Water for Profit

Contamination, riots, rate increases, scandals. From Atlanta to Manila, cities are confronting the true cost of water privatization.

Even before the water turned brown, Gordon Certain had plenty to worry about. With his north Atlanta neighborhood in the middle of a growth boom, the president of the North Buckhead Civic Association had been busy fielding complaints about traffic, a sewer tunnel being built near a nature preserve, and developers razing tidy postwar ranch homes to make room for mansions. But nothing compared to the volume of calls and emails that flooded Certain's home office in May, when Georgia's environmental protection agency issued an alert to North Buckhead residents: Their tap water, the agency warned, wasn't safe to drink unless they boiled it first. Some neighbors, Certain recalls, had just fed formula to their baby when they heard the alert.

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"I had parents calling me in tears," he says. "The things that have happened to the water here have sure scared the hell out of a lot of people." A month later, another "boil water" alert came; this time, when Certain turned on his own tap, the liquid that gushed out was the color of rust, with bits of debris floating in it.

Atlanta's water service had never been without its critics; there had always been complaints about slow repairs and erroneous water bills. But the problems intensified three years ago, says Certain, after one of the world's largest private water companies took over the municipal system and promised to turn it into an "international showcase" for public-private partnerships. Instead of ushering in a new era of trouble-free drinking water, Atlanta's experiment with privatization has brought a host of new problems. This year there have been five boil-water alerts, indicating unsafe contaminants might be present. Fire hydrants have been useless for months. Leaking water mains have gone unrepaired for weeks. Despite all of this, the city's contractor -- United Water, a subsidiary of French-based multinational Suez -- has lobbied the City Council to add millions more to its $21-million-a-year contract.

Atlanta's experience has become Exhibit A in a heated controversy over the push by a rapidly growing global water industry to take over public water systems. At the heart of the debate are two questions: Should water, a basic necessity for human survival, be controlled by for-profit interests? And can multinational companies actually deliver on what they promise -- better service and safe, affordable water?

Already, the two largest players in the industry, French-based conglomerates Suez and Vivendi Universal, manage water for 230 million people, mostly in Europe and the developing world. Now they are seeking access to a vast and relatively untapped market: the United States, where 85 percent of people still get their water from public utilities. Private water providers have positioned themselves as the solution to the developing world's water problems, notes Hugh Jackson, a policy analyst at the advocacy group Public Citizen. "But it's a lot harder for them to make the case when here, in the world's center of capitalism, cities are delivering tremendous amounts of high-quality, clean, inexpensive water to people."

Yet over the past decade, hundreds of U.S. cities and counties, including Indianapolis and Milwaukee, have hired private companies to manage their waterworks. Currently New Orleans; Stockton, California; and Laredo, Texas, are in the process of going private, although opposition has sprung up in all three cities. Water companies have been conducting annual "fly ins" to Washington, D.C., to press their legislative agenda, lobbying for laws that would protect companies from lawsuits over contaminated water and block municipalities from taking back troubled privatized systems. Most recently, a bipartisan group in Congress has been pushing a federal waterworks funding bill, advocated by the National Association of Water Companies, which would require cities to "consider" privatization before they can tap federal funds for upgrading or expanding public utilities and would also subsidize such privatization deals.

At the municipal level the lobbying pressure is equally intense, with water companies actively courting local officials (the U.S. Conference of Mayors' Website features a large ad from Vivendi subsidiary U.S. Filter) and spending hundreds of thousands of dollars supporting privatization in local referendums. "It's hard for local guys to turn these companies away," Massachusetts' former water commissioner Douglas MacDonald has said. "They're everywhere, with arms like an octopus."

The argument behind privatization is that only corporate efficiency can rescue the nation's aging waterworks. But if success is measured in terms of delivering an essential commodity to everyone who needs it, then the industry's record is less than encouraging. Around the world, cities with private water-management companies have been plagued by lapses in service, soaring costs, and corruption. In Manila -- where the water system is controlled by Suez, San Francisco-based Bechtel, and the prominent Ayala family -- water is only reliably available for two hours a day and rates have increased so dramatically that the poorest families must choose each month between either paying for water or two days' worth of food. In the Bolivian city of Cochabamba, rate increases that followed privatization sparked rioting in 2000 that left six people dead. And in Atlanta, city officials are considering canceling United Water's contract as early as this winter.

