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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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4
Models of Water Service Provision

This chapter describes various public-private arrangements for water service delivery and some of the experiences gained with shifts in ownership arrangements. Many core issues in debates regarding water services privatization relate to appropriate organizational structures for delivering those services. For instance, are government agencies that operate in an open public forum the most appropriate body to deliver water services? Are water services more appropriately provided by private organizations that are subjected to full market forces? How can efficient and equitable organizations for water service delivery be created? How can a public agency ensure under either public or private operations that the water utility will not cut corners on long-term investments to enhance short-term profits, ignore important conservation programs in favor of increased revenue, or tolerate lower water quality in favor of improving the financial bottom line?

As noted in Chapter 1, water services privatization takes many forms and there are many permutations involving ownership and operation. Most choices regarding privatization do not represent a simple dichotomy between public and private ownership. The decision to privatize various sections of the water utility is complex. Nonetheless, governments are more frequently considering this option and weighing its advantages and disadvantages.

Political considerations represent a hurdle to water utility privatization in the United States. Local politicians fear losing control of a public

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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utility and the possible losses of their constituents’ jobs. Long-standing relationships between local officials and water service suppliers are important, as is job security and the role of labor unions in the operations of the nation’s water systems. But public officials must remain responsible for oversight and contract monitoring; for setting, monitoring, and enforcing water-quality standards; for protecting ecosystems; and for bringing the public into the process in an open and transparent fashion. Whether a public or private operation provides water services, failure of the organization to fulfill a community’s expectations will result in public protests to the local government. This issue is at the heart of the quandary for the public official: if a municipality decides to privatize, how can public officials ensure that, in case of failure, they can gain sufficient control of the operation to restore service? On the other hand, if a municipality decides to operate the facilities itself, how can the public official ensure that the public’s money is being well spent? Private organizations do not necessarily operate efficiently, nor are they inherently more efficient than public organizations. By the same token, public organizations do not always deliver on their promises. The point is that neither public nor private organizations automatically entail “effectiveness.” Well-run and poorly run organizations exist in both sectors.

When an organization provides a public good or service such as water and wastewater services, there are often other, more subtle factors integral to the organization’s purpose. For example, is the organization to deliver services to all members of the public, regardless of their ability to pay? Or is it to deliver those services strictly based upon customers’ ability to pay? Does the community expect the organization to deliver the best service possible, regardless of cost? Or is the lowest acceptable level of service to be provided at the lowest possible cost? Is the operation expected to assist in other public purposes in times of emergencies (e.g., snow removal; recovery from tornado, hurricane, or earthquake damage)? Is the organization expected to help meet other social goals such as giving preference for supply contracts to local businesses, to disadvantaged segments of the population, or to environmentally friendly firms?

Public service delivery is often an important factor in decisions about where people choose to live. If a public utility also provides disaster response teams, grounds maintenance, and snow removal services, important social objectives may be compromised with the restructuring of the public service. Ancillary services such as transport services or snow removal add to the price paid for the service, and if they are not perceived as adding value, consumers may not be willing to pay the additional price. Consumers tend to hold public services provided by governments to different standards than they do most privately provided services.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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Public services tend to be monopolistic and are delivered at the same level to all public consumers, and the public collectively expects them to be of a reasonable quality and reliability. The challenge for public officials is that the public determines the measure of “reasonable quality and reliability” while the public may not widely agree on important measures of quality and reliability.

FOUR STRATEGIES

Public officials often select from four broad options for improving the delivery of public services: (1) improve current public operations, (2) contract the provision of all services to a private operation that will provide services largely in the same manner as the current public operations, (3) provide improved service through a public operation with a mixture of public and private services, and (4) divest public assets and transfer ownership to a private firm.

Strategy 1—Improving Current Public Operations

Professional water utility organizations like the American Water Works Association have long recognized the need for public utilities to address organizational and management issues. Public utilities have accordingly taken measures to improve performance through strategies directed at improving worker productivity, upgrading capital facilities, and streamlining procurement of goods and services. Each utility is unique in terms of the condition of its facilities, its organizational structure, and its management. Nevertheless, several initiatives can be utilized to enhance performance and reduce costs.

Several progressive public water utilities have instituted management initiatives directed at improving organizational efficiency. These initiatives focus on performance, procurement of goods and services, labor productivity, and organizational culture. Public organizations are often bound by rules and regulations that can make them unresponsive. Coupled with labor agreements, these barriers sometimes make it difficult to realize improved efficiency. Local governments that want to eliminate the costs of such bureaucratic processes and procedures have two main options: (1) make the municipal bureaucracy more responsive to consumer needs and (2) organize the utility into a stand-alone entity such as an authority, in which case the entity’s board of directors would establish personnel, fiscal, and other policy.

An innovative example of a stand-alone entity is the Louisville Water Company in Kentucky, which serves the city of Louisville and surround-

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

ing communities. Authorized by special legislation of the Kentucky state legislature over 70 years ago, the utility’s organizational structure is modeled after a typical private corporation, with a board of directors appointed by the shareholders. The difference is that the sole shareholders are the city of Louisville and Jefferson County, which surrounds Louisville. In this arrangement, the utility operates at arm’s length from the governments, freeing it from the usual bureaucratic hurdles, yet a board of directors selected by the governments protects the public’s interests and public policy.

Benchmarking and Performance Measurement

Benchmarking refers to the process of comparing the performance of a utility or one or more of its processes or functions with the performance of similar utilities, processes, or functions. The technique ranges from informal comparisons of data to sophisticated econometric analyses, usually statistically linking unit costs of water delivery to characteristics of the environment in which the utility is operating. The procedure has been experimented with extensively in the United Kingdom, where privatized utilities are under the regulatory control of the Office of Water Services (OFWAT). This office uses these comparisons in setting “price caps” for individual utilities, while allowing utilities that exhibit below-average unit costs larger price increases in relation to the rate of inflation (chapters 6 and 10 in Armstrong et al., 1994; ICR Byatt, 1997). There are several challenges in data collection and interpretation, such as difficulties in measuring output, in determining the components of unit cost, and in the use of book values of assets in computing long-run marginal cost. In this regard, the ability to collect cost and output data from similar utilities may be easier with public utilities because of disclosure requirements. In the private sector, much benchmarking information may be considered trade secrets, while public utilities usually openly share information and research efforts.

