May 12, 2011
In a way, it’s a victory,” says Winnipeg Councillor and privatization foe Jenny Gerbasi of a sewage agreement signed last month between Winnipeg and Veolia Water. “We view it with guarded optimism,” says CUPE’s Wally Skomoroh. “There’s no parade yet, but we’re pleased that the city still drives the bus.” Even the Council of Canadians grudgingly calls the agreement “a less objectionable deal than was previously contrived,” adding that it “is far superior to the ‘water privatization’ that many of us saw on the horizon.”
When usually vociferous critics cautiously praise a city’s agreement with a private water and sewage company, it’s a good bet that ratepayers and taxpayers are being hosed. And they are. Veolia’s 30-year agreement merely provides for “expert advice” on the design, construction and operation of Winnipeg’s sewage-treatment facilities. It brings no private investment, limits incentives and opportunities for savings, and blurs lines of accountability regarding costs and performance. Yet Veolia and other industry leaders tout the deal as the wave of the future.
Veolia boasts that the agreement “is creating a lot of excitement in the industry.” It calls it “a game changer” — one that “represents a new model for cities around the world.” According to Public Works Financing, an industry journal, the company believes that the model will finally open the urban utility market in both Canada and the United States.
The agreement serves as a bad model for several reasons. First, it guarantees no private investment. This is problematic enough in Winnipeg, which plans to spend $751-million on its sewage system in the next few years. It could be a disaster in other cities across Canada, where infrastructure deficits loom large. Toronto, for example, already faces a backlog of $1.7-billion in water and sewage repairs and upgrades, and expects to spend $8.7-billion between 2011 and 2020. A number of studies suggest that Canadian municipalities need to invest $90-billion or more in their water and waste water infrastructure.
Private financing can help meet this need while transferring financial risks from taxpayers and ratepayers to the private sector. Private financing can also reduce overall costs. A private consortium that builds and finances a facility risks its own money and will invest prudently. If it is not paid until the completion of a project, it will have strong incentives to complete construction on budget and on time. If it is also responsible for long-term operations, it will try to minimize costs over the entire life of the contract.
Private investors would welcome the opportunity to put their money into water and sewage infrastructure — still the exception to the rule in Canada. Canadian pension plans, infrastructure funds and utilities are investing abroad rather than at home. The day before Winnipeg and Veolia signed their agreement, Algonquin Power & Utilities Corp. announced agreements to buy three more water utilities in the United States. The Oakville, Ont.-based company already owns 19 water and waste water utilities south of the border.
Winnipeg’s agreement with Veolia falls short in other ways, as well. A good operating contract gives a private firm both the incentives and the means to achieve considerable savings. While savings can result from economies of scale and myriad efficiencies, they are often found in reductions in staffing levels — generally through attrition or voluntary early retirement, in order to protect individual workers. Some private operators have been able to cut staff by between 40% and 60% while improving performance.
Not so in Winnipeg. The contract gives the city sole discretion in decisions about employing waste water treatment managers and staff, all of whom will continue to work for the city. Although Veolia’s profit will depend in part on how much money the city saves, unilateral decisions by the city about staff will not penalize the company. It is easy to imagine scenarios under which Veolia might actually benefit from bloated staffing levels.
The collaborative agreement also lacks the clear accountability mechanisms found in well-crafted financing and operating contracts. When a private consortium is fully responsible for the design, finance, construction, and operation of a system, it is clear where the responsibility lies if things go wrong. In fully public systems, in contrast, accountability for errors is almost impossible to assign. This helps explain why municipal projects are notorious for cost overruns — why, for example, in Winnipeg, recent upgrades to one treatment plant cost 80% more than expected — and why so many municipal utilities, Winnipeg among them, perform poorly.
Winnipeg’s agreement with Veolia could exacerbate this problem. In sharing responsibility for many matters while reserving some of the most difficult decisions for the city, the contract will provide opportunities for finger pointing and buck-passing if costs rise or performance is unsatisfactory.
Veolia Water president and chief executive Laurent Auguste concedes in Public Works Financing that a partnership that included private operations would likely provide greater benefits to ratepayers: “You probably can deliver more performance faster.” But, he adds, the current arrangement is “more realistic.” That kind of realism brought our water systems to their current state of disrepair. True realism would recognize that industry accountability, not political expediency, should rule.
Publicly operated water and sewage systems are not serving Canadians well. More than 1,000 drinking water systems violate provincial requirements or are subject to boil-water advisories. Still more sewage systems pollute local waters. Few municipalities have the resources — professional or financial — to address these problems. Most would benefit from private expertise and private capital. They would also benefit from the efficiencies that arise from competitive tendering and from the accountability mechanisms found in enforceable, performance-based contracts.
Private water companies, large and small, are lining up for municipal business. So far, they are meeting with success mainly in smaller communities. Given vocal opposition from unions and other opponents, it’s not easy for municipalities to choose private financing and operations. Nonetheless, those who have the courage to seek the expertise and efficiencies that private alternatives offer will greatly benefit the public purse, public health and the environment. Anything less will leave the public high and dry.
Elizabeth Brubaker is executive director of Environment Probe and author of A Bridge Over Troubled Waters: Alternative Financing and Delivery of Water and Wastewater Services, released today by the C.D. Howe Institute.