Opening the Floodgates

Why Water Privatization Will Continue

Water and wastewater utilities provide for safe drinking water and clean waterways. Adequate supplies of water are also crucial for economic development, public health, public safety and overall quality of life. Cities across the nation-facing problems of unfunded mandates, crumbling infrastructures, and tight finances-are increasingly looking to the private sector for help in providing needed water services. According to the United States Environmental Protection Agency (EPA), private water utilities currently serve about 15 percent of the U.S. population. City utilities are turning to private firms for technical expertise and management efficiencies as well as for cost savings. Privatization of water and wastewater services is proving to be a cost effective method of service delivery that also enhances quality and performance.

WATER AND WASTEWATER MANAGEMENT CHALLENGES

There are a variety of reasons causing local officials to consider private sector alternatives.

  • Decaying Infrastructures. Many water and wastewater systems include water and sewer infrastructures that date back to the early 1900s. The most recent systems were built with federal funds during the 1970s, and even these now need upgrading or replacing. The EPA recently estimated that the nation's 76,000 drinking water systems alone will require $150 billion in investments over the next 20 years. Wastewater systems will require a similar level of investment.
  • Mandates. The federal government has reduced its contributions to local water systems over the past 30 years, while at the same time imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. Unfunded mandates are forcing municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds.
  • Lack of Political Will. It 's often difficult for local officials to commit to making the necessary investments in community water systems. Water pipes and sewer mains are not visible and not perceived as immediately critical for adequate funding. It is easier for elected officials to ignore them in favor of expenditures for more visible services, such as police and fire. Additionally, water and sewer rates do not adequately cover the actual cost of providing services in many municipalities-but raising water and sewer rates to cover operations and maintenance as well as capital replacement is an unpopular move for elected officials.

According to the U.S. Conference of Mayors, capital expenditures on water and wastewater services are the largest facing local governments today.Thus, this area presents a great opportunity for cost savings.Through privatization,water companies can take advantage of advanced technology, more flexible management practices,and streamlined procurement and construction practices to lower costs and make the critical improvements more quickly.

EXISTING AND FUTURE WATER AND WASTEWATER PRIVATIZATION

While the current extent of privatization of water and wastewater facilities is somewhat limited,recent trends suggest that more cities will be examining private sector alternatives in the future.

  • Drinking Water. According to the EPA,more than 40 percent of drinking water systems nationwide are private, regulated utility systems. Of the others that are publicly owned, a 1997 International City/County Managers Association (ICMA)survey found that 5.7 percent of the responding cities privatize water distribution and 3.7 percent contract water treatment.
  • Wastewater. It's difficult to gather precise data for privatization of wastewater services because much of the information is proprietary. According to the EPA, there are 280 small-to mid-size (1 to 10 million gallons per day) facilities and 40 large facilities of more than 10 million gallons per day now contracting with private partners for wastewater operations. In the ICMA survey,6.2 percent of responding cities have privatized wastewater collection and treatment.
  • Trends. Several recent reports indicate that the amount of privatization is increasing and will continue to grow in the future. A survey of the water industry by Public Works Financing revealed that the municipal contract operations market increased 16 percent in 2000. Although that rate of increase was down from the previous year, the overall trend in water privatization is upward. Last year, Moody's Investor Service also predicted more privatization, saying that "public policymakers will turn to the private sector for financial, technical,and operating assistance when the municipal water system receives reliable and reasonably priced services."

CASE STUDIES

Both critics and supporters of privatization argue that post-privatization analyses are too rare.Therefore,it is encouraging to see a recent series of evaluations of water and wastewater privatizations from some of the nation's largest cities and several small communities as well. As the results of these case studies demonstrate, privatization has succeeded in many ways beyond just improving performance and lowering costs.

