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Introduction – what can you do?

Keep a watch on the City Hall

Make sure that there is no talk of outsourcing, procuring, or contracting out operations of water and wastewater systems or selling these systems altogether. Municipal officials often commence and, sometimes, complete the privatization process without public debate on the merits of privatization.

Usually, the drive toward privatizing begins with city officials hearing about the potential benefits of privatization at a water-related conference or from materials published by the U.S. Conference of Mayors, National Council for Public-Private Partnerships, National Association of Water Companies and the EPA –proponents of privatization. Officials from other cities could also mention their positive experiences with contracting out water services.

The city would then invite a consultant to prepare a feasibility study. These studies often recommend privatization because many consultants are closely associated with the water companies. In addition, if a city plans to retain the same consultant for further services, the firm’s privatization recommendation would bring in further business.

The bidding process involves issuance of requests for qualifications and proposals, documents that outline the required qualifications and the scope of the contract. Once the companies are qualified, they are eligible to submit proposals. The city, with the help of the consultant, then selects the winning proposal and signs a contract with the company. Private operations begin shortly after.

Keep your local utility in check

Everyone should have access to safe and affordable drinking water. Unfortunately, public utilities do not always perform adequately in their role as stewards of the water and sewer infrastructure that has been financed with public funds.

Make sure that your local utility is properly maintaining its facilities and keeping them up-to-date. Negligence in doing so often creates conditions conducive to privatization.

Infrastructure must be properly maintained, coupled with gradual upgrades. Unfortunately, some utilities neglect performing these vital tasks because it may involve additional spending, and possibly moderate rate increases. Politicians are averse to raising rates because it is not politically popular and may cost them votes at the time of the election.

However, if preventative maintenance and timely upgrades are not performed, the costs will be much higher and the rates will have to increase significantly when the bill finally comes due. Politicians reason that by the time this happens they will have served their terms and would not have to deal with the problem.

The public must also make sure that the local utility is providing safe water. The EPA requires water providers to publish annual reports on water quality. Review these reports to see whether the contaminant levels exceeded the permitted standard, and if it is the case, put pressure on the elected officials to bring the system into compliance.

Encourage alternatives to privatization

Make sure that the local decision-makers, community, and the media are aware of positive alternatives to privatization, such as restructuring, which can introduce improved efficiency and free up capital for infrastructure upgrades by reducing the operating costs.

The system improvements do not have to be financed with rates alone. Local utilities can often find savings by improving efficiency or partnering with another utility if consolidation makes economic sense. Although many utilities are managed well, there are some that must improve. A top-heavy workforce managed by a political appointee who knows little about water will seldom make for a well-run utility.

Restructuring, also referred to as reengineering, of a water or wastewater department can often achieve results exceeding those offered by the private companies. The restructuring process usually involves improving workforce’s flexibility and productivity. It also involves utilization of information technology to achieve a greater efficiency. For example, the Supervisory Control and Data Acquisition (SCADA) system allows an employee to supervise a facility’s operation from a remote location. Even though these changes usually involve a reduction in workforce size, the reduction can be achieved through attrition and transfer to other city departments.

However, even if water and wastewater operations are optimized, savings may not always be sufficient to pay for capital improvements. If projected rate increases exceed the EPA’s affordability guidelines and become a burden for the low-income population, ask the local government to evaluate feasibility of using non-water revenues to help finance upgrades, such as city budget allocations. The city may also consider implementing increasing block tariffs – rates that increase with the amount of water used.

Watch for improper exercise of influence

To win a contract, water companies could try to influence local officials through campaign contributions, well-connected city residents, doling out contracts to the friends of politicians, and even straightforward bribery.

Water companies can influence city officials through campaign contributions. These contributions do not even have to go directly to the targeted officials. For example, in 2000, executives of United Water working under a water contract in Atlanta gave nearly $10,000 to the brother of Atlanta’s mayor, who was running for state auditor in the neighboring North Carolina – even though the company had no operations there.

