Meeting the Challenges: How the private sector can help solve the problems plaguing Ontario’s water and wastewater providers

Elizabeth Brubaker
October 19, 2009

Presentation to Insight conference on Infrastructure Renewal

I’m planning to talk this morning about two things: first, the problems plaguing our water and wastewater systems, and second, some solutions. I’ll start with an overview of the state of our infrastructure. I’ll look at the record of our water treatment facilities, the state of our pipes, and possible water shortages. Then I’ll turn to some of the problems with our sewage systems, including compliance issues, bypasses, and combined sewer overflows.

The official line on our water systems is quite positive. Ontario’s Chief Drinking Water Inspector, John Stager, released his latest report in June. He had only the kindest of words for our municipal residential drinking water systems. He stressed that 99.85 percent of their water quality tests met provincial standards in the 2007-08 year. He boasted that "Ontario’s drinking water is among the best protected in the world." The test results, he said, "can reinforce the public’s confidence in the quality of their municipal drinking water."

Unfortunately, the reality is somewhat less rosy. The Inspector’s report includes details on the test results. Water is tested for two kinds of contamination: micro-biological and chemical. The micro-biological tests pick up total coliforms and E. coli. Of the 688 systems that submitted results, 199 exceeded micro-biological limits at least once during the year, and 94 did so on multiple occasions.

The report includes similarly dispiriting results for chemical tests. These are tests for lead, trihalomethanes, nitrates, and other chemicals. Eighty three systems exceeded provincial limits at least once, and 67 did so on multiple occasions.

The Drinking Water Inspector also reported on the inspections that the Ministry of Environment conducted on each water system over the course of the year. MOE inspected 697 systems. Only 349 systems passed with flying colours. The ministry found at least some areas of non-compliance in all the other systems. Thirty-five systems received inspection ratings of under 90 percent. The ministry identified problems with the sizing, and installation, and operation of equipment. It found inadequate sampling and reporting – some operators are still not monitoring water quality very well. It found problems with operations and maintenance manuals. And it found unacceptable flow rates.

I don’t know if the public is aware of these findings, but I do know that the public doesn’t trust the water coming out of the taps. RBC and Unilever hired Ipsos Reid to study Canadian water attitudes earlier this year. It asked: How confident are you about the safety and quality of Canada’s drinking water? Only 20 percent of Ontarians were very confident. Another 57 percent were somewhat confident. The pollster also asked: In your home, what source of water do you typically drink? Only 34 percent of Ontarians replied that they drink water directly from the tap. A whopping 63 percent filter their water or drink bottled water.

Let’s look now at a different problem – the problem of leaking pipes. The Residential and Civil Construction Alliance of Ontario released a report on municipal water systems in June. It estimated that Ontario’s municipalities lose 10-50 percent of their water, and that at least one-quarter of Ontario’s drinking water is being pumped into the ground. In other words, every year, we’re losing at least 327 million cubic metres of treated water – enough to fill 131,000 Olympic-sized swimming pools. These losses cost ratepayers $700 million a year.

We should be concerned not just about the financial costs, but also about the environmental costs. In some places, we just don’t have water to waste. This is something that the Environmental Commissioner of Ontario, Gord Miller, focused on in his report last year. He described the 2007 drought, saying that by late summer, seven Conservation Authorities were experiencing low water conditions in their watersheds. Rainfall was down 37 percent from 30-year averages. The Commissioner warned that shortages could get worse with climate change.

Others are also warning about possible effects of climate change. A few months ago, the Ministers of Environment and Natural Resources released a paper on sustaining Ontario’s water resources. They warned that climate change will increase uncertainty. We may see more severe floods and droughts. We may see more variable water levels in the Great Lakes. Some expect water levels to decline, due to higher evaporation rates and less snow and ice cover. The ministers also warned that as water supplies decline, water demand is likely to go up. The province expects to grow by 3.3 million people by 2031. Also, warmer temperatures may drive up summer demand for water.

