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23 Firms Eyeing Indianapolis Superutility

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 06 Oct 2009 15:12:00 EDT

In big water privatization news, Indianapolis has received expressions of interest from nearly two dozen firms seeking to restructure the city's water and sewer systems into a massive, combined utility with a value that may top $3.5 billion. Mayor Greg Ballard's administration is seeking to merge the two utilities—which are both currently under long term contracts with separate private operators—in order to generate hundreds of millions in long-term cost savings that would be used to hold water/sewer rates down and generate up to $400 million to invest in citywide infrastructure improvements. Bill Ruthhart at the Indianapolis Star writes:

About two dozen companies, including Citizens Energy Group, have expressed interest in owning or operating the systems, which city leaders said could generate as much as $400 million to build roads and sidewalks and make other improvements while potentially protecting customers from large rate increases. [...]

By 2025, the city expects to spend more than $4 billion to make upgrades to the water and wastewater systems. Those improvements are expected to increase water rates by 112 percent and wastewater rates by 427 percent during that time period.

Under those projections, today's average water bill of $28.07 would increase to $59.64, and the average sewer bill would go from $19.89 to $104.83 during the same period.

Robert Vane, Mayor Greg Ballard's deputy chief of staff, said the mayor's goal is to help reduce those future costs by either partnering with private companies or signing off on Citizens Energy's acquisition of the utilities. He said it was too early for Ballard to offer a specific goal for how much future increases could be reduced.

Other potential bidders include prominent industry players like Veolia Water, United Water, Macquarie Capital, CH2M Hill, and Black & Veatch. The trade publication Public Works Financing reports separately that the city plans to issue a Request for Proposals next month, with bidder selection likely slated for early 2010.

Matthew Tully at the Indianapolis Star comments on the politics of the proposal, speculating that Indy Mayor Greg Ballard's focus on core infrastructure is likely to be viewed favorably by voters:

Cash-strapped cities such as Indianapolis have few options in addressing massive infrastructure backlogs. Typically, annual city budgets for street repairs don't even keep pace with new problems. And so, cities fall further and further behind every year.

With that in mind, the mayor is aiming for a "once-in-a-generation effort to address what are generation-old infrastructure problems," spokesman Robert Vane said Monday. [...]

The money gained from the initiative wouldn't come close to solving all of the city's infrastructure problems. But there would be a one-time infusion of cash that would allow the city to plow through years of backlogged projects.

If he can do it, Ballard would put a serious dent in a problem that has turned city streets into third-rate roadways and has left many residents waiting decades for new sidewalks to replace the crumbling messes outside their homes. He'll have helped address a depressing gap in quality between streets and sidewalks within the city and those in suburban areas. He also will have focused on exactly the type of issues mayors should target. [...]

The "un-mayor," as he was once called, was elected to address the nuts and bolts of local government. Nothing is more nuts and bolts than fixing streets and sidewalks. If he can find a way to pump an extra $150 million or $200 million into those problems, he will have tackled a matter that affects the daily life of every Marion County resident.

Reflecting back to my recent commentary on the use of upfront proceeds from transactions like this, I'd say that the proposal as shaped thus far would score high on the fiscal responsibility meter, as it would re-invest the bulk of the transaction proceeds back into long-lived infrastructure. As I've said before, it's great to see Indianapolis re-embracing privatization under Mayor Ballard's watch, and this particular initiative has the potential to be as groundbreaking as Indy's managed competition was in the early 1990s.

Novato, CA Sanitary Board Privatizes Wastewater Treatment Plant

adam.summers@reason.org (Adam Summers) — Wed, 30 Sep 2009 17:50:00 EDT

The Novato Sanitary District board recently voted 4-0 to approve a contract with private water company Veolia Water to turn over the operations of its new $90 million wastewater treatment plant. While privatization is often sought primarily to achieve cost savings, the Novato Sanitary deal illustrates other benefits of privatization. The arrangement will offer the district access to management expertise that might not be available in-house, and will transfer the risk of regulatory compliance from the district to the company.

According to a Marin Independent Journal article about the deal,

District general manager Beverly James hailed the contract as making Veolia responsible for regulatory compliance and fines incurred for non-compliance, as well as liability protection, guaranteed operating costs and long-term stability. "We feel that we have negotiated a fair contract that protects the district's interests," James said.

The compliance and liability issues have been a big concern for the district, as the U.S. Environmental Protection Agency is currently conducting a criminal investigation of apparent environmental violations that occurred in the district in 2006 and 2007. The district could potentially face fines if the EPA finds that violations did, in fact, occur. Under the terms of the Veolia contract, the company would not be responsible for any fines related to violations prior to the deal taking effect.

"This business has gotten too complicated to continue running it with our hometown staff," said board member Bill Long. "This is a new era where you can get a million-dollar fine, and the people of Novato do not want to be exposed to those kinds of fines."

Other Resources:

» Reason Policy Brief: Frequently Asked Questions About Water / Wastewater Privatization

» Reason's Water and Wastewater Research and Commentary

Arizona Communities Preparing to Tap Private Sector for Major Water Project

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 13 Aug 2009 17:31:00 EDT

One of the more interesting recent projects on the water privatization front comes from central Arizona.

The City of Prescott, the Town of Prescott Valley and the Town of Chino Valley all sit within a water management area (called the Prescott Active Management Area, or AMA), and the state Department of Water Resources declared several years ago that the AMA was no longer at safe-yield, triggering state rules requiring that only renewable or imported water supplies from outside the Prescott AMA be used for new subdivisions within the AMA. What that meant for Prescott, Prescott Valley and Chino Valley is pretty simple: either you bring in water, or you don't grow. The economic implications of such a roadblock to growth sent these communities looking for solutions.

Long story short, Prescott and Prescott Valley acquired 6,300 acres of property north of the AMA—named the Big Chino Water Ranch after its groundwater supplies— and plan to meet the area's future growth needs by transmitting water from the Ranch to the communities. The challenge is that the Ranch is 30 miles away, and these relatively small communities would be facing a price tag in excess of $130 million to develop such a large-scale water transmission project. Their solution: turn to the private sector through a public-private partnership (PPP).

To that end, the City of Prescott has issued a Request for Qualifications to procure professional advisory services for the city and its partner Prescott Valley (Chino Valley is engaged in discussions to join the intergovernmental agreement) to provide financial, legal and technical advisory services related to a PPP for the proposed Big Chino Water Delivery System. Responses are due at the end of the month. Here's more from Prescott's RFQ:

The tentative scope of engagement includes an evaluation of alternative Project delivery options utilizing multiple criteria analysis. Additionally, a complete range of advisory services are required, including valuation, financial, contract, legal and technical in the solicitation, identification, negotiation and contract administration of private partner(s) for the financing, design and/or design review, permitting, construction, operation, maintenance, management, and possible ownership of Project facilities.

The Project will produce, transport, import and deliver up to 12,000 acre-feet of water annually from the Big Chino Sub-basin to the Prescott Active Management Area. The facilities that might be included as part of the Project may consist of the following components:

1. Well field – multiple wells, connecting pipes and storage reservoirs on the City's Big Chino Water Ranch property
2. Big Chino Water Delivery Pipeline – approximately 30 miles of pipeline varying from 30 to 36 inches in diameter, with a planned maximum delivery capacity of 27.5 cubic feet per second
3. Pumping Facilities – Highway 89 Pump Station and Chino Valley Water Production Facility.
4. Prescott Valley Pipeline – approximately 15 miles of 24-inch diameter pipe to serve the Town of Prescott Valley

The purpose of this project is to produce and transport groundwater from the Big Chino Water Ranch, located approximately 18 miles northwest of Paulden, Arizona, to the City’s Chino Valley Water Production Facility located in Chino Valley, Arizona. The Project will then convey water to the City utilizing existing infrastructure, and to its partner, the Town of Prescott Valley, via the Prescott Valley Pipeline described above, and to other users who may participate.

According to the RFQ, the public partners plan to issue a request for statements of qualifications for private partners for the project in January 2010, with submissions due back in March.

Many communities across the country should be watching this project, as it may ultimately offer a model for how to address major infrastructure, growth and environmental challenges through win-win partnerships with the private sector.

For more on recent developments in water privatization, see Reason Foundation's Annual Privatization Report 2009. We discuss the continuing trend of government satisfaction with water partnerships, Milwaukee's proposed water works lease, the U.S. Conference of Mayors' recognition of an innovative Phoenix water partnership and other news.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Efficient, Effective And Run Privately

adrian.moore@reason.org (Adrian Moore) — Fri, 07 Aug 2009 10:55:00 EDT

My old friend Michael Deane, late of EPA, has this great column in the Milwaukee Journal Sentinel:

Americans are fortunate to have options for how we get the basic necessities of life, like food and shelter and water. It is important that Milwaukee residents have the same opportunities as other communities in deciding how their water is delivered, and that those options are supported by clear and indisputable facts.

To deliver water - a valuable and essential resource of finite quantity and inconsistent quality in its natural state - water utilities employ the latest technology to collect and treat water to ensure it meets state and federal health and environmental standards. They also manage the massive infrastructure that enables high-quality water to be delivered to our homes, schools, and businesses. Public and private utilities provide these services 24 hours a day, seven days a week, at a cost to the consumer of less than a penny a gallon.