The companies can also subcontract to local businesses with close ties to the city officials. Generally, public bid laws hinder local officials’ ability to award city contracts to businesses they favor. However, a private company is not required to adhere to the public bid laws, which allows it to subcontract work to the well-connected local firms.

Campaign contributions and facilitation of patronage are two basic ways for a private company to gain favor with the decision-makers in the City Hall. Allegations of influence peddling surfaced in the recent bidding processes in Fulton County, Georgia, Houston, and Atlanta. Executives of leading multinational water companies have been indicted on criminal charges, and, in one case, imprisoned for bribery.

Please report any improper exercise of influence to Water for All Campaign, Public Citizen, 215 Pennsylvania Ave. SE, Washington, DC 20024; 202-588-1000; cmep@citizen.org.

Oppose Privatization Language in Federal and State Legislation

Oppose pro-privatization provisions in the federal and state legislation. In 2002, the federal legislators tried to tie consideration of privatization to eligibility for federal assistance.

In February 2001, Senators Bob Graham (D-Fla.), James Jeffords (I-Vt.), Michael Crapo (R-Idaho) and Robert Smith (R-N.H.) introduced Senate Bill S.1961 that authorized a significant amount of federal assistance for water and wastewater infrastructure. A similar bill was introduced in the House of Representatives (H.R.3930).

Although both bills had many positive provisions, they also marked a first legislative effort to promote water privatization. The bills contained language that made federal assistance for water and wastewater infrastructure improvements conditional on consideration of privatization.

Several groups criticized the pro-privatization provisions, including the National League of Cities, Association of Metropolitan Sewer Agencies, and Public Citizen. These groups persuaded the senators to remove the provision from S.1961. However, a similar provision remains in the House bill, so when the bills are merged in the conference committee, the final legislation may contain pro-privatization language.

Call your representatives to oppose pro-privatization language in water legislation, while expressing support for a higher level of federal investment in water and wastewater infrastructure. Find out more about the current legislative developments at: http://www.citizen.org/cmep/water.

If the process has already begun

Inform local officials and the community about the risks of privatization

Refute the idea that privatization is a panacea to current problems by informing your local officials, community, and media about cities that had negative experience with privatization.

City officials are usually only exposed to one side of the privatization story – one presented by the private companies and the industry consultants. However, the companies’ marketing materials are biased in favor of privatization and do not provide an objective assessment. Although some cities have had positive experiences with short-term operation contracts, others have not. And the long-term contracts are still an experiment in progress, because not one has lasted longer than 5 years. The largest such contract in Atlanta was rescinded in January 2003, as the promised savings failed to materialize and the company failed to live up to its contractual obligations.

Advocate limiting the contract to 3-5 years and including an early termination provision.

If the privatization is imminent, it is wise to limit the term of the contract to 3-5 years. The contract must include a provision that permits the local government to terminate the contract early, if needed.

Limiting the contract to 3-5 years will allow the city to bring the operations back in-house relatively quickly if the company’s performance is unsatisfactory. It also allows the city to compare the fee it is paying to the going market rates and to decide whether it would get a better deal if it renegotiated or renewed the contract or offered it for a bid again. This would allow the city to make sure that the service it receives is competitively priced.

The contract must contain an early termination clause that would allow the local government to end the contract before its expiration. The provision may require the government to compensate the company for its prior investment, but should not require compensation for potential profits. This safeguard is decisive because without it, premature contract termination on terms favorable for the city would be required to prove the company’s breach of contract. This can be both difficult and costly.

Request that the city employees be allowed to submit a bid

A "managed competition" process allows current employees to submit a bid, as do the private companies. If the local water department strives to become and remain competitive, the employee bid has a solid chance of being selected.

Employee teams often win managed competition. If the public operations are optimized employee team bids can be very competitive because they do not include profit expectations. For example, after Charlotte, North Carolina water department employees successfully bid and won managed competition, they were able to achieve 22 percent cost reduction, reduced personnel by 45 percent and met all targets.

Several private consultants, such as HDR Engineering and EMA Services, help public utilities optimize their operations and assemble a winning bid in a managed competition.

