Elizabeth Brubaker-The Canadian Council for Public-Private partnerships
July 11, 2000
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Although new to much of the globe, the water and wastewater privatizations of the last 10 years built on a centuries-old tradition of private ownership and management in several western countries.
In England and Wales, some of today’s private water supply companies have been operating since the seventeenth century. Over the years, local authorities began providing public water and sewage services. The 1945 Water Act encouraged the amalgamation of both public and private providers, reducing their numbers to 150 and 29 respectively by 1963. Further amalgamation of the public providers occurred in 1974, when they were organized into 10 regional authorities supplying water to approximately three quarters of the population and sewage services to all of the population connected to sewers. The 29 private water supply companies continued to provide water to the remaining quarter of the population.
In 1989, the Thatcher government sold off the assets of the 10 regional authorities. To prepare for their privatization and to enable their successors to meet tough environmental standards, the government wrote off £5 billion of their debts and provided them with a “green dowry” – a £1.6 billion cash injection. It then transferred their infrastructure and most of their functions to 10 new “water service companies” and sold shares in these companies in an oversubscribed public offering. The government also established environmental, health, and economic regulators to oversee both the new water service companies and the long-established water supply companies.
In 1997, the new private water service companies provided water to 40 million people and sewage services to 50 million people, while the old private water supply companies – by then numbering 18 – provided water to 11.5 million people.
Western countries are embracing-or returning to-privatization for many of the same reasons as their counterparts in the developing world. Although they don’t face the same degree of water supply and sewage treatment crises, their problems are surprisingly similar in nature: inadequate infrastructure, rising environmental demands, scarce funds, and politicized decision making that has left utilities underfinanced, overstaffed, and poorly regulated.
In England and Wales, each of the above factors contributed to the decision to sell off the water and wastewater systems. A hose of problems had long plagued the underfunded systems. Almost a third of the treated water disappeared through leaking distribution and supply pipes, some of which dated back to the Victorian era. Many sewage systems discharged untreated sewage directly into the ocean, making beaches unswimmable. The government, unwilling to insist on improvements that it would have to pay for, created what former regulator David Kinnersley called a “potent culture of government concealment” in order to keep public concern at bay and to avoid having to prosecute polluting facilities.
The European Community made it impossible for Britain’s government to continue concealing the extent of sewage pollution.
In 1975, when the EC issued a directive giving member countries ten years to bring their bathing waters up to uniform standards, the government tried to evade the issue by claiming that the country had only 27 beaches. Not until 1987 did it admit that hundreds of beaches encircled the island. It then had to also admit that sewage contaminated a third of those beaches: In 1988, only 241 of 364 designated beaches met European bathing water standards.
By the late 1980s, the government estimated that £24 billion – over C$57 billion – would be required within ten years to repair the water and sewage systems and to meet new European standards. However, “the financial harness of Whitehall” severely constrained any public investment. As Mr. Kinnersley explained, “the government wanted this huge financing of additional investment to be taken out of the public sector . . . The part of it that would come from borrowing, the government wanted to be private borrowing; the part that wouLd come from price increases, the government wanted not to be the responsibility of ministers.” Under privatization, the government understood, the suppliers of water and sewage services would be “released from the constraints on financing which public ownership imposes.”
Privatization in England and Wales was driven not only by mounting financial pressures but also by the growing understanding that a government could not properly regulate facilities that it owned. In 1987, the Secretary of State noted that in a publicly owned system, the government acted as both “gamekeeper” and “poacher.” While responsible for controlling the discharge of pollutants, it was a major discharger in its own right. These dual roles put it in an inescapable conflict of interest. By separating the polluter from the regulator, privatization would free regulators to regulate.
The results of privatization: debunking the myths
A number of myths surround water and wastewater privatization in England and Wales. Canadian labour and environmental activists routinely justify their opposition to privatization on the grounds of England’s experience, the utter failure of which has become an article of faith. Although deeply entrenched and difficult to dispel, that faith is founded on considerable misinformation.
Myth #1- The new private water and wastewater companies have not invested sufficient capital in the system.
Reality: The ten new water and sewage companies have invested enormous sums in infrastructure. By 1998-99, capital expenditures amounted to £33 billion and showed no sign of letting up. That year alone, investments neared £3.7 billion -£ 3.2 billion for new fixed assets and £0.5 billion for infrastructure renewals. When current water and sewage programs are completed, the private companies will have invested £40 billion – over C$92 billion. As one official from the Department of the Environment noted, “You just couldn’t contemplate that kind of expenditure in the absence of privatization.” Indeed, capital expenditures before privatization had been minimal in comparison, remaining well under £1 billion a year (in 1993-94 cost terms) between 1920 and 1960, and generally fluctuating between £1 billion and £2 billion a year in the 1960s, 1970s, and 1980s.
In addition to financing the construction of new primary treatment facilities for the wastewater of over 7 million people and new secondary treatment facilities for the wastewater of over 15 million people, this money has gone into upgrading over 70 water treatment plants and nearly 600 wastewater treatment plants, improving over 2,400 combined sewer overflows, and, between 1991-92 and 1997-98, building or renovating over 46,000 kilometres of water mains and over 10,000 kilometres of sewers. The water companies have also begun to stem water losses, which reached 30 percent in the mid-1990s; they reduced leakage from reservoirs, distribution mains, and supply pipes by 10 percent in 1996-97, by 12 percent in 1997-98, and by another 11 percent in 1998-99.
Myth #2 – Since the private sector took over the water and wastewater systems, environmental standards are not being met.
