Responding to the Crisis: Strengthening Regulation Through Privatization

Elizabeth Brubaker
July 10, 2001

Safe and Clean Drinking Water Strategies Conference, Toronto

The first question posed to this panel was: Have governments responded effectively to Canada’s water crisis? I will argue that they have not and that they can not – at least not without major changes in the operations and the financing of our water systems.

The conference organizers were right to call the current situation a crisis. We certainly have a crisis here in Ontario. Because I’m most familiar with this province’s experience, I’ll focus my comments on it. But I think that those of you from other provinces will see your own experiences reflected in Ontario’s. The principles I’ll lay out apply all across Canada.

Here in Ontario, our municipal water systems are in terrible shape. Last year, the government inspected all 659 plants in the province. It found that 367 didn’t comply with provincial laws and regulations. That’s a very sobering number: More than half of our plants were out of compliance! The most common problem was inadequate sampling: Inspectors found inadequate sampling programs at 267 plants. Other common problems involved disinfection, treatment, and the certification of operators.

Compliance rates, of course, are just one way to assess the state of our systems. There are other measures as well, such as boil-water advisories. Here too, the numbers are sobering. Between last June and February, there were 246 advisories issued in Ontario. They affected 70 municipal water supplies. About half of them were due to coliforms.

Yet another way to measure the state of our systems is to look at whether they’re keeping up with their capital investment needs. They aren’t. We actually know very little about the state of our infrastructure – especially the underground pipes. Estimates of capital needs are based on a good deal of guesswork. But that said, most people agree that our systems need extensive upgrades. A few years ago, the Ministry of Environment estimated that $16 billion would be needed for water and sewage infrastructure over ten years – $6 billion for above-ground infrastructure and $10 billion for below-ground infrastructure.

The Canadian Water and Wastewater Association thinks that the figure is even higher. It says that Ontario needs to invest more than $32 billion in the next 15 years – $13 billion on water and $19 billion on sewage.

I think it’s fair to say that, by any measure, we’re in big trouble. Our plants need a lot of capital upgrades. They’re not being run well. And they’re posing real threats to public health.

Now this shouldn’t really surprise anyone. After all, this is not a new problem. Municipal plants have been out of compliance with provincial standards ever since we started monitoring them. Between ’92 and ’94, the government inspected 86 percent of the water plants in the province. At that time, inspectors found inadequate sampling at more than half of the plants they looked at.

Other studies in the late ’80s and early ’90s found a host of other problems. One found that at least half of the plants it looked at had problems with flow measurement, chemical selection and application, and turbidity monitoring. Another report identified operator expertise as a major problem at many water plants. It noted that many operators “do not understand the fundamentals of water treatment in terms of chemistry and the unit processes.”

Despite these well-documented risks to public health, virtually nothing has been done to force improvements. It’s not that we haven’t had enough laws. The government has had the power to control water systems since 1884, when it enacted the first Public Health Act. But it hasn’t used its power. It’s been very reluctant to force municipalities to comply with health and environmental standards.

One of the issues has been cost. Compliance can be expensive. As a former official from the environment ministry told the Walkerton Inquiry, before making demands, the government has always taken costs into consideration.

Why does the government care about the costs? Well, in part, it cares because it fears that it will have to pay them. Through various grant programs over the years, it has paid up to 92.5 percent of the cost of capital improvements. So the government is in a conflict – a financial conflict. It understands that if it enforces the law, and requires expensive improvements, it will have to foot the bill.

There’s another conflict as well – an operational conflict. For years, the environment ministry owned and operated many water plants. It continues to operate 161 plants through OCWA, the Ontario Clean Water Agency. About a third of OCWA’s plants don’t meet provincial standards. In other words, if the government prosecutes a violator, it may well be prosecuting itself!

And of course, even when the violator is a municipality, it’s still just another level of government. Municipalities aren’t independent of the province. Their relationship is very close. They’re thought of as “children of the province.” Who would prosecute his own children?

For both of these reasons, self-interest encourages a gentle approach to enforcement. And that’s what we’ve gotten. The province has always preferred voluntary over mandatory compliance – cooperation over coercion. It has chosen to work with municipalities, to educate them, to encourage them, to subsidize them. And it has chosen not to prosecute them, no matter how badly they perform or how many laws they violate.