A late-1999 report by the city of Indianapolis examined the success of the White River Environmental Partnership (WREP) in running the city's sewer collection system and wastewater treatment plants since 1994. The report measured performance in three crucial areas:

  • Employee Treatment. Employee wages and benefits have risen between 9 and 28 percent, accident rates have dropped 91 percent,and grievances are down 99 percent.
  • Environmental Compliance. WREP has improved on the city's record of environmental compliance in exceeded permits and effluent discharges.
  • Cost Savings. Over five years,privatization saved the city $78 million-surpassing the expected savings of $65 million.

In 1997, after three years of contract performance that exceeded expectations, the city decided to replace the existing five-year contract with a new 10-year contract extending through 2007. Total savings from the contracts from 1994 to 2007 are expected to total $250 million. To date, the city has used most of the savings for capital improvements in the sewer system and treatment facilities and for rate reductions.

In March 2000, Milwaukee released a second-year evaluation of its 10-year contract with United Water to operate the city's sewage collection system and wastewater treatment plants. For the second year, United Water exceeded the operating standards of the contract. The contract set the permitted effluent discharge levels well below the levels permitted by state regulators, and performance exceeded even those levels, earning the contractor its second annual $50,000 bonus. Meanwhile, workplace injuries, sick days, and grievances remain at levels less than 50 percent of those experienced under city management.

More recently, Atlanta released the results of an audit of the first 18 months of its 20-year contract with United Water to run the city's water utility:

  • All payments and fees charged so far are warranted,with no evidence that the firm is using change orders or budget manipulation to increase revenues;
  • The firm is using state-of-the-art technology and environmentally sound practices; and
  • Costs to the city have been minimized wherever possible.

United Water employed 417 of the 535 employees at the utility when it assumed operations in January 1999. Since then, 49 quit, 14 were terminated for cause, and four were transferred to other cities in the region. The firm signed an agreement with the American Federation of State, County, and Municipal Employees (AFSCME) that unionized 95 percent of the workers-a first in "right-to-work " Georgia..Union members received benefits equal to or better than their former city packages, and a 3 percent initial pay raise.

Privatization has succeeded not just in large cities, but in smaller communities as well. A public-private partnership in Mount Vernon, IL, not only saved money and improved performance, it also led to expanded economic growth for the city of 17,000.

In the mid-1980s,Mount Vernon was under a sewer connection ban because of compliance problems at its wastewater treatment plant, meaning the city could not accept any more sewer customers and was unable to attract or expand industry. The city entered into a 20-year service partnership with Environmental Management Corporation (EMC) to design, build, and operate (DBO) an upgraded and expanded wastewater treatment facility. Sewer restrictions were lifted after the first phase of construction was completed.

The agreement is guaranteed to meet EPA effluent standards and, in fact, led to the wastewater system operating significantly better than all EPA permit limitations. In addition, the agreement saved the city approximately $3 million in tax dollars, and was completed in substantially less time than alternate proposals. The impact on economic development was impressive. Within 18 months of the first phase of construction, the city attracted approximately $300 million in private investment.

Monmouth, IL, a city of 10,000, privatized its water and wastewater services as part of a contract with a firm to operate all public works services. The agreement saved the city approximately $300,000 (nearly 20 percent), improved the quality of services, and was a key factor in the city's recovery from severe financial problems. In addition, union employees endorsed the agreement before final city approval and have benefited from a better compensation package than what would have been available from the city.

CONCLUSION

Water and wastewater management, because it is the costliest portion of a city's budget, is emerging as a critical factor in a city's economic health and competitiveness. While privatization of water and wastewater services is currently limited, evidence strongly suggests that more cities will examine contracting in the future. The benefits through cost savings and increased quality of service are too obvious to ignore. As city officials learn from successful experiences in other municipalities, they will see that water and wastewater privatization also produces important benefits beyond cost savings and improved performance-it's also an attractive policy choice for city officials seeking economic growth and community development.

Robin A.Johnson is director of the Privatization Center at the Reason Public Policy Institute (Reason Public Policy Institute ) and Adrian T.Moore is executive director of Reason Public Policy Institute . They can be reached at robinj@reason.org and adrianm@Reason Public Policy Institute .org .

Adrian Moore is Vice President, Policy






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