Liquid assets

The privatization of water has a mixed record. But with little opposition, Pawtucket officials are moving ahead with plans to privatize the state's second largest public water system

by Steven Stycos

A PRIVATE CORPORATION whose principals included the giant Bechtel Corporation bought the water system in Cochabamba, Bolivia, last year. In April, the New York Times reported that corporate raider T. Boone Pickens is marketing the aquifer under his Texas ranch, and the ranches of his neighbors, to whichever Texas city is willing to pay the most for desperately needed water. Pickens estimates the deal could be valued at $1 billion.

Water is essential to life, and most Americans expect large quantities of it to be supplied by a government agency at little or no cost. But around the world, profit-seeking corporations increasingly control the flow of this basic resource.

In Rhode Island, multi-national corporations are preparing bids to rebuild and operate the treatment plant of the state's second largest public water system, the Pawtucket Water Supply Board. Since 1997, private companies have been hired to operate wastewater treatment plants in Cranston, Newport, and Woonsocket, but Rhode Islanders currently receive their municipal water from a private company -- United Water Rhode Island, a subsidiary of Suez, the French based multi-national corporation -- only in Narragansett and South Kingstown.

Eighty-six percent of water customers in the US are supplied by publicly owned systems, according to a 1995 Environmental Protection Agency survey, but the role of private companies is growing rapidly. In 1997, the water industry got a big boost when the Internal Revenue Service repealed a rule prohibiting private operating contracts of longer than five years for municipal facilities financed by tax-exempt bonds. The results have been dramatic. Since 1996, corporate revenue from operating municipal water and sewer plants has tripled, to $1.68 billion, according to the industry magazine Public Works Financing. That doesn't include the $20 billion-plus global market in bottled water, which, according to a recent report by the World Wildlife Fund, often bears scant difference from tap water.

Demand for high quality drinking water has led Congress to tighten drinking water standards three times in the last 30 years. The most recent standards, passed in 1996, will be phased in for Pawtucket in 2002 and 2004. Because the existing treatment plant was built in 1938, Pawtucket needs a new facility regardless of the regulations, and it would certainly have difficulty meeting the 2004 standards without a replacement, says June Swallow, chief of the office of drinking water quality for the Rhode Island Department of Health.

All Rhode Island communities with reservoirs should meet the 2002 standards, Swallow adds. Woonsocket and Newport, however, may have difficulty meeting the 2004 standards, but they will not know for certain until the EPA finalizes the standards next summer. The Providence Water Supply Board, which supplies 60 percent of Rhode Island with water from the Scituate Reservoir, is unlikely to have trouble with the 2004 standard, Swallow says.

Water supplies in Rhode Island generally meet all federal drinking standards. There are violations, Swallow says, but most occur in small groundwater systems that service a lone restaurant, school, or condominium association. There was a spectacular problem in Pawtucket in August 1992, when residents had to boil water to kill fecal coliform bacteria that penetrated the city's aging pipes. It won't be known if water systems that draw their supplies from wells -- like Westerly, North Kingstown, and the Kent County Water Authority -- need large capital improvements until the EPA issues new radon and virus standards for groundwater this summer, Swallow says.

As US communities with aging facilities and water quality issues struggle to meet the new standards, she notes, most are considering turning their operations over to a private company.

Overseas, private control of water is more common. The United Kingdom in 1989, under the leadership of then-prime minister Margaret Thatcher, sold its regional water utilities to private companies. The result, according to the Wall Street Journal, was a "disaster" of higher prices and poorer service. In Cochabamba, the doubling and tripling of water rates triggered a general strike and forced the government to cancel its contract with San Francisco-based Bechtel. But in nearby Lynn, Massachusetts, a small city north of Boston, Mayor Patrick McManus says the privately operated water and sewer systems have been a success, saving the city millions of dollars.

So far, opposition to privatizing the water supply in the US has been muted, except from the unionized workers who stand to lose their jobs when a private company takes over. In Pawtucket, the water board's 17 treatment plant workers objected to putting their work out to bid, but the public has been quiet. Nationally, Public Citizen, the environmental and consumer group founded by Ralph Nader, hasn't worked on the issue. And a leading environmental group, Clean Water Action, has no firm policy on privatization.