That, then, is a snapshot of our water problems: Poorly performing utilities, little consumer confidence, considerable water losses, and looming shortages.

The state of our wastewater systems is no better. The environment ministry releases annual reports on the municipal sewage facilities that don’t comply with provincial standards, or with their certificates of approval. Last year, 102 facilities were on the list. Some of our biggest cities – Toronto, Ottawa, Hamilton, London – failed to comply with the rules. And some communities failed again and again and again. Brockville had 19 exceedances, Sarnia had 23, and Waterloo had 17.

The environmental group that used to be called Sierra Legal Defence Fund (and is now called Ecojustice) has been a very steady critic of our municipal sewage polluters over the years. It has periodically graded sewage systems, and found many – including those serving Hamilton, Kingston, London, the Niagara Region, Sarnia, Sault Ste. Marie, Sudbury, and Toronto – to be lacking.

A few months ago, Ecojustice released a report on combined sewer overflows and bypasses. It lamented that it didn’t have much data to work with. "The province," it said, "simply does not know how much sewage is escaping proper treatment and being dumped in Ontario’s waterways." We do know that 89 communities have combined sewer systems. But the volume and frequency of overflows are not measured. Nor do we have a good idea of how much sewage bypasses full treatment at plants. The province’s figures exclude the plants that are run by OCWA. Even so, we know that the discharges are enormous – well above 15 billion litres in 2007, and well above 18 billion litres the previous year.

Environmentalists are also keeping an eye on the toxic pollution emitted by our sewage plants. Pollution Watch collects information from the federal governments’ National Pollutant Release Inventory. It reports that sewage treatment plants are Ontario’s top 10 water polluters. In 2006, sewage plants were responsible for 88 percent of the mercury released into Ontario’s water. They were also responsible for 71 percent of the lead, 37 percent of the arsenic, and almost all of the chlorine.

It’s clear that the province isn’t doing enough to ensure that sewage treatment plants don’t pollute. That’s one of the reasons why the feds are stepping in. Environment Canada has been working with provincial environment ministers to put together federal regulations on sewage pollution. In February, the Canadian Council of Ministers of the Environment approved the new Canada-wide Strategy for the Management of Municipal Wastewater Effluent.

Federal Environment Minister Jim Prentice has promised to implement the new strategy. He’ll be publishing new regulations under the Fisheries Act in December. It sounds like he’s taking a tough line on this issue. "Canadians must make [wastewater treatment] a priority," he says. He adds, discharging untreated sewage is simply "not acceptable." This might make those running sewage treatment systems sin Ontario squirm.

So my message to municipalities is: You have some very serious problems. And it’s time to get serious about solving them. And my message to private-sector financers and operators is: You have some excellent opportunities to help municipalities solve their problems. There is a desperate need for your services.

What, exactly, is needed? We need five things: capital investment, pricing reforms, expertise, efficiency, and accountabilty. I don’t have a lot of time today, so I’m going to discuss just the first two of these: capital investment and pricing reforms.

The estimates of how much we need to invest in our water and wastewater systems are notoriously unreliable. We just don’t have good information on the state of our systems – especially the underground pipes. But we do know that whatever the exact figure, it’s huge. The Water Strategy Expert Panel (the panel that was headed up by Harry Swain, and produced the report called Watertight) estimated that we’ll need between $30 and $40 billion over the next 15 years. Its best guess was $34 billion – $25 billion for capital renewal, and $9 billion to accommodate growth. That estimate is similar to one produced in 1998 by the Canadian Water & Wastewater Association. It predicted that Ontario would need to invest $32 billion over 15 years – $13 billion for water, and $19 billion for wastewater.

