The Third Way to Water: Public, Private, and Nonprofit Water Governance

• In Event: Contracting and Collaboration

Abstract

This paper explores differences in performance between government, for-profit, and nonprofit drinking water utilities in the United States. Existing research on the difference between publicly and privately owned water systems typically concludes that private providers are more expensive but outperform public providers (Konisky & Teodoro 2016) in terms of quality. However, these studies usually group for-profit and nonprofit organizations together under the umbrella term “private,” thereby masking important institutional and regulatory differences between for-profit and nonprofit organizations. Thousands of private, nonprofit cooperatives operate community water systems in the U.S. How do these systems perform, compared with their government and for-profit counterparts?

Institutionally, economic theory suggests that public trust is higher in nonprofit organizations than in their for-profit counterparts when informational asymmetries are large, due to nonprofit organizations’ nondistribution constraint. Because nonprofits do not distribute their profits, these organizations seek to maximize both service quality and quantity, while for-profits seek to maximize quantity to increase their profits (Newhouse 1970). Thus, nonprofits are expected to be more trustworthy than for-profit organizations when information asymmetries are high (Hansmann 1986). This higher trust typically manifests as the assumption that nonprofits will outperform their for-profit counter parts when outcomes are not easily evaluated.

However, from a regulatory standpoint, nonprofit organizations do not face the same accountability standards that local governments and for-profit organizations face. American local government officials are subject to periodic electoral accountability, open records laws, and oversight by higher levels of government. Private, for-profit water utilities are subject to greater regulatory oversight by government agencies (Konisky & Teodoro 2016). Although all U.S. water systems are subject to Safe Drinking Water Act (SDWA) rules, nonprofit utilities are lightly monitored relative to their government and for-profit peers. Unlike local governments, nonprofit utilities are not subject to public elections or open records laws. Unlike for-profit utilities, nonprofits are not subject to oversight by state utilities commissions. Nonprofits are not accountable to the general public like governments, and they are not accountable to shareholders or financial regulators, like for-profits. Nonprofit organizations, rather, are accountable to their donors or board members.

Pairing new data on the nonprofit status of private U.S. water utilities with these utilities’ SDWA compliance records, we ask: Do nonprofit water utilities perform differently from government and for-profit water utilities? To our knowledge, no study to date has examined differences in the performance between for-profit and nonprofit water utilities. That the difference between for-profit and nonprofits is yet to be examined within U.S. drinking water provision is surprising; nonprofit studies examining performance differences between for-profits and nonprofits are commonplace in other service areas like health care (hospitals) and elderly care (nursing homes).

We expect nonprofit water utilities to perform worse on average than their for-profit counterparts in terms of service quality due to lax regulation, low transparency, and a lack of democratic accountability. We also expect service quality to vary more widely among nonprofits relative to both governments and for-profit firms, as the relative lack of oversight in the nonprofit sector allows greater latitude for a water system’s management—for better or for worse.

Our findings contribute to research on the politics of drinking water in the U.S., with important implications for the governance of this essential resource. Our findings also advance our understanding of nonprofit management in other areas of service delivery, such as health care, education, and human services.

Authors

• Manny P. Teodoro, University of Wisconsin

• Samantha Zuhlke, University of Iowa