Privatizing Water Supply and Sewage
Treatment: How Far Should We Go?

In Canada, we face a number of water problems. Some of the problems concern water supply. Although we have 9 percent of the world’s fresh water (and less than one percent of the world’s population), much of it is inaccessible: 60 percent runs north to Hudson Bay and to the Arctic. That water is not available to the 90 percent of the population that lives in the southern part of Canada. Even where water is plentiful, we often do not have the infrastructure to get it to those who need it. In 1994, 17 percent of Canada’s municipalities reported problems with water availability.¹

Where water is scarce, low prices do not encourage people to conserve. Almost half of Canadians pay flat rates for water. Unmetered, they use a large volume of water—on average, 430 litres a day, or almost three times more than the typical French consumer uses.² Even metered customers can afford to waste water, which is uniformly cheap. The average Canadian pays under a dollar for a cubic meter of water and sewage treatment—less than a quarter of the average price in France.³

These low prices do not mean that the cost of our water use is low. In most cases, our prices and costs are unrelated. Our prices reflect neither the availability of water nor its value for domestic or alternative uses. Nor do they reflect the environmental impacts of sewage discharges. Our water prices often do not even reflect the full costs of treating and supplying water or of collecting and treating sewage; in fact, they may cover only a small part of the costs of operating, repairing, and upgrading our systems. Government subsidies cover the balance of the costs. In 1994, consumers benefitted from $5.3 billion in subsidies to water and sewage projects.⁴

The billions of dollars that governments—meaning taxpayers—pour into maintaining the pipes and plants have not produced a very good system. Sewage pollution is a serious problem across Canada. Approximately 75 percent of Canadians are connected to sewer systems. Not all of those sewer systems, however, are connected to treatment plants. Seven percent of them simply carry the sewage, untreated, to the nearest lake, or river, or ocean. Over one and a half million Canadians dispose of their sewage in this way.⁵ Another five million Canadians—almost a quarter of our municipal population—have access only to primary treatment.⁶ A conventional primary plant removes only 40 to 60 percent of the suspended solids and only half of the total coliforms; it reduces biological oxygen demand by only 25 to 40 percent.⁷ Even the more common secondary plants may be too small, poorly constructed, ill maintained, or badly operated.

Hundreds of plants across the country fail to comply with provincial standards. In some provinces, non-complying plants are the norm; more plants violate the rules than comply with them. The polluters, however, are almost never punished. Although our laws look stringent, our governments rarely enforce them.⁸ Indeed, when aggrieved citizens and non-governmental organizations have tried through civil suits and private prosecutions to stem sewage pollution, their attempts have frequently been foiled by governments intent on shielding offending municipalities.

Untreated or inadequately treated effluent has a number of environmental effects. It degrades aquatic habitat and is toxic to fish. Furthermore, it poses a human health hazard, both for those who swim in it and for those who eat shellfish contaminated by it. As a result, beach closures are common across Canada. Shellfish closures are also common. On the Atlantic coast, it is not unusual for thousands of square kilometres of shellfish grounds—more than a third of the region’s total—to be closed. Municipal sewage pollution is the sole cause of 20 per cent of these closures and contributes to over 50 percent of them.⁹

Why don’t our governments take action against sewage polluters? The problem lies in the fact that governments are not merely the regulators: they also own, operate, or finance our sewage systems. Governments are therefore in conflicts of interest. If they decide to curb sewage pollution, they—meaning either the federal, provincial, or municipal governments, depending on the plant—will have to pay the bills. Governments understand that the bills will be enormous. A federal advisory committee suggests that over the next 20 years, Canada will need to invest $38-49 billion just to maintain its existing water and sewage infrastructure. In addition, it predicts, we will need to invest $41 billion in new stock. These investments will be required to meet existing standards; tighter standards would mean even higher costs.¹⁰

Governments are reluctant—and in some cases, unable—to foot bills of this magnitude. As populations grow and systems deteriorate, governments are looking for help. Increasingly, they are admitting that the help will have to come from the private sector. Private sector involvement is attractive for a number of reasons. Private companies will be able to invest much-needed capital in infrastructure. They will insist on recovering their investments from their customers. Prices will rise to a more appropriate level. Subsidies can then fall—even disappear.

