A Water Treatment Plant Employee
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 France’s $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 they’d 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 America’s 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 Company’s 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. That—excuse the pun—no 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 agencies—over 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 state’s 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 Fund’s office in Oakland, California, makes this complaint: "Water is one of the last areas in which unaccountable public agencies sit astride the domain."