Infrastructures. Many water and wastewater systems include water and sewer infrastructures that date back to the early 1900s. The most recent systems were built with federal funds during the 1970s, and even these now need upgrading or replacing. The EPA recently estimated that the nation's 76,000 drinking water systems alone will require $150 billion in investments over the next 20 years.[3] Wastewater systems will require a similar level of investment.
  • Regulations. Over the last two decades, through the Clean Water Act and the Safe Drinking Water Act and their subsequent amendments, standards governing the quality of drinking water and cleanliness of effluent discharged into waterways have become ever more stringent. To meet these increasing standards, many local water and wastewater systems require improved technologies and upgraded infrastructure.
  • Other—Mandates. The federal government has reduced its contributions to local water systems over the past 30 years, while at the same time imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. Unfunded mandates are forcing municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds.
  • Other—Structure of local financing. It's often difficult for local officials to commit to making the necessary investments in community water systems. Water pipes and sewer mains are not visible and not perceived as immediately critical for adequate funding. It is easier for elected officials to ignore them in favor of expenditures for more visible services, such as police and fire. Additionally, water and sewer rates do not adequately cover the actual cost of providing services in many municipalities, but raising water and sewer rates to cover operations and maintenance as well as capital replacement is an unpopular move for elected officials.

These combined factors have led to a capital-funding crisis for water and wastewater facilities. In the face of such a crisis, surveys show that privatization is a policy tool public officials often turn to. Local government surveys have found that public officials turn to privatization in response to fiscal crisis and/or when privatization has been shown to work in other jurisdictions. According to the U.S. Conference of Mayors, four out of ten cities are actively considering privatization in order to reduce costs and attract private capital investment.[4]

So how does private sector participation in water and wastewater systems affect quality? If anything, privatization improves quality. Indeed, it was President Clinton's Environmental Protection Agency that endorsed private participation as a means by which local governments can meet environmental standards. Indeed the EPA wrote, "[Privatization case studies] provide concrete examples to local officials of how successful partnerships and other models can be used by communities to provide needed environmental services more efficiently. They also show how public-private partnerships can be used as a way to provide substantial benefits to both the public and private sectors, creating the classic 'win-win' situation."[5]

Furthermore, a recent study released by the Brookings Institution and the American Enterprise Institute found that public systems are somewhat more likely to violate maximum levels of health based containments allowed under the Safe Drinking Water Act (SDWA).[6]

Private participation can also save municipalities money. Indeed, the AEI-Brookings study found that as the share of private ownership went up, the lower the average household expenditures on water were.[7] In addition, a 1999 study examined public-private partnerships in water and wastewater systems in 29 cities serving over 3 million customers throughout the United States. It found that all of the privatizations resulted in lower rate increases than were planned prior to privatization, and at 17 percent (five) of the facilities, public-private partnering brought cost savings of between 10 percent and 40 percent, allowing local governments to avoid large increases in water rates.[8]

Case studies of savings abound. The EPA has collected a set of case studies where cities were able to meet water quality standards more efficiently thanks to privatization.[9] Contract renewal rates are also indicative, since privatization is primarily motivated by communities seeking cost savings. That 17 out of 20 privatization contracts are renewed at the end of their term indicates that communities are satisfied with the savings being achieved.

One argument often used against water and wastewater privatization is that water is so vital we can’t trust it to the market? This is a conceptual rather than a research question, but grounded in basic facts about our lives in the United States. Yes, water is vital, and along with most other vital things, the market has proven exceptional at providing it. The closest analog is food, which the market provides, as it does medicines and healthcare. Our government hires contractors to maintain the airplanes that that transport the President, to run the space shuttle, to guard our nuclear power plants, and to build, maintain, and often operate submarines, fighter jets and other high-tech weapons systems.

The sheer track record of water and wastewater privatization, with thousands of satisfied communities, reveals this concern to be mainly rhetorical, rather than factual. Government remains responsible for establishing and enforcing quality and reliability standards. While contractors have every incentive to ensure the same. Just as with government-run facilities, employees and managers, and their families, live in the community and are customers of the services they provide. And companies that consistently fail to deliver expected service will soon find no more willing customers.

HB1333 flies in the face of reality and national experience in water and wastewater privatization. Its supporters have largely ignored the importance of competition and private sector participation. If they were truly concerned with the quality of water and the rates taxpayers pay they would embrace additional competition and privatization—that’s what the data and experience tell us is needed.

I thank you for your time and consideration. I would be more than happy to follow up with any committee members should there be any questions regarding my testimony.