Water privatization market sees opportunities and setbacks

By Michael Clark - 23 Jun 2011 12:59:1 GMT
Water privatization market sees opportunities and setbacks

The other day Nicholas DeBenedictus, CEO of Aqua America, one of the largest private water utilities in the United States, rang the closing bell at the NYSE in celebration of the company's 40th year on the exchange and 125th year of business. Mr DeBenedictus has reason to celebrate. The company's stock was upgraded from sell to underweight, it's stock price is nearly at pre-recession levels, and the company recently completed the acquisition of 51 water systems in Texas, significantly growing their presence in that state.

One of Aqua America's closest US competitors, American Water Works Company, also has reason to celebrate: it's stocks continue to climb and they were the seller of the Texas water systems purchased by Aqua.

It would seem the private water utility industry is doing well and its future appears promising.

Global Water Intelligence predicts a 20% growth in the industry this over the next five years, and notes that hundreds of US cities and towns are considering privatization of water services. Strong environmental and economic drivers may liven up the market. The budget crisis facing US cities and towns will likely drive them to consider privatization, which often includes heavy upfront fees payable to the sellers. A report by Food & Water Watch indicated that, in 2010, 39 US cities were actively seeking to privatize water services to over 11m people, a surge the organization claims is driven by budget woes. Increasing water scarcity will drive up the value of water, making it more attractive the privatization bloc.

These data and trends will only instigate private operators and their supporters. Anti-privatization advocates will raise their voices as a result, citing previous failures. And they will cite the the UN's proclamation that water is a right and, as such, shouldn't be employed as a commodity for profiteering.

The road will not be a smooth one for the likes of Aqua America and American Water in the US, where privatization has been touch and go at best; the market remains dominated by public utilities. Even after the surge in privatization in the 1990's, there have been only a handful of executed privatization contracts each year and some have been utter failures.

In perhaps the most famous perceived privatization failure in the US, Atlanta signed a $420m, 20 year contract with United Water to operate its water system, only to fire the company four years later, in 2003. Towns and cities that even raise the spectre of privatization are often met with strong local opposition, which abhors the perceived corporate takeover of their local water supply.

The future may prove equally difficult for players in the European market. Long a bastion of privatized water services, Europe is exhibiting some second thoughts. Paris recently elected to move water services in-house, claiming it could operate the system much more efficiently, even going so far as to cut water rates. This week Italian voters roundly rejected laws that would have privatized water services in their country, which is struggling with the need to spend billions on much needed water infrastructure upgrades.

The future of water services privatization is uncertain but what is certain is that the battle over it will only intensify as budgets continue to freefall, infrastructure spending gaps widen, and water scarcity increases. Opponents will continue to argue that water is not a commodity on which to profit; supporters will argue that privatization offers financing alternatives and efficiency only the private sector can provide.

Unless public funding increases drastically, it appears that the two sides will need to come to a compromise via innovative, yet equitable, public-private partnerships that capitalize on lessons learned and best practices. This, of course, will require that the parties transcend the inclination to define water as simply a public good or a commodity; instead, it may need to be treated as a hybrid of the two, which entails developing a strategy that achieves the much vaunted triple bottom line: people, planet, profit.

Top Image Credit: © Christopher Nolan