Professional Documents
Culture Documents
Public-Private Partnerships:
Issues and Difficulties with Private Water Service
Public-private partnerships do not 30 percent to operation and maintenance costs,8 and a lack
of competition and poor negotiation skills can leave local
reduce costs. governments with expensive contracts.
Municipalities should not expect privatization to reduce
costs. Empirical evidence indicates that there is no significant Municipalities tend to get the bad end of the deal when
difference in efficiency between public and private water privatizing monopoly services. For example, many wastewa-
provision.7 In many cases, privatization increases costs. ter contracts allow private operators to pass through produc-
Corporate profits, dividends and income taxes can add 20 to tion costs leaving the local government paying more than
it would have with public provision.9 Private operators also
increasingly require public subsidies or guarantees before
taking on water projects, especially in underdeveloped coun-
Total Cost of a 20-Year, $100 Million tries.10
Loan
In theory, competition would lead to cheaper contracts, but
$300 in practice, researchers have found that the water market
is “rarely competitive.”11 There are only a small number of
$251 million private water businesses,12 and Suez and Veolia, both French
$250
multinationals, dominate the market.13 In the United States,
the growing need for expensive improvements to water and
$200 sewer systems could inspire corporations to further con-
Millions of Dollars
$160 million solidate and take over competitors in order to have greater
access to capital.14 A lack of competition can lead to excess
$150
profits and corruption in private operations.15
Public-private partnerships can be ties with many participating communities the process may
become so complex that it would be difficult to implement.”23
expensive to implement.
Establishing public-private partnerships for water systems is
complicated, expensive and time-consuming.17 The cost of Public-private partnerships can worsen
executing and monitoring a contract can be substantial and service.
erode any potential savings.18 In total, contract monitoring
There is ample evidence that maintenance backlogs, wasted
and administration, conversion of the workforce, unplanned
water, sewage spills and worse service often follow priva-
work, and use of public equipment and facilities can in-
tization.24 In fact, poor performance is the primary reason
crease the price of a contract by as much as 25 percent.19
that local governments reverse the decision to privatize and
Other hidden expenses, including change orders and cost
resume public operation of previously contracted services.25
overruns, can further inflate the price of private service.
When private operators attempt to cut costs, practices they
Renegotiations also drive up costs. In the United Kingdom,
employ could result in worse service quality. They may use
contract changes occurred in a third of all Central Govern-
shoddy construction materials, delay needed maintenance or
ment privatization projects signed between 2004 and 2006
downsize the workforce, which impairs customer service and
and increased the project costs by an average of £4 million,
slows responses to emergencies.26 Such neglect can hasten
or the equivalent of 17 percent of the value of each proj-
equipment breakdowns and increase replacement costs,
ect.20 A World Bank review of more than 1,000 concession
which are usually the responsibility of the municipality. In
agreements in Latin America and the Caribbean found that
many contracts, private operators can technically comply
renegotiations occurred in three-quarters of the water and
with their contract terms while effectively shifting upkeep
sanitation contracts.21
costs to the local government.27
Because of transaction costs, public-private partnerships are
A report published by the National Rural Water Association
impractical for both small utilities and large regional water
found deterioration of water systems can be “particularly
districts. Transaction costs can be prohibitively high for small
problematic” in long-term contracts.28 Because 70 to 80
municipalities. For that reason, the U.K.’s Treasury considers
percent of water and sewer assets are underground, a mu-
public-private partnerships “not suitable” for projects worth
nicipality cannot easily monitor a contractor’s performance.
less than £20 million (approximately $31 million in U.S.
Consequently, as a researcher for the Global Water Advisory
dollars).22 Similarly, given the intricacy of the transaction,
Committee warned, “The effects of shoddy work may not
the privatization of large water and sewer systems can be
become evident during the contracting period.”29
especially time-intensive. The U.S. Environmental Protection
Agency said, “In the case of extremely large regional facili-
Food & Water Watch
About Food & Water Watch: Food & Water Watch is a nonprofit consumer organization that
works to ensure clean water and safe food. Food & Water Watch works with grassroots organiza-
tions around the world to create an economically and environmentally viable future. Through
research, public and policymaker education, media and lobbying, we advocate policies that
guarantee safe, wholesome food produced in a humane and sustainable manner, and public,
rather than private, control of water resources including oceans, rivers and groundwater.
Copyright © April 2010 by Food & Water Watch. All rights reserved. This briefing paper can be viewed or downloaded at www.foodandwaterwatch.org.