Several U.S. cities sold their water systems to the private sector in 2019, but Harrisburg, Pennsylvania decided after lengthy consideration it will not pursue privatization.
Capital Region Water (CRW), Harrisburg’s water utility, announced plans to implement higher stormwater fees on January 1, 2020. In response, Harrisburg Mayor Eric Papenfuse put out a request to see if any local firms were interested in purchasing the utilities and could lower fees for residents. Four companies responded, and the city interviewed three.
The CRW Board voted to delay implementation of the new stormwater fees until July 1. The delay will allow CRW to seek approval from the U.S. Environmental Protection Agency for a 20-year, $315 million plan to reduce wastewater and stormwater overflow draining into local waterways.
Based on CRW’s decision to postpone the rate increases, the city will drop the idea of selling or leasing the water and sewer systems, The Burg reported on November 20.
“Ultimately, I’m hopeful that CRW can get the job done,” Papenfuse said. “Privatization is off the table.”
Harrisburg is just one of several U.S. cities that considered water utility privatization in 2019, but other municipalities took the step. For example, Lake Station, Indiana sold its water system to Indiana American Water for more than $20 million in October, joining more than a dozen other water and wastewater systems bought by IAW in recent years. Jerseyville, Illinois sold its water system to Illinois American Water for more than $43 million in December.
Nationwide, about 12 percent of the population, or more than 36 million people, are served by private water utility systems, states the Environmental Finance Center at the University of North Carolina.
There are several benefits to a municipality when it sells or leases utility assets to a private provider, says Austill Stuart, director of privatization and government reform at the Reason Foundation and editor of its annual privatization report.
“The basis for entering into any such agreement usually stems from wanting to transfer risks,” Stuart said. “If major rebuilding or expansion is needed, transferring construction risks—and the costs associated with them—can save municipalities time and money, as most municipalities lack the labor resources on-demand to undertake such endeavors in a time-efficient or cost-efficient manner.”
Private Sector Role
The private sector will probably have a role in infrastructure finance or management in cities like Harrisburg that don’t sell their assets, Stuart says.
“Even if a city doesn’t sell or lease its water system, new infrastructure most likely will be delivered by the private sector,” Stuart said. “Private companies that manage multiple systems are usually better staffed to handle large projects that involve rebuilding and new construction and can more quickly complete them, especially when the municipalities enter ‘performance-based’ contracts that financially reward firms for good, timely work and punish them for delays and cost overruns.”
The CRW plan for Harrisburg is projected to eliminate only about 60 percent of the raw sewage dumped into the Susquehanna River and other waterways that empty into the Chesapeake Bay, Stuart stated in a commentary on November 20 before the CRW vote.
“Over the long-term, CRW has shown that it does not possess the ability to fix the city’s water issues alone, much less ensure Harrisburg won’t be facing similar problems down the road,” Stuart wrote.
Avoiding the ‘Next Flint’
Cities can avoid or mitigate water quality problems, such as the public health crisis that occurred in Flint, Michigan due to deteriorating infrastructure and mismanagement, by utilizing the private sector, Stuart says.
“If a publicly run water system has the problems of Flint, it’s the city’s responsibility to fix them,” Stuart said. “With privatization and outsourcing, the private partner would bear at least some responsibility.
“Those companies don’t want to be responsible for the ‘next Flint,’ and will look to avoid water-quality issues before they make their way to faucets,” Stuart said.
Many cities want the benefits of outsourcing utility management without transferring ownership through privatization, Stuart says. These municipalities enter service contracts with private firms.
“New Orleans outsources its wastewater system’s operations and management,” Stuart said. “Atlanta, Baltimore—which has otherwise ‘banned’ water privatization—and Philadelphia are just a few cities that rely on private firms to handle services related to ‘sludge’ [a byproduct of wastewater treatment] management, though in those cases the private firm also built the infrastructure providing the service and usually owns it, too.
“By having a firm build sludge treatment infrastructure, as well as operate and maintain it, those cities transferred a large amount of risks that officials deemed would be better handled by the private sector,” Stuart said. “When speaking of larger water and wastewater systems, the story is similar: Since cities usually rely on private firms to build new infrastructure in ‘design-build’ contracts, it often can make a lot of sense for those same firms to operate and maintain the infrastructure, which typically leads to saving time and money.”
Most municipalities that choose to privatize utilities seem satisfied with the arrangement. Data show 85 percent of private municipal water/wastewater contracts from 2007-2016 were renewed, Reason Foundation’s Annual Privatization Report 2017 states.
“It is important to note than when municipalities enter these arrangements, they tend to stick with them overwhelmingly—or move to a competitor—rather than take the service back ‘in-house,’” Stuart said.
Austill Stuart, ed., Annual Privatization Report 2019, Reason Foundation, updated October 31, 2019: https://reason.org/privatization-report/annual-privatization-report-2019/