Benchmarking efforts help public utilities share knowledge and benefit from the latest self-improvement techniques. They can provide an overall assessment of individual utility performance and, more powerfully, they can be utilized to evaluate the performance of components of the business, such as quality of service, quality of product, metering, operation and maintenance, worker productivity, and capital investment. Indeed, seeing how a utility or a utility’s business process compares with other utilities creates a powerful incentive to improve performance.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

BOX 4-1
Improving Water Utility Operations and Management in the Western United States: Experiences of the San Francisco Bay Area and Phoenix

The East Bay Municipal Utility District (EBMUD) serves 1.2 million customers in Oakland, California, and recently utilized a “reengineering” program to help improve its water system maintenance practices. EBMUD auditors identified the need for a review of business practices in several areas: materials handling, purchasing, work management and scheduling, maintenance needs and setting priorities for repair, information systems, and preventive maintenance. The district decided to initially focus on all processes related to maintenance and issued a request for proposals for a business process review and suggestions for improving those processes. After selecting a proposal and evaluating the suggestions, EBMUD estimated that it could save at least $6.7 million per year (with an initial outlay of $1.2 million) in system technology improvements, and it could improve its organizational climate.

The Phoenix Water Services Department (PWSD) faces several challenges in meeting customer demands. Water service providers across the nation share many of Phoenix’s challenges: customer demands for high-quality/low-cost water, limited ability to affect future rate increases, regulatory concerns, aging infrastructure, rapid population growth, and prospects of both regionalization and privatization. The city was especially concerned about the prospects of privatization and recognized that private sector firms held potential advantages over the public sector in many areas.

To help meet these demands and to help improve its performance, in 1995 the Phoenix Water Services Department began an internal review to see how it com

Organizational Improvement

Organizational improvement, often referred to as “reengineering” or as “capacity building”1 in the water utility field, represents a set of methods to change business processes and organizational climate. Business process reengineering has been defined as the fundamental rethinking and radical redesign of existing business processes in order to achieve improvements in performance measures such as cost, quality, service, and speed. Reengineering in the water utility sector generally begins with goal setting and an assessment process that includes evaluation of a range

1  

The term “reengineering” (or “capacity building”) is used to describe changes in water utility organizational performance. These changes borrow from concepts and methods from fields such as public administration and evaluation. Outside the water utility sector, efforts aimed at improving organizational performance are known by other terms such as “organizational strengthening.”

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

pared with well-run public utilities. The utility was especially interested in union-management relations, and it established a Participating Association of Labor and Management (PALM) group to identify and focus on the key issues. PWSD then initiated a comprehensive reengineering plan that constituted the most ambitious internal change process in the utility’s history.

The program focused on several areas, including improved union-management relations, dispute resolution, and employee empowerment. The city enlisted industry consultant assistance and worked with several of its sister agencies within the city and with local unions. The city identified several clear goals in the process: develop empowered, self-directed teams; ensure that no employee would involuntarily lose a job within the city; maintain or improve levels of customer service, product quality standards, and environmental protection; and become a “best in class” water utility, with cost-effective operations. The PALM group sought to move from a reactive maintenance mode to a planned maintenance strategy, to merge formerly separate operations and maintenance (O&M) staff into a combined O&M program, and to emphasize on-the-job training and cross-training (e.g., encouraging staff to develop multiple skills across the utility).

Initial results have been impressive: $3.1 million saved in the first phase of reengineering, with additional savings of nearly $2 million. In 1999, PWSD estimated savings of more than $10 million by the year 2000. PWSD also estimated that improvements in operations efficiencies allowed them to avoid hiring 72 additional staff.

How does reengineering within a public organization compare with the prospects of privatization? According to PWSD director Michael Gritzuk, “Privatization doesn’t even begin to address the scope of what a reengineering project can address” (AWWA, 1999).

of business processes that include: work practices, information management and technology, procurement of goods and services, management systems, and organizational structure. Box 4-1 describes examples of reengineering in the San Francisco Bay area and in Phoenix, Arizona. These examples also highlight the importance of including labor to help improve organizational performance. In the East Bay Municipal Utility District (EBMUD) and Phoenix experiences, both labor and management were intimately involved in the evaluation, modification, and implementation of consultant recommendations. Areas addressed included management systems, work task redesign, team building, and strategic use of information technology. Both utilities had labor forces willing to allow workers to perform multiple jobs utilizing multiple skills in exchange for increased compensation.

But improving an organization’s overall performance includes more than merely changing its organizational chart. As evidenced in the EBMUD and Phoenix examples, successful change involves an overall

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

change in the way members of the organization perceive and carry out their work. In initiating useful changes, the organization must understand the nature of its “core culture.” Just as societies and cultures exhibit different customs, traditions, and beliefs, organizations also develop unique cultures. The key to initiating successful change is to understand the key elements of an organization’s core culture and how they impact utility characteristics such as strategy, leadership, and business processes.

Financial Incentives

Public water utility service professionals have long contended that utility revenues should be kept separate from other municipal revenues and should be directed solely toward the operation and maintenance of existing facilities and the development of new facilities. They advocate cost-based pricing, dedicated revenues, and long-term capital improvement planning and implementation. Many communities have blended water revenues with other government revenues, allowing revenues needed for upgraded capital facilities and/or enhanced operation and maintenance to be diverted to other government services. But this constitutes a lack of transparency and accountability.

In some cases, such as in New York State, municipalities have found themselves unable to finance additional capital improvements because of constitutional limits on borrowing. As a result, capital improvements have been deferred, resulting in increased operation and maintenance costs and in greater difficulty achieving environmental and public health objectives. In New York City, legislation was passed that allows the city (municipalities) to form a water finance authority that could issue revenue-backed bonds. These funds were exempt from the state’s constitutional debt limit and were issued at significantly lower interest rates than subsequent city general obligation finances.