While privatization will change the parties bearing the costs of water supply and sewage treatment, the costs themselves should decline. The private sector has shown time and again that it is more efficient than the public sector. Jurisdictions in the United States have realized significant savings from water and sewage privatization. A study of water companies in California found public operations to be substantially less efficient than private operations.¹¹ Proportionally, public operators hire more than twice as many employees. They spend almost twice as much on maintenance to produce a product of the same quality. As a result, even though public operations enjoy tax exemptions and other subsidies, they cannot provide cheaper water. When subsidies are accounted for, water from public operations costs 28 percent more than water from private operations.¹² Another US study found that contracting out water services to the private sector achieves cost savings of between 20 and 50 percent.¹³ While efficiencies are, of course, spurred by the profit motive, profit does not eat up all of the savings: some can be invested back into the system. In Indianapolis, savings from sewage privatization allowed the city to invest US$90 million in the reconstruction of a sewer system that was on the verge of collapse.¹⁴

It is reasonable to expect that privatization in Canada will likewise bring capital investment, rationalize prices, remove subsidies, and improve efficiencies, freeing up money for further investment. Lastly, privatization will remove the conflict of interest that now prevents governments from enforcing their laws. The environment should benefit from all of these changes.

The question is not whether we should privatize but how we should privatize. Water privatization will, inevitably, come to Canada. The form that it will take—short-term contracts, long-term concessions, or asset sales—is far less clear. The UK’s experience with full privatization suggests that the sale of assets to the private sector convers tremendous economic and environmental benefits.

Privatization in England and Wales

Since 1989, ten new water and sewage companies in England and Wales have invested enormous sums in infrastructure. The need for massive investment was a primary force driving privatization. In the 1980s, the government estimated that £24 billion would be required within 10 years to repair the system and to meet new European standards. But the government did not want to borrow or to raise water prices.¹⁵ The government’s promise, in 1986, that the new private water companies would be “released from the constraints on financing which public ownership imposes”¹⁶ proved to be a dramatic understatement. The water companies have invested about £3 billion a year. When current programmes are completed, they will have invested £40 billion.¹⁷

Not surprisingly, these unprecedented investments have improved performance. Drinking water quality has improved steadily.¹⁸ Fewer customers are threatened by water shortages.¹⁹ Fewer are affected by sewer flooding.²⁰ Investments have also brought environmental improvements. In the first five years following privatization, the percentage of plants complying with their discharge permits increased from 87 to 96. During that period, the quality of more than 3,000 kilometres of rivers and canals improved significantly. In 1990, less than 48 percent of the rivers and canals tested were classified as very good or good; by 1995, that figure had increased to 60 percent.²¹

Privatization also made coastal beaches swimmable. Britain’s beaches had long been polluted by raw sewage. In 1975, when the European Community gave member countries 10 years to clean up their bathing waters, the British government resisted, claiming that the country had only 27 beaches. The number of beaches in England and Wales has increased since then: it is now at 447. Compliance with European standards is also up: it increased from 66 percent the year before privatization to 89 percent in 1997.²²

A number of companies are currently working to exceed European standards. Four companies have agreed to install full treatment plus disinfection at some or all of their sewage treatment plants. Some of these plants will meet guidelines that are 20 times stricter than European standards.²³

Why are they doing this? In part, they are responding to public pressure. A number of environmental groups fight for cleaner rivers and oceans. They and their members monitor and report sewage pollution, rate beaches, lobby regulators, and launch legal actions against polluting companies.

More than the public’s attitude has changed: The government’s attitude has also changed. When the government owned polluting plants, it created what one former regulator called a “potent culture of government concealment.”²⁴ According to another regulator, Britain’s old system had been “designed with a view to avoiding . . . an excessive number of prosecutions of public organisations.”²⁵ In other words, Britain suffered from the same conflict of interest that now plagues Canada. The government acknowledged this. In 1987, the Secretary of State noted that in a publicly-owned system, the government acts as both “poacher” and “gamekeeper.”²⁶ By separating the polluter from the regulator, privatization would free regulators to regulate.

