Private Partners

For decades, essential services like drinking water, sewagecollection and education have been the job of state and localgovernments. But over the past decade, the private sector hasincreasingly taken on some of these tasks. With state and localgovernments desperately short of revenue, the privatization ofpublic services is likely to increase at a faster pace. In somesectors, small businesses that get in on privatization early canreap the rewards.

Drinking-water and wastewater management are two of the mainservices being privatized. Many cities' water and wastewatersystems are in dire straits, with pipes dating back 100 years; areport by the EPA estimates that the U.S. water system needs morethan $140 billion in repairs. Yet America's cities can'tafford these upgrades. Privatization allows city governments tohave a contractor do the upgrade and manage the systems, often forfar less, since private firms are given incentive-laden contractsthat push them to work more cheaply, says Clay Landry, a principalat WestWater Research LLC, a water economics research firm inLaramie, Wyoming. "The cities and states are in fiscal crisis,and the Bush administration's answer to them is to look to theprivate sector to handle services, so we'll see more ofthis," Landry says. What's more, as water scarcityincreasingly becomes an issue, privatization will become even moreattractive, since handing water management to a private firm thatcan set market-oriented rates helps manage scarcity.