An Employee in Midland, Michigan examines a control panel at the city's Water Treatment Plant..
Like the drip-drip-drip of a leaky faucet, the agencies that supply most Americans with
their water are an over-looked but steady waste of precious resources. The Reason
Foundation has just concluded a study in California that finds average customers
effectively pay $121 a year, or 22% more, if their water system is a government monopoly
than they would if it were investor-owned.
Since water delivery is a $55 billion business in the U.S. and since 85% of the U.S.
population still gets its water from municipal sources rather than from private companies,
this suggests that American consumers are paying billions of dollars annually to a system
of socialized waterworks.
Compare that with abroad. Britain and France have turned ownership or management of
water delivery and treatment over to big private companies like the U.K.s $1.2
billion (revenues) Thomas Water Plc. And Frances $19 billion (including nonwater
businesses) Lyonnaise des Eaux (Forbes, Sept. 12, 1994). The European water
companies, as well as major American engineering concerns like Bechtel Corp. and Fluor
Corp., are thirsting for huge system development opportunities in Asia and South America.
But attention may be about to shift to the U.S.and its immense investment and
business possibilities. Ralph Stanley, senior vice president of United Infrastructure, a
joint venture of Bechtel and Peter Kiewit Sons, has championed infrastructure
privatization since he was a transportation official in the Reagan Administration. He
detects something new in the water sector: "For the first time in any of these
[public] asset classes, the mayors are now saying theyd like the ability to
privatize these assets."
In privatizing its water supply, the U.S. lags behind Europe, but this may
change as evidence mounts about the relative inefficiency of public water.
One reason is that local governments are strapped for cash. Another is that meeting the
increasingly complex water pollution and purity standards is beyond the capability of all
but the biggest of Americas 34,461 local water and sewer districts.
Opposition looms from unionized public employees and other constituencies that regard
government as a haven for good jobs, and, in the West, from a visceral burn over perceived
profiteering in water. That latter hurdle was evident in the rejection of the American
Water Works Companys attempted $300 million takeover of the Santa Margarita Water
District in Orange County, California, last year. The plan was hooted down at a six-hour
public hearing. "We posed a question that, as it turns out, is not ready to be
answered yet," laments George Johnstone, chief executive officer of American Water
Works, which, at $800 million in 1995 revenues, is the largest private U.S. water company.
The concept that water should belong to the people is rooted in the Progressive Era of
the turn of the century. The thinking was that clean water at cheap rates could be best
achieved by building water facilities with tax-exempt debt. Thatexcuse the
punno longer holds water. The Reason Foundation compared ten public providers in the
San Francisco Bay area with a sample of privately owned water companies throughout the
state The survey found that the rates were nearly identical. This despite more than $60
million in taxes and tax breaks for the public agencies.
The Reason study found that government-owned water companies have 3.49 employees per
1,000 connections, more than twice the level at private water companies. Salaries, too,
are much more generous at the public agenciesover 37% of operating revenues at the
public sector companies, against 13.4% at the private ones.
The water bureaucrats have a propensity for grandiosity. The East Bay Municipal Utility
District in California, which serves 1.2 million customers, opened a sumptuous $64 million
headquarters months before a disastrous fire swept the parched Oakland Hills in its
service area. Near Santa Margarita, meanwhile, is the rich Irvine Ranch Water District. It
gains income off a $360 million reserve and replacement fund, in addition to its
investment in a large apartment complex and a stake in two housing subdivisions.
Granted, the public suppliers have a built-in advantage: They can raise capital on
tax-free bonds. But Walter Winrow, who was responsible for water investments at GE Capital
and is now at the Stamford, Connecticut-based development firm Poseidon Resources,
maintains that the cost-of-capital disadvantage is diminishing as interest rates stay low.
In fact, the debt edge for public agencies is bogus when lost tax revenue is figured
in, the Reason study finds. The true cost of capital per connection in its sample was $67
for investor-owned water, versus $92 for government water.
The current setup defies market rationalizing. Without effective pricing, supply and
demand get out of whack. Chipmakers in Silicon Valley faced arbitrary cutbacks during the
last drought and this helped inspire corporate titans at the California Business
Roundtable to order a report on privatizing and perhaps consolidating the states
mishmash of water authorities. This, as bigwigs at the Federal Reserve Bank of San
Francisco are poring over the Reason study.
A few battles are already being won. American Water Works got voters in Monmouth
County, New Jersey to agree last November to sell a $35 million system. A $42 million deal
for the Wheelabrator unit of WMX Technologies, Inc. to handle the Wilmington, Delaware,
wastewater plant awaits a city-county agreement. The city of Indianapolis blazed this
trail with its own pact in 1993.
Support for privatization is beginning to come from sources some might not expect.
Thomas Graff, director of the Environmental Defense Funds office in Oakland,
California, makes this complaint: "Water is one of the last areas in which
unaccountable public agencies sit astride the domain."