Opinion: Privatizing Pittsburgh’s water utility is a win-win

This year, there’s a new initiative on Pittsburgh voters’ ballots. Pittsburgh United, a “labor, faith, community and environmental justice” organization, is pushing an initiative that would amend Pittsburgh’s Home Rule Charter (effectively its local constitution) to restrict the lease or sale of the City’s water and wastewater system to private entities. Should this initiative pass, it would result in worse, not better, water services for Pittsburgh’s 300,000 residents. 

Today, Pittsburgh’s water infrastructure is operated publicly by the Pittsburgh Water and Sewer Authority. PWSA was initially created in 1984 to borrow money to repair the City's water system without negatively impacting its bond rating. But for the last 30 years, it has operated most of Pittsburgh’s water and wastewater systems. The actors spearheading the anti-privatization effort would like to see the status quo unchanged.

Over the last 10 years, PWSA has overseen a litany of operational and environmental failures. Indeed, as far back as July 2016, PWSA was documented to have distributed water with a lead level of 22 parts per billion, exceeding the federal lead action level of 15 parts per billion. In November 2017, PWSA was slapped with a $2.4 million civil penalty by the Pennsylvania Department of Environmental Protection to address violations that included lead action level exceedance and a failure to replace lead service lines as required. More recently, in July 2020, then-Pennsylvania Attorney General Josh Shapiro announced a settlement with PWSA for exposing customers to high levels of lead from partial lead line replacements. PWSA agreed to pay $500,000 toward lead reduction efforts and agreed to corporate monitoring. 

PWSA’s incompetence has even attracted the attention of federal agencies. In November 2020, the Environmental Protection Agency and Department of Justice charged PWSA for violating the Clean Water Act when it discharged clarifier sludge into the Allegheny River in violation of PWSA's NPDES permit. The story doesn’t end there: In June 2021, the EPA went even further, accusing a former PWSA supervisor of conspiring to violate the Clean Water Act in connection with the aforementioned sludge. 

With this track record of public mismanagement, it’s puzzling why the anti-privatization ballot initiative is even being proffered. The real solution to Pittsburgh’s water woes is, in fact, full or partial privatization – done the right way. There are many variations; for example, one could just privatize the operation and maintenance of the water and wastewater systems, while the city retains ownership of the facilities. Privatization will result not only in higher-quality operation and maintenance of Pittsburgh’s water systems but also in lower costs. Indeed, comparative cost analyses of private versus public provision of goods and services support the conclusion that private firms are more cost-effective than public firms. Considerable evidence suggests that the public cost incurred in providing a given quantity and quality of output is about twice as great as the private provision. This result occurs with such frequency that it has given rise to a rule-of-thumb: “The Bureaucratic Rule of Two.” 

To implement a sound privatized system, the terms of the contract must be well-specified, the contract must be awarded in an objective fashion, and the terms of the contract must be policed. This requires the existence of some sort of “buyers’ agency” to represent Pittsburghers. The City government need only create such a buyers’ agency with a mandate to conduct the auction and devise the contracts for the construction, maintenance, or operation of the facilities. Once the franchise is granted, enforcement of the contract can itself be privatized (if enforcement is not done by the agency). An accounting or engineering firm, for example, could be retained to audit the private operator and confirm that the terms of the contract have been observed. To create additional incentives for private operators to maintain and improve quality, contracts could require the operator to post a bond for the duration of the contract. This bond would be forfeited to the contract enforcers if the operator is found to be in violation of the contract; it would serve essentially the same function as a security deposit on an apartment. 

The only way to improve Pittsburghers’ water utilities is through some variant of full or partial privatization. The passing of the Home Rule Charter amendment would eliminate the possibility of any improvement. In fact, it would be doing nothing more than ringfencing and rewarding failure. Economics is all about incentives: if the Pittsburgh Steelers posted a losing record every year for the next decade, should the Home Rule Charter be amended to grant Mike Tomlin tenure?