That’s a big mistake. Cooperative approaches to abatement only work when they’re backed up by the credible threat of enforcement action. That threat has been missing in Ontario.

No one actually seems to know how many prosecutions there have been over the years. Apparently the government doesn’t keep track of its prosecutions by sector. We asked several witnesses at the Walkerton Inquiry about this subject. One ministry investigator could remember only two prosecutions. Another former investigator could remember one more. The acting program manager at the investigations and enforcement branch thought that there may have been 20 in the last decade – or maybe, he thought, even less than ten. In short, we may be talking about one or two prosecutions a year – even though there could have been hundreds of targets!

It’s hard to imagine law enforcement officials giving other law-breakers this kind of leeway. The police aren’t known to cooperate with thieves or murderers in order to help them comply with the law. Even squeegee kids and welfare cheats are dealt with harshly – they face mandatory minimum penalties.

But municipalities that threaten public health have generally gotten off scot-free. Instead of prosecuting them, the ministry has often simply denied that there’s been a problem. Back in 1997, Norm Sterling was the Minister of Environment and Energy. He appeared before a provincial standing committee to talk about our water and sewage services. You know what he told them? “The sewage and water systems in this province are in very good shape.”

The sad thing is that after all of the attention our water systems have been getting, the ministry still seems to be in denial. This has come out in the Walkerton Inquiry. In one case, our lawyer was asking a regional program coordinator for the ministry about the SWIP program – the Sewage and Water Inspection Program.

The fellow said, “I think that SWIP was quite successful, actually, in getting municipalities on the band wagon of what is adequate in terms of monitoring for their works.” And our lawyer countered, “But it wasn’t really just to get them on the band wagon. I think it was pretty clear that it was to bring about conformance. And certainly the … 2000 inspections belie any suggestion that SWIP brought about conformance in water treatment plants in Ontario; wouldn’t you agree?” To which the ministry man answered, “No, I wouldn’t.” Now that is denial.

Our lawyer had a similar exchange with a former investigator for the ministry. He said, “it seems to me that there really wasn’t an enforcement culture prior to ’95 with respect to water treatment plants and there didn’t seem to be one post-’95 either; is that fair?” The former investigator answered, “Well, where it was warranted, I think enforcement was taking place.”

It’s time to stop living this lie! We are doing a lousy job and we’ve got to admit it. Our municipal and provincial operators aren’t running their plants safely and our government isn’t forcing them to do so. This has got to change. The government has got to fulfill its role as the regulator of our water systems and the enforcer of our laws. No other party can do this!

But you know what? I don’t think we’ll see real change under the current system. Yes, the government did respond to last summer’s tragedy with a slew of charges against non-complying plants. The pendulum did swing toward enforcement. But if history is any indication, the pendulum will swing back again. There are just too many disincentives to enforcement. It all boils down to the conflicts of interest I was discussing earlier: Conflicting loyalties and objectives paralyse governments that own, operate, or finance systems on one hand and regulate them on the other. A bias against prosecution is built right into the system.

This concern about bias is nothing new or radical. Indeed, the rule against bias is a fundamental rule of natural justice. The Oxford Dictionary of Law explains that “no man may be a judge in his own cause.” It goes on to say that in any exercise of administrative authority, any decision “is invalid if made by a person with any financial or other interest in the outcome or any known bias that might have affected his impartiality.” I don’t think that there’s any question that you can’t expect impartiality from a regulator that is also an owner, or an operator, or a funder.

Back in 1944, the economist Friedrich Hayek wrote very wisely on this subject. He explained that the government will always protect its agencies against criticism: “A state monopoly is always a state-protected monopoly … Where the power which ought to check and control monopoly becomes interested in sheltering and defending its appointees, where for the government to remedy an abuse is to admit responsibility for it, and where criticism of the actions of monopoly mean criticism of the government, there is little hope of monopoly becoming the servant of the community.”

