The Promise of Privatization

Table of Contents

Introduction

Water and Wastewater Utility Privatization in the United States
   Why Privatize?
   The Results

Two Case Studies: Atlanta, Georgia, and Indianapolis, Indiana
   Water Utility Privatization in Atlanta, Georgia
   Wastewater Utility Privatization in Indianapolis, Indiana

Water and Wastewater Utility Privatization in England and Wales
   The Benefits
   The Costs

The Privatization of Canada's Water and Wastewater Utilities
   The Growing Recognition of the Need for Private-Sector Involvement
   Barriers to Privatization
   Promising Experiments
   Ontario
   The West
   Atlantic Canada

Privatization: Facilitating the Enforcement of Laws and Regulations Ensuring Safe Drinking Water

Privatization: Facilitating the Enforcement of Laws and Regulations Limiting Sewage Pollution

Conclusion

Introduction⁽¹⁾

The mid-1980s marked the beginning of a worldwide trend toward the privatization of public enterprises. Inspired by the United Kingdom - in particular, the 1984 British Telecom share issue - the governments of Denmark, Italy, Chile, Malaysia, and Singapore adopted privatization programs in 1985.⁽²⁾ More than 100 countries soon followed suit, prompting a research manager for the World Bank to, in 1998, call privatization "a defining feature of the last two decades."⁽³⁾

Popular candidates for early privatizations included telecommunications and electric power utilities.⁽⁴⁾ Water and wastewater utilities soon followed, haltingly at first and then with greater momentum. In 1997, World Water and Environmental Engineering magazine noted "a seemingly irreversible and rising tide of private sector involvement in the provision of water supply and sewage treatment services all around the globe."⁽⁵⁾ By the end of 2000, at least 93 countries had partially privatized water or wastewater services or were in the process of doing so. Privatizers appeared in all regions of the world. They included local, provincial, or national governments in North America's three countries, 23 countries in Latin America and the Caribbean, 20 in Europe, 30 in Africa and the Middle East, and 17 in Asia and the Far East.⁽⁶⁾ Water companies now serve vast numbers of consumers. Suez Lyonnaise des Eaux, for example, provides water and/or wastewater services to 110 million people.⁽⁷⁾

Although impressed by the successes of Margaret Thatcher's government in the United Kingdom, many subsequent privatizers do not share her conservative ideology. Indeed, even staunchly communist governments are privatizing. Cuba has formed a joint venture with a Spanish water company to develop and operate drinking water systems for three cities over the next 25 years.⁽⁸⁾ China has signed contracts for the construction and operation of three water supply systems and has contracted out the operation of at least 20 other water and wastewater facilities.⁽⁹⁾ Vietnam has given two Malaysian-led consortia long-term contracts to build and operate a water pipeline and two treatment plants for Ho Chi Minh City.⁽¹⁰⁾ Pragmatism, rather than ideology, drives most privatizations.

The privatization of water and wastewater utilities is attractive for a host of reasons that vary among countries. Governments commonly call on the private sector to invest in desperately needed infrastructure that they could not otherwise afford. The private sector has access to enormous pools of capital. The size of Suez Lyonnaise des Eaux's war chest would enable it to invest almost US$8 billion a year without borrowing money.⁽¹¹⁾ Private capital obviates the need for governments to borrow money or raise taxes, reducing their financial and political liabilities. Privatization carries other financial benefits as well: Proceeds from sales, concession fees, and tax revenues from privatized operations enable governments to invest in neglected infrastructure or reduce their debts.

Many governments privatize to increase the effectiveness of their water and wastewater systems. Struggling to comply with health and environmental standards, they turn to firms whose many years of experience and large investments in research and development have enabled them to develop a degree of expertise rarely found in the public sector. Governments that privatize also want to improve the economic performance of their utilities. The pursuit of job creation or other social goals has left many public utilities over-staffed and inefficient. Free from public-sector practices that hinder productivity and innovation, and able to take advantage of expertise and economies of scale, the private sector enjoys greater latitude to pursue efficiencies. Disciplined by competition and capital markets, it has powerful incentives to do so.

Privatization may correct other inefficiencies as well: those associated with the underpricing of water and wastewater services. Politicized decision making in the public sector distorts the relationship between prices and costs and encourages subsidies to various interest groups. Shifting responsibility to the private sector often allows governments to discontinue subsidies. In a fully competitive, or alternatively, a well regulated system, competition or regulation sets prices that better reflect costs. Governments have fewer reasons to oppose accurate pricing - the private providers take most of the heat for price increases - and, in any case, have no authority to interfere with the markets' or regulators' decisions.

Privatization also allows for the de-politicization of environmental and health regulation. Governments that own, operate, and finance water and wastewater utilities cannot properly regulate them. All too often, conflicts of interest prevent them from enforcing compliance with laws and regulations. Privatization reduces those conflicts, freeing regulators to regulate and increasing the accountability of all parties.

For the above reasons, governments around the world have come to accept that their core function is to "steer rather than row."⁽¹²⁾ Rather than owning, operating, and financing water and sewage works, they are setting policy. Rather than providing services, they are regulating them. As evidenced in the following chapters, the results of this shift have often - but not always - been impressive.

The owners, operators, funders, and regulators of Ontario's water and wastewater systems have much to learn from other jurisdictions' experiments with privatization. And they have no shortage of reasons to conduct experiments of their own. Across the province, hundreds of facilities fail to comply with provincial laws and standards. Many are inefficiently run: Some are grossly overstaffed; others are staffed by insufficiently trained operators. Many are in need of upgrades: One estimate of the investment required over 15 years exceeds $32 billion.⁽¹³⁾ Water charges are insufficient to cover these costs. Clearly, many systems would benefit from the capital investment, expertise, efficiency, and accountability that privatization can bring.

The following chapters will examine what has worked, what has not worked, and why. They will focus on privatization in the United States, the United Kingdom, and Canada, those jurisdictions for which the most detailed information is available, whose experience is most similar to our own, and from whom we can learn the clearest lessons.

Water and Wastewater Utility Privatization in The United States

Although new to much of the globe, the water and wastewater privatizations of the last ten years built on a centuries-old tradition of private ownership and management in several western countries, including the United States. Private companies have supplied water to U.S. consumers since 1652, when the Water Works Company of Boston was established. At the beginning of the 19^th century, private water companies served 94 percent of the U.S. market. Their share of the market fell as governments stepped in to service unprofitable areas. By the end of the century, their share had fallen to 47 percent.⁽¹⁴⁾ It continued to fall, past 30 percent in 1910⁽¹⁵⁾ to below 15 percent by 1986.⁽¹⁶⁾

A survey conducted in 1995 by the United States Environmental Protection Agency (EPA) found that 28,500 privately owned water systems served approximately 14 percent of the U.S. population.⁽¹⁷⁾ These private systems were primarily located in small communities. Nonetheless, private systems did appear in many larger communities. Twelve percent of the systems serving more than 10,000 people were privately owned.⁽¹⁸⁾ The EPA did not calculate the number of privately owned wastewater facilities. Its privatization coordinator estimated the number to be in the low thousands, primarily in trailer parks and small developments. A study that year by the National Regulatory Research Institute reported that public utility commissions regulated approximately 1,300 small, privately owned wastewater systems in 28 states.⁽¹⁹⁾

The more common approach to privatization in larger U.S. municipalities is the contracting out of the operation and maintenance of publicly owned water and sewage utilities. Burlingame, California, introduced this approach to the U.S. in 1972, when it contracted with Envirotech Operating Services to operate its wastewater treatment plant. Such contracts remained fairly rare in the 1980s, covering perhaps a few hundred facilities. The 1990s saw a rapid increase in their numbers. In 2000, 17 private firms surveyed by Public Works Financing operated 2,273 facilities for 1,882 public clients.⁽²⁰⁾ Cities contracting out water system operations now include Atlanta, Seattle, Houston, and Tampa. Those contracting out sewage system operations include Indianapolis, Milwaukee, New Orleans, and Cincinnati. Many more, including some of the country's largest cities, have been reported to be studying privatization options.

Why Privatize?

Although U.S. communities are embracing - or returning to - privately owned, financed, constructed, or operated water and wastewater systems for a variety of reasons, there is one overarching theme: Financially stressed communities with inadequate infrastructure cannot meet tough health and environmental standards on their own.

Many communities have found it difficult to comply with the Safe Drinking Water Act. In 1996, the EPA warned that one out of every five people received water from a facility that violated a national safety requirement.⁽²¹⁾ That year, 5151 community water systems violated the EPA's maximum contaminant levels or treatment technique requirements; in addition, 15,182 community water systems violated monitoring and reporting requirements.⁽²²⁾ Serious problems remained in 1999, when the EPA reported that one out of every ten people was served by a water system reporting a health standard violation. The agency attributed at least a half-million cases of illness to microbial contamination in drinking water.⁽²³⁾ Many of these problems can be traced to inadequate infrastructure. Older distribution systems are deteriorating. Over one-third of the systems providing surface water need to install, replace, or upgrade filtration plants. Two-thirds of water systems need to improve storage facilities.⁽²⁴⁾

Many communities have also failed to comply with the Clean Water Act, the major federal law governing sewage treatment. The U.S. Public Interest Research Group charged that 21 percent of major municipal facilities were significantly non-compliant with their permits during at least one quarter from January 1995 to March 1996.⁽²⁵⁾ The EPA has proposed expanding permitting under the Clean Water Act to reduce sanitary sewer overflows. Since at least 40,000 overflows occur each year, such a change will likely increase non-compliance figures.⁽²⁶⁾

The challenges presented by the Safe Drinking Water Act and the Clean Water Act have driven many privatizations. In 1998, the Hudson Institute surveyed 29 water management contracts or asset sales in 11 states. Compliance with standards was the primary driver of privatization in 34 percent of the projects surveyed and the secondary driver in another 43 percent of the projects.⁽²⁷⁾ Clearly, many communities hope, along with the EPA, that "where local governments have had difficulty meeting permit limits, privatization may result in real environmental benefits."⁽²⁸⁾ One state - Georgia - is so confident that private expertise will increase compliance that it has passed a law requiring the owners of all large, chronically non-complying sewage treatment plants to contract out their operations and maintenance for between ten and 50 years.

One key factor in the private sector's ability to help communities achieve health and environmental compliance is financial. Estimates of the investments required in water and wastewater systems over 20 years vary. The EPA predicts that communities across the country will need to invest US$372 billion.⁽²⁹⁾ Others' estimates are much higher. The Water Infrastructure Network - comprised of state government organizations, local elected officials, environmental organizations, and industry associations - puts the cost at nearly $1 trillion.⁽³⁰⁾

The required investments often overwhelm local governments that have to balance their budgets, are at the limit of their borrowing capacity, and fear voter opposition to tax increases. Local governments cannot count on federal assistance, since long-generous grant programs have been scaled back in recent years. As a result, many turn to the private sector for help. Bringing in private capital frees up public funds for more visible or politically popular projects. Privatization may also create income for municipalities, from the one-time windfall resulting from an asset sale, from concession fees, or from property taxes levied against private firms. Indeed, the financial attractions of privatization are so pronounced that many water and wastewater industry analysts simply assume that economic issues drive privatization. Typical are the words of privatization consultant Skip Stitt: "What's causing people to look at private management, and to a lesser degree private ownership, is simply money."⁽³¹⁾

Case studies confirm the role of fiscal pressures in the decision to privatize. Of the projects surveyed by the Hudson Institute, 62 percent cited financial reasons for privatizing. While half of these pointed to their need to reduce operating deficits or cut costs, the other half emphasized their need for capital investment - ranging from US$25,000 to US$250 million - as the primary driver of privatization. Another 31 percent of those surveyed cited financial issues as the secondary driver of privatization.⁽³²⁾ In a study of 30 water or wastewater privatizations in 16 states, prepared for the National Regulatory Research Institute, the need for funding for capital improvements tied with environmental compliance issues as the most often mentioned reason for privatization.⁽³³⁾

Municipalities also privatize in hope that any capital - public or private - that is invested will be used more efficiently. Efficiencies can lower both capital and operating costs, freeing up money for other investments or reducing the rates charged to consumers. Governments are notoriously inefficient providers of water and wastewater services. Public servants have neither the tools nor the incentives to operate systems efficiently. Insufficient training has long plagued municipal wastewater systems across the U.S.⁽³⁴⁾ Constrained by rigid rules and procedures and given little discretion to operate creatively, even well trained workers can make but poor use of their knowledge. Worse, they are rarely held accountable for their actions: They are neither rewarded for increased efficiency nor punished for poor performance. These factors contribute to the "bureaucratic inertia" complained of in a report on privatization prepared for the Joint Economic Committee of Congress. That report noted that politicians also behave inefficiently, but for different reasons: "To win elections, politicians face strong incentives to confer benefits on narrow constituencies - like particular ... subgroups of public employees - and spread the costs across all taxpayers. Concentrating benefits and dispersing costs is a tried and true formula for reelection."⁽³⁵⁾ In other words, politicians face strong incentives to operate water and wastewater systems inefficiently, particularly by wastefully increasing staffing levels.