Reality: In the six years following privatization, the percentage of plants complying with their discharge permits increased steadily from 87 to 97. Freshwater quality improved significantly. At the time of privatization, 37 percent of the rivers and canals tested were classified as very good or good; between 1993 and 1995, that figure increased to 59 percent. Not all waters improved: Between 1990 and 1995, the quality of about 225 kilometres of rivers and canals deteriorated. However, during that period, the quality of more than 3,000 kilometres improved significantly. In short, environmental gains outpaced losses by more than ten to one. Regulators attribute the improvements in large part to investments made by the water companies. Privatization also made coastal beaches swimmable. The number of beaches in England and Wales increased from 401 in 1989 to 463 in 1999. Compliance with European standards also rose dramatically, climbing from under 76 percent in 1989 to over 91 percent in 1999. Thus, private operators have brought England and Wales 116 more usable beaches. The environment has clearly benefited from privatization. Indeed, the Environment Agency reports that “most of the environmental damage of the past 200 years will have been repaired by 2005.”
Drinking water has also improved steadily under privatization. Between 1990 and 1996, the percentage of zones fully complying with prescribed limits on individual pesticides increased from 70 to 87; on lead, from 77 to 87; on fecal coliforms, from 88 to 96; on aluminum, from 90 to 97; and on iron, from 70 to 76. Smaller improvements occurred for colour, turbidity, odour, taste, hydrogen ion, nitrate, nitrite, manganese, trihalomethanes, and other parameters. Only in one category – PAH, or polyaromatic hydrocarbons – did performance decline. The Drinking Water Inspectorate reports that compliance continues to improve, especially for pesticides and coliforms. In 1998, 99.78 percent of the 2.8 million tests conducted met the required standard.
Myth #3 – Customer service has deteriorated under privatization.
Reality: Within the considerable limits imposed by its near-monopoly structure, privatization has also empowered consumers. Ten customer service committees advise the economic regulator on consumer issues. Extensive consultation and information programs involve customers in both policy and performance. Dissatisfied customers have access not only to effective complaints procedures but also to redress – in the form of set compensation payments – if companies fail to meet guaranteed standards for service. Several companies’ “customer charters” provide for compensation beyond that required by statute. Water company managers explain that satisfying customers makes good business sense, since it increases the speed with which bills are paid, reduces the costs of processing complaints, and, most importantly, opens up other business opportunities by enhancing the companies’ images. Both this attitude and tough regulations likely account for post-privatization service improvements, reflected in steep declines in the number of properties at risk of either low pressure or sewer flooding.
Myth #4 – Since privatization, water rates have increased dramatically.
Reality: While the massive investments in infrastructure have indeed raised prices, the increases have been far more modest than critics suggest. The real average cost of unmetered domestic water services rose by 38.3 percent in the decade following privatization, while the real average cost of unmetered domestic sewage services rose by 46.6 percent. Of course, costs would have risen in the absence of privatization: The real average cost of water and sewerage services to unmetered domestic customers had climbed over 22 percent during the seven years preceding privatization – and that was without major investments in infrastructure. Moreover, private-sector efficiencies have offset costs that would have prompted even greater increases. Between 1993 and 1998, operating costs fell by nine percent. Further efficiencies are expected. In November 1999, the economic regulator reset price limits for all of the water companies, reducing average household bills by 12 percent in real terms and generally stabilizing them until 2005. In so doing, the regulator explained that thanks to higher efficiencies, the average annual household bill should be only £38 higher in 2005 than it was at the time of privatization.
Regardless, customers are particularly sensitive to the costs identified with the private sector, especially the water companies’ executive salary, benefit, and bonus packages, which have in some cases approached £300,000. A poll commissioned by the BBC in 1998 found that while over half of the respondents thought that they got value for money from their water companies, nearly three quarters thought that water company executives were paid too much. Consumers also resent the water companies’ profits and dividends. Since privatization, shareholders’ annual returns have amounted to between 11 and 16 percent in real terms, leading 70 percent of those surveyed by the Consumers Association to state that shareholders have benefited more than customers from privatization. Such concerns encouraged the government in 1997 to levy a one-time “windfall tax” on the profits of privatized water, electricity, and other utilities; the water companies’ share was £1.65 billion.
Myth #5 – When private sector operators take over, they lay-off large numbers of staff immediately.
Reality: Privatization in England and Wales has reduced jobs at the water utilities. In 1989, the water service companies employed 47,807 people. By 1998, that number was down to 31,310, a reduction of almost 35 percent. The companies continue to cut staff: In December 1999, five companies responded to planned reductions in water prices with announcements of 3,200 layoffs. Analysts assume that further layoffs will follow.
The Reason Foundation points out that various benefits have helped offset the job losses. Water sector employees have gained from their stock options in the privatized companies. Workers in the construction industry have gained from the upgrading of the water and wastewater systems. And those in export or consultancy have gained from the British companies’ new international prominence.
If the water companies’ role is to keep as many people as possible employed, privatization in England and Wales has failed. If, on the contrary, their role is to bring capital to a system long starved of cash, to upgrade and repair crumbling infrastructure, to clean up rivers and beaches, and to provide better water and better service to their customers, privatization looks much more Like a success. Neither the water companies nor the environmental or economic regulators have yet achieved all that they set out to achieve. As the environment department’s Michael Williamson explained, “we’re still in the early days of feeling our way. … I don’t profess that we’ve got it absolutely right.” However, his caution hardly tempered his enthusiasm: “we’ve got such a wonderful water industry in England and Wales that I can go on madly about privatization.” Ian Byatt, the chief economic regulator, is only slightly more restrained. He points to “spectacular successes” stemming from the privatization of the water companies and their regulation under a system that acts at arm’s length from government.