Can high profit flow with safe water?

Peter Gorrie
The Toronto Star
January 28, 2001

Mike Price is happy to take on all comers if the province opens the door to privatization of Toronto’s water and sewer service.

Bring on the competition, says Price, who heads the city’s massive system. “Competition is good. It will keep us on our toes. I don’t have a problem with that.”

He’s confident his publicly run operation could beat out any multinational corporation that tried to take over the plants, pumps and pipes that every day deliver about 1.5 million cubic metres of clean water – enough to fill SkyDome – to city homes and businesses, and collect and treat a similar amount of wastewater before pouring it back into Lake Ontario.

Premier Mike Harris said last week his government is considering how to get more private involvement in a service that for more than a century has been firmly embedded in the public domain – something so basic it’s beyond profit. It might lead to “larger, more sophisticated, more professionally operated facilities,” he said.

And the Ontario SuperBuild Corporation – the agency responsible for finding private-sector cash for public infrastructure projects – requested proposals for studies on the issue.

Officials insist all options are open. “Just because you review something doesn’t mean you’re going to do it,” says the corporation’s chairman, David Lindsay.

Still, given its track record, many assume the province already has decided privatization is the way to go. Some suggest it’s employing the review like a magician’s sleight of hand to misdirect voters’ attention from the Walkerton E. coli tragedy. They also note that when it downloaded responsibility for water and sewers in 1997, the province left municipalities virtually no choice but to seek private funding.

Sid Ryan, president of the Ontario division of the Canadian Union of Public Employees, says the plan is to change the Municipal Act to require that all public services are offered to private businesses.

What would it mean for Torontonians, who rarely give the slightest thought to the miracle that safe water flows whenever a tap is turned on or that waste seems to simply vanish when a toilet is flushed. Price, assuming the system won’t change hands, suggests it will be business as usual, only better. But what if he’s wrong and a private firm did take over? Then, the views are mixed.

Toronto would have a cheaper, more efficient system, says the Canadian Council for Public-Private Partnerships.

The results won’t be good, says the Ontario Municipal Water Association, which represents more than 160 public water authorities, including Toronto’s. The incentive that drives private companies – making a profit – “runs counter to the basic interests of water customers – a safe and reliable source of drinking water.”

Privatizing Toronto’s water and sewer system would be turning back the clock. It was created in 1843 – mainly to provide water for firefighting – by a private firm called Furniss Works. The city took it over 30 years later because Furniss couldn’t afford expansion into drinking water and sewage. Since then, it has grown into a behemoth, the fifth-largest water and sewer system in North America, supplying water to 2.3 million people in Toronto and 60 per cent of York Region. Its 1,800 employees oversee four plants where water from the lake is cleaned and four for treating wastewater, as well as 18 pumping stations, 14 reservoirs and water towers and 16,000 kilometres of pipe – some buried as deep as 50 metres.

As in most other Ontario municipalities, much of the work already is contracted out. Private companies do the major construction, repairs and maintenance – anything, Price says, apart from the core business, the “day-to-day bread and butter” of running the system.

The plants are in good shape, although they need constant maintenance and upgrading, and the filtration system will have to be expanded if York Region decides to take more water, Price says. The pipes are something else. Those that carry drinking water need hundreds of millions of dollars worth of improvements – mostly relining or replacement, and the removal of lead connectors from homes in older parts of the city. At the current rate the work is being done, it would take about 350 years for the whole job, Price says. Obviously, it has to be sped up.

The sewage pipes also demand attention; the evidence is in frequently closed beaches and flooded basements.

Proponents of privatization argue city taxpayers can’t afford to pay for all this. The solution, they say, is to involve a company with a fat bank account.

But Price wonders what the private sector can do that the city can’t. His department is already on a seven-year project to modernize and automate the system, to reduce staff and make it more efficient. The payroll has been cut by 200 people. The final goal is 450.

Any savings will be ploughed back into the system.

If more money is needed, water and sewer rates could be raised, or the city could borrow – which would eventually impact rates. A private operator would face the same choices.

Privatization has been a hot trend around the world for more than a decade. England and Wales, where 99 per cent of the services are in the hands of the private sector, lead the way. France, at 75 per cent, is close behind, and other European countries, as well as the United States, are rapidly going the same route. Private firms run systems in British Columbia and Edmonton, and built the new water plant in Moncton, N.B. Ontario has 645 water-treatment plants and 454 publicly run sewage plants. Nearly three-quarters of the water plants are run by municipalities. Most of the rest are operated by the Ontario Clean Water Agency, a provincial corporation created in 1993 that bids on contracts when municipalities go private. Some 29 are privately run. The big firms have a toehold in a few places, including Goderich, Haldimand- Norfolk and – the largest to date – Hamilton, where Azurix, a subsidiary of the U.S. giant Enron Corp., has the contract.