The incentives work differently in the private sector. Competition for contracts or sales motivates bidders to reduce costs. Even after securing business, owners or operators cannot relax. Under many contractual or regulatory arrangements, the profit motive spurs continuing efficiencies. The compensation of staff and management alike may be tied to performance. Poorly performing individuals may be fired. As John Stokes, president and CEO of Azurix North America, explained, "People who jeopardize the company are not tolerated."⁽³⁶⁾ Poorly performing firms may also be held accountable. Their shareholders may desert them. Falling stock prices may raise the cost of capital beyond that of more successful competitors. They may face the threat of a takeover. Furthermore, a tarnished reputation may prevent them from winning other contracts. Such incentives to perform can promote a host of innovations and efficiencies. Potential savings are tremendous: The BTI Consulting Group estimates that municipal utilities could save US$25 billion a year by adopting the industry's best management practices.⁽³⁷⁾

When developing efficient approaches to construction, operation, and management, firms call on years - in some cases, centuries - of experience. Many of the U.S.'s largest investor-owned water utilities were founded in the nineteenth century. New Jersey's Elizabethtown Water Company was founded in 1845, the San Jose Water Company in 1866, the Indianapolis Water Company in 1867, and the American Water Works Company in 1886. The world's two largest private water companies - both French firms with U.S. operations - also have long histories: Vivendi, whose U.S. subsidiary is USFilter, traces its roots to 1853, while Suez Lyonnaise des Eaux, parent of United Water, dates back to 1880. Several water companies enhance the expertise they have gained from past experience with investments in innovation. In 1999, Vivendi and Suez Lyonnaise des Eaux invested almost US$200 million between them on research and development in the water sector.⁽³⁸⁾ Not surprisingly, investments of that magnitude have led to a number of important innovations for micro-filtration, pollution detection, remote monitoring of leakage from underground water mains, metering, and flow management. The resulting knowledge of state-of-art-technological solutions is dispersed throughout a network of hundreds or even thousands of employees whose expertise can be harnessed to solve local problems. Few, if any, municipalities can match such expertise. As they face increasingly complex technical challenges, the limitations of their staff hinder their ability to meet health and environmental requirements. Many have reached the point where, in Mr. Stitt's words, they "simply can't get it done without private expertise."⁽³⁹⁾

There remains one category of reasons that U.S. municipalities give for privatizing their water and wastewater systems. Under the loose heading of depoliticization, this category includes goals as disparate as increasing accountability through clearly stated contractual obligations, bringing the pricing of water and wastewater services - which are notoriously underpriced and overused in the U.S. - in line with costs, and limiting government. The latter is especially common. In interviews with 117 officials, the General Accounting Office learned that governments are privatizing in large part to reduce the scope and size of government.⁽⁴⁰⁾ Since the private sector has demonstrated its ability to supply water and wastewater services efficiently and effectively, many communities feel that there is no obvious need to do so themselves. Communities are increasingly agreeing with New York Governor Mario Cuomo's statement that "the purpose of government is to make sure services are provided, not necessarily to provide services."⁽⁴¹⁾

Although the above generalizations describe most communities' reasons for selling or contracting out the operations of their water and wastewater systems, they are by no means the only factors exerting influence. Such decisions also reflect policies emerging from several federal bodies. Changes in federal tax policies have at various times raised and lowered incentives for private investment in infrastructure. Executive orders - such as those signed by President Bush in 1992 and by President Clinton two years later - have encouraged privatization by reducing regulatory impediments and assisting local initiatives. Congress, concerned about its ability to fund needy systems, has pushed for the removal of barriers to privatization. Likewise, the EPA has become an enthusiastic proponent of privatization. It established a Public-Private Partnerships Initiative, later renamed Partners Rebuilding America, to encourage municipalities to meet infrastructure needs with private financing. To assist municipalities in privatizing, the agency publishes case studies of privatization successes, a "self-help guide" for municipalities that wish to engage in public-private partnerships, and other materials providing guidance on financing options, partnership arrangements, and contract development.

The Results

Privatization in the U.S. has, on the whole, lived up to its promise, both financially and environ-mentally. Although no comprehensive data exists concerning the extent of capital investment, the experience of individual municipalities and firms suggests that water companies have invested considerable sums in infrastructure. United Water, for example, has invested almost US$10 million in advanced technologies for Atlanta's drinking water system.⁽⁴²⁾ The Hudson Institute's survey found that private firms that purchased or leased facilities invested far more than those that merely operated facilities. The 16 firms involved in operations and maintenance contracts or outsourcing agreements made no significant capital expenditures. In contrast, the nine firms that purchased assets invested US$38 million in new or upgraded facilities and equipment (exclusive of acquisition costs), while the four involved in long-term leases invested US$18 million.⁽⁴³⁾

A legion of efficiencies has brought tremendous savings from privatization. By streamlining finance, design and engineering, procurement, and construction practices, private firms have reduced construction times and costs. Free from political constraints, they have cut staffing levels. They have invested in costly equipment promising long-term savings. They have developed innovative management information systems and data processing technologies to improve cash flows, accounting, metering, billing, and debt collection. Large firms have taken advantage of bulk prices for chemicals and other supplies and have benefited from economies of scale in design, expertise, and equipment. The resulting savings have been, in the words of Mr. Stitt, "just mind boggling."⁽⁴⁴⁾

Numerous studies give credence to such enthusiasm. Trent University economist Harry Kitchen reviewed three U.S. studies from the late 1970s. One study of 112 water suppliers found public firms to be 40 percent less productive than their private counterparts. When one of the public suppliers became private, the output per employee increased by 25 percent. Conversely, when one of the private suppliers became public, the output per employee declined by 40 percent. A second study of 143 water suppliers found costs to be 15 percent higher for public firms. A third study found public modes to be 20 percent more expensive.⁽⁴⁵⁾

The Reason Foundation has repeatedly found private firms to be considerably more efficient than their public counterparts. A 1992 study concluded that contracting out water services achieved operating cost savings of between 20 and 50 percent. Examples included 40 percent savings on wastewater treatment in New Orleans and 30 percent savings on wastewater treatment in Schenectady.⁽⁴⁶⁾ In a 1996 study comparing the performance of ten government-owned California water companies with that of the state's three largest investor-owned water companies, the Reason Foundation calculated that annual operating expenses per connection averaged US$330 for the former and US$273 for the latter. Proportionally, the government-owned companies hired more than twice as many employees and spent almost three times as much of their operating revenues on salaries. Furthermore, they spent almost twice as much on maintenance to produce a product of the same quality.⁽⁴⁷⁾ When subsidies were accounted for, water from public operations cost 28 percent more than water from private operations.⁽⁴⁸⁾ Another Reason report documented savings in other jurisdictions, including those of 43 percent from the competitive contracting of operations of a water purification plant in Houston.⁽⁴⁹⁾

Public Works Financing's estimates of the operating savings resulting from outsourcing, based on 45 operations and maintenance contracts with terms of over ten years, fall in roughly the same range as those reported above: 20 to 45 percent. The magazine reports that Milwaukee's ten-year wastewater treatment contract guarantees savings of 30 percent. New Haven's 15-year wastewater contract will likewise bring savings of 30 percent. In Seattle, the contract to design, build, and operate the Tolt River water filtration plant for 15 years was priced at 40 percent below the city's benchmark. Atlanta's 20-year contract to operate and manage its drinking water system will save the city 44 percent. Savings promise to be even higher in the future: In Tampa Bay, the cost of a 30-year contract to design, build, and operate a seawater desalination plant is expected to be just half the public benchmark.⁽⁵⁰⁾

Other examples of the magnitude of savings from privatization abound. The privately designed, built, and operated water treatment plant for New Jersey's Howell Township cost 25 percent less than similar plants in the area; operating costs at the extensively automated plant are also lower.⁽⁵¹⁾ In Mount Vernon, Illinois, the private expansion and operation of the wastewater treatment plant - undertaken in order to bring the plant into compliance with environmental regulations - not only saved the city 32 percent but also solved the problem six years earlier than the city could have done.⁽⁵²⁾

A representative of one large water company suspects that some of the most dramatic savings mentioned above represent losses for the bidders. On the subject of Atlanta, for example, he commented, "It all boils down to who wanted to lose the most money for the longest time." To the extent that firms so highly value an opportunity to establish themselves that they are willing to underbid their competitors at a loss to themselves, savings will be more modest in the future. Nonetheless, even this cautious insider estimates savings of between ten and 30 percent - with an average range of ten to 20 percent - for both capital works and operations and maintenance.⁽⁵³⁾

In addition to providing cost savings, privatization has frequently brought significant infusions of cash into municipal coffers. The nine asset sales examined by the Hudson Institute had a price tag of US$537 million. Lease agreements and operations and maintenance contracts may also provide cash up front. The Hudson Institute reviewed six concession fees totalling US$35 million.⁽⁵⁴⁾ Municipalities have experimented with other arrangements as well. As part of its 25-year wastewater treatment plant lease, Cranston, Rhode Island, negotiated an upfront lease payment of US$48 million, which it used to repay debt and to establish a working capital fund to enhance the city's credit standing. The city expects other benefits of privatization to include upgrades to its facility, savings of US$96 million, and lower user fees.⁽⁵⁵⁾ Some contractors have combined one-time concession fees with additional annual payments. Scranton, Pennsylvania, negotiated a US$8 million concession payment and US$620,000 in annual fees over four years from its five-year wastewater contract, while in a 20-year contract for its water treatment plant, Rahway, New Jersey, negotiated US$13 million in concession fees over three years, followed by annual payments.⁽⁵⁶⁾

The variations have seemed endless. Brockton, Massachusetts, was under considerable financial strain when it decided to contract out the operation, maintenance, and management of its water and wastewater plants. Facing a budget deficit of over US$10 million and restrained by state law from raising property taxes, the city wanted a spending breather. It negotiated a contract that allowed it to realize all of its savings from privatization up front, paying nothing for treatment in the first year. Nine years into the contract, the public works commissioner expressed his delight with the plant's performance, saying that "there has never been a day where we had to worry."⁽⁵⁷⁾

