An Analysis of the Privatization of Drinking Water Facilities in the United States

Abstract

The drinking water infrastructure in the United States faces significant underinvestment. The 2009 American Society of Civil Engineers Report Card on America’s Infrastructure gave a D minus for the Nation’s drinking water infrastructure. In a 2007 study, the EPA found a 20-year investment gap of $334.8 billion. Degrading infrastructure and constrained finances have led cities and municipalities to consider selling, or privatizing, their drinking water services to for-profit companies. Debate regarding the efficiency of public or private ownership lacks sufficient quantitative analysis to address two major concerns: water prices and infrastructure investment. Previous studies quantifying the impacts of ownership on drinking water utilities are dated or lacking financial analysis. This study uses survey data from 2002-2008 provided by the American Water Works Association and National Association of Water Companies. Quasi-experimental design methods and statistical regression analysis provide a causal link between ownership and employment levels, operating revenue, and infrastructure investment. Results of this study show ownership to have a significant impact on operating revenues and number of employees at a facility. Specifically, private ownership will increase operating revenues and decrease facility-staffing levels. However, public facilities regulated in a similar manner to private facilities show no statistical difference from private ownership regarding employment numbers. Ownership does not have a significant effect on infrastructure investment as approximated through depreciation expense and planned capital expenditures. Analysis of the results emphasizes ownership to be neither the savior nor the downfall to issues in U.S water management. This study suggests policy-makers and advocates shift focus away from debate regarding privatization towards the proper management of water infrastructure. Future studies would benefit from analyzing management structures and incentives at drinking water facilities.