The private sector has played a proud and important role in the provision of drinking water since the formation of our country. Some activist groups point to a handful of "case studies" to support their claims of service problems by private water service providers.

The facts are that today, nearly 73 million Americans - one of every four people in this country - receive water service from a privately owned water utility or a municipal utility operating under a public-private partnership. Contracts for these partnerships average a 93% renewal rate. Furthermore, the private sector has consistently been at the forefront of the industry when it comes to capital investment in infrastructure and technology, management and innovation.

When utilities lease or sell their water systems to a private company or management company, the company then provides a service, operates the facility, maintains and upgrades the infrastructure, and ensures that water quality standards meet or exceed government mandated regulations.

Further, all water utilities are subject to extensive government oversight. Public officials set water rates, establish and enforce health and environmental regulations, and make long-term water resource allocation decisions. Both public and private water utilities meet these regulations and deliver quality water in an efficient manner.

Full Colum Here

Check out the water/wastewater chapter in Reason's new Annual Privatization Report for more.

Policymakers Turn to Privatization Amid Prolonged Government Fiscal Crises

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 00:00:00 EDT

Governments at all levels are facing severe budget deficits and prolonged fiscal crises amid the national economic recession. With the federal government facing a record $1 trillion deficit and at least 44 states facing a cumulative $281 billion in budget deficits through 2011, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates and will remain so over the coming year as policymakers attempt to reduce the price of government in response to ongoing budget woes.

Now in its 23rd year of publication, Reason Foundation's Annual Privatization Report is the world's longest-running and most comprehensive examination of privatization news, developments and trends. The 2009 report finds politicians looking for solutions to growing deficits. Even seemingly privatization-resistant states like California, New York, Massachusetts and New Jersey are now turning to the private sector to help solve major fiscal and capital investment challenges.

The report's federal government section forecasts a bleak outlook for privatization and competitive sourcing under the Obama administration because the current Congress, controlled by Democrats, has been openly hostile to many competition-based initiatives. There are some highlights at the federal level, such as NASA's planned partial privatization of the manned space program, which will use private companies to design, build, and launch manned spacecraft while NASA finishes its own fleet to replace the Space Shuttle. Also, the highly successful military housing privatization initiative—which is modernizing and improving the quality of hundreds of thousands of military housing units nationwide—has spawned a new initiative to privatize on-post lodging for soldiers at Army installations.

In the state government section of the Annual Privatization Report, we profile the increasingly dire fiscal conditions in the states and offer a comprehensive review of the latest state privatization action. Due to deficits and falling tax revenues, policymakers’ interest in state privatization and government efficiency boards is demonstrably on the rise, and advisory commissions on privately-financed infrastructure have been established in California and other states. In Louisiana, the new Commission on Streamlining Government (CSG) is exploring ways to reduce the cost of state government through downsizing, streamlining and privatization to address a looming budget crisis. In other highlights, New Jersey enacted a law with overwhelming bipartisan support that privatizes the cleanup of nearly 20,000 contaminated properties in the state, while Illinois policymakers passed a partial privatization of the Illinois Lottery to help fund a massive public works bill.

At the local level, we profile Chicago's groundbreaking—but controversial—$1.15 billion parking meter system lease. Los Angeles, Pittsburgh and other cities are closely monitoring Chicago's situation as they contemplate similar parking meter initiatives to generate municipal revenues in the economic downturn. We also review Georgia's fifth new contract city, Dunwoody, which followed the lead of neighboring Sandy Springs by incorporating under a privatized city government model in which contractors provide nearly all non-safety-related services. There are also a number of privatization initiatives proposed or announced in Los Angeles, Indianapolis and numerous other cities.

The Annual Privatization Report also provides a comprehensive overview of domestic and international developments in air and surface transportation, including a wide-ranging overview of the current state of the infrastructure finance market, a review of the latest in highway and airport privatization, and a review of the latest in air traffic control reform and aviation security.

The report also examines four emerging issues attracting significant attention in policy circles. First, we offer a summary of the federal bailouts and stimulus spending to date, which currently totals a staggering $12.9 trillion spent since early 2008. We also review efforts that expand and modernize port infrastructure through public-private partnerships.

The report also reviews the latest developments in the fields of private corrections and mental health services. We review Arizona's groundbreaking prison lease proposals, a new Vanderbilt University study finding private prisons reduce state corrections costs, the looming battle to protect private prison operators' proprietary rights, and numerous other privatization developments in domestic and international corrections.

This week, the Associated Press reported: "Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion."

The federal deficit is astronomical. But states are also swimming in red ink and local governments are out of cash. Taxpayers have been hit hard by the recession and cannot be expected to bail out big spending politicians. To deal with today's economic realities, political leaders need to seek out innovative public-private partnerships and tap the efficiencies in the private sector. The Annual Privatization Report details hundreds of ways to move towards better, cheaper government.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Annual Privatization Report 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 00:00:00 EDT

With governments at all levels facing severe budget deficits and prolonged fiscal crises amid the national economic recession, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates, according to Reason Foundation's Annual Privatization Report 2009.

"Governments are swimming in red ink and realizing the effects of the recession will be felt long after the economy recovers," said Leonard Gilroy, editor of the report and director of government reform at Reason Foundation. "Interest in privatization is sky-high and rightly so. Now more than ever, policymakers need to study their priorities, re-examine what are really core government functions, and then tap the private sector's expertise in all of the areas where they can save taxpayer money and improve the delivery of services."

The Annual Privatization Report details the latest trends and examples of how public officials at the federal, state and local level are reducing costs and improving service delivery through public-private partnerships, outsourcing and performance-based government. It also examines privatization's progress in transportation, education, corrections, water and wastewater services and telecommunications.

Milwaukee Puts Water Privatization Study on Hold

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 01 Jun 2009 18:35:00 EDT

Before it even got off the ground, Milwaukee policymakers have put on hold a study on the potential long-term lease of their city water system:

Four [Milwaukee] aldermen said Friday that the review by Comptroller W. Martin "Wally" Morics will be put on hold while officials seek ways to channel more Water Works revenue into the city's general coffers.

With increasing pressure on the city budget, Morics had raised the idea of leasing the Water Works for 75 to 99 years, in exchange for a one-time payment of $550 million to $600 million. That cash could be invested to create an endowment that would generate $30 million a year, which Morics figures would stave off annual debates on slashing services or raising taxes.

Mayor Tom Barrett and the council didn't endorse the concept, but they authorized Morics to look for a consulting team to conduct a study. The comptroller is reviewing proposals from 16 consortiums of investment, law and engineering firms, and he was planning to recommend one to the council this summer.

But environmental groups and public employee unions rallied against turning the water system over to private business. They formed a coalition called Keep Public Our Water that urged supporters to contact aldermen and oppose privatization. [...]

Morics said the process of deciding whether to privatize the Water Works would likely last two or three years and would not proceed unless Barrett and aldermen were comfortable with it. He also said his plans called for studying other options. "This isn't going to be done rashly, and it isn't going to be shoved down anyone's throat," Morics said.

It's fine to take a short breather while you sort out all of the potential options. But it would be bad policy to take a powerful option off the table before you've even studied it.

The reality is that if you mention the words "water" and "privatization" together, there's a natural constituency out there that will go ballistic. But policymakers' responsibility ultimately lies in laying all the options out together on the table and having an objective process for sorting out the pros and cons of each. How else can you come to a defensible and sensible decision?

Unions and environmental activists will undoubtedly complain at the first mention of the "P" word and any attempt to advance it as one of the potential options—it's just a natural part of these interest groups' playbook. Given that, policymakers should keep their eyes on the larger ball here—ensuring the long-term fiscal health of the city and pursuing the best strategy for system investment and upkeep over the long term.

One other bit caught my eye:

[M]ayors and aldermen have pushed to keep rates low, with the result that the Water Works had to draw $10 million from reserves to cover 2008 expenses. Even if the Water Works had cash to transfer, the state's Public Service Commission "strongly discourages such actions, as they believe 'extra' cash should be reinvested in the utility," Lewis said. Rate increases need PSC approval.

I've written before (see here and here) about how the political pressure to keep rates low can often lead to chronic underinvestment in the system; this can be more colorfully described as an infrastructure "death spiral." In fact, many governments turn to privatization in order to to effectuate a shift towards more market-based pricing and proper system investment and maintenance. James Rowen at The Political Environment blog makes an important point in this regard:

"[...] it's clear that Milwaukee faces genuine hurdles financing its basic services, so if water privatization is off the table, community organizations and activists who helped shelve the privatization study should keep working on alternative revenue and service solutions."

I couldn't agree more—if privatization opponents are bound and determined to take that option off the table completely, then the ball should be squarely in their court to proffer their own viable alternative plan. This is critical, as policymakers can either be part of the problem or part of the solution.