"Atlanta was going to be the industry's shining example of how great privatization is," says Public Citizen's Jackson. "And now it's turned into our shining example about how it maybe isn't so great an idea after all."

On a cloudy August day that brought a welcome bit of drizzle to drought-parched Atlanta, Mayor Shirley Franklin lugged a seven-pound bound volume off a shelf and heaved it onto a table in her office. The report, prepared by a committee she appointed shortly after taking office last January, contained the city's case against United Water. It detailed violations of federal drinking-water standards, including one instance in which levels of chlorine rose to six times the level the company agreed to in its contract. The report also listed a string of maintenance problems ranging from broken security cameras and gates to open manholes and water-main leaks that went unrepaired for weeks. Some residents had to wait months for basic repairs, even though the company's contract specifies that some repairs must be made within 15 days. In fact, United failed to complete more than half of all required repairs in 2001, and it allowed rust and debris to build up, so that when the boil-water alerts forced the company to flush the system, brown water flowed from the taps.

Finally, the report noted, instead of improving collections of unpaid water bills as promised, United actually allowed collection rates to drop from 98 to 94 percent, costing the city millions of dollars.

United has succeeded at one thing, according to the city: cutting its own oper-ating costs, chiefly by reducing the water- works staff by 25 percent even as demand for water in burgeoning Atlanta keeps rising. Staff reductions were partly responsible for the company's service troubles, the report indicated, as were higher-than-expected repair expenses: Last year United demanded that the city provide an additional $80 million for unanticipated maintenance costs. The increase was blocked when a lone City Council member refused to sign the revised contract.

In mid-August, Mayor Franklin announced that "United Water has not lived up to its responsibility" and formally notified the company that it had 90 days to fix the problems or the city would terminate its contract. "They keep telling me they are part of a world-class corporation that can bring us world-class service," she says, offering a small smile. "So I'm giving them a chance to prove it." United has offered to spend $1 million on outside inspectors to reassure city officials that it isn't, as Franklin puts it, "cutting any corners."

It wasn't supposed to turn out this way. In 1998, when Atlanta's City Council voted to contract out its water filtration and delivery system, city officials insisted that corporate management would stave off a budget crisis and drastic rate increases, and would lower costs by more than 40 percent while improving service. (Franklin herself, then a management consultant, lobbied for one of the companies bidding on the contract.) It was the largest water-privatization program ever attempted in the United States and was expected to prompt a wave of similar contracts around the country.

Water privatization has been gaining steam since the early 1990s, when market advocates began touting it as the next logical step after deregulating electricity. Many city waterworks that were built or expanded in the 1970s are now decaying, and the cost of needed repairs is staggering. The U.S. Environmental Protection Agency estimates that U.S. cities will have to spend nearly $151 billion to upgrade or replace pipes, filters, storage tanks, and other infrastructure over the next two decades. Cities will have to spend an additional $460 billion on sewage systems -- another area where the corporate water giants are making inroads.

The prospect of skyrocketing infrastructure costs prompted U.S. officials to look overseas, where privatization is already a booming business. Multinational companies now run water systems for 7 percent of the world's population, and analysts say that figure could more than double, to 17 percent, by 2015. Private water management is estimated to be a $200 billion business, and the World Bank -- which has encouraged governments to sell off their utilities to reduce public debt -- projects it could reach $1 trillion by 2021. Fortune has called water "one of the world's great business opportunities," noting that it "promises to be to the 21st century what oil was to the 20th."

The biggest contenders for this emerging market are Suez, a corporate descendant of the company that built the Suez Canal, and the media conglomerate Vivendi Universal, which owns the USA network and Universal Studios. Together, the two companies now control about 70 percent of the world's private water-delivery systems and take in a combined $60 billion in revenues. Both have spent billions in recent years expanding in the United States: In 1999, Suez bought United Water for $1 billion, and Vivendi acquired the then-largest American company, U.S. Filter, for more than $6 billion. RWE/Thames Water, a German/British conglomerate, is currently completing its merger with the biggest remaining domestic company, American Water Works.

The water companies have been expanding even more dramatically in the developing world, where antiquated, often colonial-era, water systems are no match for rapidly increasing populations. More than 1 billion people lack access to clean drinking water, notes Peter Gleick, president of the Pacific Institute for Studies in Development, Environment and Security; a recent report he co-authored points out that "half the world's people fail to receive the level of water services available in many of the cities of ancient Greece and Rome."

