April 17, 2001
Borealis Research Association
On behalf of Energy Probe Research Foundation
Prepared for The Walkerton Inquiry
Table of Contents
Wastewater Utility Privatization in Indianapolis, Indiana
Barriers to Privatization
The mid-1980s marked the beginning of a worldwide trend toward the privatization of public enterprises. Inspired by the United Kingdom – in particular, the 1984 British Telecom share issue – the governments of Denmark, Italy, Chile, Malaysia, and Singapore adopted privatization programs in 1985. More than 100 countries soon followed suit, prompting a research manager for the World Bank to, in 1998, call privatization “a defining feature of the last two decades.”
Popular candidates for early privatizations included telecommunications and electric power utilities. Water and wastewater utilities soon followed, haltingly at first and then with greater momentum. In 1997, World Water and Environmental Engineering magazine noted “a seemingly irreversible and rising tide of private sector involvement in the provision of water supply and sewage treatment services all around the globe.” By the end of 2000, at least 93 countries had partially privatized water or wastewater services or were in the process of doing so. Privatizers appeared in all regions of the world. They included local, provincial, or national governments in North America’s three countries, 23 countries in Latin America and the Caribbean, 20 in Europe, 30 in Africa and the Middle East, and 17 in Asia and the Far East. Water companies now serve vast numbers of consumers. Suez Lyonnaise des Eaux, for example, provides water and/or wastewater services to 110 million people.
Although impressed by the successes of Margaret Thatcher’s government in the United Kingdom, many subsequent privatizers do not share her conservative ideology. Indeed, even staunchly communist governments are privatizing. Cuba has formed a joint venture with a Spanish water company to develop and operate drinking water systems for three cities over the next 25 years. China has signed contracts for the construction and operation of three water supply systems and has contracted out the operation of at least 20 other water and wastewater facilities. Vietnam has given two Malaysian-led consortia long-term contracts to build and operate a water pipeline and two treatment plants for Ho Chi Minh City. Pragmatism, rather than ideology, drives most privatizations.
The privatization of water and wastewater utilities is attractive for a host of reasons that vary among countries. Governments commonly call on the private sector to invest in desperately needed infrastructure that they could not otherwise afford. The private sector has access to enormous pools of capital. The size of Suez Lyonnaise des Eaux’s war chest would enable it to invest almost US$8 billion a year without borrowing money. Private capital obviates the need for governments to borrow money or raise taxes, reducing their financial and political liabilities. Privatization carries other financial benefits as well: Proceeds from sales, concession fees, and tax revenues from privatized operations enable governments to invest in neglected infrastructure or reduce their debts.
Many governments privatize to increase the effectiveness of their water and wastewater systems. Struggling to comply with health and environmental standards, they turn to firms whose many years of experience and large investments in research and development have enabled them to develop a degree of expertise rarely found in the public sector. Governments that privatize also want to improve the economic performance of their utilities. The pursuit of job creation or other social goals has left many public utilities over-staffed and inefficient. Free from public-sector practices that hinder productivity and innovation, and able to take advantage of expertise and economies of scale, the private sector enjoys greater latitude to pursue efficiencies. Disciplined by competition and capital markets, it has powerful incentives to do so.
Privatization may correct other inefficiencies as well: those associated with the underpricing of water and wastewater services. Politicized decision making in the public sector distorts the relationship between prices and costs and encourages subsidies to various interest groups. Shifting responsibility to the private sector often allows governments to discontinue subsidies. In a fully competitive, or alternatively, a well regulated system, competition or regulation sets prices that better reflect costs. Governments have fewer reasons to oppose accurate pricing – the private providers take most of the heat for price increases – and, in any case, have no authority to interfere with the markets’ or regulators’ decisions.
Privatization also allows for the de-politicization of environmental and health regulation. Governments that own, operate, and finance water and wastewater utilities cannot properly regulate them. All too often, conflicts of interest prevent them from enforcing compliance with laws and regulations. Privatization reduces those conflicts, freeing regulators to regulate and increasing the accountability of all parties.
For the above reasons, governments around the world have come to accept that their core function is to “steer rather than row.” Rather than owning, operating, and financing water and sewage works, they are setting policy. Rather than providing services, they are regulating them. As evidenced in the following chapters, the results of this shift have often – but not always – been impressive.
The owners, operators, funders, and regulators of Ontario’s water and wastewater systems have much to learn from other jurisdictions’ experiments with privatization. And they have no shortage of reasons to conduct experiments of their own. Across the province, hundreds of facilities fail to comply with provincial laws and standards. Many are inefficiently run: Some are grossly overstaffed; others are staffed by insufficiently trained operators. Many are in need of upgrades: One estimate of the investment required over 15 years exceeds $32 billion. Water charges are insufficient to cover these costs. Clearly, many systems would benefit from the capital investment, expertise, efficiency, and accountability that privatization can bring.
The following chapters will examine what has worked, what has not worked, and why. They will focus on privatization in the United States, the United Kingdom, and Canada, those jurisdictions for which the most detailed information is available, whose experience is most similar to our own, and from whom we can learn the clearest lessons.
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