» Reason's Privatization Research and Commentary
» Reason's Water/Wastewater Research and Commentary

Water PPPs Offer Financial, Environmental Compliance Solutions

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 23 Sep 2008 15:45:11 EDT

Another from the "PPPs aren't just for roads" file (see this one earlier this week on schools). From Virginia, an interesting new muti-jurisdictional water PPP:

A group of investors seeking a partnership with the towns of Cape Charles and Cheriton is moving forward with plans to build a state-of-the-art wastewater treatment plant and a new water distribution system to serve area residents, businesses and two industrial parks they are developing. [. . .] Cape Charles dumps its treated wastewater, or effluent, directly into the bay. The state environmental agency has required the town upgrade their plant by Jan. 1, 2011. The same deadline applies to plans for a central system for the town of Cheriton, which could not afford to build its own system because the population of the town hovers around 400. So the three parties are getting together and forming a public-private partnership to design, build, finance, maintain and operate water and wastewater systems that will serve residents and businesses in the two towns, and possibly beyond, and also the industrial needs at the Webster site, which sits partially in the county. Such ventures are formed under the authority of the state's Public-Private Educational Facilities and Infrastructure Act of 2002, or PPEA. The intent of the act is to provide a structure so public projects can benefit from the involvement of the private sector, saving time and money. The law creates resources to fund a broad range of projects, from schools to water treatment and telecommunications. It helps localities reach goals and encourages innovative approaches to financing.

This is a great example of how PPPs offer solutions as public entities face growing infrastructure needs and worsening fiscal conditions. In fact, it's apparent from this article that one of the drivers behind this deal is environmental compliance. Regs are getting tighter soon, and the cities don't have the money to get in compliance on their own, so they're pursuing a PPP to accelerate the project; pool their resources to make a more attractive, larger scale project; and get 'er done before the regs kick in. Expect to see more interest in water PPPs in coming decades. The feds have been reducing their contributions to local water systems over the several decades, at the same time that they're imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. Unfunded mandates of this nature are forcing fiscally-strapped municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds, but as we all know, government revenues are drying up and budget shortfalls are reaching epidemic status. So that leaves PPPs as one of the few nontraditional, creative options left on the table to help municipalities meet these obligations. And Virginia's PPEA is one of the great pieces of state legislation to facilitate these solutions. After the success of its big brother, the Public-Private Transportation Act of 1995, or PPTA (facilitating transportation PPPs, like the Capital Beltway HOT lanes project currently underway), the legislature wisely opted to put legislation in place to facilitate PPPs in other realms of infrastructure. [they even still refer to PPEA in the Commonwealth as the "Public-Private Everything Else Act"]. We're fortunate to have welcomed the PPTA's author, former Virginia DOT secretary Shirley Ybarra, into Reason's policy shop last year, and I'm sure she takes a certain amount of pride knowing that her work carving new ground on transportation finance and procurement has ultimately played a big role in providing options for munis in delivering water and other types of needed infrastructure. Another observation here is that we may be at the very beginning of a shift in water privatization. The standard way of doing business up to this point has been to partner with the private sector largely on operations & maintenance. The private team may design and build the plant too, or they may just take over operations of an existing facility, but to date the focus has not been on private financing in water infrastructure. But this Virginia project, a similar project under discussion in the Prescott, AZ area, and several others in recent years may be an early indicator that the more powerful PPP contracting models we see in roads, for example—where the private sector competes for the right to design, build, operate, maintain, as well as finance, infrastructure projects through longer-term contractual arrangements—may be coming to the water industry. Not that we'll see a major shift away from traditional operational contracting in water; the point is that even looking within the relatively narrow space of water privatization, models are evolving, and new opportunities are emerging that may look way different than they did even a decade ago. As more elected officials discover that there's a robust competition in the market for privately-financed road projects, they are naturally looking to similar opportunities in other sectors. And the $150B+ in private equity capital raised on Wall Street and within pension funds, etc. to invest in infrastructure are likely more interested than ever in diversification among assets. So it makes sense that we'll see them interested in spreading their resources around to invest in several infrastructure subclasses, including roads, airports, water, wastewater, energy, ports, schools, etc. This may take some time in water since current privatization models are so well-established and successful, but I do think we'll see growing interest in that evolution towards incorporating the financing component into the PPP models. And with public ledgers running redder and redder, and the maintenance and new capacity needs in water growing greater and greater, the sooner we start to engage that discussion and get some projects up and running, the better. » Reason FAQ on Water/Wastewater Privatization » Reason's Water Privatization Research and Commentary

The Benefits of Privately Financed Water Infrastructure

leonard.gilroy@reason.org (Leonard Gilroy) — Sat, 13 Sep 2008 07:11:22 EDT

KPMG Global Infrastructure's Bastien Simeon offers an excellent overview of the evolving water privatization market in an August 2008 report entitled, "Delivering water infrastructure using private finance." The paper examines the risks and rewards of using private finance to fund water infrastructure, including how local governments and investors can benefit. Topics covered include regional trends, traditional vs privately financed procurement, opportunities, risk allocation and extracting value. Here's an excerpt on what I've found to be a woefully underappreciated issue in infrastructure--the chronic neglect of infrastructure maintenance seen under traditional U.S. project delivery approaches, and the opportunities PPPs offer in locking in future asset maintenance costs and shifting to life-cycle approaches to ensure asset quality and durability:

The traditional infrastructure procurement method used to budget construction, enhancement, maintenance, and/or operation of water facilities may result in suboptimal outcomes. That's because most government budgets are based on a one or two year budget cycle for operating costs, with capital projects subject to a five-year work plan. Often, governments may find themselves pressured to balance the budget by incrementally deferring maintenance or deferring capital projects–a process that may appear innocent on a project-by-project basis. But the exponential nature of deferring maintenance or capital projects over time can result in breakdowns in infrastructure or capacity shortages that compromise public needs. Once a government gets behind in maintenance, it becomes very difficult to recover. The government is then put into a position of choosing between maintaining or rehabilitating existing infrastructure or building capacity necessary to fuel the growth in its economy. This dilemma can lead to unintended maintenance backlogs, substandard service quality, and life-cycle costs that are considerably higher than would have been achievable with optimal maintenance. [. . .] The long-term nature of concession and PPP contracts allows governments to build maintenance costs into the net present value of the monetization and assign responsibility for maintenance to the private sector. The private sector can plan and implement accordingly, since it focuses on the long-term internal rate of return, not the current-year budget cycle that can compromise service quality. This long-term approach, often referred to as life cycle asset management, can be reflected in the innovative design and construction solutions for privately funded water facilities, such as using more expensive construction materials that may increase the investment cost but decrease the longer-term maintenance costs, thereby decreasing the total net present value of the project. Governments also have the ability to impose strict operations and maintenance requirements in concession agreements and lock in future maintenance costs. While this approach may decrease upfront payments from private concessionaires, governments can effectively remove the responsibility for maintenance from their budgets and thus not make those costs subject to year-to-year budget pressures.

» Reason's Water and Wastewater Research and Commentary

Tax Hikes vs. Privatization For Water Infrastructure

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 02 Sep 2008 10:24:16 EDT

In a Carlsbad Current-Argus op-ed last week, Rio Grande Foundation president Paul Gessing comments on a Carlsbad, NM ballot measure seeking a 0.5 percentage point increase their gross receipts tax to fund water infrastructure. He raises an important question Carlsbad taxpayers should be asking: why isn't the city looking at privatization and public-private partnerships?

The City expects to raise approximately $45 million from the tax hikes with the money to be allocated for a several water-related projects around town. Carlsbad is not alone in struggling with the expense of maintaining its water system. According to the U.S. Conference of Mayors, capital expenditures on water and wastewater services are the largest issues facing local governments today. Perhaps, with the City's water system in such dire need of repair, voters, by saying "no" to this tax increase, could force Carlsbad's political establishment to consider privatization? [. . .] Across the country privately provided water saves customers an average of 25 percent over government-operated water. Inefficiencies of government-owned water companies go beyond cost to consumers. Their operating expenses per connection are 21 percent higher and the public utilities required more than double the number of employees per connection. Accordingly, salaries of public water companies ate up almost three times as much of the operating revenue as the private companies. Public companies also spent nearly double their private counterparts on maintenance. While water privatization has traditionally focused on construction and operations, we're starting to see private sector companies coming to the table with financing as well. Over $100 billion has been raised in the global capital markets to invest in infrastructure assets like roads, ports, and water systems. In Pima County, Arizona, officials are currently pursuing a $300 million upgrade of the county's 50-year-old sewage treatment system using private financing. Prescott-area officials are currently exploring private financing to build a state-of-the-art, multi-jurisdictional water transmission system. The truth is that politicians – even in relatively taxpayer-friendly cities like Carlsbad – will often choose the path of least resistance (higher taxes) over more fundamental and ultimately better reforms that use free market principles to reduce costs. After all, though privatization has been used across the nation to improve service and cut costs, it is "new" to Carlsbad. Fortunately, Carlsbad taxpayers have a say in this issue at the ballot box. Rather than blindly going along with a big tax hike that will ultimately harm Carlsbad's economic competitiveness, voters should demand that their elected officials carefully consider options like privatization.

Gessing makes an excellent point. Raising general taxes to fund water infrastructure should be a last resort, not the first go-to option. Rather than the people in Carlsbad today paying for water assets that benefit many people now and into the future, it makes more sense to finance long-lived, big-ticket infrastructure assets so that those who benefit from the improvements pay for them as they use them over the asset's useful life. And with literally hundreds of billions available in the private capital markets to invest in infrastructure, it is irresponsible for policymakers to not even explore the innovative finance options that other cities have taken advantage of through privatization. » Rio Grande Foundation » Reason's Annual Privatization Report 2008: Water & Wastewater update » Reason's Water/Wastewater Research and Commentary

Scottsdale Water Condemnation Proposal Leaves a Bad Taste

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 30 Jun 2008 00:00:00 EDT

Letter to the Editor, East Valley Tribun

The Tribune is spot on in its critique of the proposed City of Scottsdale takeover of Arizona American Water Company's water utility ("Our View: Don't buy water company, but keep close tabs on it," June 24th).

