Elizabeth Brubaker
Financial Post
July 30, 2003

Last month, Halifax Regional Council pulled out of a deal with a private consortium formed to curb the sewage pollution that has long soiled Halifax Harbour. The agreement’s unravelling – exacerbating a Canada-wide retreat from water and wastewater privatizations – spells bad news for the health of Canadians and the health of the Canadian environment. An anatomy of the breakup shows that Canada’s local governments have a long way to go before they reach the level of sophistication needed to chart their way in privatization waters.

On the surface, Halifax’s renunciation of its sewage agreement reflected irreconcilable differences over who should bear responsibility for the quality of the effluent from three proposed sewage treatment plants. The city wanted the Halifax Regional Environmental Partnership – a consortium headed up by the multinational water giant, Suez, and its North American subsidiary, United Water – to bear full responsibility for meeting effluent quality standards. But HREP feared that it could not meet the standards using the primitive level of treatment suggested by the city – at least not without the city guaranteeing substantial improvements to the quality of the “influent,” the sewage entering the treatment plants.

Inexplicably, this disagreement only arose months after the initial agreement was signed. HREP claims that potential problems with influent quality came to light when the federal government issued its environmental screening report for the project. Prior to that, it says, it relied on out-of-date data provided by the city and by local industry. Halifax, for its part, insists that it provided ample opportunities for testing. Explains project manager Mike Labrecque: “We contracted with the world’s experts. We gave them full access to the system. It would be reasonable that they would do due diligence.”

Leaving aside the issue of who should have known what, HREP’s proposed allocation of risk makes sense. As a rule, a risk should be borne by the party with the most control over it and the greatest ability to reduce it. Halifax controls what enters its sewer system. Only it can prevent hard-to-treat industrial pollutants – be they heavy metals or organic wastes – from contaminating the influent.

Through a sewer-use bylaw passed in 2001, Halifax promises to improve the quality of the influent. But the city’s regulation of discharges from some 5,000 sources will only be as effective as the monitoring and enforcement behind it. Mr. Labrecque insists that the city’s commitment to source control is “well understood.” But HREP wanted more than informal understandings; it wanted the city’s responsibility clarified in the contract. As United Water’s Gail Lavielle noted, “It’s much better to get everything spelled out before you start.”

Adding to the distrust between the parties was a change in personalities. In the five years since Halifax initiated competition for its sewage treatment project, the city lost a reform-minded mayor and his chief administrative officer, who were both committed to a private-sector solution to the city’s sewage woes. Their replacements are more committed to the status quo.

Management and strategy also changed in the companies leading HREP. Suez tired of its difficulties in the Third World, where politics strained several privatization contracts, and United Water became risk averse after changes in political leadership played a role in torpedoing a high-profile privatization in Atlanta.

Initially, Suez and its North American subsidiary were prepared to take risks to establish a presence in Canada – a country seemingly rich in opportunities for their industry. They have doubtless revised their expectations. Canada is harder to do business in than anyone could have anticipated five years ago.

The debate about water and wastewater utility privatization in Canada has steadily deteriorated, with an increasingly shrill opposition – including CUPE and the CBC – making unfounded claims with impunity. One industry insider bemoans an environment where “logic and facts don’t matter.” Another laments, “It’s terrible when you see misinformation winning – and it’s very frightening.”

Many politicians, wary of controversy, have understandably become reluctant to experiment with private solutions. Why take a political risk when the status quo is so comfortable? Even those overseeing grossly substandard water and sewage systems have few incentives to solve their problems. Although the sewage polluters among them – not only Halifax but also St. John’s and Victoria, to name just the worst of many – break the law daily, they are almost never charged. Were our notoriously tolerant regulators willing to enforce environmental laws, municipalities fearing prosecution would rush to seek the private sector’s extensive experience with bringing facilities into compliance. Indeed, the need to comply with tough health and environmental standards has been a primary driver of water and wastewater utility privatization in the United States.

Financial pressures also commonly spur privatization south of the border. American municipalities seek private-sector capital to construct and upgrade facilities, and they seek private-sector efficiencies to stretch their limited dollars. Their Canadian counterparts prefer public money – preferably in the form of grants that need not be repaid. Loath to apply the principle of “polluter pays” to their residents, and to require them to bear the full costs of cleaning their sewage, they regularly insist on provincial or federal assistance. When it fails to flow freely enough to meet their infrastructure needs, they simply defer improvements pending the next injection of free cash.

This lethargy helps explain Halifax’s mess. Its influent quality would be a minor issue if the city upgraded treatment from the “advanced primary treatment” now proposed – a method expected to remove just 75% of the suspended solids in the wastewater and to reduce its biochemical oxygen demand by just 50% – to a more effective “secondary treatment” process, as is common in advanced countries. Although council has discussed moving to secondary treatment, it is stuck on the cost. Explains Mr. Labrecque, secondary treatment “is not within the budget scope at this time.”

Even $62-million in federal and provincial grants has been insufficient to broaden the scope of Halifax’s plans. Mayor Peter Kelly has railed against the stingy federal government, accusing it of “playing games” with the city when local residents are already paying their share. Apparently, in the mayor’s eyes, Haligonians’ sewage is a federal problem. Apparently, there is nothing fair about asking people to bear the costs of fully treating their own wastes. And apparently, there is no reason to seek upfront capital from the private sector.

Halifax no longer sees a reason even to seek private-sector assistance in running its plants. Mayor Kelly insists, “This is not rocket science.” With or without a private partner, he vows, the project will proceed on schedule and on budget.

Given these attitudes, it is little wonder that HREP decided to play tough in Halifax. Making concessions – holding onto the contract at any cost – had grown increasingly difficult. And the ultimate payback – contracts across Canada, in our many communities with substandard water and sewage facilities – had grown increasingly tenuous. Any reasonable company could be forgiven for cutting its losses and concentrating its efforts in friendlier lands.