The big question, of course, is: Where should that money come from? Municipalities are adamant that it shouldn’t come from them. After Jim Prentice announced the new wastewater regulations, the president of the Federation of Canadian Municipalities wrote that he was "deeply concerned" about the lack of federal funding. "Paying for these regulations," he wrote, "will fall on the backs of property-tax payers. This is off-loading, pure and simple."

The FCM may be calling for more federal funding, but the reality is that the feds are already paying quite a bit. The Building Canada Infrastructure Plan promises $33 billion over seven years. And Canada’s Economic Action Plan promises another $12 billion for infrastructure over two years. It’s hard to imagine these figures getting much higher. And that’s a good thing. Because subsidies are actually bad for our water and wastewater systems. According to the Ontario Water Works Association and the Ontario Municipal Water Association, subsidies are counter-productive. They reward those who neglect their infrastructure, and they punish those who operate effectively. How’s that for creating perverse incentives?

The Water Strategy Expert Panel took this analysis further. It explained that subsidies encourage delays in investment. Municipalities put off making essential improvements, hoping that free money might some day flow in to pay for them. When and if the free money does come, it encourages overbuilding. (As long as someone else is footing the bill, why not go all out?) This kind of thinking has resulted in serious overcapacity. In 1996, 44 percent of the capacity in place was excess to the province’s needs. That represented more than $25 billion in premature – in some cases, completely unnecessary – spending. It also meant that a lot of municipalities had systems that were needlessly costly to run. The Water Panel’s conclusion? "The sad reality is that overly-generous grants actually caused many of the problems in Ontario’s water sector today."

An alternative to grants and subsidies and other forms of public investment is, of course, private investment. You’ll find considerable theoretical support for this idea. Countless government agencies and consultants have been promoting it for decades. But for all that, we actually have very little experience with private investment in water utilities in Canada. One exception is Moncton, where a private firm financed, built, and now operates the water filtration plant.

If we really want to get an idea of what’s possible, we have to look outside of Canada. The most impressive example I know of is that of England and Wales. They privatized their water and wastewater systems in 1989. Since then, the private owners have invested about £3 billion a year. That’s more than $5 billion Canadian dollars a year.

Clearly, there is private capital out there for water investments. And increasingly, it seems as if Canadian investors want to put their money into water. Both the Canada Pension Plan and the Ontario Teachers Pension Plan have invested in water utilities abroad. Why not invest here in Ontario?

Private investment offers several advantages over public investment. It frees up public funds for other purposes. It can transfer financial risks to the private sector. And private capital tends to be used more efficiently than public money. But private investment is not a magic wand. The investment will have to be recovered. That means that water rates will have to be sufficient. And right now, in most communities, they aren’t.

Water rates all across Canada are notoriously low – they’re some of the lowest in the developed world. This creates all sorts of problems. First of all, low rates starve municipalities of capital and operating funds. Here in Ontario, we have an unpaid bill of $11 billion in upkeep & repairs. In 2003, water revenues met just 64 percent of the costs of providing services. The other problem with low rates in that they encourage wasteful consumption. That’s serious where water is in short supply. But even where water is plentiful, it’s a problem, since excess demand requires unnecessary capacity.

For these reasons, at least seven provincial bodies have advocated pricing reforms since the early 1990s. Recommendations for full-cost pricing continue to stream in. The Water Strategy Expert Panel concluded that "Consumers should pay the full cost of the services they consume." The Environmental Commissioner is also on side. He advocates full-cost recovery for two reasons: It will enable systems to achieve financial sustainability and self-sufficiency, and it will encourage water conservation.

Many in business support full-cost pricing. Earlier this year, the CD Howe Institute released a commentary by Steven Renzetti, an economist at Brock who may know water pricing better than anyone else in Canada. Renzetti recommended universal metering, full cost accounting, and seasonal pricing to reflect marginal costs. Shortly after that, Compas polled CEOs and business leaders to see what they thought of Renzetti’s proposals. It reported that "Immense majorities back universal use of water meters, full cost accounting, and adequate revenue to allow full updating of equipment and processes."