The US Conference of Mayors "encourages public-private partnerships," says McManus, who chairs the group's Urban Water Council. The council, McManus relates, is sponsored by several private companies involved in the water industry, including one, US Filter Corporation, which has an advertisement on the home page of the conference's Web site.

But in Rhode Island, only the Pawtucket water workers' national union, the American Federation of State, County, and Municipal Employees (AFSCME), stands firmly against private operation of public water systems.

THE PAWTUCKET WATER Supply Board, which serves 110,000 people in Pawtucket, Central Falls, and Cumberland, will have difficulty meeting the 2004 standards for byproducts formed during the chlorination process, says Pamela Marchand, the board's chief engineer and general manager. Removing the byproducts, Marchand says, requires large carbon filters that can't fit inside the board's current treatment plant, which was constructed in 1938.

Building an entirely new plant for about $60 million, she says, will be cheaper than rebuilding the existing plant to accommodate the new filters. Repairing old water mains will cost another $70 million, Marchand says. To pay for both needs, the water supply board is preparing to file a rate increase request with the Rhode Island Public Utilities Commission (PUC) in June. While the proposal is not finalized, Marchand says, "Rates will definitely be doubled in 10 years, maybe more."

Pawtucket currently has the lowest regulated water rates in the state, she says. The average homeowner pays only about $200 a year.

Faced with a huge construction project, the water supply board decided to take a novel approach for Rhode Island. Customarily, a water board would hire an engineer to design a new plant, and then have contractors bid to build it. Once completed, the plant would be operated by water board employees.

Acting on the advice of a consultant, the San Francisco-based Eisenhardt Group, however, the water supply board and the Pawtucket City Council requested single bids to design, build, and operate the new treatment plant. Ratepayers benefit, Marchand says, because the financial risks of constructing a new plant, and responsibility for providing water that meets the new federal standards, are placed on the contractor. Costs for the water supply board would increase only if it requested a change in the contract.

Bids, which Marchand estimates will cost corporations about $200,000 each to prepare, are due July 27. But even then it will be difficult to measure whether the design/ build/operate method will save money for the water supply board. McManus insists savings of as much as 50 percent could be achieved because bidders will compete to design the most inexpensive building. Under the traditional system, he says, engineers who independently design a treatment plant have an incentive to propose a large facility since their fee is a percentage of the final construction price. With a long-term operating contract, like the 20-year deal being proposed in Pawtucket, McManus says, more savings are likely, because corporations will invest in cost-saving equipment. Municipalities often have difficulty doing that, he says, because elected officials postpone capital costs to avoid tax increases.

But Dennis Houlihan, a labor economist at AFSCME's headquarters in Washington, DC, is skeptical. Design/build/operate contracts are a new idea and relatively few have been completed, he notes, so it's difficult to conclude whether they generally save money. And rejecting McManus' other argument, Houlihan says public management often makes long-term plans and spreads out costs by issuing bonds.

A study by two staffers in the Massachusetts inspector general's office also found that savings projections from design/build/ operate contracts "can be unreliable" because the long-term contracts are complicated and spread costs over 20 or 30 years. Published in Public Works Management and Policy, the study maintained that a design/build/operate contractor "does not face competition at regular three-to-five-year intervals, and therefore has less incentive to maintain a high level of customer satisfaction or to yield on issues that must be negotiated [during the term of the contract]." The contracts' complexity makes them "exponentially greater" risks for municipal government, the study concludes.

Robert Carr, the lone opponent to privatization on the Pawtucket City Council, says he wanted to test the promised savings by putting both design/build and design/ build/operate options out for bid and comparing them. But he was outvoted when the Eisenhardt Group argued the council had already made that comparison. Preparing a design/build bid would have taken additional time and delayed the project, Marchand adds.

The public should be assured that a private operator will supply good water, Marchand continues, because water quality is closely monitored by the Rhode Island Department of Health, ensuring that the profit motive does not interfere with the public health.