The Walkerton Inquiry commissioned a paper on organizational behaviour that came to a similar conclusion. The question was: Why do well-intentioned organizations make bad decisions? How can the people in them see that a catastrophe is likely to happen, and do nothing to stop it? The answer was: People and organizations act defensively. They want to avoid embarrassment. They want to cover up mistakes – not expose them.

Neither individuals nor agencies want to look bad. In the context of water plants, prosecutions do look bad. A senior enforcer with the Ministry of Environment told the Walkerton Inquiry that laying charges was viewed as a negotiation failure. When prosecution is a sign of failure, rather than success, you’ve got serious psychological and professional barriers to enforcement.

There have been interpersonal barriers as well. This was especially true when the ministry itself operated water plants. At the inquiry, our lawyer asked a senior enforcer if there was ever any tension within the ministry when it was asked to investigate and prosecute its own employees. His answer was “Definitely.”

A former regional director told the inquiry that there was “an essential conflict” when the ministry operated plants. He had about 500 people reporting to him – half were plant operations people and half were regulators. He explained, “I would in fact have reporting to me the Inspector of the same … group that I was responsible for the operation [of]. So there was a clear conflict in that.”

The government hoped to reduce these conflicts by creating OCWA. But OCWA is government-owned and government-backed in terms of its risks and liabilities. It’s closely overseen by the government, with the Ministry of Environment playing a dominant role. Personal connections still tie OCWA to the ministry: OCWA’s employees initially came from the ministry, and senior management continue to travel between the two organizations. And so the conflicts remain.

The only way to resolve these conflicts is to get all levels of government out of the business of operating and financing water systems. In short, privatize. Privatization would enable the government to focus on its core responsibility: regulating our systems.

Two weeks ago, Norm Sterling, the former environment minister, told the Walkerton Inquiry that privatization would bring better enforcement of regulations. He said, “It’s easier for the government to actually regulate the private rather than the public in some ways because – because you don’t have any … political infighting taking place …in terms of that regulation. You have a private sector operator over there and then … you’re not going to get any interference from the local municipal politicians.” Mr. Sterling was then asked: “So there’s no potential conflict of interest and no potential reluctance to prosecute or be involved in enforcement, is that what you mean? … You would be more willing to deal with them as the situation dictates, rather than for political reasons?” And he answered: “That’s right.”

Privatization doesn’t just empower provincial regulators. It also empowers municipalities. Operating contracts add a whole new level of accountability. Enforceable contracts with specific performance criteria provide municipalities with powerful tools to compel compliance. Carefully drafted contracts can guarantee water quality, maintenance levels, and capital expenditures. They can include financial guarantees and penalties for non-compliance.

In a privatized system, the market itself provides yet another kind of enforcement. One water company president described the outcome of irresponsible behaviour for a private firm: “If you are negligent, you are history.” A former senior official with the environment ministry confirmed this at the Walkerton Inquiry. Private-sector suppliers, he said, “couldn’t stay … in the business of providing water if they were providing unsafe water. If you were a customer, would you buy their water from them?” If the owners of private water works made a mistake, he repeated, “they’d be put out of business.” That punishment doesn’t threaten municipal or provincial service providers. And that makes them less accountable.

In the US, some experts consider accountability to be the fundamental reason for privatizing services. An example of this thinking can be found in a report by the Joint Economic Committee of the US Congress. “Privatization,” it said, “is based on the principle that private ownership generates greater accountability than the political process.”

This is understood in England, as well. In fact, creating accountability was a major factor driving water privatization there. Before privatization, the government understood that it was in a conflict of interest. In its words, it was both the poacher and the gamekeeper. Privatization changed that. It separated the operator from the regulator. One regulator identified this separation as the “most significant gain” of the British water privatization.

Unfortunately, I don’t have time to talk about the other gains from privatization – the investments in infrastructure, the expertise, the innovation, the operating efficiencies … But I did bring copies of an article I wrote several years ago about England’s experience with privatization. The article is in The Next City magazine in your binder. It focusses on the extraordinary improvements made to sewage systems – in part because of extensive capital investments, and in part because of the leaps and bounds made in enforcement after privatization. The article should give you an idea of privatization’s enormous potential. Enjoy it.

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