Elizabeth Brubaker
Financial Post
October 18, 2007

Alberta’s water utilities need work. A few years ago, the province conducted an assessment of its 534 water-treatment plants. It found widespread problems – especially in southern Alberta, where 70% of the systems got poor ratings.

The assessment revealed inadequacies in the design and capacity of many facilities. It also revealed serious shortcomings in operations and management. It found inadequately trained operators, a lack of understanding of basic disinfection concepts, problems with cleanliness, and deficiencies in the monitoring of water flows, turbidity, and chlorine residuals.

And what did the province do with this assessment? It tried to cover it up. It claimed that releasing it could be "harmful to individual or public safety" and "harmful to intergovernmental relations." Only when facing an inquiry by the information commissioner did it release the report.

This whole episode points to three problems that commonly plague publicly financed and publicly operated water utilities: inadequate infrastructure, insufficient operating expertise and a lack of accountability. Greater private-sector involvement, and a more competitive market for water services, can help address each of these problems.

Some of the infrastructure problems reflect chronic under-investment. Alberta’s water infrastructure needs not millions but billions of dollars. No government has ever given any indication that it’s willing to invest that kind of money.

Happily, there’s a lot of private capital looking for infrastructure investments. But it’s not just capital Albertans should be seeking. It’s expertise. There are a number of established water companies out there that have far greater expertise than your average municipality. They have more experience meeting a wider range of challenges. They have greater capacity.

It’s no coincidence that both the Walkerton and the Kashechewan fiascos were caused by public operators, or that the operations of both systems have recently been turned over to the private sector. These communities were desperate for the expertise that a professional water company could provide.

A municipality that uses a competitive bidding process to select a water provider gets other benefits as well. Competition for contracts creates incentives to design and operate systems efficiently. A bidder will be more attractive if it can bring its price below its competitors’. So it looks for smarter ways of doing things. It may find them in design changes, in technological innovations, in the elimination of waste and duplication, in staff reductions, or in economies of scale. These efficiencies often bring impressive savings – sometimes as much as 40%.

The contracting process can also create incentives for good performance. Municipalities can write incentives right into their contracts. Contracts can set tough operating standards. They can guarantee water quality, monitoring and reporting procedures, maintenance levels, and customer service levels. And they can provide for steep fines – or even termination – if they aren’t met.

Enforceable contracts give municipalities meaningful control over their utilities. They are invaluable accountability mechanisms. Contracting out the operations of utilities enhances regulatory accountability as well. It puts some distance between utilities and regulators. It helps resolve the conflicts of interest that encourage governments to ignore problems, or even to cover them up.

Alberta faces three water challenges: polluted rivers, water shortages and poorly performing utilities. All of these problems result from fundamental institutional weaknesses. Polluters, consumers, utility operators and regulators have perverse incentives: incentives to pollute water, to waste it, and to hide problems. Decision-makers rarely bear the costs of bad decisions, and they rarely reap the benefits of good ones.

The challenge is to develop institutions that create more appropriate incentives. Institutions that internalize the costs and benefits of actions. Institutions that hold people accountable for their actions.

Property rights, legal liability, prices, trading systems, competitive bidding, enforceable contracts – all of these elements of markets help create the necessary incentives. The principle behind all is the internalization of costs and benefits. Moving toward markets will free water from some of the worst aspects of political control – the short-term thinking, the concessions to special interests, the regulatory compromises and the conflicts that are so common today.

Water is simply too precious for politics. We can’t afford not to begin moving toward markets.

Elizabeth Brubaker is executive director of Toronto-based Environment Probe. These comments were presented at the 2007 EPCOR Distinguished Lecture at University of Alberta’s Centre for Applied Business Research in Energy and the Environment.