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Private Partners

Can the privatization trend help your company grow?

For decades, essential services like drinking water, sewage collection and education have been the job of state and local governments. But over the past decade, the private sector has increasingly taken on some of these tasks. With state and local governments desperately short of revenue, the privatization of public services is likely to increase at a faster pace. In some sectors, small businesses that get in on privatization early can reap the rewards.

Drinking-water and wastewater management are two of the main services being privatized. Many cities' water and wastewater systems are in dire straits, with pipes dating back 100 years; a report by the EPA estimates that the U.S. water system needs more than $140 billion in repairs. Yet America's cities can't afford these upgrades. Privatization allows city governments to have a contractor do the upgrade and manage the systems, often for far less, since private firms are given incentive-laden contracts that push them to work more cheaply, says Clay Landry, a principal at WestWater Research LLC, a water economics research firm in Laramie, Wyoming. "The cities and states are in fiscal crisis, and the Bush administration's answer to them is to look to the private sector to handle services, so we'll see more of this," Landry says. What's more, as water scarcity increasingly becomes an issue, privatization will become even more attractive, since handing water management to a private firm that can set market-oriented rates helps manage scarcity.

Given these factors, privatization of water management could be an enormous industry: More than 85 percent of U.S. water systems are still in city or state hands, waiting to be turned over to public-private partnerships. "We do not think the trend toward privatization of fresh water can be stopped," note the authors of The New Economy of Water, a 2002 report on the water industry by the Pacific Institute, an environmental economics research group based in Oakland, California, and Boulder, Colorado. Already, nearly $20 billion in contracts between public systems and private operators have been signed in the United States over the past 15 years. In most cases, cities held open bidding sessions to find private firms to handle wastewater or water management; the cities retained ultimate ownership of the water systems. Usually, the winning bidder subcontracted out many tasks to smaller firms via a second round of bids.

Education is also potentially an enormous market for entrepreneurs. According to Eduventures Inc., a Boston-based education research firm, revenues of for-profit charter schools are rising by more than 10 percent per year. Overall, Eduventures calculates that the for-profit education sector-which includes charter schools, for-profit online education, and management of traditional public schools by for-profit companies like Edison Schools Inc.-is worth more than $100 billion. For-profit online education, which delivers classes to rural and impoverished areas, is growing by almost 25 percent per year, says Emily Trask, an analyst at Eduventures.

Though some companies in the sectors being privatized are giants, smaller companies can profit as well, says Edward Hudgins, Washington, DC, director of The Objectivist Center, a free-market-oriented think tank. Though giant Edison Schools has received most of the media attention, for-profit charter school companies, such as Michigan-based National Heritage Academies, can succeed with small operations; running charter schools doesn't require the resources of taking over a whole school district. And many online for-profit education firms, like K12 Inc. and Apex Learning Inc., can remain relatively small since they can handle Web hosting or instructional products and then hire instructors to teach their courses. Similarly, though larger companies like San Francisco-based Bechtel have grabbed most of the ink in the water field, small firms like Charlotte, North Carolina-based Raftelis Financial Consulting PA and Oakville, Ontario-based Zenon Environmental Inc. can share in the profits as well by focusing on subcontracts handed out during upgrades.

Ultimately, analysts say, the most important lesson for any company hoping to get into the privatized services market is to respect the public's fears about the private sector. "The private sector has to recognize the importance of being viewed as a good partner of the public sector," Landry says. "Smart companies take their time implementing plans, are open to hearing public concerns, and keep their work transparent."

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This article was originally published in the November 2003 print edition of Entrepreneur with the headline: Private Partners.

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