The financial savings from privatization have sometimes - but by no means always - translated into lower rates for consumers. In the first four years following the 1995 sale of the Franklin, Ohio, wastewater treatment plant, rates fell by 14 percent. The EPA, comparing projected rather than actual rates, credits that privatization with a 28 percent reduction.⁽⁵⁸⁾ Milwaukee's wastewater contract enabled the city to cut sewer fees by 15.5 percent after one year.⁽⁵⁹⁾ In other cases, although rates have not fallen, neither have planned rate increases materialized. Through a 20-year water contract, Atlanta pared a projected 100 percent rate increase down to 30 percent.⁽⁶⁰⁾ The Hudson Institute found that privatization enabled several communities to completely eliminate planned rate increases of five, 35, and 50 percent. Other communities tempered rate increases significantly: One reduced a planned increase from 100 percent to annual increases of between three and five percent, while another reduced a planned increase from 50 percent to annual increases of between three and ten percent.⁽⁶¹⁾ In contrast, the Reason Foundation's study of California utilities did not find rates to be lower for privatized water services. It concluded, however, that even though private companies must pay taxes - averaging US$41 per connection - that public companies avoid, and even though they do not enjoy public subsidies, their greater efficiencies enable them to offer comparable services at comparable prices.⁽⁶²⁾

Communities have also benefited from the cleaner environment that often follows privatization. The private sector's capital investments have paid off in improved environmental performance. Of the facilities surveyed by the Hudson Institute, 12 had been out of compliance with environmental regulations at the time privatization. Within one year, all had achieved full compliance.⁽⁶³⁾ Improved compliance has not resulted from an infusion of private capital alone; it has also reflected private-sector expertise. The new owner of Franklin, Ohio's, plant attributes the drop in excursions from permit requirements - from 30-40 per year to one - not only to upgrades of the plant's aeration systems but also to more efficient plant operation.⁽⁶⁴⁾ Some communities have given their contractors financial incentives to improve environmental performance. Milwaukee established a system of performance payments and penalties related to the quality of effluents from its two wastewater treatment plants. For example, it rewards the contractor for reductions in annual average biochemical oxygen demand, adding US$100,000 to the contractor's service fee for every milligram per litre of improvement. For its first year of operations, the contractor earned a US$50,000 bonus along with kudos for consistently meeting national permit requirements for the first time in five years. It repeated this performance the following year.⁽⁶⁵⁾

Not surprisingly, most communities appear to be satisfied with the results of their privatizations. Although some communities have recently "municipalized" water and sewage works, they are exceptions to the rule. Public Works Financing examined the 1998 record on contract renewals for 13 of the U.S.'s largest water contract operators. Of the 127 contracts that expired in 1998, 107 contracts - 84 percent - were renewed with the incumbent operator. Ten contracts were negotiated with different private operators. Two contracts fell into an unexplained "other" category. Eight contracts - six percent - were re-assumed by municipalities.⁽⁶⁶⁾ The magazine repeated the survey two years later, with similar results. Of the 166 contracts that expired in 2000, 151 contracts - 91 percent - were renewed with the incumbent operator. Six were negotiated with private competitors. Nine - just five percent - were re-assumed by municipalities.⁽⁶⁷⁾

Two Case Studies: Atlanta, Georgia, and Indianapolis, Indiana

Water Utility Privatization in Atlanta, Georgia

Atlanta privatized its drinking water system for one overarching reason: Privatization would dramatically reduce annual operating costs. The city's water and, especially, wastewater systems required costly upgrades, and unhappy consumers faced dramatic increases in their water and sewer rates. Privatization would free up money for repairs while moderating rate increases. It provided an environmental, financial, and political lifeline.

Throughout much of the 1990s, Atlanta's wastewater system caused nightmares for residents and politicians alike. Aging sewers and inadequate treatment plants contaminated land and water. Twenty-foot-high "faecal fountains" periodically erupted from man holes. Overflows, spills, and leaks contaminated the Chattahoochee river system with raw sewage. Federal, state, and private complaints resulted in millions of dollars in fines and a consent decree specifying expensive corrective action.

Less severe problems beset the water system. Water main breaks were common in the winter. A 1994 rupture dramatically reduced water levels, necessitating extreme conservation measures.⁽⁶⁸⁾ In 1997, state inspectors cited the city for problems with record keeping, monitoring, staffing, and discharges of filter backwash water.⁽⁶⁹⁾ One privatization consultant described the system's management as "very political" and, perhaps as a result, "not terribly efficiency-conscious."⁽⁷⁰⁾ A local newspaper called the improperly functioning system "a dangerous embarrassment" and urged the city to "get the system out of bureaucrats' hands and into those of specialists who know what they're doing."⁽⁷¹⁾

Mayor Bill Campbell initially rejected privatization as a way of solving the system's problems. Indeed, the populist democrat opposed the privatization of city services when he was running for office.⁽⁷²⁾ Reflecting on his subsequent change of heart, he admitted to one reporter, "It's an odd circumstance, because I don't favour privatization philosophically."⁽⁷³⁾ To another reporter he explained, "Privatization is a government's admission of failure. Government ought to be able to accomplish projects as efficiently as business."⁽⁷⁴⁾ Apparently, grim economic realities swayed him. In an apologia explaining his decision to privatize, the mayor noted that the city's water and sewage systems needed almost US$1billion for immediate improvements and that, in the absence of privatization, average rates would increase immediately by over 50 percent.⁽⁷⁵⁾ Such increases, he said, would place "an unbearable financial burden" on ratepayers; for senior citizens and low-income residents, they would be "unacceptable, not to mention immoral." Privatization could generate needed funds without undue rate increases. Residents would benefit, the environment would benefit, and the city could focus its attention and energy on other pressing needs. "Privatization," the mayor wrote, "is one strategy whose time has come.... There simply is no viable alternative."⁽⁷⁶⁾

Having explored its privatization options, and having rejected an asset sale as requiring more political discussion than its time frame permitted,⁽⁷⁷⁾ the city decided to proceed with a contract operations arrangement. At a cost of over US$2 million, it hired a number of engineering, financial, legal, and environmental consulting firms to help it design, execute, review, and revise the process.⁽⁷⁸⁾ Competitive selection commenced in 1998. Five firms responded to the city's request for qualifications, and all five went on to submit proposals, although only four completed the process. In evaluating the proposals, the city and its consultants used a point system that weighed, in declining importance, annual costs, technical and management quality, minority participation, employee relations, and experience.⁽⁷⁹⁾

Opposition to the process came from several corners. City council member Clair Muller objected that the privatization process was moving forward too quickly and expressed concern that a 15- or 20-year contract would create a monopoly. Even so, she supported the idea of privatization.⁽⁸⁰⁾ Louder criticism came from the Metro Group, a group of current and former business and government leaders that opposed the commitments, in the proposed privatization agreement, to affirmative action and equal opportunity.⁽⁸¹⁾ This group and other critics also maintained that the mayor's handling of privatization was prone to corruption.⁽⁸²⁾ Concerns were raised both about the relationship of one of the city's privatization consultants to a firm bidding on the project and about contributions made by that firm to Mr. Campbell's mayoralty campaign - concerns not put to rest until the firm did not win the contract.⁽⁸³⁾ Despite such opposition, on the whole, privatization received accolades from local newspapers, council members, and business coalitions.⁽⁸⁴⁾

In October 1998, with two dissenting votes, city council approved the selection of United Water Services Atlanta (UWSA), a partnership between United Water Services and Williams-Russell and Johnson, a local engineering firm. The partnership offered the lowest cost: At US$21.4 million, its annual cost for a 20-year contract was between US$1.3 million and US$4.5 million below that of its competitors.⁽⁸⁵⁾ Furthermore, it offered a good track record. United Water boasted many years of experience: It was founded in 1869, and its part-owner, the international water giant Suez Lyonnaise des Eaux, was established in 1858.⁽⁸⁶⁾ It could cite several notable privatization successes, even when measured in terms of labour relations. Indeed, the firm's good labour relations in Indianapolis and Milwaukee helped influence the choice of contractors.⁽⁸⁷⁾

UWSA's bid was also attractive for its socio-economic promises. The minority-owned Williams-Russell and Johnson provided 35 percent minority participation in the business - an important factor in the city's decision.⁽⁸⁸⁾ Furthermore, it offered benefits to the city's poorer neighbourhoods, which were the mayor's power base.⁽⁸⁹⁾ In order to boost economic development in Atlanta's inner city "Empowerment Zone," UWSA agreed to locate its regional headquarters there and to encourage its employees to relocate there. It also committed to hiring 20 percent of its workforce from the zone, to helping companies start-up operations in the zone, and to providing US$1 million in annual funding for water research at the zone's Clark Atlanta University.⁽⁹⁰⁾ The firm may benefit from tax incentives offered through the Atlanta Empowerment Zone Corporation. Indeed, it has been suggested that anticipated tax incentives of up to $8,000 per employee contributed to UWSA's low bid price.⁽⁹¹⁾

The parties signed a twenty-year agreement that went into effect on January 1, 1999. The agreement covered the operations and maintenance of two water treatment plants serving 1.5 million people in the greater Atlanta area - an area covering 650 square miles. It also assigned to the company responsibility for 12 storage tanks, 7 pumping stations, 25,000 fire hydrants, 2,400 miles of water mains, billing, collections, and customer service.⁽⁹²⁾ Although Atlanta retained responsibility for most capital investments, UWSA agreed to invest almost US$10 million in automation and information technologies.⁽⁹³⁾

The contract set UWSA's annual operations and maintenance fee at US$21.4 million - 44 percent less than the US$49 million the city had previously spent running the system. Some costs remained with the city: It would spend approximately US$6 million annually on power, insurance, and contract-monitoring.⁽⁹⁴⁾ Regardless, with 20 years of savings of between $20 million and $30 million a year, the city would be guaranteed savings of US$400 million over the life of the contract. Mayor Campbell vowed to use those savings to repair the water and sewer systems.⁽⁹⁵⁾

One source of savings for UWSA was the reduction in staff made possible by cross-training, increased employee productivity, and computerization. The city's request for proposals had prohibited layoffs in the first three years of private operations.⁽⁹⁶⁾ UWSA went further, guaranteeing no layoffs for the life of the contract.⁽⁹⁷⁾ Regardless, many staff members left voluntarily. When the deal was approved in October 1998, the water department had 535 employees.⁽⁹⁸⁾ By the time UWSA took over, that number had declined to 479. All 479 were offered jobs with current wages and benefits; 417 accepted.⁽⁹⁹⁾

In several important respects, labour gained ground in the privatization. The city had not previously recognized union employees, who had no collective bargaining agreement. Several months after signing its contract with the city, UWSA signed a three-year agreement with Local 1644 of the American Federation of State, County, and Municipal Employees. It was the first agreement in Georgia between a private firm and a public sector union. The union ended up with more dues-paying members than it had had before privatization. The agreement provided union members - many of whom had not had a raise in six years - with a signing bonus, wage increases, and bonuses for improvements in efficiency. ⁽¹⁰⁰⁾ UWSA compensated for the decrease in some benefits with more generous pension contributions and better medical plans for the workers. Even so, not all workers were happy with the change. Concerned about the loss of health benefits after retirement, 250 employees tried unsuccessfully to block privatization in the courts.⁽¹⁰¹⁾ Larry Wallace, the city's Chief Operating Officer, noted that some workers' "adverse attitudes" made the transition difficult.⁽¹⁰²⁾

Several other challenges greeted UWSA in its new job. The firm inherited from the city between 4,000 and 7,000 outstanding requests for service, some of which were three years old. (The number varies in the city's and firm's estimates.) The backlog prevented the firm from responding to leaks within one day or installing meters within 15 days - performance requirements that would kick in later in the contract period - leaving customers, in the words of one columnist, "fed up over leaky pipes and lengthy repairs."⁽¹⁰³⁾ The firm tackled the problem by installing a computer system to track work orders and cross-training workers to enable them to repair pipes more efficiently.⁽¹⁰⁴⁾