Yet corporate water's record in fixing those problems -- or even maintaining the industrialized world's systems -- has been mixed at best. In 1989 Prime Minister Margaret Thatcher pushed through a program to privatize the United Kingdom's water supply; costs to consumers soared over the following decade, despite billions in government subsidies to the water companies. In some cities, water bills rose by as much as 141 percent in the '90s, while thousands of public-sector jobs were lost. Even the conservative Daily Mail declared that "Britain's top ten water companies have been able to use their position as monopoly suppliers to pull off the greatest act of licensed robbery in our history."

Last year the Ghanaian government agreed to privatize local water systems as a condition for an International Monetary Fund loan. To attract investors, the government doubled water rates, setting off protests in a country where the average annual income is less than $400 a year and the water bill -- for those fortunate enough to have running water -- can run upwards of $110.

In Bolivia's third-largest city, Cochabamba, water rates shot up 35 percent after a consortium led by Bechtel took over the city's water system in 1999; some residents found themselves paying 20 percent of their income for water. Street protests led to riots in which six people were killed; eventually, the Bolivian government voided Bechtel's contract and told company officials it could not guarantee their safety if they stayed in town.

Privatization has also spawned protests and, in some cases, dominated elections in several other countries, including Paraguay -- where police last summer turned water cannons on anti-privatization protesters -- Panama, Brazil, Peru, Colombia, India, Pakistan, Hungary, and South Africa (see "South Africa's Driest Season," page 38). Here in the United States, some municipalities that initially jumped on the privatization bandwagon are now having second thoughts. In Milwaukee, which turned its sewage system over to United Water in 1998, an audit released in July found that a sewer tunnel was dumping raw sewage into local waterways, including Lake Michigan. Vivendi managed Puerto Rico's water and waste-water treatment for seven years, but after a territorial commission cited inaccurate billing and poor maintenance this year, its contract wasn't renewed.

Companies scrambling for lucrative municipal water contracts have also been caught up in corruption scandals. In June, Katherine Maraldo, a New Orleans Sewer and Water Board member, and Michael Stump, the former president of Professional Services Group, which ran the city's wastewater system, were convicted on bribery charges. PSG is now part of Vivendi, which is bidding to take over New Orleans' drinking-water system. And in 2001, two associates of Bridgeport, Connecticut, Mayor Joseph Ganim pled guilty to racketeering, mail fraud, and falsifying tax returns in connection with a $806,000 payment from PSG, which was negotiating for the city's $183 million water contract.

Such incidents point to a fundamental problem with allowing private companies to take over public water systems, says the Pacific Institute's Gleick. In attempting to make attractive bids for long-term contracts, companies often underestimate the cost of maintaining a water system, and so are forced to either skimp on staffing or demand more money to keep turning a profit. "At least when you have public utilities, the money they take in stays in the community," Gleick says. "With the private companies, the profits are going to go out of your community, out of your state, and probably out of your country."

Nevertheless, Troy Henry, the southern regional manager of United Water, is convinced that private water providers can do a better job than public utilities. He readily admits that his company and Atlanta city managers have had problems "dealing with the complexities of the system" in Atlanta and says the company is spending "multiple millions of dollars [to] win back the citizens' and mayor's confidence." A biomedical and electrical engineer and former manager at IBM, Henry argues that private companies can do for water delivery what Big Blue did for computing -- revolutionize technology and attract "the best and the brightest and most talented people."

Perhaps Henry can mend fences in Atlanta, which he insists is United Water's -- and corporate parent Suez's -- "No. 1 priority." But Clair Muller, chair of the City Council's utility committee, contends that even if United Water ends up saving its Atlanta contract, it will merely have proved that privatization can work only under tight city supervision. And if tight supervision is possible, why privatize? "If government is run correctly -- and that's always a big if -- there's no profit motive," she says. "So if this is about saving money, we should always be able to do it cheaper."

In the end, the debate is about more than money. Taking responsibility for a community's water, Muller argues, is simply not the same as running a sports stadium or a cable franchise. "Water is the worst thing to privatize," she says. "It's what we need to live. I think that's key to the whole debate -- are we going to lose control over functions that are essential to life?"

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