Strategy 2—Contracting All Public Service Operations to the Private Sector

Increasing interest in the prospect of private sector involvement in the water and wastewater industries has led to the emergence of “privatizers,” which include investor-owned utilities and other private interests that seek an expanded role in water and wastewater services. Some privatizers will operate utilities only where they hold ownership of the utilities’ assets; these are often referred to as investor-owned utilities. However, most privatizers will enter into contractual arrangements with public or private water and wastewater utilities to operate facilities they do not own. Such arrangements are usually referred to as “contract opera-

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

tions.” Some firms own and operate utilities while also providing contract operation services. Hundreds of U.S. water or wastewater systems are operated in this fashion. Most “privatizers” actively market their engineering and managerial expertise and, in some cases, also offer special financing arrangements to the contracting utility or municipality.

The outsourcing of noncore services such as meter reading or provision of supplies to specialists is common in both the private and public sector in the United States, as well as in many other nations. Outsourcing arrangements are intended to allow businesses to focus on their core areas by hiring specialists to perform ancillary work. Many U.S. cities and counties have outsourced the design, financing, construction, and operation of many systems, including airports, hospitals, toll roads, and waste-to-energy refuse disposal systems. But outsourcing of services in the water and wastewater sector is of greater significance than in other sectors, as a larger percentage of water and wastewater services are currently operated by their public owners. Contracted duties in the water utility sector include design and construction, financing, and many services included in operation and maintenance of facilities, including laboratory services, vehicle maintenance, meter reading, and public relations.

Governments usually outsource only a limited portion of their water utility operations to the private sector. According to a recent survey of 261 cities by the U.S. Conference of Mayors Urban Water Council (1997), municipally owned water systems operating under contract serve less than 10 percent of the population and municipally owned wastewater systems operating under contract serve less than 6 percent of the population. That survey also found that 40 percent of municipally owned wastewater facilities have some private sector involvement other than engineering, while another 14 percent are considering it. The U.S. Conference of Mayors’ survey and a Water Industry Council survey (1999) indicated that the most frequently cited reason for outsourcing of water or wastewater treatment services was the expected reduction of operating costs. Environmental compliance and political ideology were also noted as factors that encouraged privatized operations (Box 4-2 describes the experience with water services privatization in Atlanta).

American Commonwealth Management Services provides guidelines designed specifically for public utility commissions, other regulators, and grant and loan agencies (Schmidt, undated). These guidelines identify the conditions under which contract operation and maintenance services can best be used, as well as the variety of services available (including management, planning, engineering, record-keeping, reporting, evaluation functions, etc.). The U.S. Environmental Protection Agency has also prepared a quiz (Box 4-3) for municipalities considering contracting operations and maintenance for a wastewater facility (EPA, 1993).

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

BOX 4-2
Water Services Privatization in Atlanta

On January 1, 1999, the United Water firm assumed operation of the city of Atlanta’s water system after nearly a two-year process of public debate, bid solicitation, and selection. Under a 20-year agreement, United Water operates a 136 million gallon/day and a 56 million gallon/day water treatment plant along with approximately 2,400 miles of transmission and distribution water mains. They also provide the utility’s water system maintenance, customer service, and billing and meter reading services. In the Atlanta area, United also operates three wastewater treatment plants in northern Fulton County (Campos et al., 1998).

The 20-year water agreement provided for $21.4 million in annual compensation to United Water in return for water services to 1.5 million residents. This represented nearly a 50 percent reduction in operating costs when compared to operating expenses of the municipally run utility in 1998. Although no independent studies have been completed to determine actual savings since United Water has taken over operations, United and city officials at the time of signing the agreement had projected $400 million in savings over the life of the agreement. The savings are expected to go into capital maintenance and replacement programs rather than reductions in water rates.

United Water is the North American subsidiary of parent company Ondeo, a Paris, France based multinational conglomerate. In 2000, Ondeo had revenues of $8.5 million with operations in 130 countries.

U.S. Internal Revenue Service Regulation 97-13 allows contract operators with the financial strength to guarantee long-term performance an opportunity to lock in a municipally assured cash flow of up to, and sometimes exceeding, 20 years (see discussion in Chapter 3). This made it economically reasonable for a utility to operate at a loss for several years as long as it was reasonable to expect to recover that loss in the latter years of the contract. The long-term contract also made possible major infrastructure investment, 20 years being a sufficiently long time to fully depreciate investment in equipment and collection and distribution systems. The long-term contract has allowed contractors to offer municipal clients an “up-front” fee for the right to operate for 20 years. Of course, this fee (often called in the United States a “concession fee”) is factored into the annual charge to the client for system operation. Although continuing to remain small relative to the total U.S. population served, following IRS 97-13, the number of large cities contracting for their water and wastewater operations has increased. The award of a long-term contract typically does not depend on lowest price alone but rather on best value—i.e., best combination of successful operating history, financial strength, technical expertise, and price. Nonetheless, most contracts are awarded to the company offering the lowest life-cycle cost.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

BOX 4-3
Considering Private Operations and Maintenance: EPA’s Quiz for a Municipal Wastewater Utility

If your answer to most of the following questions is “yes,” then you may want to seriously consider using contract operations and maintenance.

  • Design problems? Has the plant had trouble meeting design specifications from the beginning? Have increasing design problems come to light as the plant has aged? Has staff had to jerry-rig solutions to design problems too often? Is the plant being run to design parameters?

  • Excessive costs? Has the wastewater budget been increasing disproportionately as the plant has aged? Are replacement costs high? Are the same items being replaced too frequently?

  • Personnel problems? Is morale low? Is staff over-worked, but poorly utilized? Is staffing out of synch with work-load and shift requirements? Are there labor-management disputes? Is salary not commensurate with performance? Is staff hard to acquire and keep?

