Elizabeth Brubaker and Benjamin Dachis
May 19, 2011
As the City of Toronto looks to plug its $774 million budget hole, it has kick-started a comprehensive service review. Although the city will need to find savings in many areas, the service review should consider the large potential savings from contracting out the water and sewage services that it currently provides.
The city operates all eight of its water and wastewater treatment plants, the water distribution system and the sewage collection system. In 2009, the city spent $820 million in capital and operating expenses for water and wastewater — almost twice the $420 million it spent on waste collection, recycling and disposal. Toronto Water’s 2011 budget values its water and wastewater assets at $27.9 billion. The sheer size of the water and wastewater budget suggests that large savings can be found.
Toronto’s water and wastewater services are expensive relative to those in other major Ontario cities. The costs of distributing water and collecting sewage are, per kilometre of pipe, among the highest in the province, in part because the networks are older than others. The city also pays more than most for wastewater treatment and disposal.
Torontonians might well wonder if they are getting value for their money. Water mains break more often per kilometre of pipe than they do in any other major Ontario city, and sewers back up more frequently. Overflows from sewers that carry both household sewage and stormwater commonly close beaches after heavy rains. The sewage treatment plant at Ashbridges Bay releases tonnes of pollutants into Lake Ontario every year.
The age and condition of Toronto’s water infrastructure make new investment inevitable. Because it has allowed its water and wastewater infrastructure to deteriorate, the city now has an infrastructure backlog of $1.7 billion and projects investments of $8.7 billion over 10 years. Using private partners to finance and construct new facilities can reduce those costs.
Critics claim that the cost of capital for the public sector is lower than it is for the private sector. This saving is illusory. Holders of government debt know that taxpayers will foot the bill when things go wrong. In contrast, those who finance private projects, and who can’t count on a later taxpayer bailout, require a premium that accounts for the risks they take on. The higher cost of capital for private-sector construction is akin to an insurance premium for the public in case a project takes too long, is over budget or doesn’t work.
Additionally, if the private partners finance and build a project and are not paid until its completion, they will have strong incentives to manage construction effectively and complete it on time, thereby reducing overall project costs.
Private partners are not only useful in financing and building water facilities, but also in operating future and existing ones. The evidence around the world shows that competition among private service providers can reduce operating costs. A competitive tendering system will ensure that private operators try to out-compete their competitors — and in the water utility business, there are many.
The efficiencies inspired by competition do not come at the expense of water safety or environmental quality. The city can clearly define performance standards through enforceable contracts that penalize bad performance and reward good performance. Under contracts with municipalities, private managers have strong incentives to meet health and environmental standards.
In fact, it often becomes easier for both municipal and provincial governments to regulate arm’s-length private operations than it is for them to penalize public operations. When public utilities are fined for failure to meet standards, taxpayers lose; when private companies are fined, their shareholders lose.
No one solution will fill the City of Toronto’s looming budget gap. However, introducing competition for the city’s water and wastewater services can both save money and improve the quality of the services.
Benjamin Dachis is a policy analyst at the C.D. Howe Institute. Elizabeth Brubaker is the executive director of Environment Probe and the author of A Bridge Over Troubled Waters: Alternative Financing and Delivery of Water and Wastewater Services, published by the C.D. Howe Institute and available at www.cdhowe.org