Many water and wastewater systems include infrastructure dating back to the early 1900s. Federally funded facilities built during the 1970s now need upgrading or replacing. Estimates vary, but the United States Environmental Protection Agency estimates that $300 Billion will be needed for water and wastewater systems over the next twenty years. At the same time the federal government has reduced its contributions to water systems over the past thirty years, replacing federal funding with unfunded (or lightly funded) mandates to meet stricter water quality regulations. (Johnson and Moore, 2000). This pressure for new financing of infrastructure has generated an opportunity for government to seek help from the private sector. However, the development of public-private partnerships within the water utility industry faces a major obstacle in the fact that governments with the need also have a history of providing the utility service as a purely government operation utilizing public sector management and staff.
The movement to shift responsibility, if not actual ownership, of publicly owned water systems to the private sector has resulted in a conflict between the leaders of the various stakeholder groups within the industry. This conflict predates the public-private initiative within the water industry, and was recognized in the constitutionalist model developed in the early history of the United States with its view of government as standing, essentially, in an adversary relationship to business. (Drucker, 1974). Government was seen as protecting the public against the attitude of the early American entrepreneur as encapsulated in the late 19th Century by William Vanderbilt when he stated, "The public be damned, I'm working for my stockholders." (Singer,1993).
Any attempt to create a public-private partnership must overcome this inherent conflict between the underlying basic principles of public administration and those of entrepreneurial business management. Whereas constraint may be the watchword in explaining the tradition of public administration, aggression is perhaps the appropriate foundation of traditional American business. (Henry, 1999). The need for constraint creates a tendency for public sector clients to focus on observable factors, namely price, and to give less weight to the more intangible aspects of the bid such as the contractor's reputation for quality. This can have serious implications (Domberger, 1998). Savas observed that constraint and aggression naturally conflict with each other and result in distinct differences in motivational forces acting upon individual and group decision makers within the public and private sectors, in that:
1. Within the public sector there is little incentive to perform efficiently and management lacks effective control over human and capital resources; in the private sector generally there are both carrots, in the form of raises and promotions, and sticks, in the form of demotions and firings.
2. Because capital budgets and operating budgets are generally arrived at through separate processes in the public sector, the opportunity to make trade-offs between the two is limited. For example, it is more difficult to coordinate an investment in laborsaving equipment with a reduction in the size of the labor force.
3. Whereas the private firm generally prospers by satisfying paying customers, a monopolistic public agency can prosper even if the customers remain unsatisfied. When a private company performs poorly, it tends to go out of business; when a public agency performs poorly, it often gets a bigger budget. Paradoxically, the budget can grow even as customer dissatisfaction grows; in this respect a rising crime rate is good for a police department, a housing shortage is good for a housing agency, and an epidemic is good for a health department (Savas, 2000).
Arguments cited in favor of contracting generally claim that contracting is more efficient because it harnesses competitive forces and brings the pressure of the marketplace to bear on inefficient producers, it permits better management, free of most of the distracting influences that are characteristic of overtly political organizations and the cost and benefits of managerial decisions are felt more directly by the decision maker, whose own rewards are often directly at stake. Proponents claim that contracting makes it possible for government to take advantage of specialized skills that are lacking in its own workforce; it overcomes obsolete salary limitations and antiquated civil service restrictions, and permits a quicker response to new needs and facilitates experimentation with new programs. Opponents of contracting, usually leaders of government-employee unions and often middle managers in government, declare that contracting is ultimately more expensive because of corrupt practices in awarding contracts; suffer from "outrageous and pernicious work practices" among private-sector unions; generate high profits, whereas government is non-profit; and result in a high cost of layoffs and unemployment for government workers coupled with a shortage of qualified suppliers and therefore the lack of competition;
However, growth creates pressure for innovation and government has continued a pattern of growth due to the influence of three major factors: (1) there has been an increased demand for government services, by current and would-be service recipients; (2) there has been an increased supply of government services, by service producers; and (3) increased inefficiency, which results in more government staffing and spending to provide the same services (Savas, 2000). Therefore, the private sector sees opportunity, while key public sector stakeholders see threat. Beach submits that the ultimate measure of the success of public-private partnerships rests in how well private sector water companies can create partnership offers that achieve the goals and objectives established by their public sector peers (Beach, 1996).