Privatizing water: A glass half empty?

From that cooler outside your office door filled with "mountain spring water" to the single faucet supplying many villages in Africa and Asia, water is seen around the world as an essential right for rich and poor alike. If not free – like the air we all breathe – it's at least outside the normal realm of commerce. At least that's been the general perception among most societies and governments.

Increasingly, that view is changing as water and the means of providing it are becoming economic commodities. Private companies own and operate water systems around the world, with annual revenues estimated at $300 billion. In the United States, water systems in Atlanta, Milwaukee, Houston, Jersey City, Indianapolis, New Orleans, San Francisco, and other cities have been at least partially taken over by corporations, some of them foreign-owned.

Fortune magazine has predicted that water "will be to the 21st-century what oil was to the 20th." Indeed, Texas oilman (and corporate raider) T. Boone Pickens now heads Mesa Water Inc., which has water rights covering more than 150,000 acres of the massive Ogallala aquifer.

Many governments, along with such international development agencies as the World Bank and the International Monetary Fund, believe privatization of water supplies – tying them to the marketplace – is a good thing, bringing with it greater economic efficiencies and surer supplies to water-needy areas along with profits. And that's seen as a good opportunity for investors wanting to link up with a product that by its nature has potentially an eternal market.

"Today, Western Europe's water management is almost 40 percent privatized; in the US it's 15 percent," says Philip Rohmer, comanager of a global water investment fund launched earlier this year by Swiss Pictet Funds.

"By 2015, we think Europe will reach 75 percent privatization, and the US 65 percent," Mr. Rohmer told TheStreet.com recently. "So there's huge growth there."

Still, there are growing concerns about the trend, just as there have been about the privatization of energy markets in the wake of the Enron debacle. (The link between water and power generation is not as tenuous as it might seem. One water marketing company – called "Azurix" – was an Enron consortium of limited partnerships and interlocking subsidiaries.)

"There is little doubt that the headlong rush toward private markets has failed to address some of the most important issues and concerns about water," warns a recent report by the Pacific Institute for Studies in Development, Environment and Security. "In particular, water has vital social, cultural, and ecological roles to play that cannot be protected by purely market forces."

"Part of the problem is that there are few formal guidelines and, in most cases, inadequate public oversight," says Peter Gleick, president of the research institute, based in Oakland, Calif.

In South Africa, for example, researchers at the University of Witwatersrand report that every month in Johannesburg more than 20,000 people lose domestic water service because of rising costs which critics tie to privatization.

Selling water – or the rights to water – has a long history, particularly in the American West. In the drought-impacted Klamath Basin of northern California and southern Oregon, farmers and conservationists are working on a deal whereby farmers would be paid $2,500 an acre during dry years not to use irrigation water which would then be "banked." The result could benefit endangered fish and wildlife in nearby refuges and rivers.

But these days, the controversy over providing water to individuals has reached a much larger scale. And in this case, the history of privatization goes back much further in Europe.

"France has a very different view than the rest of the world regarding water, and that goes back to Napoleon," says Mr. Rohmer, the global water investment fund manager. "Water management has been privatized for a long time there, with old companies like Vivendi Environment and Suez Lyon Eaux [which dates back to construction of the Suez Canal] involved in water management."

Vivendi Environment reportedly has 110 million customers in more than 100 countries, and Suez Lyon Eaux claims 115 million customers in 130 countries. Britain privatized its water system in 1989. (When Margaret Thatcher was prime minister.)

"Water is generally considered to be a free good," Rohmer adds. "But it's not, it's an economic good – somebody has to pay for it ultimately."

The question now for a growing number of American communities is whether the economics of providing water should remain under local government control or be contracted out to private for-profit firms.

As in other parts of the world, the picture here is mixed. After control of Atlanta's water system was contracted out to the American subsidiary of a foreign firm, customers complained of cuts in service, billing problems, and a decline in water quality. What would have been a big agreement between a private water-marketing firm with land and water holdings in the Mojave Desert and the Metropolitan Water District of Los Angeles fell through recently. Opponents (led by US Sen. Dianne Feinstein) warned that it might "very well result in serious adverse impacts to California's pristine desert."

Nonetheless, there are efforts in Congress to encourage privatization of water systems. One bill would require that municipalities seeking federal funds to upgrade such water systems consider privatization.

In its recent report "The New Economy of Water," the Pacific Institute makes several recommendations for privatizing water-supply systems and infrastructure: Guaranteeing water for all those in the service area, including subsidies for the poor; maintaining government regulation and oversight; and ensuring that "negotiations over privatization contracts [are] open, transparent, and include all affected stakeholders."

Global water providers appear to be hearing that message. Recognizing the problems with privatization, Suez Lyon Eaux CEO Gerard Mestrallet suggested earlier this year that water system infrastructures should remain under public control with companies such as his providing the delivery service. "Cooperation between the private sector and the state is the best solution to manage water," he said.