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Reason Foundation

Massachusetts' Misguided Attempt to Ban Water Privatization

Testimony to Massachusetts Joint Committee on Environment, Natural Resources and Agriculture

Geoffrey Segal
October 25, 2005

Mr. Chairman and members of the committee, my name is Geoffrey Segal and I am the director of government reform at Reason Foundation a non-profit research and education "think tank" based in Los Angeles. I respectfully submit the following for the record.

For over 35 years Reason has conducted research on various policy issues focused on how to make governments work better and smarter – focusing on policy tools that enable them to be more effective and efficient in their mission.

The question before the committee is whether or not Massachusetts should outlaw the private operation of water and wastewater systems in the Commonwealth. House Bill 1333 states that it would "prevent the privatization of public water supplies and sewer systems in the Commonwealth," essentially reversing three decades of public administration trend and experience.[1]

This in itself is misguided; however, the bill is dangerous. Essentially this bill would require privately owned or operated systems to immediately divest all assets, at cost, to the host communities. This likely violates the Takings Clause in the U.S. Constitution and seriously threatens all private property in the Commonwealth.

What the bill dismisses the vital role private water and wastewater companies play in the Commonwealth and the country at large. More than 40 percent of drinking water systems in the United States are private, regulated utilities—more than 25,000. Of the remaining systems, more than 1,100 local governments have entered into a public-private partnership and contracted out the operations and maintenance (O&M) to a private company. In addition, another 1,300 communities have contracted out wastewater operations.

Several factors have been driving the shift toward private operation of water and wastewater systems. A 1998 survey found that public officials' greatest operational concern is meeting environmental regulations and that capital improvements are driven by[2]:

These top concerns are embedded in a context of change.

These combined factors have led to a capital-funding crisis for water and wastewater facilities. In the face of such a crisis, surveys show that privatization is a policy tool public officials often turn to. Local government surveys have found that public officials turn to privatization in response to fiscal crisis and/or when privatization has been shown to work in other jurisdictions. According to the U.S. Conference of Mayors, four out of ten cities are actively considering privatization in order to reduce costs and attract private capital investment.[4]

So how does private sector participation in water and wastewater systems affect quality? If anything, privatization improves quality. Indeed, it was President Clinton's Environmental Protection Agency that endorsed private participation as a means by which local governments can meet environmental standards. Indeed the EPA wrote, "[Privatization case studies] provide concrete examples to local officials of how successful partnerships and other models can be used by communities to provide needed environmental services more efficiently. They also show how public-private partnerships can be used as a way to provide substantial benefits to both the public and private sectors, creating the classic 'win-win' situation."[5]

Furthermore, a recent study released by the Brookings Institution and the American Enterprise Institute found that public systems are somewhat more likely to violate maximum levels of health based containments allowed under the Safe Drinking Water Act (SDWA).[6]

Private participation can also save municipalities money. Indeed, the AEI-Brookings study found that as the share of private ownership went up, the lower the average household expenditures on water were.[7] In addition, a 1999 study examined public-private partnerships in water and wastewater systems in 29 cities serving over 3 million customers throughout the United States. It found that all of the privatizations resulted in lower rate increases than were planned prior to privatization, and at 17 percent (five) of the facilities, public-private partnering brought cost savings of between 10 percent and 40 percent, allowing local governments to avoid large increases in water rates.[8]

Case studies of savings abound. The EPA has collected a set of case studies where cities were able to meet water quality standards more efficiently thanks to privatization.[9] Contract renewal rates are also indicative, since privatization is primarily motivated by communities seeking cost savings. That 17 out of 20 privatization contracts are renewed at the end of their term indicates that communities are satisfied with the savings being achieved.

One argument often used against water and wastewater privatization is that water is so vital we can’t trust it to the market? This is a conceptual rather than a research question, but grounded in basic facts about our lives in the United States. Yes, water is vital, and along with most other vital things, the market has proven exceptional at providing it. The closest analog is food, which the market provides, as it does medicines and healthcare. Our government hires contractors to maintain the airplanes that that transport the President, to run the space shuttle, to guard our nuclear power plants, and to build, maintain, and often operate submarines, fighter jets and other high-tech weapons systems.

The sheer track record of water and wastewater privatization, with thousands of satisfied communities, reveals this concern to be mainly rhetorical, rather than factual. Government remains responsible for establishing and enforcing quality and reliability standards. While contractors have every incentive to ensure the same. Just as with government-run facilities, employees and managers, and their families, live in the community and are customers of the services they provide. And companies that consistently fail to deliver expected service will soon find no more willing customers.

HB1333 flies in the face of reality and national experience in water and wastewater privatization. Its supporters have largely ignored the importance of competition and private sector participation. If they were truly concerned with the quality of water and the rates taxpayers pay they would embrace additional competition and privatization—that’s what the data and experience tell us is needed.

I thank you for your time and consideration. I would be more than happy to follow up with any committee members should there be any questions regarding my testimony.

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