RALEIGH — Ask local politicians, officials, and citizens to make a list of essential services provided by their governments, and it is likely that the provision of water and sewer service will rank fairly high on the priority list.
It’s understandable. Receiving utility service and paying utility bills are among the most familiar ways that North Carolinians interact with local government. Plus, many analysts would argue that a water utility is a “natural monopoly” — and that the most direct and efficient way to deliver the service is for the government to do it, rather than having private companies, duplicative infrastructure, and potentially wasteful competition involved.
The problem with this theory, as with some many notions of natural monopoly and the related concept of market failure, is that there is real-world experience to contradict it. For example, mainstream economists for years used to cite the case of lighthouses to prove that there were some services freely available to everyone, and difficult if not impossible to price, that must inevitably be provided by the government. Then Ronald Coase, later to win the Nobel Prize in Economics, came along to ruin this perfectly good theory with the fact (warning, it’s a pdf) that many private lighthouses had been built and operated over the years, funded through market mechanisms such as harbor fees.
Similarly, while many North Carolinians might think that water service should inevitably be provided by the government, there is actually a wide array of institutional arrangements for obtaining the service. Most obviously, plenty of folks living outside the corporate limits of a municipality have wells. But even beyond that, privately owned and operated water systems are surprisingly commonplace. According to Adrian Moore of the Reason Public Policy Institute, about 2 out of 5 drinking-water systems nationwide are private, and they serve about 1 out of 6 Americans. In addition, a sizable and growing number of government-owned water utilities are operated by private companies on contract.
The history of these water systems is varied, but their performance has some common denominators. For the most part, privately operated utilities deliver at least as good or better service at a lower average price. “Nearly every credible cost comparison study that has been done shows that privatizing utility ownership or management reduces costs,” Moore says. “Even [Bill] Clinton’s EPA argued that private management reduces costs and helps communities achieve compliance.”
Moore notes that customers of private water systems are generally satisfied, with 91 percent of communities choosing to continue privatization at renewal time. And this is not because they are captive to the private firms—6 percent of communities switch to another private company when existing contracts are up, and each year about 10 communities bring services back in house. The vast majority of communities say they would recommend their private water manager to other communities.
North Carolina governments looking to focus their resources on high-priority uses and maintain or reduce their taxes and fees — and as I’ve recently written, many such governments exist right now — should consider the possibility of soliciting bids on their water utilities. There is no guarantee that a good proposal will come along, and as with all privatization initiatives the goal should be improved services and competitive costs, not the awarding of private contracts per se. Moreover, contracts should be carefully worded to avoid performance and management problems later, and to ensure that local officials retain the authority to set health and safety standards.
Still, a properly structured privatization effort could result in significant savings, which localities could pass along to households and businesses, as well as the potential to sell all or part of the existing infrastructure to a private firm to generate financial capital for use on other infrastructure projects, such as improving city streets or building county schools.
Don’t accept simple platitudes about “the way we’ve always done it” or how “we can’t take risks.” The economics of providing water service is, if you’ll pardon the expression, slippery. It takes some real effort and creative thinking to fully capture it.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.