A takeover would be fiscally irresponsible given current budget conditions and future needs. Taxpayers would likely face exorbitant acquisition and legal costs far higher than initial projections, as seen recently with the Toll Brothers' condemnation case. Add in the potential for rising operations, maintenance, and environmental compliance costs into the future--not to mention the staggering long-term investment needed to meet the water demands of a rapidly growing population--and the folly of a takeover becomes quickly apparent.

More importantly, using the power of eminent domain to expropriate a private business with a long track record of safe and successful operations would be an egregious affront to private property rights and an idea better suited for Hugo Chavez's Venezuela than modern America.

As we saw with the overwhelming support for Prop 207 in 2006, most Arizonans understand that strong private property rights are key to freedom, progress, and a dynamic market economy. A City takeover of American Water's facility would be just as egregious as expropriating assets from APS, Qwest or any other investor-owned utility that serves its customers while being held accountable to stringent federal, state, and local regulations. Government's role is to protect private property rights whenever possible, not selectively undermine them.

Hopefully, the City Council will re-evaluate its position. As rapid growth brings increasing pressure on scarce tax dollars, we should be partnering more with private businesses to help meet our infrastructure demands, not driving them away through government bullying.

Reviewing Blue Covenant

skaidra@reason.org (Skaidra Smith-Heisters) — Thu, 03 Apr 2008 00:00:00 EDT

Blue Covenant: The Global Water Crisis and the Coming Battle for the Right to Water, by Maude Barlow, New York: The New Press, 196 pages, $24.95 (2007).

"Like a comet poised to hit the Earth," Maude Barlow writes, "The three water crises-dwindling freshwater [sic] supplies, inequitable access to water and the corporate control of water-pose the greatest threat of our time to the planet and to our survival."

Barlow's sixteenth book (in nearly as many years) critiquing free trade and globalization, Blue Covenant: The Global Water Crisis and the Coming Battle for the Right to Water, is a follow-up on a book Barlow co-authored in 2002, Blue Gold: The Battle Against Corporate Theft of the World's Water. Barlow is, herself, transnational in a sense, as she chairs the Ottawa-based Council of Canadians, where she founded the Blue Planet Project, while also serving on the boards of the International Forum on Globalization and Food and Water Watch in San Francisco.

In Blue Covenant, Barlow provides a recent history of global water politics, highlighting in particular the policy conflicts played out at global conventions, beginning in 2000 at the World Water Forum in The Hague, subsequent Forums in Kyoto and Mexico City, the Johannesburg World Summit on Sustainable Development, and others. The narrative focuses on alleged injustices by the World Bank, International Monetary Fund, World Trade Organization, and others who have promoted private infrastructure development, water and sanitation services in the developing world.

The book's introduction invites the reader to "imagine a world in twenty years in which no substantive progress has been made to provide basic water services in the Third World; or to create laws to protect source water and force industry and industrial agriculture to stop polluting water systems," where "the rich will drink only bottled water found in the few remaining uncontaminated parts of the world, or sucked from the clouds by corporate-controlled machines, while the poor will die in increasing numbers from a lack of water." Barlow predicts two-thirds of the world population will face water scarcity by 2025, and, relying on the research of Slovakian hydrologist Michal Kravçik, argues that water use is as great a cause of climate change as greenhouse gas emissions are.

Through her earnest attention to the plight of people in the disenfranchised and destitute regions where she has traveled, Barlow successfully balances human and ecological concerns where many of her contemporaries in water and environmental writing fall short. That attention makes her narrow view of human progress and her projections for the future harder to understand.

The ambitious water improvements identified in the United Nations Millennium Development Goals call for halving the proportion of people in the developing world without adequate drinking water and sanitation by 2015. Eastern, South-Eastern and Western Asia, Northern Africa, and Latin America and the Caribbean are on track to meet those goals. Though still short of the goal of 68 percent of people in the developing world having access to adequate sanitation, overall that measure has improved from 35 percent in 1990 to 50 percent in 2004. In important related measures, such as the incidence of cholera, the absolute number of cases has remained stable in the last decade while affected areas have seen rapid population growth. These are no small feats.

The fantastically dystopian future Barlow invokes in Blue Covenant might have more utility in the water policy debate if it weren't for the unfamiliar and bleak hints she gives to describe her utopian alternative. According to Barlow, irrigated agriculture has done "more harm than good," technology is "part of the problem," and private investment in "sophisticated new technologies to recycle our dirty water" is deplorable. These ideals alone should belie any efforts to cast Blue Covenant as a populist creed.

In Blue Covenant, Barlow fails to explore the key dimensions of water scarcity at the heart of her first two premises for alarm: dwindling fresh water supplies and inequitable access to water. The water supplies for most human needs come from precipitation captured in streams and underground aquifers. Except for occasional inputs from ice-filled comets (not to be confused with Barlow's virtual "comet called the global water crisis") Earth's hydrological system is a closed cycle. The total amount of available fresh water is not as relevant as when and where the water occurs. All you have to do is look at a map of average annual precipitation in the United States to see that water equity is not an element of the natural system, a fact which makes both the underlying values in Blue Covenant and Barlow's ultimate goal harder to justify.

Barlow concludes that the solution to crisis three-corporate control of water-is a binding United Nations mandate asserting water as an inalienable human right, not an economic commodity. It is unfortunate that the divisive depiction of water as either a right or a commodity has proven galvanizing in this debate, because in practice these qualities are far from mutually exclusive. Declaring water a government-controlled resource and a human right in the United States would mean wrenching away existing "water rights," long-standing legal rights evolved from the days of the pioneers. Similarly, satisfying an inalienable human right to government-controlled water sanitation means drastic changes to current incentives, in which people who invest labor, ingenuity, technology and capital into water purification systems currently have the right to sell that water as a commodity.

Rights of any kind depend on the rule of law, and water and sanitation are certainly not the only problems faced by people living under despotic and unaccountable regimes. Government corruption features so strongly in the concerns of Blue Covenant-in issues relating to national sovereignty, the legal rights of indigenous people, and the misappropriation of public resources-Barlow's conclusion that water and sanitation should be wholly in the purview of the public sector is utterly unconvincing.

Reviewing Blue Covenant

chris.mitchell@reason.org (Chris Mitchell) — Wed, 02 Apr 2008 14:39:37 EDT

Reason's Skaidra Smith-Heisters reviews Blue Covenant: The Global Water Crisis and the Coming Battle for the Right to Water, by Maude Barlow, and concludes: "In Blue Covenant, Barlow fails to explore the key dimensions of water scarcity at the heart of her first two premises for alarm: dwindling fresh water supplies and inequitable access to water."

"Clean Water Restoration Act" Would Expand Federal Powers

adrian.moore@reason.org (Adrian Moore) — Sun, 07 Oct 2007 10:44:00 EDT

...

In Order to Solve the Problem, We Need More of the Problem

info@reason.org (Geoffrey Segal) — Mon, 27 Aug 2007 06:16:43 EDT

Infrastructure has been a hot topic lately with transportation getting most of the press. However, many of our nation's water systems have been in service longer than originally designed and the cost to upgrade them is truly staggering. Indeed, the Government Accountability Office pegs the cost between $485 billion and $1.2 trillion over the next two decades. How did it get this bad? The GAO suggests the problems are because of the following:

Many drinking water and wastewater utilities do not cover the full cost of service–including needed capital investments and operation and maintenance costs–through their user charges. Many drinking water and wastewater utilities defer maintenance and needed capital improvements because of insufficient funding. For many utilities, a significant disparity exists between the actual rehabilitation and replacement of their pipelines and the rate at which utility managers believe rehabilitation and replacement should occur.