In terms of water quality, performance has neither dramatically improved nor worsened. Atlanta's drinking water met or surpassed all state and federal standards in the years immediately preceding and following privatization. Some contaminant levels decreased during the first year of private operations while others increased. The measure of total coliform bacteria fell from 1.4 percent in 1998 to 0.8 percent in 1999. Levels of copper increased from 180 to 200 ppb, lead from 4.1 to 5.5 ppb, nitrate as nitrogen from 0.5 to 0.6 ppm, and total trihalomethanes from 46 to 47.1 ppb. Sampling increased dramatically. In 1998, the city collected over 2,000 samples and conducted over 10,000 tests. In 1999, those numbers rose to 12,000 and 50,000 respectively.⁽¹⁰⁵⁾

There has been limited public criticism of privatization. In 2000, mayoral candidate Gloria Bromell-Tinubu claimed that the private delivery of water services had not been effective. Although she offered no details, her comments on privatization in general provided insight into her thinking: If a responsive government delivers services that exceed the expectations of its citizens, she insisted, "the whole notion of privatization becomes moot."⁽¹⁰⁶⁾

Overall, however, the city seems delighted with privatization. Mayor Campbell, no longer sounding like a reluctant partner, has indulged in the occasional rhetorical flourish on the subject: "We have learned that in rebuilding our city, the public and private sector are like the two wings of a bird. In today's climate of shrinking budgets and environmental challenges, each partner is needed to make the bird take flight."⁽¹⁰⁷⁾ In 1999, the mayor professed his administration "extremely pleased with our transition in this public-private partnership that has allowed us to make major investments in our infrastructure and to enhance environmental protection."⁽¹⁰⁸⁾ It was so pleased, in fact, that it was considering other privatizations. In a speech delivered in January 2000, the mayor announced his intention to build on the success of water privatization by privatizing the city's sewer system. Noting that water privatization had saved Atlanta's residents over US$20 million a year, the mayor expressed his hope that sewage privatization would "provide huge savings for our residents, as well."⁽¹⁰⁹⁾

Wastewater Utility Privatization in Indianapolis, Indiana

Privatization in Indianapolis has been an unqualified success.⁽¹¹⁰⁾ The city contracted out the operations and maintenance of its two sewage treatment plants in 1994. Two years later, it contracted out the operations and maintenance of its sewage collection system. Combined, the contracts will save the city more than US$250 million by 2007.⁽¹¹¹⁾ Privatization has also enhanced environmental performance and improved relations with the systems' employees.

Privatization of the sewage treatment plants began with a competitive bidding process in which all documents, including the contract, became public. From a field of five bids, the city selected the White River Environmental Partnership (WREP), a consortium including IWC Resources (parent to the company that has supplied drinking water to Indianapolis for over 100 years), JMM Operational Services (now United Water Services), and Suez Lyonnaise des Eaux. WREP brought extensive expertise to Indianapolis. According to Mike Stayton, director of the city's public works department, "It's just a different league. These guys have resources our guys could only dream of." Mayor Stephen Goldsmith added, "WREP brought us some of the best technical experience in the world - the companies comprising the partnership employ more PhD civil engineers than the city of Indianapolis has employees. They literally wrote the book on water treatment."⁽¹¹²⁾

Its appreciation of the contractor's experience had not prepared the city for cost savings of the magnitude that occurred. Before privatization, consultants Ernst and Young had estimated that contracting out operations of the recently renovated and apparently well run sewage treatment plants would achieve savings of just five percent.⁽¹¹³⁾ That estimate was off by a factor of eight. The city had spent US$30.1 million on its plants in 1993; in the first year of private operations, costs fell to US$17.6 million - a drop of almost 42 percent.⁽¹¹⁴⁾ Over the first five years of the contract, the city saved US$72.8 million, including US$63.1 million in operations and maintenance costs and US$9.7 million in avoided capital expenditures.⁽¹¹⁵⁾ These savings were US$7.9 million greater than promised in WREP's initial proposal.

In part, the savings reflect lower staffing costs. Rather than specifying staffing levels, the sewage treatment contract simply requires WREP to employ adequate staff to operate the plants at specified performance levels.⁽¹¹⁶⁾ This flexibility allowed WREP to reduce staff from 322⁽¹¹⁷⁾ to 196 at the start of the contract.⁽¹¹⁸⁾ Four years later, just 157 people remained at the plants - fewer than half the pre-privatization number.⁽¹¹⁹⁾ WREP's decision to use chlorine rather than ozone to disinfect the plants' effluents brought further savings.⁽¹²⁰⁾ Savings also resulted from the use of technology that was previously unavailable to the city, economies of scale allowing for wholesale purchase agreements, and improved planning, including greater emphasis on preventative rather than corrective maintenance. In its first year, WREP decreased inventory from US$6.7 million to less than US$2 million and reduced the number of warehouses from 37 to 2.⁽¹²¹⁾ By the end of the second year of private operations, utility costs had fallen by 20 percent, corrective maintenance costs had fallen by 30 percent, and unanticipated capital expenditures had fallen by 20 percent.⁽¹²²⁾

Cost savings have enabled Indianapolis to keep taxes low, prompting Mayor Goldsmith to applaud privatization's "enormous benefits for taxpayers." Savings have also enabled the city to avoid raising sewer rates, which remain at 1985 levels. The city has invested much of the savings in repairing its crumbling sewer system. According to one source, the city's investment in sewers has totalled US$30 million.⁽¹²³⁾ Elsewhere, Mayor Goldsmith has been quoted as saying that privatization allowed the city to invest over US$90 million in re-building the sewer system.⁽¹²⁴⁾

Under a differently structured contract, cost savings might have been even greater. While the contract obliges WREP to fund routine maintenance and operations, the city retains responsibility for all major investments. It will fund up to US$3.5 million a year in corrective maintenance and minor capital improvements and another US$3 million a year in major capital improvements. The city's agreement to reimburse WREP for labour, materials, and subcontracting at cost plus 11 percent mark-up may curb WREP's incentive to reduce the costs of major maintenance and capital improvements.⁽¹²⁵⁾

Labour relations

Despite extensive cuts to staff, relations between management and labour have improved. Thanks to job banking within city government operations and an extensive outplacement program funded by WREP, the transition from public to private operations left no workers unemployed: Sixty-seven found positions with the city; 43 found private sector jobs through the outplacement program; ten found jobs on their own; five retired; and one found a job with a WREP partner.⁽¹²⁶⁾

Fostering good relations with those who remained at the plants, WREP became one of the country's first private companies to sign a bargaining agreement with the American Federation of State, County and Municipal Employees (AFSME).⁽¹²⁷⁾ It has rewarded staff with higher salaries and better benefits, leaving them between 9 and 28 percent ahead of their city counterparts. WREP's employees also enjoy more training and a safer work environment, bringing accidents down by 84 percent. Grievances fell from an average of 43 for the three years before privatization to an average of 0.4 for the five years following privatization.⁽¹²⁸⁾

Although AFSCME formally opposes privatization - and even launched a court action to stop it - it now admits that privatization has improved the lot of its members. Union local president Steve Quick praises both the opportunities for training and advancement and the safer work environ-ment.⁽¹²⁹⁾ Steward Cherie Moore likewise defends the change, saying "Just because it's different, don't say it's not good."⁽¹³⁰⁾ Former local president Stephen Fantauzzo offers the most telling comment about former city workers: "The majority would say they don't want to come back."⁽¹³¹⁾

Environmental performance

Like the union activists, environmentalists initially opposed privatization. Most were concerned that a profit-driven contractor would compromise environmental safety. To ensure environmental accountability, the city provided for extensive monitoring by WREP, an independent private company, the Department of Public Works, and the Indiana Department of Environmental Management (IDEM). Two advisory panels involving academics, stakeholders, and over 20 environmental groups also monitor WREP's performance. As a result, the city has more - and better quality - data than ever and can exercise greater control.⁽¹³²⁾

In the Fall of 1994, the death of over 513,000 fish in the White River revived controversy over privatization's effects on the environment. Frank O'Bannon, Stephen Goldsmith's successful opponent in the state gubernatorial race, tried to politicize the fish kills, blaming them on WREP's operation of one of the sewage treatment plants. The Indianapolis Star / News accused Mr. O'Bannon's campaign of skewing some facts and suggested that overflows from the publicly operated sewage collection system were the likely culprit. It noted that state regulators had sent a letter praising WREP for its work in meeting environmental challenges and confirming that it had found no violations of the sewage treatment plants' permits.⁽¹³³⁾ Environmental groups, including the Indiana Environmental Institute and the Hoosier Environmental Council, agree that responsibility for the fish kills rests with the city's inadequate sewer system rather than with WREP.⁽¹³⁴⁾ In the words of Glenn Pratt, formerly with the Environmental Protection Agency and now with Friends of the White River (FOWR), "The fish kills had nothing to do with the operation of the wastewater treatment plants. The fish kills were caused by the discharge of raw sewage from the collection system ... [They] became very political events in which our new more political IDEM confused the facts for political mileage."⁽¹³⁵⁾

The fish-kill controversy aside, privatization has clearly benefited the environment. The contract requires WREP not only to comply with all environmental laws and regulations but also to equal or better all aspects of the city's environmental performance.⁽¹³⁶⁾ WREP has more than halved permit exceedances and has reduced fecal concentrations to a quarter of what they were under city management.⁽¹³⁷⁾ The plants now regularly meet the targets, established by Indianapolis, for treatment efficiency, biological oxygen demand, suspended solids, and ammonia concentrations.⁽¹³⁸⁾ Furthermore, they are exceeding the standards established by the Environmental Protection Agency and have earned numerous environmental awards from the Association of Metropolitan Sewerage Agencies.⁽¹³⁹⁾ The system is also better able to handle stormwater and has reduced plant bypasses and combined sewer overflows.

As a result, privatization has won over local environmentalists. FOWR's Mr. Pratt had vocally opposed privatization in 1993, predicting that treatment standards would be lowered.⁽¹⁴⁰⁾ He now acknowledges that WREP has improved upon the city's performance.⁽¹⁴¹⁾ The Audubon Society's Richard van Frank agrees that operations and maintenance have improved since privatization.⁽¹⁴²⁾ FOWR's Brant Cowser also has praise for privatization. Citing a good working relationship and good communication with WREP, he insists that contracting out wastewater operations "was a good move for our city.⁽¹⁴³⁾

The city wholeheartedly agrees. On the first anniversary of the sewage treatment plant contract, Mayor Goldsmith boasted, "we have one of the most extraordinary competition successes in the world."⁽¹⁴⁴⁾ In 1997, the city extended by ten years the contracts to operate the collection and treatment systems. Two years later, Mayor Goldsmith expressed his ongoing delight with the arrangement: "The deal, which has proven to be a major victory for all Indianapolis taxpayers, has also benefited the local environment."⁽¹⁴⁵⁾ It is little wonder that Public Works magazine calls the arrangement a "model for public-private partnership."⁽¹⁴⁶⁾ It has, without doubt, been a victory for taxpayers, workers, and the environment.

Water and Wastewater Utility Privatization in England and Wales

In 1989, Margaret Thatcher's government sold off the assets of the ten regional water and wastewater authorities in England and Wales. That sale has become - at least in Canada - the most criticized and least understood of all privatizations. From labour and environmental activists it has received steady and harsh criticism, a good deal of which is baseless.

England and Wales privatized for many of the reasons discussed in previous chapters. A host of problems had long plagued underfunded systems. Almost a third of the treated water disappeared through leaking distribution and supply pipes, some of which dated back to the Victorian era.⁽¹⁴⁷⁾ Many sewage systems discharged untreated sewage directly into the ocean, making beaches unswimmable. The government, unwilling to insist on improvements that it would have to pay for, ignored - and in some cases, concealed - the problem.