  • Public-image issues? Do citizens complain about over-flow and backup problems? Odors? Appearance? Higher user charges? Water-quality problems?

  • Operating inefficiencies? Do plant managers fail to take advantage of opportunities for cost savings or economies of scale? Are certain operating units underused? Have chemical or energy costs risen excessively?

  • Compliance difficulties? Has plant effluent frequently been in violation of standards? Has the plant experienced enforcement actions? Is compliance regularly marginal? Are periodic problems from industrial loads frustrating compliance?

  • Training issues? Do plant managers fail to provide training in a consistent, effective manner? Is staff inadequately prepared to deal with sophisticated equipment? Are there too many specialists and not enough generalists on staff? Does the plant have above average safety probl5ems or lost-time accidents?

SOURCE: EPA (1993).

In addition to national-level regulations, the International Organization for Standardization (ISO) has developed a set of international standards for utility performance. Based in Switzerland, the ISO provides a basis for certifying enterprises based upon performance benchmarks. Certification under ISO 9000 and ISO 14000 uses a standardized system for assessing company performance, particularly in terms of resource management and environmental protection. The U.S. representative to the ISO is the American National Standards Institute (ANSI), whose membership includes more than 1,000 private and public members. ANSI administers and coordinates a voluntary standardization and conformity assessment system in the United States, and provides formal national standards.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

Compliance with ISO 9000 and 14000 has been included in water privatization service contracts in the United States, and the familiarity of prospective contractors with ISO procedures has been part of evaluation criteria. A proposal by France to have the ISO set standards for contracts on water privatization around the world was approved in late 2001; as this report went to press, the ISO was establishing a committee to enact this proposal.

Private firms may not be able to assume operations and willingly invest significant resources to fix a water utility’s ills and also reduce prices. Private companies and their shareholders will not invest money in a local community without receiving reasonable returns on investment. Over the short term (5-10 years), private firms are most likely to effect changes in organizational structure and functioning, such as staff reductions and supply cost savings that help achieve cost and service efficiencies. The resulting savings may be sufficient to pay for needed capital investments and pay the needed return to the firm’s shareholders.

Contractors accomplish operational benefits and savings in cost by being energy-efficient, purchasing-proficient, staffing and training oriented, economically positioned, technically deep process-control versed, automation-knowledgeable, and improvement-astute (PWF, 1994). In Farmington, New Mexico, for example, a 30 percent reduction in water system operating costs was attributed to consolidation of the maintenance groups of different facilities, the installation of management control systems to save on power and chemicals, and the implementation of changes in physical facilities to promote more efficient utilization of the utility plant (Haarmeyer, 1992). On the other hand, it is possible that contractors might achieve cost savings by cutting staff, by not making necessary investments in operations and maintenance, and by reducing necessary long-term investments.

When a public utility’s operations are handed over to the private sector, the public agency’s importance in running the agency does not diminish, but the way the agency performs its role changes dramatically. For the local government, it becomes a question of contract management versus traditional program management. When a contractor provides the operations, the local government organization’s focus is on contract management. The talents and skills needed for contract management are significantly different than the talents and skills needed for traditional operations management. The importance of reorganizing for contract management must be recognized. After all, if an agency could not capably manage itself, it probably would not be able to immediately change and effectively manage outside contractors (Scalar, 2000).

Successful contract operation arrangements ultimately rely upon a good working relationship between the contractor and the public agency.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

This relationship begins with a contract that clearly states the unified purpose of the function being turned over to the contractor, a well-defined understanding of customer preferences, and a description of the division of responsibilities between the contractor and the public agency. Each of these responsibilities requires specific performance measurements to assure that the contractor has performed up to expectations and is deserving of the prescribed compensation. Clear and measurable performance indicators are essential to answer questions such as “How will we know if the private operating firm is meeting the terms of the contract?”

Under a well-designed agreement, full-contract operations firms can help pay for the cost of some capital improvements, provide corrective and preventive maintenance, apply specialized knowledge and experience, install computerized management systems, prepare regular reports, document and disclose costs and savings, implement sound management and staff motivation practices, and assume most utility-management headaches (EPA, 1993). Many contract firms prefer to operate under a contract of five years or more so that they can establish a track record with the client, prove their effectiveness, and spread their front-end costs over several years. Some contracts require that the contractor pay fines for violation of drinking water and effluent standards.

Small and Rural Contract Operators

The practice of contract operations has been common in the United States for small and/or rural communities including suburban or ex-urban subdivisions and mobile home parks. Water or wastewater systems for such communities generally serve less than 3,300 households and businesses. In the United States these systems make up 78 percent of all drinking water systems, with a majority of these small systems serving fewer than 500 people (EPA, 1999a; see also Chapter 1). For these small or remote communities, it has often been economical for a specialized contractor to oversee water and/or wastewater system operations of several small communities, rather than to burden a community with a service that might require only a few hours per week of attention. Most contract operators in the country remain small, local “mom and pop” type businesses. According to the EPA, there are approximately 46,000 small and remote water operations in the United States, but they constitute only 15 percent of the volume of water processed (EPA, 1999a). The percentage of these systems that are under contract operations is unknown, but the needs of these small operators and the manner in which these operators interact with their clients and communities differ markedly from large regional companies or large multinational conglomerates.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

The needs of firms that operate small and/or rural water utilities differ from those of the major multinational companies. Small utilities cannot take advantage of the economies of scale to the extent that larger utilities can. Small firms usually do not have access to specialized technicians that multinationals retain. The borrowing and bonding power of large firms is essential for competing for and operating large water and wastewater systems. Rural firms are often protected from competition by oft-renewed short-term contracts perpetuated by the long-term involvement of the firms with the community. Small and rural firms also are often too dispersed for multinational firms to be effective competitors, and contracts tend to be too small to be of interest to these large companies.