If you read these carefully they suggest a lack of funding -- but that's only one piece of the equation. What about the spending side? There's a general feeling that government is inefficient and doesn't spend the resources they have well (e.g., building convention centers and baseball stadiums instead of investing in vital infrastructure). Frankly the incentives for long-term care or management don't align well -- public officials are in office for only a few years and what's more exciting (or likely to get you reelected); cutting the ribbon a new monument or replacing pipes under ground? Perhaps, privatization is a solution? Indeed, the GAO also found that "plans developed by privately owned drinking water utilities tended to be more comprehensive than those developed by publicly owned utilities." Meaning that private utilities or private companies had different incentives and acted accordingly. Yes, profit (that terrible six letter word) was an incentive - but the realization that the best way to achieve "profit" was to take care of your investment and provide a good service. Indeed, GAO further notes that "public drinking water utilities were more likely than their privately owned counterparts to defer maintenance and major capital projects." Water privatization and public-private partnerships are not new. Some 15% of the U.S. population is served by a private regulated utility, in addition more than 2,000 communities contract for operations and maintenance of publicaly owned facilities. See Reason's extensive work on the issue here. For many, including this USA Today editorial argues that profit and privatization have no business in "our water." Instead they turn to a higher power...state and federal governments to bail them out. So let me get this straight - it was years of mismanagement that got us into this mess and what we need is more of that? Seems like in order to fix the problem we need more of the problem. Sadly for the authors they've let ideology blind them - and their obfuscating the facts to push their agenda - an attack on globalization, "corporations" and profit. The same authors in another editorial point to Stockton (check out a Myths v. Facts) to make their case. Here's some of Reason's work on the issue: here and here. First, nothing is up for sale and nothing has been sold. Long-term leases are not sales. In the case of Stockton which is heavily critqued in the column, it was a management contract - the city continued to own the assets and indeed, pay the company for providing a service. Second, the authors fail to mention the numerous problems and challenges that Stockton faced before the contract. Indeed, the city's wastewater plant had numerous chemical spills for years - with little incentive to change (and they didn't). Third, the contract was mutually ended. Not because of poor performance but rather because the constant litigation didn't allow the partnership to function Fourth, the process was open and transparent. It took more than three years to complete and numerous study commissions and town meetings took place - indeed, more than 92 hours of public testimony was heard. Someone once told me, and I can't remember who it was, that "god may have given us the water, but he sure didn't give us the pipes." The truth is those pipes cost money and they need to be maintained. Rather than focus on ideology and process I'd like to focus on results and outcomes. I suspect that most taxpayers feel the same way i.e., they don't care so much who provides a service so long as its done well, and cost efficiently. More of the problem will not solve the problem - we need to drastically rethink how our infrastructure is funded, operated and maintained. There is a role for the private sector to play . P/S - I've always wondered if the same people get this fired up over government operations? I.e., do they demand more transparency, more reports on staffing and efficiency or effectivness? Or is just because a private company is involved that gets them fired up?

Bottled Water: The New Cigarette

info@reason.org (Geoffrey Segal) — Tue, 14 Aug 2007 06:12:36 EDT

Chicago Alderman George Cardenas wants to place a new tax of up to 25 cents on the cost of every bottle to help close a $217 million budget gap. "People enjoy jogging or driving with a bottle of water. There's a cost associated with this behavior. You have to pay for it" said Cardenas. You may be surprised to learn that there's a social cost associated with drinking bottled water -- afterall, it was your choice to buy and consume it. Cardenas argues that city's $40 million shortfall in water and sewer funds is because more taxpayers, I mean residents, are choosing to buy bottled water and not using city's water for a fee. Of course the government's own operations aren't the problem -- I'm sure they run a tight ship. Perhaps most frustrating is that Mayor Daley has been an avid supporter of privatization -- leasing the Chicago Skyway, some parking lots and pursuing a lease of Midway airport -- all of which have brought billions into city coffers. Unfortunately he's been fast and loose with the proceeds which have largely been diverted into new programs rather than shoring up infrastructure and shoring up city finances. Its inexcusable to have a "deficit" after raising more than $2 billion in privatization/leases in recent years. Cardenas is also pushing the tax to help the environment by dissuading people from buying the plastic bottles that end up in landfills. Check the links - enough said. If you're a frequent reader of Out of Control you know this is a pet issue of mine -- some of my colleagues and myself have written about this before -- check the links out if you want some more of the back story.

California's Looming Water Crisis

skaidra@reason.org (Skaidra Smith-Heisters) — Thu, 26 Jul 2007 10:47:00 EDT

With drought conditions in affect across California, Gov. Arnold Schwarzenegger picked an auspicious time to warm up his campaign for more surface water storage (i.e. dams) and additional water "conveyance" (i.e. building a peripheral canal) in the Sacramento-San Joaquin River Delta. In doing so, he waded into a debate that has long epitomized the tensions between water-rich Northern California and the populous southern half of the state.

The governor's press conferences in Merced and Sacramento counties last week drew criticism from some Delta interest groups, who say he is jumping the gun by advocating for construction of a peripheral canal. They think Schwarzenegger should wait to hear the recommendations of the Delta Vision task force that he appointed to study remedies for the extremely precarious environmental and economic situation in the Delta, which are expected in January.

Restore the Delta, a group of Delta residents criticizing Schwarzenegger's move last week, opposes plans for any water conveyance that would take water around—instead of through—the Delta. This opposition is because "there will be no incentive to fix Delta levees or to create a flood management plan that will protect Delta people, Delta property, and Delta infrastructure." That's the same unfortunate conclusion that many environmentally-minded policymakers reached back in 1982, when then-Governor Jerry Brown's plan for building a peripheral canal was rejected on a statewide ballot.

The interconnectedness of ecological and economic systems in the Delta is a reality that should not be underemphasized. But what environmental and in-Delta opponents of the peripheral canal sought and won a quarter-century ago was a policy that built even greater dependency into the system. By drawing water through the Delta, water users south of the Delta (most importantly, the Metropolitan Water District of Southern California)—so the reasoning goes—would be forced to have a stake in the maintenance of levees and water quality in the Delta.

A second motivation for opponents of the peripheral canal was to create an intentional bottleneck in the state's water conveyance infrastructure. As in many planning processes, bottlenecks are the worst nightmare of engineers but a commonly-used last resort tactic for activists.

The CalFed planning process, which brought together 25 state and federal agencies to negotiate goals for improvement of the highly contentious California water supply and environmental values which depend on the Delta, approached the conflicting interests carefully—too carefully, perhaps. The CalFed mantra that all stakeholders would "get better together," essentially meant that failure of the process would amount to something like mutually assured destruction.

In fact, there is little dispute that routing water around the Delta has always made good engineering sense. Numerous planning processes, beginning as early as the 1940s, settled on around-Delta water conveyance as a promising compliment to the rest of the state's considerable water infrastructure. In 2000, CalFed's approach to the issue was to agree not to discuss it.

Earlier this year, the Public Policy Institute of California reiterated the benefits of peripheral water conveyance in a report that indicated, based on computer modeling at the University of California at Davis, that higher salinity levels as a result of water diversions would not be catastrophic to in-Delta agriculture (as canal opponents claim) and that in some scenarios, using projections for the year 2050, a canal could make a difference in the need to develop other expensive and controversial water supply improvements, like seawater desalination facilities in the Bay Area. Flexibility in the "plumbing" of the state's water resources is expected, overall, to lower the costs of ensuring that water is used where it is needed most—including in the environment.

Maybe critics are right that Gov. Schwarzenegger's move is self-interested and betrays his lack of regard for the public process. At the same time, there is no need to wait another day, much less another year, to see that the decades-old gamble that has tied water conveyance to the south Delta has failed. You need only look at the Delta.

What stands between the Delta and inundation by San Francisco Bay? The "19th-century piles of dirt that we call levees," (as they were characterized by the chair of the Committee on Water, Parks and Wildlife, Assemblywoman Lois Wolk, at a Congressional field hearing in Vallejo earlier this month). Groups like the Metropolitan Water District, which peripheral canal opponents hoped might invest in levee improvements after the failure of the ballot proposition in 1982, instead made safer investments in water storage and conservation outside of the Delta.

The so-called Delta "islands" are farther below sea level today then they were in 1982, and some are still sinking. Meanwhile, the number of lives and value of property protected behind levees is increasing. That means both the risk and the liability of serious flooding as a result of levee failure, especially that which might accompany a major earthquake, continues to grow.

Most absurd of all, the solution purportedly preferred by some environmental opponents of the peripheral canal results in sections of the Middle River and the Old River running backward, uphill, toward the intake pumps in the south Delta, killing endangered Delta smelt in the process. This endangered fish is regarded as an indicator of overall ecological health in the Delta, and is already imperiled by toxic agricultural runoff and other threats.

Marc Reisner, author of Cadillac Desert: The American West and its Disappearing Water, wrote: "Imagine two segments of sleek superhighway separated by a forty-mile jumble of dirt roads. There one has a crude allegorical image of the California water system today. The jumble of dirt roads is the Delta." That was in 1979, but it is just as true today.

At this month's Congressional field hearing on this topic, Phil Isenberg, head of the governor's Delta Vision task force, said that during the peripheral canal debate years ago, "we all argued that routing water through the Delta would protect it." Isenberg co-chaired the campaign against the peripheral canal measure in 1982. What should change the current debate, according to Isenberg, is that nobody can argue the Delta is better protected from environmental or economic collapse today.

Expanding water conveyance around the Delta won't solve all the environmental problems the region faces, it won't make politicians honest, and it won't promise to enrich all stakeholders equally—nothing will—but it would be a critical mistake to put progress in the Delta on hold any longer.

If you care about the environment, youíll stop drinking water

info@reason.org (Alex McCorbin) — Mon, 16 Jul 2007 13:36:18 EDT

CNBC reported this morning on the Sierra Club's new area of attack on human welfare: water, specifically bottled water. Apparently, the Sierra Club believes that companies searching for clean water sources for human beings are committing an egregious sin against Mother Nature. Their website includes this foreboding warning: "Nestle has at least 75 spring sites around the country and is actively looking for more." Horrifying, indeed. In a recently published brochure, the Sierra Club has this to say about its position:

The bottled water industry promotes bottled water as a healthy, trendy drink, without mentioning that it can cost 1,000 times as much as tap water. The Sierra Club believes that all people should have access to affordable, clean drinking water.