The European Community made it impossible for Britain's government to continue denying the extent of sewage pollution. In 1975, when the EC issued a directive giving member countries ten years to bring their "bathing waters" up to uniform standards, the government tried to evade the issue by claiming that the country had only 27 beaches. Not until 1987 did it admit that hundreds of beaches encircled its island. It then had to also admit that sewage contaminated a third of those beaches: In 1988, only 241 of 364 designated beaches met European bathing water standards.⁽¹⁴⁸⁾

By the late 1980s, the government estimated that £24 billion would be required within ten years to repair the water and sewage systems and to meet new European standards. However, "the financial harness of Whitehall" severely constrained any public investment. As former regulator David Kinnersley explained, "the government wanted this huge financing of additional investment to be taken out of the public sector ... The part of it that would come from borrowing, the government wanted to be private borrowing; the part that would come from price increases, the government wanted not to be the responsibility of ministers."⁽¹⁴⁹⁾ Under privatization, the government promised, the suppliers of water and sewage services would be "released from the constraints on financing which public ownership imposes."⁽¹⁵⁰⁾

Privatization was driven not only by mounting financial pressures but also by the growing understanding that a government could not properly regulate facilities that it owned. Indeed, Mr. Kinnersley described the regulatory regime of the time as intentionally ineffective. A "potent culture of government concealment" kept public concern at bay and enabled the government to avoid prosecuting polluting facilities.⁽¹⁵¹⁾ In 1987, the Secretary of State acknowledged that in a publicly owned system, the government acted as both "gamekeeper" and "poacher."⁽¹⁵²⁾ While responsible for controlling the discharge of pollutants, it was a major discharger in its own right. These dual roles put it in an inescapable conflict of interest and made good regulation impossible. By separating the polluter from the regulator, privatization would free regulators to regulate.

To prepare for privatization and to enable the public water and wastewater authorities' private successors to meet tough environmental standards, the government wrote off £5 billion of their debts and provided them with a "green dowry" - a £1.6 billion cash injection. It then transferred their infrastructure and most of their functions to ten new "water service companies" and sold shares in these companies in a public offering.⁽¹⁵³⁾ The new companies provided sewage services to all of the connected population and water services to approximately three- quarters of the connected population. The remaining quarter continued to be served by one of 29 previously existing private water supply companies, some of which had been in business since the seventeenth century. The government established environmental, health, and economic regulators to oversee both the new water service companies and the long-established water supply companies. This combination of privatization and regulation has by many measures - including capital investment, environmental performance, drinking water quality, and customer service - been a success. By other measures - notably popularity among consumers and workers - it has fared less well.

The Benefits

The ten new water service companies have invested enormous sums in infrastructure. By 1998-99, capital expenditures amounted to £33 billion and showed no sign of letting up. That year alone, investments neared £3.7 billion - £ 3.2 billion for new fixed assets and £0.5 billion for infrastructure renewals.⁽¹⁵⁴⁾ By 2005, the private companies will have invested £50 billion.⁽¹⁵⁵⁾ As one official from the Department of the Environment noted, "You just couldn't contemplate that kind of expenditure in the absence of privatization."⁽¹⁵⁶⁾ Indeed, capital expenditures before privatization had been minimal in comparison, remaining well under £1 billion a year (in 1993-94 cost terms) between 1920 and 1960, and generally fluctuating between £1 billion and £2 billion a year in the 1960s, 1970s, and 1980s.⁽¹⁵⁷⁾ Annual investment averaged £1.7 billion in the 1980s.⁽¹⁵⁸⁾

The water companies' investments have paid substantial health and environmental dividends. In addition to financing the construction of new primary treatment facilities for the wastewater of more than seven million people and new secondary treatment facilities for the wastewater of more than 15 million people, the money has gone into upgrading more than 70 water treatment plants and nearly 600 wastewater treatment plants, improving more than 2,400 combined sewer overflows, and, between 1991-92 and 1997-98, building or renovating more than 46,000 kilometres of water mains and more than 10,000 kilometres of sewers.⁽¹⁵⁹⁾

Environmental performance has improved by a number of measures. Between 1990 and 1998, the percentage of plants not meeting their "consent conditions" fell from ten to less than three.⁽¹⁶⁰⁾ The total polluting loads of sewage treatment plants fell by between 30 and 40 percent during the 1990s, depending on the pollutant. Ammonia discharges fell by 37 percent. Phosphates declined by 40 percent.⁽¹⁶¹⁾ As a result, freshwater quality improved significantly. At the time of privatization, 37 percent of the rivers and canals tested were classified as very good or good; between 1993 and 1995, that figure increased to 59 percent. Not all waters improved: Between 1990 and 1995, the quality of about 225 kilometres of rivers and canals deteriorated. However, during that period, the quality of more than 3,000 kilometres improved significantly. In short, environmental gains outpaced losses by more than ten to one.⁽¹⁶²⁾ Gains continued unabated in the following five years. In 2000, the Environment Agency announced that rivers were the cleanest they had been since before the industrial revolution and that fish, otters, and other wildlife were returning to waters long devoid of life. The agency attribute the improvements in large part to investments made by the water companies. In Environment Minister Michael Meacher's words, "The billions being invested in cleaning up our rivers are really bearing fruit."⁽¹⁶³⁾

Privatization has made coastal beaches swimmable. The number of beaches in England and Wales increased from 401 in 1989 to 461 in 2000. Compliance with European standards also rose dramatically, climbing from under 76 percent in 1989 to almost 92 percent in 2000.⁽¹⁶⁴⁾ Thus, private operators have brought England and Wales 118 more usable beaches.

The water companies have also made considerable progress in stemming water losses. The Environment Agency's director of water management notes that a severe drought in the mid-1990s "brutally exposed industry shortcomings in this regard."⁽¹⁶⁵⁾ Spurred by public opinion and regulatory pressure, the water companies reduced leakage from reservoirs, distribution mains, and supply pipes by nine percent in 1996-97, 12 percent in 1997-98, 11 percent in 1998-99, and another seven percent in 1999-2000. Ofwat, the economic regulator, has asked for further cuts of six percent and four percent in 2000-01 and 2001-02 respectively.⁽¹⁶⁶⁾

Much work remains to be done before privatization can be said to have completely fulfilled its environmental mandate. In 1998, the wastes of 13 percent of those connected to the sewerage system still received only preliminary or no treatment.⁽¹⁶⁷⁾ The Marine Conservation Society complained in 2000 that 180 million litres of raw or partially treated sewage flowed into the U.K.'s waterways or the sea each day.⁽¹⁶⁸⁾ Not until 2005 will all collected sewage be treated.⁽¹⁶⁹⁾ In the mean time, the European Commission has complained to the European Court of Justice about ongoing pollution at two beaches on England's northwest coast and has asked it to impose heavy fines on the government.⁽¹⁷⁰⁾

However, there is little doubt that the remaining required capital improvements and repairs are more likely to be made under the new private system than under the former public system, if for no other reason than that the regulatory environment is far stricter than it was before privatization. Although bathing waters are cleaner than ever, Environment Minister Meacher has called them "not good enough" and vowed, "I want to see significant improvements and our bathing waters to be regarded among the best in Europe."⁽¹⁷¹⁾ According to another minister, Baroness Hayman, "The government will not be satisfied until we achieve close to 100 percent compliance regularly."⁽¹⁷²⁾ Even the water companies agree that they must do better. In the words of one industry representative, "We are not happy - one incident is one too many."⁽¹⁷³⁾

The rising number of prosecutions - despite the falling number of pollution incidents⁽¹⁷⁴⁾ - and their higher public profile also demonstrate a tougher attitude towards pollution. In 1999, the Environment Agency published its first annual "Hall of Shame" to call attention to the worst polluters, saying that "they have let down the public, the environment, and their own industry." The agency's chief executive complained that the fines imposed by the courts are too low, averaging just £3,489 for the industry and not exceeding the £36,500 paid by Wessex Water for five prosecutions: "Clearly this is not sending out a strong enough message to deter water and sewage companies who have the potential to seriously damage the environment."⁽¹⁷⁵⁾ Deterrence increased dramatically the following year, when a court imposed a record fine of £250,000 on Thames Water after a mixture of raw sewage and industrial chemicals overflowed and contaminated the Thames river and ten homes. The Environment Agency expressed unreserved delight regarding the fine.⁽¹⁷⁶⁾

Regulators continue to toughen their stance. In 2000, the Environment Agency announced the details of a five-year National Environment Programme to further enhance water quality. It identified all of the water companies' known environmental problems and required more than 6,000 specific projects - with an estimated price tag of £5.3 billion - to increase treatment levels, reduce storm water overflows, and otherwise clean up beaches and rivers. It expected the new requirements to bring 97 percent of the beaches in England and Wales into compliance with EC standards and to bring the water industry to the point where it would pose few threats to the water environment.⁽¹⁷⁷⁾ Indeed, the Environment Agency expects that "most of the environmental damage of the past 200 years will have been repaired by 2005."⁽¹⁷⁸⁾

Drinking water has also improved steadily under privatization. Between 1990 and 1996, the percentage of zones fully complying with prescribed limits on individual pesticides increased from 70 to 87; on lead, from 77 to 87; on faecal coliforms, from 88 to 96; on aluminum, from 90 to 97; and on iron, from 70 to 76. Smaller improvements occurred for colour, turbidity, odour, taste, hydrogen ion, nitrate, nitrite, manganese, trihalomethanes, and other parameters. Only in one category - PAH, or polycyclic aromatic hydrocarbons - did performance decline.⁽¹⁷⁹⁾ The Drinking Water Inspectorate reports that compliance has continued to improve, especially for pesticides - which have been virtually eliminated from drinking water - and coliforms. In 1999, 99.82 percent of the 2.8 million tests conducted met the required standard. The number of tests not meeting the standard was just one-tenth of that in 1992.⁽¹⁸⁰⁾ The taste of water has also improved. The Economist reports that a test in 2000 indicated that tasters preferred London tap water to bottled mineral waters.⁽¹⁸¹⁾

Within the considerable limits imposed by its near-monopoly structure, privatization has also empowered consumers. Ten customer service committees advise the economic regulator on consumer issues. Extensive consultation and information programs involve customers in both policy and performance. Dissatisfied customers have access not only to effective complaints procedures but also to redress - in the form of set compensation payments - if companies fail to meet guaranteed standards for service. Several companies' "customer charters" provide for compensation beyond that required by statute. Water company managers explain that satisfying customers makes good business sense, since it increases the speed with which bills are paid, reduces the costs of processing complaints, and, most importantly, opens up other business opportunities by enhancing the companies' images.⁽¹⁸²⁾ Both this attitude and tough regulations likely account for post-privatization service improvements, reflected in steep declines in the number of properties at risk of either low pressure or sewer flooding.⁽¹⁸³⁾

The Costs

Despite privatization's benefits, many customers - especially in the early years of adjustment - objected to its associated costs. The massive investments in infrastructure raised prices.⁽¹⁸⁴⁾ The real average cost of unmetered domestic water services rose by 38.3 percent in the decade following privatization, while the real average cost of unmetered domestic sewage services rose by 46.6 percent.⁽¹⁸⁵⁾ Some consumers faced above-average increases, the most dramatic of which received considerable press attention.

Over time, concerns about pricing subsided. Consumers seemed to accept higher prices. Perhaps they understood that environmental improvements were expensive: Ninety-five percent of those surveyed in 1997 said that they would prefer water company profits to be spent on environmental improvements than on cuts to their water bills.⁽¹⁸⁶⁾ Perhaps they appreciated that private-sector efficiencies offset costs that would have prompted even greater increases: Between 1993 and 1998, operating costs fell by nine percent.⁽¹⁸⁷⁾ Or perhaps they simply realized that Ofwat was determined to keep prices under control. In November1999, the economic regulator reset price limits for all of the water companies, reducing average household bills by 12 percent in real terms and generally stabilizing them until 2005.⁽¹⁸⁸⁾ In so doing, he explained that thanks to higher efficiencies, the average annual household bill should be only £38 higher in 2005 than it was at the time of privatization.

