THE PERFORMANCE OF MUNICIPAL WATER UTILITIES: EVIDENCE ON THE ROLE OF OWNERSHIP

Abstract

There is growing concern about the operations of the municipal agencies responsible for supplying potable water and treating sewage, spurred by (1) difficulties of maintaining aging capital stocks in times of tightening fiscal constraints, (2) the water pollution generated by these agencies, (3) problems associated with service quality and reliability, and (4) the recognition of the role played by utilities in allocating scarce water resources. These concerns have lead to a heightened scrutiny of these agencies with increased interest in reforming their operations. In particular, this has focused on an examination of whether the ownership of water utilities is a factor explaining their behavior and whether changing their ownership will lead to improvements in their operations. The purpose of this paper was to critically assess what is known regarding the relationship between the ownership and performance of municipal water utilities. There are a number of theoretical arguments that support the prediction that privately owned water utilities will out-perform comparable publicly funded utilities. These arguments draw on property-rights and public choice theories and principle agent models in order to emphasize the difficulty that governments have in monitoring and providing proper incentives for utility managers. Empirical evidence was obtained from the United States, the United Kingdom, and France based on a variety of performance indicators. These data revealed that there was no compelling evidence of private utilities outperforming public utilities or that privatizing water utilities leads to improvements in performance.

This paper was completed while both authors were visiting scholars at CSERGE (Centre for Social and Economic Research on the Global Environment), University of East Anglia, Norwich, UK. The authors thank their research assistants, Jenna Sudds and Meghan Ihrig, and acknowledge the financial support of the Canada Donner Foundation. All errors and omissions remain the sole responsibility of the authors.

Notes

*The latter is known as the Farrell measure of technical efficiency (Farrell, 1957).

*Such data may be problematic in the case of municipal water utilities, particularly in those situations where they “purchase” water from regional water wholesalers at prices that do not reflect true opportunity costs.

*Sargent and Rodriguez (2000) compare these two measures and argue that the choice of particular approach should depend on, among other factors, the quality and comparability of capital stock data for the units under analysis.

*It should be noted that a change in ownership structure may also entail a change in the firm's object ives, which may further complicate the measurement and assessment of performance.

*Rate of return regulation has been historically popular in the United States, for example, in the telecommunications industry. Under this form of regulation, firms are permitted a given or market rate of return on their capital stock. However, the method has been criticized for providing perverse incentives to firms to expand their capital stock beyond what is allocatively efficient.

*Some alternatives include contracting out some or all of a utility's operations through a competitive bidding process and then regularly reopening the contract for rebids; competition induced in the equity market; and competition for large customers (in particular, England and Wales have put some effort into introducing some competition this way).