Milwaukee Puts Water Privatization Study on Hold

Before it even got off the ground, Milwaukee policymakers have put on hold a study on the potential long-term lease of their city water system:

Four [Milwaukee] aldermen said Friday that the review by Comptroller W. Martin “Wally” Morics will be put on hold while officials seek ways to channel more Water Works revenue into the city’s general coffers.

With increasing pressure on the city budget, Morics had raised the idea of leasing the Water Works for 75 to 99 years, in exchange for a one-time payment of $550 million to $600 million. That cash could be invested to create an endowment that would generate $30 million a year, which Morics figures would stave off annual debates on slashing services or raising taxes.

Mayor Tom Barrett and the council didn’t endorse the concept, but they authorized Morics to look for a consulting team to conduct a study. The comptroller is reviewing proposals from 16 consortiums of investment, law and engineering firms, and he was planning to recommend one to the council this summer.

But environmental groups and public employee unions rallied against turning the water system over to private business. They formed a coalition called Keep Public Our Water that urged supporters to contact aldermen and oppose privatization. […]

Morics said the process of deciding whether to privatize the Water Works would likely last two or three years and would not proceed unless Barrett and aldermen were comfortable with it. He also said his plans called for studying other options. “This isn’t going to be done rashly, and it isn’t going to be shoved down anyone’s throat,” Morics said.

It’s fine to take a short breather while you sort out all of the potential options. But it would be bad policy to take a powerful option off the table before you’ve even studied it.

The reality is that if you mention the words “water” and “privatization” together, there’s a natural constituency out there that will go ballistic. But policymakers’ responsibility ultimately lies in laying all the options out together on the table and having an objective process for sorting out the pros and cons of each. How else can you come to a defensible and sensible decision?

Unions and environmental activists will undoubtedly complain at the first mention of the “P” word and any attempt to advance it as one of the potential options—it’s just a natural part of these interest groups’ playbook. Given that, policymakers should keep their eyes on the larger ball here—ensuring the long-term fiscal health of the city and pursuing the best strategy for system investment and upkeep over the long term.

One other bit caught my eye:

[M]ayors and aldermen have pushed to keep rates low, with the result that the Water Works had to draw $10 million from reserves to cover 2008 expenses. Even if the Water Works had cash to transfer, the state’s Public Service Commission “strongly discourages such actions, as they believe ‘extra’ cash should be reinvested in the utility,” Lewis said. Rate increases need PSC approval.

I’ve written before (see here and here) about how the political pressure to keep rates low can often lead to chronic underinvestment in the system; this can be more colorfully described as an infrastructure “death spiral.” In fact, many governments turn to privatization in order to to effectuate a shift towards more market-based pricing and proper system investment and maintenance. James Rowen at The Political Environment blog makes an important point in this regard:

“[…] it’s clear that Milwaukee faces genuine hurdles financing its basic services, so if water privatization is off the table, community organizations and activists who helped shelve the privatization study should keep working on alternative revenue and service solutions.”

I couldn’t agree more—if privatization opponents are bound and determined to take that option off the table completely, then the ball should be squarely in their court to proffer their own viable alternative plan. This is critical, as policymakers can either be part of the problem or part of the solution.

Reason’s Privatization Research and Commentary
Reason’s Water/Wastewater Research and Commentary