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Privatizing Water Facilities Can Help Cash-Strapped Municipalities

by Adam Millsap on October 5, 2016

in City Life, Infrastructure, Public Goods

In my latest Forbes piece I discuss water privatization in the U.S. and why it is often a good idea.

“A public-private partnership has several benefits versus a completely public system. First, private firms often operate in many different jurisdictions, which means they have more experience and are able to institute best practices based on their accumulated knowledge.

Second, there is more oversight. The firm has an incentive to provide the specified water quality in order to maintain their business with the city and to avoid being sued for breach of contract. Local government officials can easily monitor the firm since they only need to focus on water quality and availability. If either the government or the firm fail to do their job, the other entity can alert residents.

Third, private companies are often better situated to maintain the infrastructure than public ownership, and public choice analysis helps explain why. Under complete government ownership, rate increases are a political decision rather than a business decision. There is a strong incentive for government officials to keep rates low, especially during election years, since rate increases rarely lead to votes.

Moreover, it’s difficult for politicians to commit to making necessary infrastructure improvements since the deterioration of a city’s water infrastructure is a long process that’s hard for the average voter to notice. A politician can get more votes by allocating tax dollars to conspicuous things like additional policemen or shiny, new fire trucks—it’s hard to trot out a new water main at a campaign rally.”

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