Environmentalists also support full-cost pricing. In August, a coalition that included Ecojustice, Environmental Defence, Great Lakes United, and Canadian Environmental Law Association issued a report urging the province to mandate meters and to encourage volume-based, full-cost pricing. The full-cost analysis, it added, should include source protection and water conservation.

Even consumers support higher prices. Nanos Research polled Ontarians on this issue this spring. It asked, "How willing would you be to pay more for water if it improved the supply of clean water for Canadians and the environment?" Forty-seven percent of the respondents were very or somewhat willing to pay more for water. Only 22 percent were somewhat or very unwilling to pay more.

Despite this extraordinarily broad support, the province seems reluctant to mandate higher prices. After the Walkerton tragedy, it looked as if we were going to get real pricing reforms. In 2002, the province passed the Sustainable Water and Sewage Systems Act. The act applied to drinking water and wastewater. It mandated provincially approved cost-recovery plans. That’s not the same as full-cost pricing, but it’s a step in the right direction. What happened to that act? Nothing. It was never proclaimed. After all these years, the act is still not in force.

Two years ago, the province did issue the Financial Plans Regulation. But that’s a weak substitute for the earlier act. It applies only to drinking water – not to sewage treatment. The financial plans require only municipal approval – not provincial approval. And the regulation requires only full-cost accounting – not full-cost recovery, or full-cost pricing. The Environmental Commissioner was quite critical of the regulation. Full-cost recovery, he said, "is unlikely to be undertaken on a voluntary basis. The Financial Plans Regulation alone is unlikely to push most municipal systems towards achieving financial sustainability."

That said, there are reasons for optimism. In their recent paper on water resources, the Ministers of Environment and Natural Resources noted that there’s strong stakeholder support for metering and conservation-based pricing. In listing possible actions for their water strategy, they said that they could require municipalities to have a pricing structure that charges all users the full cost of providing water and wastewater services. Full-cost pricing may still be on its way.

Where does the private sector fit into plans for pricing reforms? One great thing about private participation is that it helps de-politicize pricing. It replaces political considerations with commercial principles. Partnerships also let private operators (instead of municipal councils) take some of the heat for rate increases.

Perhaps more important, private participation invites economic regulation. In the UK, privatization was accompanied by the establishment of Ofwat, the Office of Water Services. In the US, state commissions have been set up to regulate private utilities. These regulatory bodies usually have two purposes. On one hand, regulators must protect consumers. On the other hand, they have a duty to protect the viability of the water companies. They have to ensure that legitimate revenue requirements are met, and that utilities are able to attract capital. We could really use some of this regulation in Ontario.

There is one obvious question: If the private sector has so much to offer, why haven’t we embraced it? The barriers to private participation are essentially political. There’s been a lot of loud and well financed opposition, most of it spearheaded by CUPE. But CUPE’s Waterwatch campaign may be losing momentum. They’re hosting a big water bash in November, and they’re calling it "Party like it’s 1999!" That seems awfully backward looking. It makes Waterwatch sound so "yesterday." And I think it’s true – CUPE and other labour unions seem increasingly out of touch with both environmentalists and the general public.

Of course, this may be wishful thinking on my part. But I’m not so sure. Randy Christensen of Ecojustice has an article in the current issue of Canadian Water Treatment. He says that the jury is still out on privatization. And he maintains that the quality of regulation is more important than whether a system is public or private. That’s a very interesting position for a main-stream environmentalist.

I’m also intrigued by a recent poll by Circle of Blue and Globe Scan. It found that 82 percent of Canadians think that solving Canada’s drinking water problems will require significant help from companies. I’ll leave you on that optimistic note. Thank you.


1 thought on “Meeting the Challenges: How the private sector can help solve the problems plaguing Ontario’s water and wastewater providers

  1. Pingback: Walkerton pleased with private water and wastewater operations | Environment Probe

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