North Carolina city and county water and wastewater services should be contracted to private firms or converted into privately owned, government-regulated services.

Background

Privatizing water and wastewater services is not a radical idea. More than 40 percent of the nation's drinking water systems are privately owned with government regulation controlling quality and price. Between 1998 and 2001, cities that contracted fresh water and wastewater services to private firms chose, when those contracts came up for renewal, to keep their water systems in the private sector 91 percent of the time (see chart).

Many of North Carolina communities' problems with fresh water and wastewater services could be solved by privatization. The drought of 2007 caused several communities to place strict controls, enforced with $1,000 fines, on how citizens used water. This exclusive focus on reducing demand through coercion diverted the public's attention away from government failures to price water properly (in order to manage demand voluntarily) and plan for adequate supply. But local governments often respond to political incentives and set prices well below the market rate, which inevitably leads to shortages. Private ownership creates incentives to price water based on market forces -- including a temporary greater scarcity of water owing to drought -- and to increase the water supply and avoid shortages.

Citizens also have experienced serious contamination of fresh water from government wastewater systems. For example, Wilmington was forced to close swimming and fishing areas when 4 million gallons of untreated sewage went into Hewletts Creek. Cary had similar problems when millions of gallons in raw sewage contaminated Swift Creek, causing the closure of Lake Wheeler and Lake Benson. With privatization, such problems are less frequent. Private companies facing competition for government contracts have additional incentives to act responsibly and prevent contamination.

Additional advantages of water privatization

The U.S. Clean Water Act requires cities and counties to install costly equipment to prevent water pollution. The Environmental Protection Agency suggests privatization for cities to meet this federal mandate because of the increased efficiency of private-sector firms. In many cases, areas that have chosen this path have even seen private firms surpass EPA standards.

Privatization contracts often include cost, quality, and customer service criteria that private servers must adhere to in order to maintain their contracts.

With public water operations, citizens have fewer guarantees of those criteria. A city whose public water system is inefficient faces few consequences. A private supplier that is inefficient or endangers water quality, however, risks losing its contract to a competitor. For this reason, citizens benefit greatly from the privatization of water.

Should we trust the private sector?

Through government regulation, water safety is achieved in both publicly funded and privately owned water services. The profits of private water companies are contingent on their maintenance of high levels of safety. Many other indispensible goods, including food and medicine, are well provided through the private sector. People trust that with government oversight and private companies' incentive to maintain a positive image, those goods will be safe. Private water service is no different.

With water provided by a private firm that must adhere to strict quality regulations, water safety is preserved and can even be improved.

How do local officials maintain control and accountability of private providers?

Public officials can easily write water and wastewater contracts that specify measurable performance standards by which the officials can monitor private firms. By providing compensation only when the contract firms meet their standards, local governments are able to maintain a high level of control over the water supply. The contracts can include both safety and quality terms, as well as be flexible to a community's particular needs.

When a local government opts to convert its water operations to a private service, it can retain some power through regulation. If the private firm fails to adhere to the regulations, it risks being fined, losing customers, or being shut down. For those reasons, private water systems have an incentive to follow the regulations and deliver a high-quality service at a competitive price.