While I do not personally value water at a dollar a bottle, and I certainly question how much purer bottled water is compared to tap, others do value it that much, and I'm sure they realize they're paying a little more than they would for tap. The Sierra Club should not pretend as though it actually cares about maximizing access to clean water supplies when the majority of its material and obvious concern is with the production of plastic and growth of industry. What it means that "all people should have access to affordable, clean drinking water" is that people should stay away from the environment, even when trying to access the basic sustenance of life. Perhaps what is even more incomprehensible is their plan of action for resolving these problems. One solution to bottled water they list is for people to "[u]se containers that you can refill with tap water when you are away from home". It seems to me that plastic bottles don't disintegrate when you add water to them. In fact, they serve as very nice containers for future water use that I know many of my friends actually use them for. So what is the Sierra Club really saying? "By drinking clean water you kill the environment. Stop drinking water." For more information on the issue, check out this previous Reason blog.

Bottled Water, Choice and Privatization

info@reason.org (Geoffrey Segal) — Mon, 02 Jul 2007 07:09:15 EDT

My colleague recently wrote about a ban the City of San Francisco enacted on bottled water at city events. San Francisco Mayor Gavin Newsom projected the move as a budget saver -- saving the city some $500,000 a year. If the story ended there, I'd be more than happy (and don't get me wrong, the city ought to be finding more $500k saving opportunities). Unfortunately, the story doesn't end there. The bottled water industry is being demonized on ideological grounds against profit and private property. The convenient example of bottled water is also being used as a springboard to attack water privatization and public-private partnerships. Indeed, Food and Water Watch, an offshoot of Ralph Nader's Public Citizen has issued a new report about how bad bottled water is for us -- its not healthy, its expensive and its bad for the environment. However, nearly half of their press release is focused on municipal water and sewer operations: Our nation's public water and sewer infrastructure is old and in the coming years will need billions of dollars of investment to maintain and further improve treatment, storage, and distribution. Each year we fall more than $20 billion short of what is needed to maintain our public water and sewage systems. "It's time for Congress to establish a clean water trust fund that would give communities the financial help they need to invest in healthy and safe drinking water for every American and for future generations."
They're right i.e., our nations water and wastewater infrastructure does need significant investment. FWW's solution is a massive federal bailout (i.e., increased federal taxes and spending) -- while dismissing any role for the private sector to play (not even counting how this lets local governments off the hook for their years of mismanagement, poor administration and giveaways to unions running the water and sewer systems). FWW ignores that it was President Clinton's Environmental Protection Agency endorsed privatization as a means by which local governments can meet environmental standards. Indeed the EPA wrote, "[Privatization case studies] provide concrete examples to local officials of how successful partnerships and other models can be used by communities to provide needed environmental services more efficiently." They also ignore that more than 40 percent of drinking water systems in the United States are private, regulated utilities–there are more than 25,000. To be fair many of these are small ancillary systems that the government has no interest in owning or running. Further, there are more than 2,500 partnerships where a private company is providing operational functions for local government. Nationally, the rate of private participation has been impressive in the last 15 years, growing by more than 85 percent. Research suggests that these systems are in far better condition than their public sector counterparts. Anti private sector supporters have largely ignored experience, data, and the importance of competition. The private sector has demonstrated time and again that they have a role to play in the delivery of water and sewer services here at home and abroad. Their experience, innovation, and capital are vital pieces to ensuring access to clean safe drinking water worldwide. Private activity bonds (which FWW fought - calling for public spending over "private profits") and long-term concessions similar to toll roads are both effective and promising tools to bring billions of capital into our water and wastewater infrastructure. They're a vital, important tool in the policy makers tool box and they shouldn't be dismissed out of ideology. For more, check out Reason's water privatization work here. Now, let's deconstruct their specific issues with bottled water. Yes, bottled water is expensive -- more than tap. But those bottles are so damn convenient. And did I mention there are different flavors now! And not to mention the ones with bubbles. That's where choice comes in -- no one is forced to buy bottled water and we shouldn't stop others from making their own choice either. As far as health and safety -- the bottled water industry, is regulated and tested for safety. Think back to the last time someone got sick from drinking bottled water....I'll give you a few minutes...oh wait, you don't hear those stories all that often (if ever - I Googled it and couldn't find any). But you do hear about people getting sick from tap water. This isn't to say that all municipal water is bad, in fact, most of it is quite good. Unfortunately, not all of us can live near Yosemite snow melt and we ought to have choices and not be publicly ridiculed for making them. Also, let's not forget how instrumental the bottled water industry was in getting fresh water into New Orleans after Katrina while muni water systems were down. Environmental concerns i.e., the energy it takes to make the bottles and landfill space they utilize is the strongest leg FWW can stand on. However, there are a lot of consumer products that require a lot of energy to make and utilize but we don't stop making them. When it comes to plastic bottles, most cities have aggressive recycling programs that should offset some of the environmental harm. I live in Arlington, VA and until the city can figure out how to deliver mandarin orange sparking water to my tap, its bottled water for me (thankfully I have that choice)! I also don't know about the condition of my local water system but if they do need billions in upgrades I hope they seek private partners rather than jacking up my taxes and fees.

What would Jesus drink?

ted.balaker@reason.org (Ted Balaker) — Thu, 17 Aug 2006 17:27:59 EDT

Apparently not privatized water. Alex Tabarrok explains the United Church of Canada's boycott; Thanks to Meredith for the heads-up. Unless you have religious objections, check out our roundup of water privatization trends. Related: How Privatization Quenches the Poor Related: Water of Life

Getting Clean Water to the Rest of the World

info@reason.org (Geoffrey Segal) — Fri, 31 Mar 2006 00:00:00 EST

World Water Day has come and gone. Generally speaking most Americans don't think about water too often. We take for granted that by simply turning on the tap clean water will flow.

On a global scale, the world's water infrastructure is significantly lacking. The numbers of people who are without clean water or sanitary sewer systems are staggering. While our infrastructure isn't in the best of shape, it is far superior to that of the rest of the world. Our network or public and private utilities, coupled with more than 2,500 public-private partnerships helps keep our system running, our water clean, and our families safe.

The private sector has long had a role in the delivery of water and wastewater utilities in the developed world. Seeing these successes the World Bank has embraced and adopted the public-private partnership model to help developing countries develop water infrastructure. Worldwide access to clean water is part of the banks' Millennium Development Goals. More than 2,500 projects have been initiated world wide with glowing success and with a failure rate of less than 4 percent.

Much work remains—the real impetus behind World Water Day and the weeklong forum. Unfortunately, a relatively small but vocal group of activists protested the forum and its approach which has a large role for the private sector to play. The World Bank has used both public-private partnerships and private concession agreements to deliver water service to needed areas.

Instead of fighting against water access, what the protestors really are fighting is free trade, globalization, and the "corporatization of water." This puts politics and ideology over common sense and practicality. Perhaps most disturbing is that activists dismiss the vital role private water and wastewater companies play in the delivery of our vital infrastructure here at home, and how that can and should be a model for the rest of the world.

More than 40 percent of drinking water systems in the United States are private, regulated utilities�there are more than 25,000. To be fair many of these are small ancillary systems that the government has no interest in owning or running. Further, there are more than 2,500 partnerships where a private company is providing operational functions for local government. Nationally, the rate of private participation has been impressive in the last 15 years, growing by more than 85 percent.

Ever since new clean water regulations were put into place, many local governments turned to the private sector for much needed new technology and investment in their infrastructure. They did so to meet the new strict standards. Even still, the U.S. Environmental Protection Agency estimates that our infrastructure needs around $300 billion in investments over the next 20 years.

The protestors moved the debate away from the real issue—getting access to clean, safe water worldwide. They made it an issue of public vs. private blindly choosing public. Jamal Saghir, the World Bank's director for Energy and Water, sums it up best, "What is important is to identify who can provide this service in the most efficient manner and at the lowest cost." Not focus on ideology.

Lest we forget it was President Clinton's EPA that endorsed private participation as a means by which local governments can meet environmental standards and meet needs more efficiently as well, calling public-private partnerships a "classic win-win situation." Even the U.S. Conference of Mayors has endorsed public-private partnerships for water and sewer operations.

One argument often used against water and wastewater privatization is that water is too vital a resource that we can't trust private contractors with. This is a conceptual rather than a research question, but ignores basic facts about our lives in the United States and the world. Yes, water is vital, and along with most other vital things, we rely on the private sector to provide it. The closest example is food, which the market provides, as it does medicines and healthcare.

Anti private sector supporters have largely ignored experience, data, and the importance of competition. The private sector has demonstrated time and again that they have a role to play in the delivery of water and sewer services here at home and abroad. Their experience, innovation, and capital are vital pieces to ensuring access to clean safe drinking water worldwide. An open accountable service provider, regardless of public or private, is essential to success. Rather than hide behind the thin veil of ideology, the protestors should embrace the power and value of competition—it is what the data and experience tell us is needed.

Geoffrey Segal is director of government reform at Reason Foundation. An archive of Segal's work is here and Reason's water-related research and commentary is here.

Detailing Foreign Management of US Infrastructure

Wed, 01 Mar 2006 00:00:00 EST

The recent Dubai Ports controversy launched a firestorm over what kinds of infrastructure critical to national security should be privately operated, particularly by foreign firms. A recent USA Today/CNN/Gallup poll showed that around 66 percent of Americans opposed the proposed transfer of six major U.S. port operations to Dubai Ports World, a United Arab Emirates firm, viewing the deal as a national security threat.

It is interesting how foreign involvement in international ocean-borne shipping has generated so much hostility, given that we have long since come to rely on products made by foreign companies that much more directly affect our health and daily lives. Every day, Americans drive foreign cars, drink water distributed by foreign-owned water systems, strap our children into foreign-made car seats, and take medicines made by companies from around the world.

