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Water sector woes

by Michael Wilson

With the tragedy in Walkerton, Canadians are, more than ever before, aware of the issues, challenges and risks facing municipalities in the delivery of safe and affordable water. Following the report of the Walkerton Inquiry, due next spring, public debate will shift from issues to solutions to Ontario's, and by natural extension, Canada's, water sector woes.

In Canada, the dominant service provision model has water and wastewater systems owned and operated primarily by municipalities. In many other developed countries, the private sector is involved to a much greater extent. Several large multinational private water companies have served this worldwide market for decades. Many invested in Canada in the 1990s after a few pioneering municipalities such as Moncton, Hamilton and Dartmouth initiated public-private partnership (P3) projects. Despite successful projects in these and a handful of other communities, adoption of the P3 model was not widespread.

There appear to be several inhibiting factors - most recently, an anti-privatization campaign launched by public sector labour unions, which attempts to raise fear and cast doubt on the private sector's ability and motive to deliver safe and affordable water and wastewater services.

In reality many municipalities worldwide have found that involvement of the private sector better meets its obligations to operate highly efficient and technically sound water and wastewater systems. The World Bank and the IMF have actually specified the use of the private sector with respect to a number of utility projects they are directly and fiscally supporting. A few key differences between a private water company and a public sector operator lie at the root of the benefits being found.

The first difference relates broadly to the nature of private enterprise in general but also specifically to private water companies. Non-performing water companies fail to thrive. There is no second chance when a water company fails to deliver of safe drinking water - they go out of business. There is no tolerance for error, either internally within the company or externally from clients. Everything within the company is designed to ensure continued survival starting with their governance structures.

Municipally run water and wastewater facilities are commonly overseen by a body consisting of political appointees or the political representatives of the municipality - people elected to oversee the activities being performed by their municipal organizations or boards, but not necessarily expert in any individual area. Typically those serving on oversight bodies have no technical background in water systems.

However, standing in sharp contrast, management boards of private water companies typically have expertise from both the technical or management side of the water business. Charged with the responsibility of ensuring that the company thrives and its clients enjoy a superior level of service, these boards are professionally able to judge the quality of the service being delivered in their company's contracts.

The private model carries a higher degree of professional competence than the government model. It is positioned, from a governance perspective, to achieve a higher quality operation and greater assurance of water quality provision. To support this, the detailed service contract spells out the performance standards, the extent and manner of risk the company assumes and penalties it will suffer for non-performance. No similar document exists for monitoring the performance of the government model.

A second difference is how the private sector evaluates and manages risk compared to the public sector provider. Anything jeopardizing a company's ability to perform is considered a risk. Inadequately trained staff, malfunctioning equipment, faulty infrastructure, etc., are unacceptable risks. Operations and standards are monitored continuously to ensure that top performance is being achieved and that the potential for failure is minimized or eliminated.

Risks in the public sector are often not given the same consideration. There is an inherent cost to any organization that assumes risk - be it public or private. When the public sector delivers a service, either directly or through an agency of the government, risk is being assumed and should be valued and treated as an expense of operation.

Consistent with the objective to reduce and minimize risks while at the same time building efficiencies, many private water companies invest heavily in research and development activities, bringing improvements on a technical and operational level to all operations throughout the network of contracts worldwide.

These two sets of factors - the nature of enterprise and the management of risk through all factors including governance, research and technology and training of staff - in combination compel private sector operations somewhat differently than public sector operations and bring benefits to municipalities that have selected private sector partners.

Michael Wilson is Chairman of the Canadian Council for Public-Private Partnerships. This article has been prepared drawing on the expertise and advice of Mark Hodgson, Vice President, PricewaterhouseCoopers Securities Inc.



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