Reason Foundation

New at Reason: Looking Back at the Last Year in Local Government Privatization

Posted on May 6, 2013, 4:25pm | Leonard Gilroy

The rollout of Reason Foundation's Annual Privatization Report 2013 continues today with the release of the Local Government Privatization section—authored by Reason's Harris Kenny, Adam Summers and Steven Titch—which provides an overview of the latest on privatization and public-private partnerships in local government. Articles include:

• Mayor Emanuel Establishes Chicago Infrastructure Trust
• Public-Private Partnerships for Parking Assets
• Yonkers, New York Pursuing Innovative School Partnership Approach
• City of Austin Releases Surprising Outsourcing Study
• Georgia Contract Cities Continue to Evolve
• Finding New Ways to Provide Parks and Recreation Amenities
• Water and Wastewater Privatization Update
• Solid Waste Collection Update
• Non-Profit Partnerships for Animal Shelters Grow
• ANALYSIS: Is Managed Competition Dead in San Diego?
• ANALYSIS: San Diego, San Jose Lead the Way in Local Pension Reform
• ANALYSIS: Despite Glossy Reports, Muni Broadband is Still a Net Money Loser
• Local Government Privatization News and Notes

» Annual Privatization Report 2013: Local Government Privatization
» Complete Annual Privatization Report 2013

Denver Public Water Utility Draws Criticism

Posted on January 24, 2011, 3:42pm | Harris Kenny

Last week Jared Jacang Maher of Face The State wrote a provocative piece on the internal auditing conducted by Denver Water (which I discovered via Chuck Plunkett of The Denver Post.) Maher found through his review of their internal audits that Denver Water-Denver, Colorado's 90-year-old public water utility-operates under almost complete secrecy.

Face The State requested the past two years of internal audit reports under the Colorado Open Records Act, which yielded nine sheets of paper. If you're confused as to how two years of internal audits from a public water utility for a over 600,000 residents can fit on nine pages, you're not alone. Face The State reports that Denver Water conducts most of its meetings in executive sessions, which are confidential and unavailable to the public. The public utility is able to do this under the Colorado Sunshine Law, which allows agencies to conduct portions of meetings in private "executive sessions."

According to Maher, there is no additional oversight over Denver Water beyond its own limited internal auditing - the State Auditor, Colorado Public Utilities Commission, city of Denver and county of Denver have no oversight authority whatsoever.

Denver Water president John Lucero told Face The State that the utility's system of oversight is "more than adequate (because of the board's close attention to detail)... [And the board is] very committed to providing high quality services at as low a cost as possible."

Denver City Council members are not convinced - probably because rates could increase by 35% by 2013. Maher reported Denver councilwoman Jeanne Faatz saying, "People have an expectation that [Denver Water] is being as efficient as possible before [they raise] rates... That's the kind of trust officials should have with the public. And of course, performance auditing goes to the efficiency."

Municipal water and wastewater treatment services have been effectively operated through public-private partnerships (PPPs) in the U.S. and around the world, and PPPs may provide an appealing alternative to Denver Water's purportedly murky operation. Through PPPs policymakers can apply performance-based contracting to ensure accountability. Well-written contracts can also guarantee transparency and public control over rate increases.

According to the National Association of Water Companies (NAWC), "nearly 73 million Americans-almost one in four-receive water service from a privately owned water utility or a municipal utility operating under a public-private partnership." Further, NAWC's member companies have supplied water for nearly 200 years.

For more, see Reason Foundation's water and wastewater research archive here; and Reason Foundation's F.A.Q. on water and wastewater treatment PPPs here.

Might California's Massive Water Bond Fall Off the November Ballot?

Posted on June 30, 2010, 2:41pm | Adrian Moore

From Flashreport:

A hot rumor around Sacramento lately has been the status and fate of the water bond, now known as Prop 18 on this November's state ballot.  The realities of the economy and state budget wreck have finally hit home to Sacramento decision makers that an $11 Billion measure may not fly with voters this year.  Many don't see how we will make the $900 million per year payments...or that they're getting value for those payments.  Today, the Governor, bond proponents, and others including Sen. Darrell Steinberg seem to now publicly agree that this isn't the year. 

Read the rest here.

New Deloitte Reports on Infrastructure Partnerships

Posted on February 18, 2010, 6:32pm | Leonard Gilroy

Deloitte has released two new reports on infrastructure public-private partnerships (PPPs) that are well worth a read. From the press release:

After decades of neglect, infrastructure has finally made it to the top of the political agenda. Thanks to stimulus packages in the United States and many other countries, public infrastructure is receiving both long over-due attention and a significant infusion of public funds.

While this is a welcome development, the level of direct government funding proposed will meet only a tiny fraction of infrastructure needs around the world. In the United States, according to the American Society of Civil Engineers, there is a $2.2 trillion gap between the supply of and demand for roads and bridges, water and sewage systems, public transit systems and other public infrastructure. The infrastructure stimulus money from the 2009 American Recovery and Reinvestment Act (ARRA) addresses less than 5 percent of these infrastructure needs.

At the same time, that gap may be increasingly difficult to close because the global recession and tightened credit markets have dramatically altered the landscape for infrastructure funding and finance. "Partnering for value: Structuring effective public-private partnerships for infrastructure" and "The changing landscape for infrastructure funding and finance" look at these economic trends and the impact they have on infrastructure funding, particularly with regard to the prospects for public-private partnerships (PPPs). The reports analyze these issues and make some concrete recommendations for effective, efficient models to meet the nation's infrastructure needs.

