April 23, 2010
The City of Hamilton’s besieged water and wastewater system is no poster child for public operations
Hamilton is often held up as an example of why not to privatize the operation of water and wastewater systems. In recent debates over Victoria’s options for procurement of a new wastewater system, the Water Watch coalition used Hamilton’s 10-year experiment with private operations to illustrate the many ways a public-private partnership can go wrong. The Canadian Union of Public Employees describes the Hamilton contract as “one of Canada’s most infamous examples of the disastrous consequences of privatized water and wastewater treatment.” The Council of Canadians calls it “a raw deal” for the community, citing higher costs and loss of accountability as problems with partnerships.
Before jumping on the anti-privatization bandwagon, those concerned about costs and accountability would do well to look at Hamilton’s experience with public operations. The city has run its own water and wastewater system since 2005. Allegations by Abdul Khan, Hamilton’s director of water and wastewater treatment for four of the last five years, call attention to the serious problems that can arise when decisions about investments and operations are removed from the private sphere.
Mr. Khan has accused the city of mismanaging its water and wastewater systems, misusing funds and compromising public health. In an email sent to Hamilton’s mayor, members of city council, and local media in December, he detailed financial irregularities, unscrupulous behaviour, misplaced priorities, unnecessary delays and repeated wastes of resources. He also claimed that his employment had been terminated because he had tried to blow the whistle on these inappropriate practices. The city is currently investigating his claims.
Among Mr. Khan’s many allegations – several of them scandalous examples of misspent public funds – two stand out as being particularly relevant to the debate over who should design, finance and operate water and wastewater systems. Both concern the upgrades to Hamilton’s Woodward Avenue Wastewater Treatment Plant – upgrades that are being funded in part by $200-million in federal and provincial grants announced last month.
According to Mr. Khan, Hamilton needs no new wastewater capacity. At current rates of growth, “it will take over 50 years before the plant rated capacity is exceeded.” Even with the higher growth projected by the province, capacity won’t be exceeded for more than 15 years. Mr. Khan charged that Public Works officials misled city council and the public about the capacity of the Woodward plant and the need to expand it to accommodate future growth, intentionally providing false information and using “scaremongering tactics.”
Roger Lambert, who worked in Hamilton’s wastewater system for 24 years (during some of those years as the “overall responsible operator”), has confirmed that the Woodward plant is more than capable of handling current and future flows if the system is operated efficiently. The catch, he told The Hamiltonian, is that “a responsible operator is required with the essential skills.” Also required is management that encourages operators and engineers to investigate better operating scenarios rather than tying their hands.
However shaky his grounds, Hamilton’s mayor used the plant’s limited capacity as a lever to obtain grants. “If we don’t get the dollars identified and get working on the project, we’re going to have to stop entertaining development applications,” he warned last year. “We cannot add more to the existing system.”
Mr. Khan also charged that the city has chosen the wrong technology (a membrane treatment system) for upgrades to the Woodward plant, based in part on misrepresentations of how much that technology will cost. He claimed that the city’s senior management initially grossly underestimated the capital costs of its preferred technology, and subsequently withheld information about the burgeoning costs of operating the new system. Mr. Kahn predicted that the upgrades – the estimated cost of which has already doubled to $700-million – could end up costing $1.2-billion, pushing wastewater rates far higher than currently forecast. Hamilton’s services, he warned, may become “the most expensive in Canada.”
Mr. Khan’s allegations should shock no one in the industry. Municipal utilities are notoriously inefficient. Unhampered by the restraints of the market and hoping to polish their own political images, municipal politicians and bureaucrats tend to overbuild. Mr. Khan suggested that this was typical of Hamilton: “Priorities were misplaced, giving preference to grandeur over urgencies related to the health of the taxpayer.”
Utility managers have long tended to overestimate needs and underestimate costs – especially when someone else is footing the bill. Ontario’s Expert Panel on Water and Wastewater Strategy pointed this out in its 2005 report, noting that in the previous decade 44% of capacity had exceeded current needs. More than $25-billion had been spent prematurely, or “to meet no real needs whatsoever.” The panel concluded that this indicated “a serious misallocation of public money.”
Things work differently in the private sector. A competitive bidding process will encourage firms or consortia to devise the most efficient solutions to given problems. Under appropriate contractual arrangements, the winning provider will bear responsibility for costs and performance and will therefore ensure that its financial estimates, technical choices and management practices are sound. An experienced provider that is responsible for designing, building, maintaining, and operating a system over a long period of time will have both the expertise required to make appropriate technical judgments and the incentives to take into account the long-term costs and performance of its chosen technologies.
Hamilton’s first experiment with privatization was indeed deeply flawed. Rather than inviting experienced water companies to compete with one another for the contract, the city “sole sourced” the job to a local business with little experience in the field. And rather than negotiating a contract that clearly defined responsibilities and imposed penalties for poor performance, the city blurred lines of accountability and diluted incentives. That this arrangement failed to bring the expertise and efficiencies typically associated with privatization should have surprised no one.
But it would be foolhardy to use this failure to condemn competitive, well-structured privatizations. A rigorous bidding process and an enforceable contract with built-in accountability mechanisms can solve the problems typical of so many public operations – including those that Mr. Khan suggests now beset Hamilton.
Elizabeth Brubaker is executive director of Environment Probe and the author of Liquid Assets.