As prices rose in the 1990s, customers were particularly sensitive to water company executives' generous salary, benefit, and bonus packages, which have in some cases approached £300,000.⁽¹⁸⁹⁾ A poll commissioned by the BBC in 1998 found that while more than half of the respondents thought that they got value for money from their water companies, nearly three quarters thought that water company executives were paid too much.⁽¹⁹⁰⁾ Consumers also resented the water companies' profits and dividends. In the decade following privatization, shareholders' annual returns amounted to between 11 and 16 percent in real terms.⁽¹⁹¹⁾ Large returns led 70 percent of those surveyed by one consumer magazine to state that shareholders have benefited more than customers from privatization.⁽¹⁹²⁾ Such concerns encouraged the government in 1997 to levy a one-time "windfall tax" on the profits of privatized water, electricity, and other utilities; the water companies' share was £1.65 billion.⁽¹⁹³⁾

In the early years of privatization, the water companies' practice of disconnecting non-paying customers also drew fire. With only eight percent of the households on water meters, most people could do nothing to keep their costs down.⁽¹⁹⁴⁾ Many had just two options: They could simply pay their rising bills or be disconnected from their water supply. Private companies had not invented the penalty of disconnection: Their public predecessors had disconnected 9,187 and 9,218 households, respectively, in the two years preceding privatization,⁽¹⁹⁵⁾ in part because changes to social assistance in 1988 had made it more difficult for those receiving state benefits to pay their water bills.⁽¹⁹⁶⁾ However, the private companies demonstrated even less patience with non-paying customers. The number of households disconnected for not paying their water bills soared to 21,282 in 1991-92. It then fell steadily, reaching 1129 in 1998-99. That year, nine of the 27 companies disconnected no households.⁽¹⁹⁷⁾ In 1999, the new Water Industry Act banned disconnection of households and vulnerable water users such as day care centres, doctors' offices, nursing homes, and schools.⁽¹⁹⁸⁾

When disconnections were at their peak, health and social policy organizations feared possible adverse health effects. They wondered if disconnections were linked to increases in dysentery and hepatitis A. Dysentery increased in 1992, with 16,960 cases reported that year - levels not seen since the 1960s, when between19,491 and 43,285 cases were reported annually. Hepatitis A also increased in 1992, by 426 cases, to 7,856. However, the following year, hepatitis A cases fell to 4,457 - just 84 percent of the 1989 pre-privatization baseline. They fell further in the following five years, staying at between 25 and 51 percent of that baseline. In 1996, 1997, and 1998, dysentery rates were also lower than they were at the time of privatization.⁽¹⁹⁹⁾

Researchers were unable to find any causal relationship between disconnections and disease. In 1993, the British Medical Association asked its Board of Science and Education to prepare a report on the health consequences of water disconnections. While the report stressed water's vital role in preventing disease and recommended making disconnections illegal, it concluded that "a causal link has yet to be established between water disconnections and infectious diseases, such as dysentery and hepatitis A." It noted that increased rates of the two diseases could be considered part of long-established cyclical patterns. It also noted that dysentery had increased in Scotland, where water suppliers do not disconnect non-paying customers.⁽²⁰⁰⁾

Other researchers reached the same conclusions. In Sandwell, where high numbers of both water disconnections and cases of dysentery and hepatitis A appeared within the same post codes, doctors reported that none of the reported infections occurred in a household where the water had been cut off. Although the Director of Public Health wondered if other cases may have gone unreported, he could conclude on the basis of the evidence only that "there is a direct association between both diseases and poverty. Families who are poor and more likely to be at risk of having their water cut off, are also at most risk of these infections." Britain's Chief Medical Officer also reviewed the possible relation between gastrointestinal infections and water disconnections, finding in 1992 that "there is no evidence at this time stage that the two are connected." The following year, the Faculty of Public Health Medicine, while stressing its opposition to disconnections, likewise stated, "we accept that a convincing case has not yet been made on epidemiological grounds."⁽²⁰¹⁾ The economic regulator confirmed such conclusions in 1999: "Ofwat has seen little evidence of a link between water disconnections and public health.... [T]he issue is not mentioned in any Ofwat documents on disconnection."⁽²⁰²⁾

While concerns about prices, disconnections, and health effects have been put to rest, one concern about privatization remains in the mind of some critics: Privatization has reduced the number of jobs at the water utilities. In 1989, the water service companies employed 47,807 people. By 1998, that number was down to 31,310, a reduction of almost 35 percent.⁽²⁰³⁾ The companies continue to cut staff: In December 1999, five companies responded to planned reductions in water prices with announcements of 3,200 layoffs. Analysts assume that further layoffs will follow.⁽²⁰⁴⁾

Organized labour admits that various benefits have helped offset the job losses. While confirming its opposition to privatization, the Amalgamated Engineering and Electrical Union notes that severance and early retirement packages have often been generous, making job losses tolerable if not welcome. It also notes that remaining employees have gained from their shares in the privatized companies and that they tend to be better paid, better trained, and enjoy better working conditions.⁽²⁰⁵⁾ The Reason Foundation points out that workers outside of the water utilities have also benefited. Workers in the construction industry have gained from the upgrading of the water and wastewater systems. And those in export or consultancy have gained from the British companies' new international prominence.⁽²⁰⁶⁾

If the water companies' role is to keep as many people as possible employed, privatization in England and Wales has failed. If, on the contrary, their role is to bring capital to a system long starved of cash, to upgrade and repair crumbling infrastructure, to clean up rivers and beaches, and to provide better water and better service to their customers, privatization looks much more like a success. Neither the water companies nor the environmental or economic regulators have yet achieved all that they set out to achieve. As the environment department's Michael Williamson explained, "we're still in the early days of feeling our way. Let's face it, this was the most radical and most complex privatization that's ever been adopted in the world and I don't profess that we've got it absolutely right." However, his caution hardly tempered his enthusiasm: "we've got such a wonderful water industry in England and Wales that I can go on madly about privatization."⁽²⁰⁷⁾ Reviewing the first decade of private ownership and operations, Ian Byatt, then the water industry's chief economic regulator, was only slightly more restrained. The privatization of the water companies, he said, coupled with their regulation under a system that acts at arm's length from government, had resulted in dramatically improved service delivery, much greater efficiency, steady prices, and good returns to shareholders. He concluded, "There have been spectacular successes."⁽²⁰⁸⁾

The Privatization of Canada's Water and Wastewater Utilities

The Growing Recognition of the Need for Private-Sector Involvement

"Canadians have been slow to capitalize on the benefits of public-private partnerships in water and wastewater." So lamented Thompson Gow and Associates in a study prepared in 1995 for Environment Canada. The authors warned, "If present trends continue, Canadians may soon be facing a growing crisis in water and wastewater infrastructure. Aging infrastructure, increasing demand for services, and reduced government resources are all major contributing factors to this crisis. As experience in France, England and Wales, and the United States demonstrates, private sector participation in the water and wastewater industry could be an important part of the solution to the problems facing Canada."⁽²⁰⁹⁾

The crisis that Thompson Gow and Associates warned of may well be upon us. The Walkerton tragedy called attention to severe problems plaguing water infrastructure all across Canada. In the months following the tragedy, governments issued boil-water advisories for 90 Quebec drinking water systems in need of urgent repairs⁽²¹⁰⁾ and for 188 Newfoundland communities with inadequate or no chlorination.⁽²¹¹⁾ Similar advisories covered more than 50 communities in southeastern B.C.⁽²¹²⁾ and another 28 in Saskatchewan.⁽²¹³⁾ Water systems in 171 aboriginal communities were reported to pose health risks.⁽²¹⁴⁾ Inspections revealed deficiencies at 357 of Ontario's 645 water treatment plants.⁽²¹⁵⁾

A primary problem identified by Thompson Gow and Associates was the public sector's inability to meet the required levels of capital investment. Fixing Canada's water and wastewater problems will require billions of dollars. The National Round Table on the Environment and the Economy suggested in 1996 that over the following 20 years, Canada would need to invest between $38 billion and $49 billion to maintain and refurbish existing water and sewage infrastructure. In addition, it estimated, it would need to invest $41 billion in new stock. These investments would be required to meet existing standards; tighter standards would require even higher investments. The Round Table stressed that its estimates were conservative, noting high-end projections for new infrastructure requirements of $100 billion.⁽²¹⁶⁾ The Canadian Water and Wastewater Association roughly echoed the Round Table's projections, estimating that between 1997 and 2012, $27.6 billion would be required to renew water treatment and distribution and $61.4 billion would be needed to upgrade sewers and wastewater treatment. It warned that further investment would be required to serve an expanding population or to meet more stringent standards.⁽²¹⁷⁾

The tens of billions required are not, however, readily available. Michael Power, president of the Association of Municipalities of Ontario, charged in June 2000 that "the single most important impediment to the successful maintenance and rehabilitation of Ontario's municipal infrastructure is a shortage of funds."⁽²¹⁸⁾ In recent years, subsidies - federal and provincial alike - have declined. As municipalities struggle to meet their needs with less help from upper levels of government, their other traditional financing sources - taxes and debt - are increasingly constrained. The downloading of responsibilities from provincial governments has stressed municipal budgets and rising tax rates have led to "ratepayer fatigue."⁽²¹⁹⁾ Politicians are also reluctant to tap consumers for their share of the costs, fearing a voter backlash and an industrial and commercial exodus.⁽²²⁰⁾ As the Quebec government's Commission on Water Management notes, engaging in costly infrastructure repair is "politically speaking, unprofitable" for municipalities.⁽²²¹⁾

Within government bureaucracies and consulting circles, there is widespread recognition that privatization could help solve this and other problems troubling our water and wastewater systems. Throughout the 1990s, numerous studies of privatization resulted in almost as many endorsements of the process. The studies identified a tremendous range of potential benefits. Thompson Gow and Associates enumerated the economic and environmental benefits as follows: higher levels of financing; shorter construction schedules; greater incentives to implement new technologies; reduced maintenance costs; increased tax revenues; revenue windfalls from asset sales; better valuation of water resources; and improved environmental performance. It also noted that public-private partnerships in Canada would improve the domestic water industry's capacity to export services to growing world markets.⁽²²²⁾

The National Round Table on the Environment and the Economy stressed this last point in its Sustainable Cities Initiative, where it promoted the private provision of water and wastewater systems in Canada as a way of positioning Canadian firms abroad to meet the growing demand for private involvement in water and wastewater infrastructure. Before they can compete to provide services abroad, Canadian firms need experience at home. "The most important action that Canadian governments at every level can take is to use the PPI [public-private infrastructure] model themselves," the Round Table explained, adding, "Canada has a window of opportunity to position itself as a front-runner, rather than an also-ran, in providing real urban solutions. We just need to get started - now."⁽²²³⁾ The interest in opening up a major export market also appeared in the Round Table's 1996 report on water and wastewater services. Perhaps more important was that report's acknowledgement of the domestic gains to be had from privatization. While noting the lack of a national consensus on privatization, the report concluded, "given public fiscal realities, a major infusion of private capital is required to maintain existing systems and build new facilities."⁽²²⁴⁾

Among the government agencies persuaded of privatization's advantages was Industry Canada, which saw in it potential for meeting domestic environmental needs while building a base for the export of environmental services. In 1995, the agency sponsored a series of workshops across the country to stimulate interest in public-private partnerships for municipal environmental infrastructure and services. The Vancouver workshop helped prompt a federal-provincial initiative to involve the private sector in solving British Columbia's wastewater treatment problems. The report of a subsequent "awareness workshop" touted public-private partnerships - covering a broad continuum from operations and maintenance contracts to build-own-operate agreements - as a "robust and flexible" framework for dealing with municipal sanitation. Their benefits, the report elaborated, include: access to capital; enhanced debt ratings; otherwise unaffordable investment in new or improved facilities; more rapid development; more efficient operation; greater cost control; new revenues; reduced public-sector risk; improved valuation and accounting of water resources; improved environmental performance; increased quality control; better asset preservation; deep technical expertise; greater incentives for technological developments; and improved capacity for domestic companies to compete internationally.⁽²²⁵⁾