Request financial disclosures

Effective disclosure of companies’ contributions to all local decision makers involved in the privatization process, as well as the disclosures of potential conflicts of interest involving both the local officials and consultants is essential to an untainted selection process.

Request that the request for proposal (the bid solicitation document that outlines the terms of the proposed contract) requires the companies submitting bids to file disclosure reports that list their contributions to the local decision makers. The reports should also include the professional history of the attorneys and the consultants, because it is very possible that they may have worked for or have a professional relationship with one of the companies.

Campaign contribution reports can also be an important source of information on improper exercise of influence. Unfortunately, contributions can be difficult to track because executives of a company can donate money without specifying that they work for a company that seeks city business.

Elected and appointed officials involved in the process must disclose payments and other benefits (such as free travel) they may have received from the companies, their attorneys, and their potential subcontractors. Companies may try to win the officials’ favor by paying for them to attend conferences or visit their plants.

Private bidders frequently hire well-connected local law firms and individuals to lobby on their behalf. Please inform Public Citizen if you become aware of any such instances.

Make sure there will be no stranded costs

The utilities compensate other municipal departments for support services, such as legal, financial, and personnel. After privatization, the city, and not the utilities, will have to provide compensation for the would-be performed services that become no longer needed.

Municipal departments are often integrated to assist each other. The utilities may be receiving support from other city departments with financial records, legal services, accounting, labor relations, personnel services, budget oversight and other services. These departments are compensated for such services by the utility.

If the utility is privatized these services will no longer be needed. However, the staff that provided the supporting services will be retained because generally the utility-related work comprises only a part of the workload. However, prior to privatization, utility would have paid for that share. After privatization, the additional costs for work no longer performed are borne by the city and the taxpayers.

The city must make sure that privatization will not create an unnecessary burden on the taxpayers by leaving stranded costs.

Make sure that savings are guaranteed

In O&M contracts, water companies often rely on change orders – reimbursements for work outside of the scope of the contract – to make profit. This can significantly reduce the savings potential or neutralize the savings altogether.

Any contract, no matter how elaborate, will leave something out. Companies capitalize on the service items not included in the contracts. They perform the tasks themselves or contract them out to other companies, and then send the bill to the city. In the case of public operations, however, these additional costs are usually absorbed by the utility budget.

The company’s choice of subcontractor to perform some of these jobs can also be questionable. A company can pay twice the market rate to a subcontractor, in an arrangement that would allow it to reclaim some of the payment. The subcontractor may even be a subsidiary of the same company. The company would not be interested in finding savings when it can send the bill to the city.

If United Water, the company operating the Atlanta water system under contract, continues to submit change orders at the current rate, the promised savings of $400 million will be effectively neutralized.

It is difficult to transfer responsibility for all capital and O&M expenditures to the company. The more responsibility is transferred and the more tasks are covered, the more difficult it will be for a company to request reimbursements through change orders. At the same time, the contract cost will increase the more responsibility is transferred.

If private operations begin:

Make sure that the city is effectively monitoring contract performance

The city must have an effective oversight team to monitor the contract performance and make sure that that the company is performing according to the contractual obligations.

Companies frequently fail to perform according to all contractual obligations when there is no monitoring mechanism in place. Unfortunately, many local governments feel that once the task of operating the system is transferred to a private company the water or sewer service is no longer of concern.

Private companies take advantage of the lack of monitoring and cut corners whenever possible. However, the company’s failure to perform minor preventative maintenance tasks can leave the city with neglected infrastructure and a high cost of repairs.

Small towns should have at least one municipal employee monitoring the contract. Mid-size cities should have at least 3-5 employees. Finally, large metropolitan centers should have oversight teams of at least 10-15 public employees monitoring the contract.

Annual contract performance reviews must be conducted to help local officials and the public evaluates the company’s performance and make sure that the contractual obligations are being followed. If the city chooses to hire an outside consultant to perform such a review, it must make sure that the consultant does not have any conflicts of interest.

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