AFSCME, however, opposes the privatization. "Certain day-to-day operations," says Joseph Peckham, business agent for AFSCME's Local 1012, "the government should control." The mayor of Pawtucket, who appoints five of the water board's six members, can be voted out of office if the water supply is poorly managed, Peckham notes. If US Filter -- a probable French bidder whose parent company, Vivendi Universal, operates Universal Studios and manufactures video games -- wins the bid, Peckham notes, it can't be replaced until the 20-year contract is completed.

Houlihan agrees. Losing direct public control of the water supply can be costly, he says. A corporation will supply what is required under the contract and nothing more. Someone else, probably taxpayers, will pay for additional services. The contract must be carefully written, he notes, and the contractor's performance closely watched by the water supply board. In addition, once the water board's employees become private sector workers, he says, they can no longer be used for other municipal work, like snow plowing or emergencies.

But the union has already lost that argument in Pawtucket. With bids being solicited, AFSCME is negotiating to ensure its members won't lose their jobs or pensions. The most difficult issue, Peckham says, is that as employees of a private company, water supply workers won't be able to remain members of the Municipal Employees Retirement System.

Assuming workplace issues are resolved with the union, the water supply board still has to win PUC approval for a rate hike, and PUC and health department approval of the purification system proposed by the winning bidder.

Unmentioned in Pawtucket is another concern, raised by the Council of Canadians, a Canadian public interest group fighting plans to sell tankers full of Canadian lake water to other nations. At a time when water is increasingly scarce due to population increases, privatization is "antithetical" to conservation and sustainable water use, the group argued in a working paper issued last year. No profit will be made from plugging leaks or reducing consumption, notes the Council of Canadians.

The report by the Massachusetts inspector general's office makes the same argument, noting that the design/build/operate contract to run the water and wastewater systems in Taunton, Massachusetts, "all but eliminates Taunton's financial incentives to reduce waste."

Residents of Pawtucket, Central Falls, and Cumberland won't be the first Rhode Islanders to have their water delivered by a corporation should the water supply board award the bid, as expected, this summer. Since 1878, residents of Narragansett and South Kingstown have received their water from United Water Rhode Island, a wholly owned subsidiary of Suez, another giant French water company which is interested in the Pawtucket bid. Operating in the US as United Water, Suez recently won a 20-year $400 million contract to run Atlanta's water system. It not only operates the South County water system, but also owns all the pipes and aquifer.

Stanley Knox, the local company's general manager, says the public is protected because the PUC controls rates and the health department regulates water quality. The company has had no regulatory violations in 20 years, he adds proudly. Health department records, which date back to 1988, confirm the company's spotless performance.

The experience of other privately run water systems, however, illustrate some of the possible pitfalls of hiring corporate water operators. In 1995, Lee County, Florida, hired Severn Trent Plc, a British firm, to run its water and wastewater systems, which serves more than 100,000 people in the Fort Myers area. Five years later, when the contract expired, the county decided to run the operation itself. Business representatives had promised millions of dollars in savings, recounts James Lavender, director of Lee County's department of public works, but Severn Trent did not perform well. There were no water safety issues, he notes, but problems with poor meter installation, customer service, and plant maintenance convinced the county to do away with privatization. The county also did a poor job monitoring Severn Trent, he says.

Lavender has some advice for communities considering hiring a private contractor to run their water systems: "Beware of people showing up at their meetings waiving millions of dollars they could save by turning their utility over to a private company. Their motive," he adds, "is profit."

Residents of Camden, New Jersey, recently made a similar discovery, according to the Philadelphia Inquirer.

In early 1999, they were told that Camden would receive a $20 million signing bonus from US Water LLC, a company controlled by Bechtel, as part of US Water's contract to operate their water and sewer systems. But 18 months later, the Inquirer discovered that the $20 million was a high-interest loan that would ultimately cost $45 million for Camden to repay. In addition, the Inquirer found, the city was responsible for $1.8 million in transition fees to make the change from a publicly to privately run system.