Ontario was bombarded by similar information. The Ministry of Municipal Affairs heard it from Price Waterhouse after commissioning a study of innovative financing approaches for municipal infrastructure, including water and waste water systems. The consultant sang the praises of voluntary private sector participation, calling it "perhaps the most desirable mechanism for funding municipal infrastructure." Among the significant benefits for the public sector were: access to capital; access to technology; revenue enhancement; risk allocation; increased efficiency; and reduced construction costs and times.⁽²²⁶⁾

The message resurfaced in the report of the Provincial-Municipal Investment Planning and Financing Mechanism Working Group, whose membership included representatives of local and regional municipalities, school boards, and the Ontario government. The report noted that the private sector is often better positioned than the government is to manage the risks associated with project financing, operating, marketing, and regulation. Communities taking advantage of the private sector's experience and skills, flexibility, and access to funding could look forward to undertaking projects that could not otherwise have gone forward, to lower project and operating costs, and to re-directing government resources to other pursuits. Furthermore, firms could develop highly exportable expertise.⁽²²⁷⁾ Another working group - this one an infrastructure services subcommittee with representatives of the Ministry of Environment and the regions and municipalities in the Greater Toronto Area - included public-private partnerships in its list of basic strategic initiatives and related options.⁽²²⁸⁾

Despite a seemingly endless stream of studies endorsing the concept, privatization remains the exception to the rule in Ontario and, more generally, in Canada. Ontario has made several feints toward privatization. In 1996, then Environment Minister Norm Sterling announced his intention to privatize the Ontario Clean Water Agency. Although the Office of Privatization began a review of the agency in 1998, the proposal languished.⁽²²⁹⁾ Another privatization initiative surfaced in June 2000. A cabinet document prepared by the Minister of Municipal Affairs revealed plans to instruct the province's 571 municipal governments to examine services in order to determine whether public or private provision would provide the best value. If governments could not prove that a public service provided better value, they would not be permitted to directly provide that service.⁽²³⁰⁾ The press caught wind of these plans at the time the government was establishing Walkerton Inquiry. Sensitive, perhaps, to the inquiry's plans to broadly review the provision of water services, Premier Harris denied any intention to force municipalities to examine privatization. "Nobody," he insisted, "is considering any development or privatization that I know of, of water or sewer."⁽²³¹⁾ Seven months later, however, the premier announced that SuperBuild Corporation would be hiring consultants to advise it on the restructuring of the province's water sector. The corporation would "see what kind of interest there is" within the private sector and explore private finance, design, construction, and operation options.⁽²³²⁾

Barriers to Privatization

Given the Ontario government's interest in privatization, the consensus among experts that privatization holds great promise, and the overwhelming evidence of privatization's benefits elsewhere, why do the province and its municipalities so often lose their courage when faced with a decision to privatize? Some are slowed by financial impediments, both real and imagined. A number of tax policies tilt the playing field in favour of the public sector.⁽²³³⁾ Furthermore, municipalities commonly believe that public capital may be obtained more cheaply than private capital. Public borrowing costs may indeed be lower for municipalities with good credit ratings. The so-called advantage of public financing, however, fails to recognize the real costs of cheap money: the reduced credit ratings and increased future borrowing costs that may accompany higher levels of debt, the opportunity costs associated with using the capital for water and wastewater systems instead of other projects, and the assumption of financing risks by taxpayers rather than shareholders.⁽²³⁴⁾ Perhaps more important is the fact that private-sector efficiencies are generally large enough to offset any financial advantages provided by public operations.

Generally, it is politics rather than economics that gets in the way of privatization. Unions lobby hard for services to remain in the public realm. Many environmentalists likewise fight greater private sector involvement, often on the grounds that water is a uniquely precious substance that must not be tainted by the marketplace. Anti-privatization activists also raise the spectre of water exports, oblivious to the reality that private firms acquire the right to serve customers in a given area rather than an unlimited right to extract water from a given source for whatever purpose suits them.

Given the barrage of anti-privatization "information" - however inaccurate and irrational - Canadians have been exposed to, it is hardly surprising that many would develop concerns about the process. The Canadian Union of Public Employees claims that Canadians, by a margin of five to one, prefer publicly owned to privately owned water utilities.⁽²³⁵⁾ The Canadian Environmental Law Association and Great Lakes United report the results of another poll: When asked who should control water systems, 76 percent of the respondents said municipal officials.⁽²³⁶⁾ Although these polls didn't test public support for publicly controlled, privately operated systems, many agree that the public harbours concerns about privatization and that governments' fears of adverse public opinion may be barriers to successful partnerships.⁽²³⁷⁾

Another factor preventing governments from embracing privatization is simply the fear of the unknown. Municipalities have little experience. They want more information on what works and what doesn't. They want case studies, templates for successful contracts, and models for creating and managing partnerships and assessing their success or failure. As their counterparts both within and beyond Canada's borders accumulate and share experience, they will doubtless gain confidence. Ultimately, as one provincial official noted, they will just have to take the plunge: "The public sector needs to jump in the pool and try it. They are looking too long. They need to be bolder. Part of the learning process is making mistakes."⁽²³⁸⁾

Promising Experiments

While privatization remains rare, Canadians are takings steps in that direction. In 1998, the Canadian Council for Public-Private Partnerships (CCPPP) inventoried dozens of planned or completed public-private partnerships for water and wastewater projects across the country.⁽²³⁹⁾ The same year, CCPPP, the Canadian Chamber of Commerce, and the Federation of Canadian Municipalities sponsored a national survey of 211 players, including 34 provincial government representatives and 97 politicians and administrators from 57 municipalities with over 40,000 residents. Of the municipal and provincial respondents, five to 15 percent expected to see new or expanded partnerships for sewer construction or water supply within two years.⁽²⁴⁰⁾

Canada's early contracts have generally brought specialized skills and savings to communities. They have less often brought infusions of private capital, in part because, as noted above, many municipalities believe they can obtain public capital more cheaply. It is likely only a matter of time before private financing becomes commonplace. At least four contracts in Alberta, Manitoba, and Ontario have involved a mix of public and private financing.⁽²⁴¹⁾ Moncton, New Brunswick's, new drinking water plant - discussed in detail below - was completely privately financed. USF Canada, the firm that won that job, is confident that, with its parent Vivendi, it can meet the capital needs of any Canadian municipality.⁽²⁴²⁾ United Water Canada, backed by Suez Lyonnaise des Eaux, likewise assures prospective clients of its financial capabilities: "With combined revenues of over $40 billion worldwide and over $3 billion in assets already under management in North America, United Water has the financial resources necessary to finance capital improvements."⁽²⁴³⁾

Ontario

More than two dozen Ontario communities have entered into water or wastewater agreements with private operators.⁽²⁴⁴⁾ Another five communities in northern Ontario are served by privately owned water works.⁽²⁴⁵⁾ Typical arrangements involve three-to-five year contracts for operating the sewage treatment plants of small communities such as Forest, Listowel, Petrolia, and Plimpton. Tiny communities can also work with private firms, as is evidenced by the contract to finance, design, build, and operate a sewage system for Campden, a hamlet with just 80 homes.⁽²⁴⁶⁾ Rarer are contracts that cover many facilities spread out over a large geographic area, such as that signed in 1998 by the Regional Municipality of Haldimand-Norfolk and the Professional Services Group; the contract covered seven wastewater treatment plants, six lagoon systems, and 43 pumping stations serving 46,600 people living in a 2,800-square-kilometre area.⁽²⁴⁷⁾ Also rare are contracts for systems serving large populations, such as the 400,000 people in the Regional Municipality of Hamilton-Wentworth - a contract described in detail below.

In December 2000, the Ontario town of Goderich - population 7,500 - entered into a water and wastewater operations and maintenance contract with USF Canada. The town had received eight submissions in response to a request for qualifications, and had weighed four proposals. The five-year contract, renewable for another five, will bring savings of over $71,000 a year.⁽²⁴⁸⁾ While the decision ultimately rests with the town council, town administrator Larry McCabe assumes that savings will be used to benefit the water and wastewater systems.⁽²⁴⁹⁾ The savings largely reflect a reduction in staff from eight to six, made possible in part by integrating the operations of the water and wastewater systems, which had previously been split between the local Public Utility Commission and the municipality. In keeping with council's concern for its employees' welfare, no staff were laid off: One was re-deployed to the electric utility and another took early retirement. All of the transferred staff were given equal or better wages and benefits.⁽²⁵⁰⁾

Savings, while welcome, did not drive Goderich's decision to privatize. "The primary objective," mayor Delbert Shewfelt explained, was "to improve safety and reduce the risk of harm to our residents, and we feel that a public-private partnership best accomplishes these goals."⁽²⁵¹⁾ The town also anticipated improvements in service - in particular, a reduction in the number of bypasses at the sewage treatment plant - and in computer-enhanced equipment maintenance.⁽²⁵²⁾ The town looked forward to taking advantage of USF's - and parent Vivendi's - expertise. The deal gave the town access to state-of-the-art management systems along with technology at below-market costs.⁽²⁵³⁾ It also gave it an operator who can't afford to make mistakes. In the words of the mayor, "The chances of getting in trouble decrease because they have a huge reputation to live up to."⁽²⁵⁴⁾ The mayor welcomed the transfer not only of responsibility for treatment but also of "some of the liabilities," noting the inherent hazards of providing water in an agricultural area. The Walkerton tragedy, it seems, had reminded the town of its own potential vulnerability.

Ontario's largest - and most controversial - privatization to date occurred in Hamilton.⁽²⁵⁵⁾ The municipality signed two contracts, effective January 1, 1995, with Philip Utilities Management Corporation (PUMC) and its parent, Philip Environmental. A ten-year contract covered the management and operation of one water treatment plant and three wastewater treatment plants, and a renewable shorter-term contract covered the outstations and a high lift pumping station. In 1999, Azurix purchased PUMC and took over the firm's contracts.

The partnership's successes and failures have been vigorously debated. Hamilton officials have repeatedly praised the arrangement for bringing savings in operating costs and economic development benefits.⁽²⁵⁶⁾ In contrast, CUPE has called it "the worst example, bar none, of the horror stories we've heard about privatization."⁽²⁵⁷⁾ The truth lies somewhere in between: Hamilton's approach to privatization has brought limited savings and investment and has permitted the city to offload labour-relations problems. On the other hand, neither PUMC nor its successor have yet solved many of the severe performance problems plaguing the city's systems.

Before privatization, Hamilton's poorly managed, over staffed, persistently polluting wastewater system disgraced the community. Yet privatization was not driven by a search for solutions to these problems. Instead, Hamilton privatized primarily in order to aid a local company and to reap economic development benefits. Rather than engaging in a competition to find the most experienced operator at the best price, it negotiated a sole-sourced agreement. Hamilton was not troubled by the newly formed PUMC's lack of expertise; indeed, providing it with experience was a key element of the venture.⁽²⁵⁸⁾ Nor did Hamilton mind passing up greater opportunities for savings. KPMG's Will Lipson, hired to evaluate the fairness of the proposal, explained, "sole sourcing may not be the way to get the absolute best deal, but it is a way to get a fair deal that's good enough, that's a win-win situation and addresses the criteria that matter the most, which in this case revolve around economic development."⁽²⁵⁹⁾

PUMC and Philip promised a variety of investments in the community.⁽²⁶⁰⁾ They lived up to approximately one-half of their promises. PUMC did locate its head office in Hamilton, but instead of constructing new office space, the firm, with Hamilton's blessing, refurbished several floors of an existing building.⁽²⁶¹⁾ By the end of 1998, PUMC had invested $6.5 million in the region.⁽²⁶²⁾ Although it had promised $15 million in capital investments, Hamilton agreed that it had fulfilled its obligations in this regard.⁽²⁶³⁾ Hamilton was also satisfied that Philip had lived up to its promise to create 100 jobs.⁽²⁶⁴⁾ At the time of PUMC's sale to Azurix, Azurix inherited the unfulfilled promises to develop an environmental enterprise centre and to establish an international training centre.