This has certainly happened in the UK. Now that the government is not polluting, it does not have the same incentives to hide information. It can worry about protecting the public rather than its own interests. As a result, it is enforcing its laws against pollution far more vigorously than before. Prosecutions for environmental offenses—which were rare under the former public regime—are now the norm. Recent years have seen over 200 successful prosecutions of water and sewage companies.²⁷ Unfortunately, the fines resulting from these prosecutions are often low.

Regardless, the environment has clearly benefited from privatization. But what about the consumers? Have the new water companies provided better service at lower prices? While service has improved, prices have by no means declined. Because of the huge investment in infrastructure required, average water and sewage prices doubled between 1989 and 1996.²⁸ The increases have frustrated consumers. With only 11 percent of the households on water meters, most people can do nothing to keep their costs down.²⁹ Thousands have been disconnected for not paying their water bills. High prices and disconnections have made the water companies quite unpopular.

Other problems persist. The water system leaks badly: As much as 30 percent of the water put into the distribution system leaks out.³⁰ Furthermore, sewage pollution remains common: in 1997, almost four million people who were connected to sewers received either no treatment or only preliminary treatment.³¹ All collected sewage should be treated by 2005.³² Thus, there remains much work to be done. There is little doubt, however, that the work is more likely to be done under the new private system than it would have been under the former public system.

Privatizing regulation

I have been discussing privatizing the operation and financing of water supply and sewage treatment services. I will now briefly explore the possibility of privatizing the regulation of these systems.

In Canada, provincial governments normally regulate water and sewage. In England and France, much regulation ostensibly occurs at the river basin level. However, national authorities may guide—and overrule—river basin decisions. Furthermore, the European Union sets standards that all member states must comply with.

Is such highly centralized regulation appropriate for water supply and sewage treatment? At what level should these services be regulated? And by whom? The European principle of subsidiarity is a sound—albeit frequently violated—one. Resource use should be regulated at the lowest reasonable level. Strictly local problems merit local solutions. Indeed, the principle can be taken further: problems that affect a limited number of individuals can best be solved by those individuals.

The effects of sewage discharges tend to be localized—more localized, often, than the effects of water withdrawals. Often, the release of sewage into a river affects the people living immediately downstream and those who own fisheries in the river. Why not let these people negotiate solutions that suit them?

Under the English common law—a system that also exists in most of Canada—the people living along lakes and rivers and the owners of fisheries have strong property rights. They have rights to water in its natural state—water that has not been diminished or polluted. Unfortunately, governments frequently override these rights. They pass laws and regulations authorizing abstraction and pollution. These laws remove decision-making authority from those who are most affected and transfer it to government regulators.³³

Restoring property rights to clean and plentiful water would partially privatize regulation. The change would not constitute de-regulation of the water supply and sewage treatment systems. It would simply encourage regulation by affected individuals rather than regulation by regional agencies or central governments.

How would citizen regulators handle their responsibilities? Experience suggests that some would do very little. Some would sell their rights. And some would be very tough regulators—far stricter than governments have been. When armed with strong property rights, many people use them to protect their waters and the fish that live in them.

Private regulation is most likely to work in a system in which the financing, ownership, and operation of water and sewage has also been privatized. When those insisting on clean or abundant water are not facing the state’s power of expropriation, the playing field is more level and bargaining is fairer.

Property rights cannot replace all central regulation. Governments may wish to set minimum environmental standards to protect those who have an interest in—but no rights to—water resources. Under no circumstances, however, should governments set maximum environmental standards—standards that diminish individuals’ property rights. Decisions to sacrifice water quantity or water quality should be made by the rights holders themselves.

Of course, other kinds of regulation will remain in place. As long as companies have monopolies over water supply and sewage treatment, governments will want to regulate both the quality and the price of the services. Whether monopolies are inevitable is another question, the answers to which I must leave for another time.