Contract operators headquartered near the site of operations may have a better understanding of local needs. A relationship may eventually develop between the facility owner and an efficient operator. An operator may have a competitive advantage by being headquartered near the site. The operator may have a detailed understanding of the needs of the facility and the community it serves. In many cases, the contract operator is a former municipal employee stationed at that plant and certified to operate it. The contract operator typically negotiates directly with the owner for the terms and conditions of the contract. Contract terms are usually between one and five years. The contract is typically renewed on a sole source basis for the same reasons it was initially consummated. If the relationship is mutually satisfactory, the level of trust and familiarity that can develop between a client and contractor can create a barrier to new entrants competing for the contract. There are occasions, however, when a contractor terminates a satisfactory partnership. The principals of a contract firm may retire, sell their business, or die. A larger contractor may offer such significant improvements that the community is induced to open the contract process to competition. Such competition from larger regional or national contract operators has occurred more frequently since the mid-1990s.

In 1997, a National Research Council committee reported on small water systems (NRC, 1997). The report noted that water supply is generally acceptable if a well with an ample supply of good-quality water is available. However, this is often not the case, in which event problems are likely to ensue. Improvement costs are high, and the original contractor may not be qualified to make the changes. Small communities that lack sufficient resources for water treatment and distribution can have difficulty meeting federal Safe Drinking Water Act standards. Systems serving fewer than 500 people violate drinking water standards for microbes and chemicals more than twice as often as systems serving larger communities (NRC, 1997). A key problem concerns small, private developers that

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

build a community distant from a city, where land costs are lower, and they put in their own water supply and wastewater treatment and disposal facilities. Getting approval is generally no problem as the technology is widely employed. The developer or a homeowners association generally owns the facilities, and they almost always contract out the operation and maintenance to private contractors.

Wastewater problems are far more numerous. Package plants for these small communities are “off-the-shelf” but require competent operation and maintenance. Their failures come to the attention of regulatory agencies only when a nuisance is created and complaints are made. In many cases, the facilities put out a poorly treated effluent that is not discerned because it reaches a point of disposal without creating a nuisance. State regulators seldom have the resources to monitor the facilities. Private assistance can be helpful, but small, local private contractors are often not fully qualified, and the facilities are too small to warrant a large and competent contractor’s interest. Public or private regionalization (the assumption of the operations of multiple water or wastewater systems in a given area by a government agency or a private organization) is a viable strategy that has proven to be useful in both circumstances. For example, the Greater Cincinnati Water Works, a department of the city of Cincinnati, Ohio, has actively pursued regionalization strategies by providing smaller utilities with technical and operational assistance, wholesale supply of finished water, or a merger of operations into the larger utility when desired. Similarly, the American Water Works Service Company has pursued a specific strategy of purchasing or entering into contract operation agreements with groups of small utilities. These types of regional approaches, which can be accomplished by either public or private organizations, achieve economies of scale from common operations, as well as improved customer service through an organization with access to greater technical and operational skills.

Strategy 3—Combining Public and Private Roles

A third option for public utility officials considering improvements is a mixture of public and private services within the utility. This approach implies that the efficiencies that a private firm can achieve in the operations of specific tasks of the public utility can be achieved at less cost to the consumer despite the need for shareholder return. The key with this option is a careful review of the utility’s operations to determine which parts can more efficiently and effectively be provided by internal resources versus outside “private” resources.

In reality, a mixture of public and private services within a utility operation has been a common practice (albeit on a limited scale) for de-

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

cades. Many U.S. utilities have often used engineering firms to design, prepare bid specifications, and manage construction of new facilities. Some utilities contract with private firms to provide billing and meter reading services, and most utilities use private firms to perform specialized maintenance tasks and laboratory services. However, with technological improvements and extensive use of the Internet, utilities have been able to effectively merge public and private services and to use private firms’ services to a larger extent.

The EPA has long advocated the use of public-private contracts as a means of addressing the rising cost of complying with critical environmental regulations (EPA, 1990). The EPA believes these types of partnerships will help reduce costs, speed project completion, guarantee performance, and preserve jobs (EPA, 1990). Some common types of partnerships are summarized in Table 4-1.

The EPA has documented some successful public-private partner-

TABLE 4-1 Public-Private Contract Options

Partnership Option

Description

Acquisition

Public utility sells the facility to private contractor, resulting in private ownership and operation.

Joint Venture

Private contractor owns facility in conjunction with public utility.

Build, Own, and Transfer (BOT)

Private contractor builds, owns, and operates the facility. At the end of the specified period, such as 30 years, the facility may be transferred to the public utility for a nominal fee.

Turnkey Facility

Private contractor designs, constructs, and operates the facility. The public utility retains ownership and generally assumes the financing risk, while the private contractor assumes the performance risk for minimum levels of service and/or compliance.

Full-Service Contract

Public utility contracts with private contractor for a fee to operate and maintain the facility. The public utility owns the facility (although it may have been built by the private contractor).

Contract Operations

Private contractor operates and maintains the public utility’s facilities over the long or short term.

Contract Management

Private contractor manages and supervises the public utility’s personnel.

Operations Assistance

Private contractor provides transition management or program management to improve effectiveness of the public utility’s operations.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

ships, including projects in Mount Vernon, Illinois (construction and operation of a wastewater treatment plant); Scottsdale, Arizona (creative financing for drinking water supply); Dowingtown, Pennsylvania (regionalization for upgrading and expanding wastewater treatment facilities); and Kerrville, Texas (competitive negotiation for financing wastewater treatment facilities). Examples of other successful partnerships include the Western Carolina Sewer Authority (two-step competitive bidding for wastewater treatment plant construction and operation) and the Seattle, Washington, Tolt River treatment plant project. Two major privatization initiatives in wastewater treatment (in the city of Indianapolis and the Miami Conservancy District in Ohio) are EPA demonstration projects that will be closely monitored and analyzed. In the year 2000, over 60 competitive government contracts were announced, totaling $113 million in annual revenues (PWF, 2001).

