Elizabeth Brubaker
Financial Post
January 23, 2007

In his recent "Economic and Fiscal Update," federal Finance Minister Jim Flaherty announced a "bold new plan to make our country a world leader" through public-private partnerships. The financing provided through such partnerships, Mr. Flaherty explained, is a way "to get more out of infrastructure investments."

Lawrence Cannon, Minister of Transport, Infrastructure and Communities, has likewise expressed his government’s determination to tap into private-sector innovation and efficiencies. "Our government sees great opportunity for public-private partnerships in the realm of infrastructure," he told a conference late last year. "And perhaps nowhere is the need greater."

Although the federal ministers did not refer specifically to water and waste-water infrastructure, that sector’s need is great. Boil-water advisories are common in small communities across Canada. Even large cities are not exempt, as illustrated by the boil-water advisory issued in Vancouver in November. Sewage treatment is frequently substandard, with both the Treasury Board and Environment Canada calling municipal wastewater effluents "one of the largest threats to the quality of Canadian waters." Correcting these problems will require many tens of billions in investment – capital that the private sector is able and willing to invest. Also required will be highly qualified operators and effective and efficient management – again, available from the private sector.

What can the federal government do to promote greater private-sector involvement in the water and wastewater sector? The provinces bear primary responsibility for drinking water and sewage treatment and have generally delegated all but their regulatory responsibilities to municipalities. Although the federal government funds and oversees water utilities in aboriginal communities and in other areas under its jurisdiction, such as military bases and national parks, its role in the rest of Canada is more strategic.

The federal government can lead by example. Most obviously, it can encourage private operation or oversight on reserves, which have Canada’s worst run water and wastewater facilities. Happily, the government has begun to appreciate the role that private firms can play in providing clean, safe water to aboriginal communities. When E. coli contaminated Kashechewan’s water, prompting the airlift from the reserve of more than 1,100 residents, the federal government called in Northern Waterworks, a firm that operates 11 plants in Northwestern Ontario. The firm’s technician flew into the community and repaired the malfunctioning chlorination system in less than six hours.

The firm now operates the system. Increasingly, Indian and Northern Affairs Canada is calling on private operators to perform similar services in other communities. In its December progress report on its drinking water action plan, INAC promised to hire third-party operators and overseers for native communities most in need in the next several months.

Ottawa can do much else to facilitate private-sector participation in the provision of water services in non-native communities. It can educate both decision-makers and the public about the potential benefits and risks of private involvement. Minister Cannon recognizes that "many Canadians are still wary of the idea of involving the private sector in the delivery of public services." Attributing a great deal of that wariness to a lack of understanding, he proposes a federal role in educating the public: "I believe it is incumbent on the government to work with its private sector partners to communicate the value of these projects to Canadians."

By providing unbiased information about partnerships and the partnering process, peer-reviewed research papers, and case studies of privatization’s successes and failures, the federal government can get the facts out, demystifying the privatization process and countering the misinformation often offered by privatization’s critics. For several years, Industry Canada’s Public-Private Partnership Office played such a role, albeit modestly, posting on its web site a wide selection of resources on privatization. With one exception, Industry Canada stopped updating the site in early 2004. That year, it also discontinued its P3 Media Scan – an email service that, in providing a continuous stream of articles about private-sector involvement, not only supplied invaluable current information but also created a sense of momentum. Such services may now be best provided by Infrastructure Canada, whose mandate includes building and sharing research and knowledge about infrastructure issues and working with provincial and municipal governments.

Furthermore, the federal government can help ensure the success of privatizations that do occur. Many municipal governments, especially smaller ones, lack the knowledge or skills required to negotiate and oversee complex contracts. Ottawa can help prevent municipalities from bungling the process – it can ensure that contracts are drafted and implemented in ways that protect the long-term interests of municipalities, workers, consumers, and investors. It can help municipalities navigate the privatization process. It can prepare model requests for expressions of interest and requests for proposals, along with information to guide municipalities through the bidding process. It can distribute model contracts that create incentives for adept and efficient performance and include effective monitoring and enforcement mechanisms. As well, it can help develop models for the effective economic regulation of public-private partnerships.

Ottawa can also promote economically sustainable systems – and encourage greater private-sector involvement – by reducing water and wastewater subsidies. The government recognized the hazards of subsidies as early as 1987, when it noted in the Federal Water Policy – which has yet to be updated or replaced – that subsidies, in making possible low prices, had fostered the overuse of water and created an artificial need for costly treatment infrastructure. In the intervening decades, other adverse effects of subsidies on municipalities have emerged: While the expectation of grants has encouraged municipalities to delay necessary work, once they have materialized grants have encouraged municipalities to undertake unnecessary work, resulting in excess capacity and higher upkeep and operating costs. Furthermore, the availability of grants and low-cost loans has left municipalities with few incentives to seek private capital. Thus, the federal government, by reducing subsidies, can motivate consumers to use water more efficiently, prompt municipalities to make more timely and efficient infrastructure choices, and encourage municipalities to seek private- sector investment.

Finally, the federal government can create a regulatory environment that both encourages private-sector participation and ensures its success. Although regulations that could be effective are currently in place, the government rarely enforces them. It rarely requires municipal sewage plants, for example, to comply with the federal Fisheries Act, which forbids the deposit of deleterious substances into water frequented by fish. Enforcing existing health and environmental standards will prompt many municipalities to seek assistance from those with greater expertise and will ensure that those providing that expertise perform satisfactorily.