From The Wall Street Journal (Richard G. Little/Wenonah Hauter):
[Little] Is privatization the solution in every case? Of course not. We must strive to find what works best for the customers in a specific situation. Mismanagement is not a problem limited to private operators, just as good management is not intrinsic to public systems.
But private management can be successful much more often than its critics would like to believe. Private-sector managers focus on the cost of service and return on capital. The new and innovative technologies in which they invest may have a higher initial cost, but they offer savings, too, which can be shared with customers while improving service and quality. Privatization offers economies of scale wherein a single company can provide the financial and human resources to serve many small systems in a far more cost-effective manner.
Government-owned enterprises, by contrast, often don’t have rate structures that reflect the true cost of the service. Thus many small publicly owned water utilities lack the means not only to make capital investments but also to hire the professional staff needed to meet increasingly stringent water-quality standards.
Critics say private enterprise’s desire for profits leads directly to overcharging (particularly of the poor), deterioration of service, and a loss of public input and transparency. In practice, however, this is not the case…
[Hauter] Private water providers are businesses. They are motivated mainly by their bottom line. The pressure to deliver high rates of return for shareholders drives them to cut corners when they are operating under contracts, and to drive up costs when they are operating as regulated utilities. The latter is a well-established phenomenon known as the Averch-Johnson Effect, named for the economists who first modeled it in the 1960s. Under rate-of-return regulation, investor-owned water utilities make more money when they invest in infrastructure, giving them an incentive to “gold plate” systems. Yes, they are investing in improvements. But they may build an unnecessarily large treatment plant or choose a more capital-intensive treatment process, such as desalination.
Private companies that operate water systems have appalling track records of rate increases, poor system maintenance, faulty billing practices and other failures, sometimes even jeopardizing the health and safety of local residents…
Some municipalities have taken their water systems back from private water providers. Indeed, some are realizing what cities like New York, Baltimore and Boston realized a century ago—that water is best controlled by an entity that is accountable to the public, not outside shareholders.
Water service isn’t a business enterprise; it’s a basic human right, and what privatization proponents refer to as “political pressure” is actually our democratic processes at work. Our elected leaders should absolutely respond to public concern about the affordability of their water service. The provision of water service is a natural monopoly, and the public can exercise choice only at the ballot box through the election of the officials who oversee the service. How government-run utilities decide to allocate costs among different users is a local decision that should be made in an open and democratic manner.