A form of public-private partnerships that has recently gained a wider acceptance is the use of design-build or design-build-operate agreements between public agencies and private firms. In the construction of a capital asset, water utilities can enter into privatization agreements at three separate stages in the development of a capital facility: (1) prior to the design of the project, (2) after completing the preliminary design, and (3) after completing the final design, but prior to construction (Westerhoff, 1986). Each approach has unique advantages and disadvantages. For example, the first approach provides the private firm with the opportunity to construct a facility that it views as the most cost-efficient. The second approach can facilitate joint development of the project, so that the interests of both parties are served. The third approach provides the water utility with maximum control over the design of the project before the private firm begins construction. Box 4-4 shows case studies of DBO projects in Seattle and New Jersey.

Growing Interest in the Design-Build-Operate Model

The design-build-operate model (DBO) of public-private water system partnerships has become popular with some contract operators and private water companies. In this model, one corporate entity, possibly composed of a partnership of several companies, has responsibility to design the water or wastewater facility or system and then build and operate it under contract for a period, typically between 15 and 25 years. The advantage of this system is that the designer is motivated to anticipate operation problems and to design for the best overall performance over the contract period. Financing of the project may also be included as a contractor responsibility although the contracting community typically retains ownership.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

BOX 4-4
Design-Build-Operate Projects in Seattle and New Jersey

Seattle: One notable example of cost savings through the design-build-operate model is Seattle’s 1997 procurement of a new 120 million-gallon-per-day water treatment plant following substantial completion of a conventional design. The estimate for the construction and operation costs of the conventional design was $171 million over the 25-year maximum project life. The selected DBO proposal was for $101 million, providing savings of $70 million, which is 41 percent of the engineering estimate.

The city is also proceeding with the Cedar Treatment project to treat 180 million gallons per day with provisions to treat 275 million gallons per day, at an estimated DBO savings of $50 million over the estimated cost of a conventional procurement process. The project enhances Seattle Public Utilities’ (SPU) existing multiple barrier approach to provide reliable public health protection and specifically provide treatment for Cryptosporidium, and it addresses the non-health-related taste and odor issues associated with the Lake Young reservoir on the Cedar supply.

CEDAR TREATMENT PROJECT

Capital Cost (permitting, design, construction, in millions $)

Operating Cost (25-year present value; in millions $)

Total (25-year present value; in millions $)

SPU’s estimated cost for design, build, and construction of thefacility using a conventional design-bid-build contracting approach (in 2001 dollars)

$115.0

$49.0

164.0

Amount negotiated with contractor

$78.0

$31.0

109.0

Add estimated cost of SPU oversight

$3.0

$1.30

4.3

The contractor that provides the proposal deemed most advantageous to the community must deliver a finished facility to the community on a certain date and at a guaranteed cost, and the facility must be able to pass an independent test of its performance. After passing an “acceptance test,” the facility is placed in service and is operated by the contractor. In this model, one entity bears full responsibility for all elements of the project from design through 15-25 years of operation. This differs from conventional municipal procurements, which typically have started with the non-competitive selection of a qualified engineering firm to design a new facility under a professional services agreement. Construction of the facil-

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

New Jersey: A similar but smaller project in Washington Borough, New Jersey demonstrated the differences between the conventional and the DBO model. (Mangravite, 1999). The initial engineering estimate for construction of this 3.6-million-gallon-per-day wastewater treatment plant was $11 million. Private firms offered a combined design-build-operate procurement as a means of reducing overall cost. The borough invited the firms to develop nonbinding conceptual proposals. The Borough and its consultants compared the conventional engineering-construction model of procurement to the design-build-operate model. The Borough’s consultants prepared a Request for Proposal for each concept. On the same day, November 7, 1998, the Borough received cost proposals for a DBO project and construction bids for a conventional design. After comparing the costs and benefits, including time to completion and full life-cycle costs, the Borough voted to negotiate with two DBO firms. The DBO advantages were the shorter DBO construction period, a design cost of $370,000, 58.4 percent lower than the estimated cost of sole source conventional design fee, and lower construction costs. The proposed construction cost in the conventional model averaged $10.28 million, which was close to the $10 million estimate, about 10 percent below typical construction costs for a project of this nature. The construction price for the selected DBO proposal, after subtracting cost of design and management, was $7.4 million. This is 16 percent lower than proposed in the conventional model for Washington Borough and 25 percent lower than is typical for this type of project.

SOURCE: Mangravite (1999).

ity is then publicly bid, with the award going to the lowest bidder. After start-up, the municipality operates the facility. In a DBO procurement, the DBO firm is the construction manager. This is done to aggregate all design and construction liability. It also eliminates change orders for all but uncontrollable circumstances.

Another area where privatization can be used is in the development of joint water projects among two or more utilities (Hardten, 1984). The utilities can enter into an agreement with a private firm to develop source of supply, treatment facilities, and possibly distribution networks. By serving more than one community, joint projects can help the utilities share

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

costs and realize economies of scale. Joint projects also facilitate regional water supply planning and environmental management of water resources.

Lease Financing

For utilities willing to delegate some elements of control, especially ownership, leasing has emerged as an alternative technique for financing equipment and facilities for water utilities. For investor-owned utilities, leasing is a means of reducing equipment costs and eliminating construction expenditures. For publicly owned utilities, leasing is a form of privatization, as well as a means of compensating for the reduced availability of federal and state government construction grants. Leasing can be complex, with tax consequences for the lessee (the water utility) and tax benefits for the lessor (the private firm providing the leased good or the lender). The simplest form of leasing is the direct lease (AWWA, 1986). A leveraged lease is a more complicated three-party lease in which the lessor (the owner) acquires financing from a third party (the lender) for the bulk of the cost of the equipment or facility. A third form of leasing involves certificates of participation (AWWA, 1986).