Privatization brought savings in operating costs. Hamilton agreed to pay the operator an annual fee equal to the $18.6 million it had previously budgeted to run the plant, less $500,000 in guaranteed savings, $103,000 to cover the environmental services department's overhead, and $100,000 for contract co-ordination.⁽²⁶⁵⁾ The contract also allotted Hamilton a portion of further cost savings, should they materialize. The operating savings - comprising less than four percent of Hamilton's previous costs - were modest compared to those achieved in jurisdictions that have contracted out operations through a competitive bidding process. When Azurix purchased PUMC, it sweetened the pot somewhat. As a condition of taking over the contract, it agreed to design and build, at its own expense, a pre-treatment facility for the Woodward Avenue sewage treatment plant - a commitment valued at $7.5 million.⁽²⁶⁶⁾

Staff reductions - made possible in part by changes in plant processes and computerized automation - generated many of the operating savings. PUMC's contract with the region required the firm to retain existing staff for 15 months. Once that limit had passed, it lost no time in paring numbers. By 2000, just 51 employees remained in a system that had maintained 122 positions five years earlier.⁽²⁶⁷⁾ The deep cuts - along with management's expectations that workers would cross-train and multi-task - poisoned labour relations. Union opposition to the operator's introduction of a training program to facilitate automation, equip workers to perform a wide variety of tasks, and ensure literacy and numeracy led to a 111-day strike in 1999. Labour relations have improved since then. Representatives of both the operator and the union now sound optimistic - in the latter's case, cautiously so - about their working relationship.

The contractor's environmental performance is more difficult to assess. Decades of inadequate sampling make meaningful comparisons between the public operator and its private successors impossible. Taking Hamilton's effluent data at face value, one measure of performance - biochemical oxygen demand - has improved while others - suspended solids, phosphorus, nitrogen, and ammonia - have worsened.⁽²⁶⁸⁾ In any case, it is clear that myriad problems have continued to beset the sewage system. Sewage has frequently bypassed at least one stage of the full treatment process.⁽²⁶⁹⁾ Levels of suspended solids, phosphorus, and biochemical oxygen demand have periodically exceeded municipal and provincial limits.⁽²⁷⁰⁾ A series of sewage spills have fouled local environments. The worst incident occurred in January 1996, when a pump failure at the Woodward Avenue treatment plant flooded more than 100 homes and businesses and spilled 182 million litres of raw sewage mixed with rain and melting snow into local creeks and Hamilton harbour. PUMC insisted that the spilled wastewater, extremely diluted, was cleaner than the receiving water and that "the bay was not affected one iota."⁽²⁷¹⁾ Regardless, as a "goodwill gesture," it donated $27,000 to the Bay Area Restoration Council, a group monitoring the rehabilitation of Hamilton harbour.⁽²⁷²⁾ It was harder to lay to rest the question of liability for flood damages. One-hundred-fifteen victims had claimed $2.5 million in damages, and squabbles with Hamilton over who should pay dragged on for years. Not until 1999, when Azurix sought council's consent to PUMC's sale, did Hamilton obtain relief: Azurix agreed to resolve the claims at its expense.⁽²⁷³⁾

Municipal staff generally defend the contractor's environmental performance. They maintain that it is, however imperfect, an improvement over that which the city itself could achieve. They point out that poor performance often reflects circumstances beyond the operator's control. The system needs $570 million in expansion and upgrades - which are Hamilton's responsibility.⁽²⁷⁴⁾ As Leo Gohier, then Hamilton's Director of Water and Wastewater, explained, "It's falling apart faster than we can fix it."⁽²⁷⁵⁾

The West

A number of Alberta communities are also experimenting with contracting out the operations and maintenance of their water or sewage systems. In its 1998 inventory, CCPPP described five such arrangements in the province. Among the contracting agencies was the Alberta Capital Region Wastewater Commission, which has contracted out the operations of some of its facilities for more than 15 years. In 1998, it awarded an eight-year contract to OMI Canada for the operation and maintenance of one sewage treatment plant and five pumping stations serving approximately 150,000 people in 12 municipalities surrounding Edmonton. The contract brought savings of approximately ten percent in the first year and 18 percent in subsequent years. The savings will average $400,000 per year.⁽²⁷⁶⁾

Several communities outside Edmonton took a different approach to their water supply system. In the early 1990s, Tofield, Ryley, and their neighbours wanted to pipe treated water from Edmonton. Their county approached CU Water Ltd., a division of a natural gas company that owned a right-of-way along the highway and could thus build a pipeline without spending time or money acquiring land or easements. Two years of negotiations and a plebiscite gaining public support for the project followed. CU agreed to design, build, own, operate, and maintain a pipeline in exchange for an exclusive 25-year franchise. It also agreed to finance $7.1 million of the construction costs, with the province providing the balance of $4.9 million. The agreement entitles the Alberta Public Utilities Commission to buy back the system at net book value at the 15^th, 20^th, and 25^th years of the agreement, with a five-year notice period. Ryley administrator Bob Luross called the deal a godsend, adding, "It's been a big load off our minds. Our treatment plant was 40 years old and it was a big chore to keep up. Now they run everything and we are out of the water business."⁽²⁷⁷⁾

Privatization is also gaining momentum in British Columbia, where 187 privately owned water utilities serve approximately 30,000 households in the province.⁽²⁷⁸⁾ More than half of these utilities are very small, serving fewer than 50 customers in trailer parks, resort areas, subdivisions, or isolated communities. The largest - White Rock Utilities - has been operating since 1913 and supplies 18,500 people.⁽²⁷⁹⁾ The province's two largest cities are slowly involving the private sector in water and wastewater projects. Victoria has contracted with a private firm to treat septage from approximately 100,000 people.⁽²⁸⁰⁾ The Greater Vancouver Regional District (GVRD) is engaging the private sector in the design, construction, and operation of the Seymour water filtration plant. The plant - the district's first filtration plant - will remove Giardia and Cryptosporidium cysts, reduce bacteria and organic matter, and eliminate turbidity in order to make disinfection more effective, ensure compliance with provincial and federal standards, and improve the appearance of the water.⁽²⁸¹⁾

GVRD issued a request-for-qualifications in the fall of 2000 and, in February 2001, announced a shortlist of four consortia from which it will invite full proposals. It plans to issue a draft request-for-proposals in May 2001, followed by a final version in June. To help offset the costs of preparing proposals, it will offer $100,000 honoraria to the consortia that submit unsuccessful proposals. It expects to award a contract in 2002 and to see the plant completed in 2005. It envisions a contract with a 20-year operating term. According to lead engineer Mark Ferguson, involving the private sector is "all about efficiency." The district has simply found public-private partnerships to be more competitive than purely public alternatives. GVRD believes, however, that its triple-A bond rating gives it access to cheaper money than the private sector can obtain. It therefore expects to finance the project itself.⁽²⁸²⁾

Atlantic Canada

Atlantic Canada has also seen some private sector involvement in both water supply and sewage treatment. Nova Scotia's most important private wastewater initiative is currently underway in Halifax Regional Municipality. The proposed project - the design and construction of four new sewage treatment plants and their private operation for 30 years - will stop the centuries-old practice of dumping raw sewage into Halifax Harbour. The 1998 request for expressions of interest drew 22 responses, convincing Halifax that the private sector had sufficient capacity to undertake all aspects of the project, including financing.⁽²⁸³⁾ The city continues to consider several financing options: It is prepared to finance two-thirds of the capital costs; it is soliciting federal and provincial funding; and it is also open to private financing should that option be less expensive than public alternatives.⁽²⁸⁴⁾ Halifax has received proposals from two private consortia and a reference bid from staff. It has applied to the Supreme Court of Nova Scotia for declaratory relief regarding the completeness of the proposals and the appropriateness of evaluating them. If it gets a favourable ruling from the court, it will review the proposals by the end of June, 2001, and sign a contract a month later.⁽²⁸⁵⁾

The East coast is also home to Canada's largest completed private drinking water project. USF Canada operates and maintains the water filtration plant that it financed, designed, and built in Moncton, New Brunswick. Prior to the plant's construction, the city had struggled with discoloured, bad tasting, sub-standard water for many years. High bacteria counts in the municipal water system had led to several boil-water orders, including one in 1997 that stretched for 36 days.⁽²⁸⁶⁾ The following year, the city's water failed to meet standards for pH, turbidity, and total trihalomethanes.⁽²⁸⁷⁾ At one point in 1999, contamination with coliform bacteria prompted the city to haul clean water in stainless steel tanker trucks from another town's treatment plant.⁽²⁸⁸⁾ One reporter marvelled over city council's decision to solve the problem by constructing its own filtration plant: "Imagine drinking water right out of the tap and enjoying it. For most Greater Monctonians, that concept is as foreign as some of the substances they have found in their water over the past couple of years."⁽²⁸⁹⁾

Unable to obtain provincial or federal funding for a water treatment system, Moncton turned to the private sector for help. Ron LeBlanc of the city's engineering department explained that working with the private sector was the only way the city could afford to construct a state-of-the-art system.⁽²⁹⁰⁾ In 1998, after a competitive bidding process that initially saw expressions of interest from nine firms, the city signed an agreement with Greater Moncton Water, a company owned by USF Canada and the Hardman Group. The company offered considerable expertise: Parent USFilter, a subsidiary of the French water giant Vivendi, manages over 260 facilities in North America.⁽²⁹¹⁾ Moncton is delighted to gain access to the company's patented technologies, computerized systems, and resulting efficiencies. In the words of City Manager Al Strang, "We came up with a far superior deal than if we could have built it ourselves."⁽²⁹²⁾

Privatization brought immediate financial benefits to Moncton. The arrangement relieved the city of having to make any up-front capital investment. Equally important were the substantial cost savings. Greater Moncton Water built the plant for $23 million - between $8 million and $10 million less than a publicly designed and built plant would have cost. Those savings resulted in part from a 40 percent reduction in the size of the building, which was made possible by the choice of a particular kind of filtration. Operating costs will also be lower than they would have been at a publicly-run plant. All told, the city expects to save between $14 million and $17 million in capital and operating costs over the course of the 20-year lease; estimates of savings have ranged from $12 million to $20 million. The city will pass along these savings to consumers. The average household will pay $91 a year for the plant instead of the $119 anticipated under the public alternative. Mr. Strang expressed his pleasure with the deal, calling both the city and the company "winners."⁽²⁹³⁾

Moncton's privatization also brought dramatic health benefits. In an editorial congratulating the city for its decision to proceed with a public-private partnership, the local newspaper enthused that residents "should be able to celebrate clean, clear, and contaminant-free drinking water for the first time in recent memory."⁽²⁹⁴⁾ The contract requires the operator to meet or exceed Canadian drinking water guidelines. Its requirements for aluminum and colour are considerably stricter than the guidelines.⁽²⁹⁵⁾ The contract also specifies turbidity levels of less than 0.1 nephelometric turbidity unit (NTU) at all times. This significant improvement over the average 1.87 NTUs recorded in 1998 will improve the taste and smell of the water and reduce chlorine requirements and subsequent trihalomethane formation.⁽²⁹⁶⁾ Mr. LeBlanc boasted, "We believe the water that we have specified will be the best in Canada," adding, "If they don't meet the specs, then they ain't getting paid."⁽²⁹⁷⁾ The new plant quickly