Unlike when natural gas or electricity is privatized, homeowners wouldn’t have a choice of water suppliers. There’s competition for the contracts to run a system. After that, it’s a monopoly – just like cable TV.

Except, of course, that water is essential. Beyond that, it’s hard to paint a picture of privatization because the word has many meanings.

In England and Wales, the plants and pipes were sold, and that’s what most in the industry mean by privatization.

Almost everywhere else, though, ownership has remained in public hands, with companies brought in to run all or part of the system.

Just how much the private-sector firms are hired to do varies widely.

They can take on either the water or sewer services, or both. In each case, facilities must be designed, built, operated, maintained and upgraded. Customers have to be supplied and billed and their complaints given an ear. Equipment and supplies must be purchased. Employees need to be trained, supervised and paid. Unions often have to be dealt with.

A company might lease a system for a few years or run it on a contract for anything from three years to 30. It might be paid a fixed fee for running the system, in which case the public-sector owner sets the rates, bills customers and keeps their payments. Or the company might pay for the right to run the system, then set the rates and collect from the customers.

All of this can be mixed and matched in many combinations.

The idea of full privatization raises doubts and strong opposition.

It’s not clear whether current laws allow municipalities to sell those assets, says Gord Wilcox, a lawyer who specializes in the field. “I don’t think it has been contemplated.”

“Privatization is culturally not quite on,” says Jane Peatch, executive-director of the Canadian Council for Public- Private Partnerships. “Personally, I think it would work fine,” but “it’s culturally unacceptable. There’s a discomfort level. We still feel we have to own the asset.”

“It would be disastrous,” Price warns. If you sell the assets, eventually you lose control and “they just keep jacking the prices up.”

Cities that sell off their systems can never get them back because it’s too expensive, Ryan argues. At that point, the private contractor “has them over a barrel.”

What about hiring companies to run the systems?

Debate is just as strong.

Supporters make the traditional argument that because the private sector is inherently more efficient, costs will fall. And, since the companies likely to win contracts are subsidiaries of a handful of multinationals – mainly from France, Britain and the United States – they’ll benefit from economies of scale when buying supplies and equipment. They can also offer almost instant technical help and sophisticated training.

A big system like Toronto’s doesn’t need that kind of support. But Peatch said smaller ones do. Walkerton, for example, stumbled along for years with unqualified operators until it hit the rocks.

Then there’s financing.

“Our infrastructure is crumbling,” says Elizabeth Brubaker, of Toronto-based Environment Probe, who backs privatization. A 1999 study by the Ontario Water and Wastewater Association concluded the cost of bringing all of Ontario’s water and sewer services up to standard would be $32 billion over 20 years, she says.

“That’s an enormous expenditure. We won’t see that from the government,” she adds. The private sector “has the cold, hard cash to do it.”

Moncton couldn’t get $23 million from New Brunswick or Ottawa to build its new water plant, so it went to a subsidiary of a French multinational that operates in about 100 countries, Brubaker says.

In Canada, Moncton expects to save $14 million to $17 million over its 20-year contract. Hamilton projects $12 million.

The reports conclude that privately run plants usually meet water quality and pollution standards. They also note substantial staff cuts under most of the new regimes, but generally portray the downsized workforces as productive and content.

“Privatization, if done wrong, won’t help anything,” Brubaker says. “The key is good regulations and enforcement.”

Wording of contracts is also critical.

Savings can vanish, critics say, if the private operator can, for example, scrimp on maintenance, leaving the city with a big repair bill at the end of the term.

In Hamilton, water and sewer were originally contracted in 1994 to a local company, Philip Utilities Management. A problem at a sewage plant sent about 1 million litres of wastewater into Hamilton’s harbour. Under the contract, the city, not Philip, was liable for the damage.

Privatization could help Toronto, Brubaker says.

A contract set up to reward reduced pollution, or to cut water use, could lead to innovations like paying homeowners to disconnect their eavestroughs from the stormwater system or creating more marshes in the river valleys.

Price says Toronto’s system is being made more efficient and his staff is just as creative as any company’s.

“We don’t have to make a profit for shareholders. But we do have to prove we’re competitive with the private sector.”


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