Presumably, most people’s fears regarding the port controversy are based on two prevalent myths: (1) there is a greater risk of a security breach when American infrastructure assets are owned by foreigners, and (2) under such a scenario, foreign companies are responsible for the security of critical assets.

However, what was often lost in the ports debate was that the Dubai firm was not “buying” the port facilities themselves; they would have simply leased certain terminals at the ports and provided management and logistics services. The ownership of the ports would have remained in domestic hands. In addition, foreign firms are subject to the same legal and regulatory security requirements as any domestic firm or public agency. In the ports deal, the U.S. Coast Guard and the U.S. Bureau of Customs and Border Protection—not Dubai—would have had the primary responsibility for port security.

Setting aside the hyperbole and fears generated during the ports debate, the controversy presents an opportunity to provide a sense of perspective on the foreign management of domestic infrastructure and related national security concerns.

Reality Check: Foreign Firms Already Manage Critical Infrastructure

Many of the critical infrastructure assets that Americans rely on in their everyday lives—including such important assets as airports, highways, and water systems —are managed by private, foreign companies.

Consider the example of Indiana, in America’s heartland. Every day, citizens in Indianapolis drink and brush their teeth with tap water provided through the nation’s largest public-private water partnership with a domestic subsidiary of a French-owned company, Veolia. Thousands of Hoosiers catch flights at Indianapolis International Airport, an airport entirely managed by a subsidiary of a British company, BAA plc. And families traveling through northern Indiana may choose to drive on the Indiana Toll Road, which may soon be leased to a consortium that includes Spanish and Australian firms.

Indiana is not unique. Here’s some perspective on the foreign operation of infrastructure assets and related security issues throughout the U.S.

Ports: Foreign companies already own most of the infrastructure used in the domestic shipping industry, including vessels, containers, handling equipment, and port facilities. Approximately 80 percent of U.S. port terminals are leased and operated by foreign companies, largely because federal law requires U.S.-based shipping companies to use American crews, making these firms less competitive.
- For example, 80 percent of the terminals at the nation’s busiest cargo port, the Port of Los Angeles, are run by foreign companies (see below).
- Six of seven companies that operate terminals within the Port of New York-New Jersey are foreign-owned.
- At the Port of Houston, the British firm Peninsular & Oriental Steam Navigation Co. (the firm being acquired by Dubai Ports World) handles freight at several public terminals. Inchcape Shipping Services, the world's largest private shipping manager which was recently acquired by a UAE investment company, also has had a long-time presence in Houston.
- At the Port of Boston, P&O Ports, a wholly owned subsidiary of Peninsular and Oriental, and the Massachusetts Port Authority have teamed up to operate the Black Falcon Cruise Terminal.
- P&O Ports is also a 50% joint venture partner in Delaware River Stevedores (DRS), which provides stevedoring and terminal services in Philadelphia, PA, Camden, NJ, and Wilmington, DE
- At the Port of Baltimore, APM Terminals, a division of the Danish A.P. Moller-Maersk Group, operates a private container terminal within Dundalk Marine Terminal. C. Steinweg (USA) Inc., a division of Dutch company C. Steinweg Handelsveem B.V., operates the Baltimore Metal & Commodities Terminal Inc. Terminal. Wallenius Wilhelmsen Logistics, a company born of a merger between a Swedish firm and a Norwegian firm in 1999, operates the Mid-Atlantic Terminal. Finally, Ceres Terminals Incorporated, of Japanese firm NYK, currently provides service at cruise terminals in Bayonne, NJ, Brooklyn, NY, and Baltimore, MD.
- Foreign interests or their subsidiaries operate container cargo terminals at seven of the 10 busiest container cargo ports in the U.S.
- Neptune Orient Line, which is 68 percent owned by the Singapore government, bought U.S.-based APL Limited in 1997 and now operates terminals in Los Angeles, Oakland, Seattle, and Alaska.
- Yang Ming Marine Transport Company, which is partially owned by the Taiwanese government, operates terminals in Los Angeles and Tacoma.
- Cosco Container Lines, a division of China Cosco, is owned by the Chinese government and operates a terminal at Long Beach.
- A.P. Moeller-Maersk, a Danish company, is the largest terminal operator in the United States and owner of the world's largest shipping fleet. It operates terminals at the ports of Miami-Dade and Jacksonville, among others, and owns APM Terminals NA, which is building a $500 million private container terminal in Portsmouth, Virginia, scheduled to open next year.
- At Norfolk, Virginia, Ceres Marine Terminals Inc. is one of the major stevedoring firms and is owned by Japanese shipping firm NYK Line. Norfolk is the U.S. headquarters of French shipping line CMA-CGM Group and Israeli shipper Zim-American Israeli Shipping Co.
- According to Dennis Rochford, president of the Maritime Exchange for the Delaware River and Bay, of the 2,700 ships that pass through the ports of Camden (New Jersey), Philadelphia, and Wilmington along the Delaware River each year, 2,500 are foreign.

Airports: Of the 517 domestic airports offering commercial passenger, 13 have management contracts with private companies, and all of these companies have significant foreign ownership or involvement. For example:
- Indianapolis International Airport is now the largest privately-managed airport in the United States and is under a long-term management contract with BAA Indianapolis LLC, a wholly-owned subsidiary of BAA plc (the privatized British Airport Authority). BAA plc also holds medium-term retail management contracts with Pittsburgh International, Boston Logan International, and Baltimore/Washington International airports.
- International Terminal 4 at New York’s John F. Kennedy International Airport is operated under a long term concession deal between the Port Authority of New York and New Jersey and a consortium that includes Amsterdam's Schiphol Airport, which is a corporation run by the Dutch government.
- International Concourse E at Atlanta’s Hartsfield International Airport is managed by a domestic subsidiary of TBI plc, a British airport management company. TBI also provides ramp control at four of Hartsfield’s six ramps and manages the Airport-wide Flight Information Display System.
- TBI also manages both the international and domestic terminals, develops additional air service, and provides ground handling and cargo services for Central Florida’s Orlando Sanford International Airport. TBI additionally provides total airport management services at Burbank’s Bob Hope Airport.
- AvPorts, a domestic subsidiary of the Australian-owned Macquarie Infrastructure Company, provides management and operations services at Albany International Airport, Atlantic City International Airport, Tweed-New Haven Regional Airport, and Westchester County Airport.
- Stewart International Airport, located north of New York City, operates under a 99-year lease to the U.S. subsidiary of the U.K.-based National Express Group, PLC.
Like security at sea ports, security at airports is controlled by the federal government. The responsibility for baggage and passenger screening at all of these airport facilities is the responsibility of the Transportation Security Administration—not the companies that hold the management contracts.
Water and Wastewater: Out of approximately 54,000 publicly-owned water and wastewater systems, over 2,400 (5 percent) of them contract with private firms to provide system operations and maintenance services. Many of these 2,400 contracts are held by domestic firms with a foreign parent. For example, Veolia Water, the U.S. subsidiary of a French firm, serves more than 600 communities and 14 million people through public-private partnerships with local governments, including the nation’s largest water partnership in Indianapolis. Of the four largest water companies that provide operations and maintenance services to publicly-owned water and wastewater systems in the U.S., only one—OMI—is a domestic company.

In addition, 15 percent of the U.S. population is served by approximately 20,000 private, regulated water and wastewater utilities, including many small systems serving subdivisions or trailer parks. Most of these are owned by domestic subsidiaries of foreign firms.

Regardless of size or scale, the private firms—both foreign and domestic—that provide water and wastewater services to local governments and communities are subject to the same environmental and safety regulations as publicly-managed utilities, and all fall under the regulatory supervision of federal, state, and local governments.
Highways: Though increasingly common in Europe and other parts of the world, the phenomenon of privatized highway infrastructure is relatively new in the United States. But it is a rapidly growing trend here, as state and local governments discover they can provide vastly improved services for residents thanks to private capital and private-sector management and operations expertise. While there are few privately-operated highways, many of these are managed by foreign-owned companies. For example:
- In 2004, the City of Chicago leased the 7.8 mile Chicago Skyway to the Australian-owned Macquarie Infrastructure Group and Spanish-owned Cintra Concesiones de Infraestructuras de Transporte S.A. for 99 years at a cost of $1.8 billion.
- The same firms were selected as the preferred bidder for the 75 year, $3.85 billion lease of the Indiana Toll Road. This deal is pending approval by the Indiana legislature.
- Cintra is the majority interest in the consortium that won the $7.2 billion bid to design, build, and operate the first Trans-Texas Corridor (TTC-35).
- Macquarie holds long-term concessions to operate the Dulles Greenway toll road in Virginia, the Foley Beach Expressway in Alabama, and the SR-125 toll road under construction in San Diego, among others. Macquarie was also selected by the Oregon Department of Transportation to build up to three toll roads in the Portland area.
- The Australian firm Transurban is partnering with U.S.-based Fluor on projects to add high occupancy toll (HOT) lanes to the Capital Beltway (I-495) and along the I-95/I-395 corridor in Virginia.

