TAPPED OUT

America can’t trust public water, so it’s turning to private companies

While most Americans don’t have to think too hard about whether their water is safe to drink or not, people in Camden, New Jersey are used to not having clean water.

When a water main breaks, which has happened at least twice this year, residents are advised to boil their water. When it rains hard in the city, sewage backs up (pdf) and floods the streets. And kids in school there drink from water coolers instead of water fountains, which were shut off in 2002 after officials found lead in the pipes of older schools. Since then, Camden has has been shipping water into its schools at the cost of $75,000 a year.

It’s probably no coincidence that nearly 40% of the population lives under the poverty line. But soon it won’t just be poor cities like Flint, Michigan or Camden that have to worry about water. A perfect storm of aging infrastructure, stretched municipal budgets, and changing climate conditions are putting even more of the country’s water systems under pressure. Faced with the steep cost of fixing their broken and ill-prepared infrastructure, lawmakers on both sides of the aisle are turning to private money in their search for an answer to the country’s water woes. While the record of private companies handling water supplies has been mixed, this trend toward water privatization seems to be some kind of tacit acknowledgment that local governments can’t fix the problem on their own.

It’s complicated

Delivering water is complicated—and expensive. In many municipalities around the country, a patchwork of city and county governments is responsible for differing aspects of the water infrastructure. One entity may manage water treatment plants, another could be responsible for pipes that deliver water to people, and another for billing and maintaining the system. Building owners are responsible for their own pipes. This is how it works in Camden, which involves private companies. But regardless of what entity sends out clean drinking water, if pipes in Camden’s homes and school buildings have lead in them, then the water is contaminated when it comes out of the faucet.

About 240,000 water mains break every year in the country, sucking $2.6 billion down the drain, according to an email from the Environmental Protection Agency. Aging sewer structures, which in many parts of the country borrow sewer technology from Roman times, spit billions of gallons of raw sewage into local surface waters, says the agency. It estimates that the country will need $655 billion in the next two decades to modernize water infrastructure.

That’s on top of changing climate conditions, which have a varied impact on different regions of the country. In California, for example, Governor Jerry Brown has declared a state of emergency because of a years-long drought. Meanwhile, the east coast faces floods from too much rain and needs massive sewer repairs.

Wall Street to Main Street

Money to fix America’s water woes needs to come from somewhere. The question is where.

“We seem to struggle as a nation to pay the full cost of public services,” says Mildred Warner, a professor of city and regional planning at Cornell University. She has a point. American Water Works Association estimates that water rates in the US are about half of rates in northern Europe.

As water-related issues hit closer to home, Warner believes more municipalities will take a harder look at privatization. “I believe it’s on the horizon in a really big way, because the level of investment needed is so massive,” she says.

The ground for large-scale privatization is already being prepared. On the federal level, for example, President Obama signed the Water Resources Reform and Development Act in 2014, which has a provision that promotes private investment in water efforts, such as repairing water pipes, boosting water monitoring, and desalinating ocean water to make it safe to drink. In New Jersey, where lead has been found in at least 137 schools, Governor Chris Christie signed the Water Infrastructure Protection Act in February of 2015, which allows municipalities to contract out water services to for-profit companies without a citizen vote.

For municipalities, bringing in private players is often the easiest and most politically expedient solution.

That’s what happened in Bayonne, New Jersey, according to Chris Sturm, managing director of policy and water at New Jersey Future. She says that the city had a poor credit rating and wasn’t able to get money to upgrade water infrastructure on public markets. So in 2012, a division of French multinational company United Water, now rebranded Suez, along with private equity group KKR (formerly Kohlberg Kravis Roberts & Co.) signed a 40-year agreement to take over Bayonne’s water services.

The city got $150 million upfront, which it used to pay down debt. That year Bayonne residents saw water rates go up by 8.25%. Four years later, residents are seeing rates go up another 13.25%—a clause in the contract guarantees Suez and KKR a minimum amount of money. Because residents used less water, the partnership gets to hike rates to make up the difference.

Madeline Power, director of communications at Suez, says that the deal helped the city boost its credit rating, upgrade infrastructure, and keep water rates lower for residents than if the city had to borrow on its own. “It’s been a truly great partnership,” she says. “We’re bringing Wall Street to Main Street, USA.”

Going back

Privatization is far from a cure-all, however, and with for-profit players comes a heated debate over whether private players are any more or less efficient than government ownership of public services.

Those pushing for privatization believe that for-profit companies are more efficient at managing water systems and have the expertise to do so. But opponents believe that for-profit companies charge too much for water services in order to meet corporate bottom lines. Food and Water Watch, a consumer rights group, for example, reports that large, for-profit, privately-owned water systems charged households 59% more for water than large, publicly-owned systems.

In reality, private companies are no better or worse at holding down costs than public entities, says Warner. She looked at published studies from 1965 to 2009 and found no difference in costs between privately-controlled and publicly-controlled systems.

Whatever advantages or disadvantages that come from private companies managing water supplies disappear because contract terms are often decades long, and water quality standards are tightly regulated by the Environmental Protection Agency.

It’s something that many municipalities are discovering on their own. So far, the rate of water privatizations in the country has remained pretty steady in recent years, according to Warner. Using data from the International City County Management Survey of 2012, she reports that about 75% of the country’s municipal water systems are entirely in public hands and 6% are run by for-profit companies. The rest have some mix of public and contract management.

Curiously, even though the overall share of municipal water systems under public control has remained steady, that number obscures the much larger number of towns that are experimenting with privatization. Warner reports that about 10% of municipalities newly contract out water services each year while another 10% bring their water system back under public control.

“What that suggests is that local government managers are looking to save money, and if it doesn’t work they bring it back,” she says.

A patchwork

Except in Camden. It’s sticking with for-profit contractors. In 1999 Camden entered into a 20-year contract with Suez to operate and maintain the city’s water and wastewater systems. But the city terminated the contract a few years early after finding that it badly mismanaged (pdf) Camden’s water resources. In February earlier this year, American Water took over management of the city’s water system with a ten-year contract. Lured by incentives, the company is also moving its headquarters to Camden.

Camden officials hope new management and higher rates will help fix some of the water issues that the city faces. The reality is that some of the problems, like badly outdated pipes, run so deep that new ownership and rate hikes will do little to help. The school district plans to continue shipping bottled water to schools with lead pipes. Water main breaks aren’t going away anytime soon.

Warner says that headlines in places like Flint and Camden are opening people’s eyes to the coming challenges with water.

“Water is invisible—it comes out of the tap, and we don’t want to think about it. But as soon as it fails, it’s front page news,” she says. “In the US we’re going to start thinking about water a whole lot more.”

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