So now you need a whole new, massive burocracy to enforce those regulations, do inspections etc. etc. - all things you could do with a small divison inside the old water department now requires a much bigger entity - with prosecution and fining powers. So you haven't even made government smaller (for the people who are dumb enough to think SIZE matters in government  - it really doesn't) - you actually made it BIGGER and gave it MORE power.
Well.. maybe if you SELL the infrastructure to the companies they will manage it better ? If only so when their contract expires they can sell it at a profit to whoever wants teh contract next ? A sense of ownership may give you some benefits right? 
Except that is impossible - government CAN'T sell the infrastructure - it doens't BELONG to government in the first place. We, the taxpayers, paid for it - it belongs us. Government can't sell it anymore than a chaufeur can sell his boss's car.