Protectionist Legislation Introduced

Amid the Dubai Ports hysteria, politicians lined up to take advantage of public fears by introducing a flurry of protectionist bills. The “National Defense Critical Infrastructure Protection Act of 2006” (H.R. 4881), introduced by Rep. Duncan Hunter (R-CA), chairman of the House Armed Services Committee, is one such piece of legislation. The bill would prevent non-U.S. companies from owning, managing, or operating any system or asset that is included in a list of critical infrastructure to be prepared by the Departments of Defense and Homeland Security.

Exceptions may be made if certain officers and directors are American citizens and have been “approved” by the government, a majority of the company’s shares are owned by Americans, and other requisite hoops have been jumped through. Moreover, the aforementioned critical infrastructure list would include “any system or asset, whether physical or virtual, that is so vital to the United States that the incapacity or destruction of such system or asset would have a debilitating effect on national security, on national economic security, on national public health or safety, or on any combination of those matters.” In other words, the government would have the power to prohibit foreign ownership of pretty much anything it wants.

Free Trade, or Protectionism Debunked

There have been a number of attempted justifications for trade protectionism through the years. Most have focused on the myth that trade impoverishes one party or the other. Of course, free trade enriches both parties to the transaction, or else we would all grow our own food, build our own cars, and make our own computers from scratch. The most recent attack, thrown about in the wake of the Dubai Ports deal, is that it can threaten national security. Desperate cries of “national security” have robbed Americans of many other rights and liberties already.

Is free enterprise next?

The nationalism and protectionism at the heart of the discontent over the Dubai Ports deal is the same kind of thinking that leads people to conclude that the entire agricultural industry must be home-grown and that we must harvest our own food for national security. Despite significant protectionist barriers in the U.S. and elsewhere, Americans nonetheless are perfectly safe in eating food from all over the world, abundantly available in grocery stores and restaurants across the nation.

Competition, whether local or international, leads to a greater variety and quality of goods and services (thus increasing consumer choice) and lower prices for consumers. This competition should be embraced rather than stifled and micromanaged.

Of course, for politicians and government bureaucrats, it is not about economic efficiency or consumer welfare, it is about control. Politicians have an interest in perpetuating an “us-versus-them” attitude because it allows them to advance agendas and score political points.

The ubiquitous “them” is ever-changing, shifting with the fears and politics of the day. During the 1980s, it was the Japanese who were “taking over America” as Japanese companies made significant investments in the United States. In the late 1990s, China Ocean Shipping Co. (COSCO) wanted to build a $200 million container terminal at the Port of Long Beach until there was a public outcry and Congress passed a bill scuttling the plans. After a terminal at the port was later vacated by another tenant, however, Cosco was able to take it over and operate at Long Beach. More recently, there was similar hysteria when China National Offshore Oil Corp.’s subsidiary, CNOOC Ltd., made a bid to buy Unocal. Now that Arabs are the political boogeyman of the moment, the Dubai Ports deal has attracted the wrath of the powers that be.

The Dubai Ports Deal and the United Arab Emirates

Protectionist fears of the Dubai Ports World deal are even more ridiculous when one considers the nature of Dubai Ports and the U.A.E. Fears of Arab terrorists infiltrating U.A.E.-owned businesses to launch attacks on America are unfounded and borne out of fear and a lack of knowledge about the U.A.E. According to the Heritage Foundation’s 2006 Index of Economic Freedom, the U.A.E. rates “mostly free,” placing slightly below Mexico and Peru; slightly above Bolivia, Malaysia, and Thailand; and significantly higher than “mostly unfree” nations such as Russia, India, Turkey, Argentina, or “War on Terror” partner Pakistan.

Add to this the fact that, according to the State Department, “The U.A.E. has been a key partner in the war on terror after September 11, 2001.” (Tellingly, the U.S. Navy has no qualms about using the U.A.E. port of Jebel Ali, also operated by Dubai Ports World, for warships such as the USS John F. Kennedy.) The point is that the U.A.E. is a relatively economically liberalized nation—and one of the most liberal, pro-Western states in general in the region—run by wealthy businessmen not intent on destroying relations with a significant trading partner.

Incentives Matter

Even if a foreign company was not from a nation on such good terms with the U.S. as the U.A.E., this does not mean there should be cause for alarm. Businesses exist to make money in exchange for the goods and services they provide. Allowing terrorists to compromise security and attack your customer base is simply not good business practice. If there is a possibility of such an occurrence, businesses have a strong incentive to do whatever is necessary to prevent it from happening.

This becomes a little more complicated when the business is not entirely private, but owned (in part or total) by a government. In the case of Dubai Ports World, the company still operates in a very competitive market and its efficiency has led to a history of growth and success. The successful completion of the purchase of P&O would have made it the third-largest port operator in the world, with 51 terminals in 30 countries. Thus, there should have been little, if any, cause for concern.

Conclusion

There has been a great deal of paranoia surrounding the Dubai Ports deal. Contrary to public fears, federal and local government agencies would still have been in charge of enforcing security measures; the company would merely operate certain terminals at the ports, not own the ports themselves; and the people operating the ports would be substantially the same. The vast majority of port terminals in America are already operated by foreign businesses.

Private companies, even foreign-owned companies, have successfully owned and operated numerous “critical infrastructure” systems and assets in the United States—from airports to highways to water and wastewater plants—for many years. The country has managed to survive, indeed thrive, under these arrangements because these companies have a strong interest in keeping their customers healthy and happy and maintaining their business.

Public Water Systems Buys Private Water!

info@reason.org (Geoffrey Segal) — Mon, 02 Jan 2006 10:00:22 EST

The Los Angeles Department of Water and Power, which operates the city's water and wastewater systems, spent nearly $90,000 to buy bottled water for employees. While this may not seem like a big deal, the department spent over a million dollars last year to assure residents that their tap water is not only safe but that its top quality. So which is it: is the water good enough for your own employees or not?

Monterey Rejects Anti-Privatization Forces

info@reason.org (Geoffrey Segal) — Tue, 08 Nov 2005 04:54:10 EST

Monterey, CA voters overwhelmingly rejected Measure W, on Tuesday, which would have studied a public takeover of California American Water's private water system. Our "friends" at Public Citizen had been fighting for this for several years. This makes them 0 for 2 in California cities for what I can tell after Stockton privatized despite their efforts in 2001.

More than 25,000 Private Drinking Water Systems in US

info@reason.org (Geoffrey Segal) — Fri, 28 Oct 2005 00:00:00 EDT

On Monday the Joint Committee on Environment, Natural Resources and Agriculture heard testimony on House Bill 1333, an act to preserve public water and sewer systems. The bill if passed would "prevent the privatization of public water supplies and sewer systems in the Commonwealth," essentially reversing more than three decades of experience, and expertise.

This measure puts politics over common sense and practicality. Beyond being misguided, the bill is potentially very dangerous. If signed into law it would require all private operators of water and sewer systems to divest their assets, at cost, to their host communities. What's next? Where will the Commonwealth stop? What business is safe from the reach of government? Who's property is protected from seizure if the government can just decide it doesn't want you around any longer? While this may very well likely violate the takings clause of the Constitution, that is not the only fault with the proposed legislation.

Perhaps most disturbing is that the bill dismisses the vital role private water and wastewater companies play in the Commonwealth and the country at large. More than 40 percent of drinking water systems in the United States are private, regulated utilities—there are more than 25,000. Many of these are small ancillary systems that the government has no interest in owning or running.

Of the remaining systems, more than 1,100 local governments have entered into a public-private partnership and contracted out the operations and maintenance to a private company for water services. An additional 1,300 communities have similar arrangements for wastewater operations. Nationally, the rate of private participation has been impressive in the last 15 years, growing by more than 85 percent.

The private sector responded to governments call for help. Faced with new clean water drinking regulations most local governments needed new technology and investment in their infrastructure to meet strict standards. Even still, the U.S. Environmental Protection Agency estimates that water and sewer infrastructure needs around $300 billion in investments over the next 20 years. In the face of such a crisis, surveys show that privatization is a policy tool public officials often turn to. Local government surveys have found that public officials turn to privatization in response to fiscal crisis and/or when privatization has been shown to work in other jurisdictions.

Indeed, even the U.S. Conference of Mayors has endorsed public-private partnerships for water and sewer operations. Furthermore, it was President Clinton's EPA that endorsed private participation as a means by which local governments can meet environmental standards and meet needs more efficiently as well, calling public-private partnerships a "classic win-win situation."

One argument often used against water and wastewater privatization is that water is too vital a resource that we can't trust private contractors? This is a conceptual rather than a research question, but ignores basic facts about our lives in the United States. Yes, water is vital, and along with most other vital things, we rely on the private sector to provide it. The closest example is food, which the market provides, as it does medicines and healthcare.

The sheer track record of water and wastewater privatization, with thousands of satisfied communities, reveals this concern to be mainly rhetorical, rather than factual. Government remains responsible for establishing and enforcing quality and reliability standards. While contractors have every incentive to ensure the same. Just as with government-run facilities, employees and managers, and their families, live in the community and are customers of the services they provide. And companies that consistently fail to deliver expected service will soon find no more willing customers.

HB1333 flies in the face of reality and national experience in water and wastewater privatization. Its supporters have largely ignored the importance of competition and private sector participation. If they were truly concerned with the quality of water and the rates taxpayers pay they would embrace additional competition and privatization�that's what the data and experience tell us is needed.

Geoffrey F. Segal is the director of government reform at Reason Foundation.