Notes

1 Environment Canada, Urban Water: Municipal Water Use and Wastewater Treatment, SOE Bulletin no. 98-4, 1998.

2 Ibid.; and Environment Canada web site: http://www.ec.gc.ca/water/images/manage/use/a4f4e.jpg.

3 Environment Canada, Water Works, web site: http://www.ec.gc.ca/water/en/info/pubs/FS/e_FSA4.html#price; and communication between Henri-Benoit Loosdregt (Suez Lyonnaise des Eaux) and Craig Golding, June 1998.

4 National Round Table on the Environment and the Economy, State of the Debate on the Environment and the Economy: Water and Wastewater Services in Canada, 1996, p. 8.

5 Environment Canada, Urban Water, op. cit.

6 Ibid.

7 Martin Nantel, Sewage Treatment and Disposal in Quebec: Environmental Effects (Toronto: Environment Probe, 1995), p. 2.

8 Elizabeth Brubaker, “Bring Back Our Beaches,” The Next City, vol. 2, no. 4. Summer 1997. p. 36.

9 Martin Nantel, Troubled Waters: Municipal Wastewater Pollution on the Atlantic Coast (Toronto: Environment Probe, 1996), p. 7.

10 National Round Table on the Environment and the Economy, op. cit., p. 10.

11 Kathy Neal et al., Restructuring America’s Water Industry: Comparing Investor-Owned and Government-Owned Water Systems, (Los Angeles: Reason Foundation, 1996).

12 Adrian Moore, Clearing Muddy Waters: Private Water Utilities Lower Costs and Improve Services (Los Angeles: Reason Foundation, 1997), p. 1.

13 David Haarmeyer, Privatizing Infrastructure: Options for Municipal Water-Supply Systems (Los Angeles: Reason Foundation, 1992).

14 "Indianapolis extends United Water contract," World Water and Environmental Engineering, vol. 20, no. 12, December 1997, p. 8.

15 David Kinnersley, Coming Clean: The Politics of Water and the Environment (London: Penguin Books, 1994), pp. 4, 60-1.

16 The Secretary of State for the Environment et al., Privatisation of the Water Authorities in England and Wales, Government White Paper, February 1986, pp. 1, 2.

17 Dr. Ted Thairs (Water UK), personal communication, July 1998.

18 Drinking Water Inspectorate, Summary of 1996 Report by the Drinking Water Inspectorate, DWI web site: http://www.dwi.detr.gov.uk/water/drinking/summ2.htm, June 1998.

19 Adrian Moore, op. cit., p. 3.

20 OFWAT (Office of Water Services), Summary of the Director General’s Annual Report, 1997, OFWAT web site: http://www.open.gov.uk/ofwat/summary.htm, June 1998.

21 Environment Agency, “The Quality of Rivers and Canals,” State of the Environment Report, EA web site: http://www.environment-agency.gov.uk, 1996.

22 Environment Agency, State of the Environment Report, EA web site: http://www.environment-agency.gov.uk, June 1998. The European Union, which publishes figures for all of the UK, gives a compliance rate of 88.4 per cent at 492 sites. See web site: http://europa.eu.int/water/water-bathing/report/uk97.html, June 1998.

23 Elizabeth Brubaker, “Bring Back Our Beaches,” op. cit., p. 38.

24 Kinnersley, op. cit., p. 202.

25 Lord Crickhowell, House of Lords Hansard, April 17, 1989, col. 579.

26 Kinnersley, op. cit., p. 53.

27 David Wallen, “Profiteering claims mark British privatization,” The Globe and Mail, October 17, 1996.

28 Water Services Association of England and Wales, Waterfacts ‘95, p. 35.

29 Department of Environment, Transportation, and Regions, Water Charging in England and Wales—A New Approach, DETR web site: http://www.environment.detr.gov.uk/consult/watercharge, June 1998.

30 OFWAT, Leakage of Water in England and Wales, May 1996, p. 4.

31 Water Services Association of England and Wales, Waterfacts ‘97, p. 35.

32 Dr. Ted Thairs (Water UK), personal communication, July 1998.

33 Elizabeth Brubaker, Property Rights in the Defence of Nature (London: Earthscan, 1995); and Elizabeth Brubaker, “The Role of Property Rights in Protecting Water Quality,” Journal des Economistes et des Etudes Humaines, vol. 7, no. 2/3, June/September 1996, pp. 407-14.