Privatized Water Systems More Costly than Loans

As municipalities throughout the United States struggle to balance budgets in the wake of last decade's financial crisis, some may raise cash by leasing or selling their drinking and wastewater systems to private entities. But Borrowing Trouble: Water Privatization Is a False Solution for Municipal Budget Shortfalls, released today by the consumer advocacy organization Food & Water Watch, shows that taxpayers ultimately suffer when water systems are privatized, and that leasing or selling these essential systems simply masks, not alleviates, local budget shortfalls.

Although more than 80 percent of water systems worldwide are publically owned and controlled, the collapse of global financial markets in the 2000s has led many governments around the world to consider privatizing these assets through arrangements such as concession contracts, where a municipality retains ownership of a system, but the corporation that has assumed control is responsible for setting rates and financing system upkeep.

In these deals, the private company will give the local government what is effectively an upfront loan for control of the water system, while ratepayers, not the municipality, are expected to repay the loan through rate increases and other fees.

"Water system concession contracts are a new form of predatory lending, targeting cash-strapped, financially desperate cities and towns," said Food & Water Watch Executive Director Wenonah Hauter. "Because they do nothing to address the source of budget problems, long-term water system leases just use fiscal smoke and mirrors to obscure them, transferring a municipality's money woes to local taxpayers through rate increases."

Because ratepayers must repay the loan from the company leasing their water system, water bills will increase. The more money a local government receives from the deal, the more households and local businesses will pay through their water bills.

Such loans are far more expensive than the common form of government borrowing on the municipal bond market. The upfront loan can have an interest rate of 14 percent or higher, while local government debt typically has an interest rate of about 4 percent. For similar reasons, concession contracts have also been shown to drive up the cost of system improvements, adding $0.8 million to $2.5 million onto the total cost of every $1 million investment.

In addition to transferring a city's financial burdens to current and future generations of ratepayers, concession contracts, leases and sales have also drawn criticism for undermining civic transparency, often because the deals are arranged without public approval, or are misrepresented by public officials and privatization consultants. Even worse, some officials have been accused of deliberately misleading the public about the costs and consequences of a potential privatization.

In Allentown, Pa., for instance, Mayor Ed Pawlowski told residents that leasing the water and sewer system for 50 years would pay down the city's liabilities without having residents of the city assume any of the financial burden associated with the debt. But research by Food & Water Watch revealed that by the end of the 50-year concession, residents would see their water and sewer bills increase by at least 418 percent on top of inflation.

Food & Water Watch recommends that public officials reject deals to privatize their local water and sewer systems, as doing so will not provide a real, sustainable and responsible solution for financial shortfalls. Policymakers should grant the public access to all information regarding potential privatization contracts, encourage public input and require a referendum on any proposed lease, concession or sale of a public drinking or wastewater system.

Borrowing Trouble: Water Privatization Is a False Solution for Municipal Budget Shortfalls is available here: https://fwwat.ch/ZBGPso