Leasing provides several advantages for the various parties involved. The primary advantage for the lessee (the water utility) is the capability to have equipment or facilities in place more quickly because of fewer obstacles than with conventional financing. In other words, private financing results in less regulatory oversight, fewer delays in bringing the equipment or facilities on-line, and lower aggregate project costs. The leveraged lease has some unique advantages. For tax purposes, the lessor owns the equipment or facility and thus qualifies for federal tax benefits based on the total equipment or facility cost. The third-party lender receives interest payments that generally exceed those associated with comparable loans. The lessee receives the benefits of lower equipment and facility costs. By transferring a portion of the tax savings linked to equipment purchases and facility construction, the water utility can obtain external financing, thus saving water customers substantial capital costs.

Lease financing has additional advantages (Crane, 1987). Leasing frees some funds for other purposes and reduces the risk of obsolescence associated with aging equipment. In a regulatory context, lease financing can be viewed as a technique for coping with rate shock (large increases in rates to generate sufficient cash to pay for expensive equipment or building replacements), because it alters the capital recovery pattern for the investment. Lease financing permits expense treatment rather than ratebase treatment of the equipment or facility. With rate basing, investments in capital assets (buildings and equipment) begin with high front-end

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

costs that decline over time with depreciation. The large cash outlay at the time of purchase requires significant rate increases to raise the needed cash. With leasing, level payments are made indefinitely. Leasing can reduce initial revenue requirements and result in lower initial rates, although ratepayers actually may pay more for equipment or facilities in the long term. A similar example would be purchasing versus renting a home. In the purchase arrangement, the new homeowner usually pays a sizable upfront down payment on the purchase price and then makes monthly mortgage payments. Once the loan is repaid, the homeowner holds title to the asset and no longer has to make payments toward its purchase. On the other hand, the renter usually makes lower monthly payments for the use of the home and does not have to make a sizable upfront payment. But because the renter never owns the home, he or she will have to make payments indefinitely.

Disadvantages to lease financing also exist. Leasing essentially shifts some costs from capital to operating expenditures, depending on how lease payments are accounted for. In all leasing arrangements, insurance costs can be substantial since the lessor will require that the lessee be fully insured. In a leveraged lease, transaction costs are substantial, given the number of parties involved and various tax and legal complexities. With certificates of participation, the use of purchase options requires that interest-rate protection be provided to the investors. Finally, lease financing means that the water utility cannot earn a rate of return on the leased asset.

At the completion of the lease term, if the water utility does not want the facility, the lessor is left with an unwanted facility and the risk of being regulated by a regulatory commission. Changes in tax rates may result in lessors not receiving the anticipated tax savings. Lenders face the risk of defaults on payments of interest and principal. Problems with lease financing result primarily from each party having a different view of the arrangement’s advantages and disadvantages. The lender seeks a high return on borrowed funds; the lessor is concerned about the repayment of capital and tax benefits; and the lessee is concerned about the impact on costs, revenue requirements, and fulfilling the obligation to serve should something go wrong.2

Strategy 4—Private Ownership of Utility Assets

Turning over ownership of utility assets to an investor-owned utility is the most extreme form of privatization, but there are situations where

2  

A bankruptcy by the lessor, for example, could force a sale of facilities, which may not be in the best interest of a utility or its customers.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

this might be the best path to follow (Table 4-2 lists the major U.S. investor-owned water utilities).

There are several potential advantages of asset divestiture as a strategy (Beecher, 2000). Local government is released from direct responsibility for managing and planning operations. Monitoring of responsible operation is typically assumed by a state regulatory agency. Divestiture may facilitate regionalization and the integrated operation of water and wastewater facilities. Operating practices, pricing of services, and financing are removed to a greater distance from local politics, while opportunities for fraud and nepotism may be reduced. The privately owned utility will

TABLE 4-2 Larger Investor-Owned Water Utilities in the United States

Water Utilities

Operating Revenues (in millions $)

Residential Customer Connections

Total Water Delivered to System (in billions of gallons)

Pennsylvania American

291

495,917

71

New Jersey American

244

300,755

52

California Water Services

203

339,278

109

Southern Californa (American States)

160

238,511

64

Philadelphia Suburban

151

280,779

40

Elizabethtown (Thames)

133

187,993

49

United New Jersey

124

160,651

38

San Jose Water Co.

116

191,461

51

St. Louis County

106

285,954

61

Indianapolis

94

237,332

51

Bridgeport Hydraulic (Kelda)

92

123,837

25

West Virginia American

78

141,674

19

Illinois American

74

131,255

32

Indiana American

73

152,004

28

California American

68

91,934

24

San Gabriel

53

76,649

28

Florida Water Services

53

129,996

N/A

Middlesex Water Co.

41

51,300

17

Long Island (American)

35

68,271

11

Baton Rouge

34

127,700

21

Suburban Water Systems

32

63,959

17

Tennessee American

32

59,963

14

Virginia American

30

43,929

14

Northwest Indiana (American)

27

57,415

14

United Idaho

26

57,638

16

 

SOURCE: Adapted from NAWC (1999).

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

have greater freedom in dealing with the workforce and, through cross-training and other steps, could increase labor efficiency.

Cities that sell their assets can use the proceeds for other municipal purposes. The investor-owned utility becomes a tax-paying corporate citizen. Importantly, asset sales place the utility under the purview of independent state economic regulators who often have a greater capacity for oversight than do local governments. Regulation removes the system from local political processes and provides a powerful system of accountability and performance incentives. Economic regulation requires less duplication of expertise and management than does oversight of privatization contracts.

The National Association of Water Companies commissioned a study of 29 water utility privatizations, which were motivated primarily by the large backlog of needed investments and partly by cash-flow concerns (NAWC, 1999). The projects resulted in operating cost savings ranging from 10 to 40 percent, and previously planned rate increases were avoided. The nine divestitures resulted in asset acquisition payments of $537 million, concession fees of $35 million, and facility investments of $55 million—a substantial infusion of capital to the local communities involved.

