Acton Institute Powerblog

The Case for Water Privatization

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To provide water for people, communities have usually turned to  two different options: public or private utilities. However, if Bolivian President Evo Morales, leader of the Movement Towards Socialism Party, gets his way, the United Nations will pass a resolution blocking the sale of public water utilities to private companies. If adopted, this resolution will cause problems for many nations, especially the undeveloped countries receiving support from the U.N. that will be forced to abide by one option—public supply of water—instead of being permitted to consider privatization which may be more efficient and cost effective.  The makes the global water crisis much worse.

It will not help any country to limit its options when searching for the most efficient and cost effective solutions for providing a clean, sanitary, and abundant source of water.

Theories and examples in support and against both private and public water utility systems are numerous. A study conducted by the University of Michigan showed that water prices, in general, are too low. The study explains that direct and indirect subsidies, in both developed and undeveloped countries, have caused low prices, resulting in water waste. Furthermore, the study argues that if the subsidies are removed, the price of water will increase and provide an incentive for those utilizing water to not waste it. This, in turn,  will result in the investments that are needed to develop more efficient technologies. If subsidies are removed, then a lighter burden is placed on public funds.

Lending support to the findings of the University of Michigan study, a survey conducted in 2004 by Global Water Intelligence found that the under-pricing of water is widespread. The study analyzed the prices charged by water utilities in 132 major cities worldwide and found that 39 percent of water utilities had average tariffs that are set too low to cover basic operation and maintenance costs. Some 30 percent had tariffs that are set below the level required to make any contribution toward the recovery of capital costs.

Changing the price system may be a solution. Some argue for a metering that charges water users based on consumption. However, while subsidies are proving to be largely inefficient the question must be asked: Can those in undeveloped countries, who are already living in a state of grave poverty, afford increased prices on water?

The International Development Association and the World Bank are quick to point out the success of private water utilities. Examples can be found in Rwanda and Mozambique where the private sector helped provide, improve, and/or expand the water supply. The U.N. has acknowledged five reasons to pursue private sector partnerships.

A private sector supply of water can be more efficient and cost effective. According to the World Bank, it is estimated that in the United States each dollar of public funds raised for utilities has an opportunity cost of $1.30 of private consumption, and the average opportunity cost for each dollar of tax revenue raised is $1.17 for 38 African countries.

Critics of the privatization of water argue that while it is more efficient and cheaper, the private systems fall short of social equity in supplying water and charge higher prices. While there have been unsuccessful stories of privatization, the aforementioned examples in Rwanda and Mozambique are a just a few of the many success stories, and, as The Economist notes, when private utilities charge higher prices, that often corresponds to higher rehabilitation investments, better water quality, and better service.

Privatization will also promote the decentralization of  government, and in the case of many developing nations, remove the control of water out of the hands of corrupt bureaucrats. A large overarching centralized government is not needed. Instead, the principle of subsidiarity should be applied.

Private entities are able to supply an efficient and cost effective supply of water. Privatization is an effective solution, and its ability to meet the needs of consumers has improved. As a result, water supply can follow the principle of subsidiarity by utilizing other alternatives to supply water instead of through a system brought forth by a centralized government.

It is important to note that just as public utilities are open to corruption, inefficiencies, and poor management, so is privatization. Privatization can fall subject to a corrupt government. The example of Detroit is instructive here. For example, when a government decides to contract a private utility to supply water, instead of having an open bidding process, the government accepts no outside bids and picks a company that is owed a political favor. If privatization is to succeed government must take the appropriate actions to allow it to succeed and also nurture an environment that is open to decentralization, promoting business without unnecessary government interference.

Louie Glinzak


  • shoeless pete

    How can adding profit for those outside of a system reduce the costs of that system? The principle does not appear to be valid on its face. As well, claims of greater efficiency of privatized public utilities have not proven to be substantiated in real world examples. I think the argument is a cover for the parasitic move of capital into new areas of exploitation, now that the spiritual geography of earth has been reduced to commodity.

  • Louie Glinzak

    I appreciate your comments and contribution to the discussion. In my post I pointed out one flaw with water supplies can be the subsidies that are given. While supporters of subsides argue they keep the cost of water down, it needs to be taken into account that subsides cost taxpayers money, and while the actual water bill is lower, the price of subsides needs to be included to look at the overall costs of water. An efficient manner of supplying water should not need subsidies to operate especially if consumers are paying for the product (in this case water) for its actual value. Furthermore, as I also pointed out, public funds used for public utilities have an opportunity cost, and if privatization was employed, the opportunity cost would be erased, thus saving taxpayers even more money. In regards to my claims on greater efficiency, I cited numerous examples from the World Bank and the International Development Association. These examples can be found here, and are just a few of many examples. The argument is not “a cover for the parasitic move of capital into new areas of exploitation…” but is a suggestion of one way to solve the water crisis that has proven to be effective. I will be further exploring my argument as I demonstrate how water, being a private property right, will even advance the cause of helping solve the water crisis and also supply clean water in an consistent, abundant and efficient manner.

  • Shoeless: What do you mean by “the spiritual geography of earth has been reduced to commodity”? Thanks.

  • Mitch

    You can argue all you want about the cost of water and the efficiency of privatization, but don’t forget to factor in the cost of EVERY family in an urban population having to buy a Brita, or the indirect healthcare costs associated with drinking dirty water.

    I don’t care what your economic model is, says, or suggests… You have obviously never been to places like Washington D.C., New Orleans, or Atlanta.

    I grew up in Philadelphia, a city fortunate enough to still have PUBLIC water. Everyone drank the water straight from the tap, it was delicious, clean, and always clear.

    Meanwhile the three other cities I mentioned have TERRIBLE tasting water…. There are regular shortages from time to time and the water often appears murky.

    I don’t care how many economic degrees you have or what your rationalization even is… Privatized water is a HORRIBLE idea.

  • Dalibor

    Can I ask you which resolution you mentioned in the beginning?
    ” United Nations will pass a resolution blocking the sale of public water utilities to private companies.”