The former report has a great overview of how governments should approach PPPs, particularly with regard to the use of Value for Money analysis to determine whether or not a PPP makes sense for a given situation. The latter report considers the effects of the recession and credit crisis on the infrastructure sector and concludes, "[...] there should be an ongoing role for the private sector in the development of infrastructure and the public services delivered through it. The credit crisis may have temporarily changed the economics of public-private partnerships as financial transactions, but it has only served to highlight the need for new approaches to solving the world's infrastructure problem." Both are excellent contributions to the literature on PPPs.

23 Firms Eyeing Indianapolis Superutility

Posted on October 6, 2009, 3:12pm | Leonard Gilroy

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

Posted on September 30, 2009, 5:50pm | Adam Summers

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

Posted on August 13, 2009, 5:31pm | Leonard Gilroy

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

Posted on August 7, 2009, 10:55am | Adrian Moore

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

Milwaukee Puts Water Privatization Study on Hold

Posted on June 1, 2009, 6:35pm | Leonard Gilroy

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

Posted on September 23, 2008, 3:45pm | Leonard Gilroy

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

Posted on September 13, 2008, 7:11am | Leonard Gilroy

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

Posted on September 2, 2008, 10:24am | Leonard Gilroy

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

Reviewing Blue Covenant

Posted on April 2, 2008, 2:39pm | Chris Mitchell

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."

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

Posted on August 27, 2007, 6:16am | Geoffrey Segal

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

Posted on August 14, 2007, 6:12am | Geoffrey Segal

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.

If you care about the environment, youíll stop drinking water

Posted on July 16, 2007, 1:36pm | Alex McCorbin

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

Posted on July 2, 2007, 7:09am | Geoffrey Segal

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?

Posted on August 17, 2006, 5:27pm | Ted Balaker

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

Public Water Systems Buys Private Water!

Posted on January 2, 2006, 10:00am | Geoffrey Segal

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

Posted on November 8, 2005, 4:54am | Geoffrey Segal

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.

How privatization gets water to the poor

Posted on August 17, 2005, 9:27am | Ted Balaker

Here's Ron Bailey:

Activists around the world chant the slogan that "water is a human right." Yet more than a billion poor people in the world today lack access to safe drinking water. Twelve million of them die each year from drinking disease-contaminated water.

Among things that would most benefit the world, safe, clean drinking water is clearly a high priority, as pointed out by the Copenhagen Consensus organized by skeptical environmentalist Bjorn Lomborg in 2004.
...

[Swedish analyst Fredrik] Segerfeldt shows that even imperfect privatization efforts have already successfully connected millions of poor people to relatively inexpensive water where government-funded efforts have failed. For example, before privatization in 1989, only 20 percent of urban dwellers the African nation of Guinea had access to safe drinking water; by 2001 70 percent did. The price of piped water increased from 15 cents per cubic meter to almost $1, but as Segerfeldt correctly notes, "before privatization the majority of Guineans had no access to mains water at all. They do now.

Whole thing here.

Here's Segerfeldt on World Water Day.

And this study examines water privatization in Argentina:

[C]hild mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.

For more on water privatization, go here.

Glass half full on plan to deal with water needs

Posted on July 14, 2005, 4:19pm | Adrian Moore

A new report proposing ways to meet Colorado's long range is the old glass half full. I was impressed to see it deals seriously with the need to expand water storage systems, including resevoirs--usually a bugaboo to environmental activists. But I was disappointed that the report entirely ignores water prices. G

Gee, we want people to conserve water, but lets not consider the role of the price they pay.

Exec Summary here

Full report here

Poor disproportionately affected? Good!

Posted on April 4, 2005, 9:41am | Ted Balaker

Russell Roberts responds to the claim that imposing a cost on clean water would disproportionately affect the poor:

Unfortunately, left omitted is the fact that not imposing a cost on clean water disproportionately affects the poor. Because water is unpriced, there is insufficient incentive to provide it in the poorest parts of the world. That means there is very little of it for the poor to enjoy and as a result, poor people around the world die from lack of water.

Roberts points to this article, published in the Journal of Political Economy. He notes that the study finds the poor were disproportionately affected by water pricing, but not in the way most market skeptics suspect:

Using the variation in ownership of water provision across time and space generated by the privatization process, we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.

For more on water privatization in the developing world, see this post.

World Water Day

Posted on March 21, 2005, 2:30pm | Ted Balaker

That's right, it's today.

Amazingly, 12 million people die each year because they don't have access to clean and safe water.

Here's Fredrik Segerfeldt:

There may be a solution to what had been an insoluble problem. In recent years, a small number of developing country governments have turned to the private sector for help and have introduced market-oriented reforms in the water sector. Overall, the results have been encouraging.

But, as is often the case:

The attempts at privatization have met vociferous resistance. A coalition of non-governmental organizations, trade unions for public employees, and international organizations such as the United Nations have done all they can to limit the role of the market and the business community. And they have had some success. The pace of privatization has slowed down, and the World Bank, one of the major advocates of privatization, has gone on the defensive. Global water companies are less and less inclined to invest in developing countries, for fear that their efforts may be nationalized.

This is a tragic development, and all the more so since the anti-privatization lobby is wrong on almost every count.

N.O. Drops Water Privatization Plans

Posted on April 19, 2004, 2:11pm | Geoffrey Segal

After five years of study New Orleans Mayor Ray Nagin today announced the city's decision to drop water and sewer privatization plans.

This battle was especially contentious, and this move will no doubt be heralded as a victory of anti-privatization groups, including Public Citizen. However, I wonder if it is more appropriate to call them pro-tax and fee hike considering the city will now be faced with over $650 million bill to fix the pipes.

Something tells me that this isn't the last we'll hear from New Orleans.