There can be disadvantages or risks that are unique to this form of privatization. The valuation of utility properties is difficult, while the resulting upfront payments constitute a one-time windfall. Reacquiring the assets may require the city to exercise powers of eminent domain and can be costly. The city would also need to reacquire expertise in management and operations. The financing and tax advantages of public ownership are lost, and rates may have to be increased to pay for the costs associated with financing, taxes, and profits, particularly if water has been underpriced relative to actual costs. Advocates of private ownership contend that efficiency gains help offset these costs. Economic regulation and cost-based ratemaking may not be considered desirable. The major barrier to asset transfer, however, is the perceived loss of control, a perception exacerbated by the consolidation and globalization of the investor-owned water industry.

ASSURING SUCCESSFUL CONTRACTS

Local officials can implement a variety of safeguards to protect the interests of their communities and their citizens in the privatization process. When considering privatization, local government officials should perform a series of analyses to evaluate water system needs, review current technologies, assess vendor interest, compare risks and benefits, inventory financing alternatives, and appraise legal and regulatory consid-

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

erations (Raftelis Rate Survey, undated). Fortunately, information sources on how to contract for public services are fairly well developed. For example, public officials can draw on a wealth of information about competitive bidding processes.

Certain safeguards are based on common sense, while others may require more technical capability. Contracts involving larger communities can be complex, and the risks associated with failure can be very high. Yet for small communities, the potential risks are at least as significant because of constraints on local resources. There are also significant health and environmental considerations associated with community water supply, regardless of community size, because even a small mishap in a small community can have serious consequences. Ideally, privatization will enhance, not detract from, compliance with environmental and health standards.

RISK MANAGEMENT

Risk management is an essential part of any privatization agreement. Local government officials can ill afford to enter privatization agreements without a careful analysis of risks and a clear delineation of risk management methods (see example in Appendix C). Savings from privatization will not be realized if the privatization contract allocates costs and risks to the public entity and does not provide the contractor with adequate incentives for efficient and effective performance (Holcombe, 1991). The enticement of profits without risk sharing and accountability will not serve community interests.

According to the EPA, “public-private partnership agreements are designed to allocate risks among the parties in proportion to their abilities to bear risks, and to control factors associated with those risks” (EPA, 1990). Privatization agreements are inherently large and complex because of the numerous parties involved and the range of issues that are covered (construction, operation, technologies, and finance). Professional assistance could prove useful to community leaders in structuring privatization agreements in order to ensure protection of community interests.

CONTRACT OVERSIGHT AND EVALUATION

Continual oversight is a key part of any privatization arrangement. Three key issues for local government officials to consider are the costs of monitoring, alternative monitoring techniques, and responsibility for monitoring (Rehfuss, 1990). Monitoring costs can be significant. Monitoring techniques include inspections, reports, complaints, and accountability and performance standards. Officials at different levels within the

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

governmental agency can perform monitoring, and an arrangement working well in one organization for one type of contract may not work well under different circumstances.

Some privatization advocates have suggested that the renewal of a contract is proof of success. But contracts may be renewed for a variety of reasons, including the tendency to maintain the status quo, limited alternatives, and the economic and political cost of “undoing” an agreement in place. Politicians usually invest some political capital in the decision to privatize and are generally reluctant to reverse the course. Evaluating successes and failures of water services privatization must reach beyond the single measure of contract renewal. A broader concern is whether privatization achieves desired outcomes and is truly “successful.” These outcomes can be measured not only in terms of the provision of water services, but also in terms of economic, environmental, and social goals. Sound evaluation criteria can provide a framework for assessing whether privatization is living up to its promises. Evaluation criteria and methods of evaluation might include but are not limited to the following:

  • economic efficiency, as measured in cost effectiveness and cost and benefit terms, as well as in rate impacts on customers;

  • environmental quality, as measured in terms of compliance with federal and state water quality standards and indicators of environmental quality;

  • customer satisfaction, as measured in opinion surveys, service performance, and complaint records;

  • labor relations, as measured in worker safety, benefits, retention, and satisfaction;

  • corporate citizenry, as measured in terms of the contractor’s presence and relationships in the community;

  • equity considerations, as measured in terms of the extension of water services to those less able to afford them; and

  • transparency, as measured in terms of public access to meetings and contractual processes.

Evaluation criteria are ideally established early in the process. Mechanisms for monitoring and data collection can subsequently be put in place.

SUMMARY

Public organizations should focus on improving their services to the public and in meeting customers’ expectations through responsible expenditure of public funds. The goal of providing water services to the public can be achieved by a public organization or a private organization

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×

or by a combination of both. How a community’s public officials choose to provide these services depends on community-specific circumstances. Organizations can be improved by focusing on identified deficiencies or by undertaking a more comprehensive strategic planning process that establishes goals and options and that optimizes the conduct of each operating function based on measured benefits and costs. With a commitment to systematic improvements, both public and private leadership can open a flow of innovation from middle managers and rank-and-file employees so that all employees do their best work in the public interest. For any organization to reach its potential, it is essential for the top members to help the organization maintain a focus on its key objectives. The leadership must encourage an organization and its staff to take significant steps offered by innovative opportunities when warranted, without fear of reprisal from failure.

Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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Suggested Citation:"4. Models of Water Service Provision." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
×
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×
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×
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×
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×
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×
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×
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×
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×
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×
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×
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×
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×
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×
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In the quest to reduce costs and improve the efficiency of water and wastewater services, many communities in the United States are exploring the potential advantages of privatization of those services. Unlike other utility services, local governments have generally assumed responsibility for providing water services. Privatization of such services can include the outright sale of system assets, or various forms of public-private partnerships—from the simple provision of supplies and services, to private design construction and operation of treatment plants and distribution systems. Many factors are contributing to the growing interest in the privatization of water services. Higher operating costs, more stringent federal water quality and waste effluent standards, greater customer demands for quality and reliability, and an aging water delivery and wastewater collection and treatment infrastructure are all challenging municipalities that may be short of funds or technical capabilities. For municipalities with limited capacities to meet these challenges, privatization can be a viable alternative.

Privatization of Water Services evaluates the fiscal and policy implications of privatization, scenarios in which privatization works best, and the efficiencies that may be gained by contracting with private water utilities.

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