Friday, Jan. 19, 2007 | Mayor Jerry Sanders characterized last week’s State of the City address as “meat and potatoes,” but packed into the half-hour speech was a proposal to that could afford the private sector control of one of the city’s most valuable resources: water.
Sanders’ proposal to put out to bid the city of San Diego’s water and sewer systems is one of the most far-reaching ideas that he has pitched during his 13-month-long tenure and will likely be one of the most scrutinized outsourcing opportunities to be allowed under Proposition C, the privatization measure voters approved in November.
The mayor’s remarks come at a time when he is trying to assure the city that the water and sewer fee hikes that he is proposing will be spent wisely and efficiently. Both Sanders and skeptics of the proposed rate increases acknowledge the possibility of turning over operations for the water and wastewater systems to the private sector if it saves customers money.
“It’s something I’m looking to do in the future, but not in the first year or so,” Sanders said Thursday. “It is a huge undertaking.”
But the idea is controversial. Some are wary that a private company might put profits over public health, arguing that the problems that other major cities have faced in the past decade illustrate that cost savings can be trumped by a private operator’s poor performance.
“I think a problem with privatizing things like wastewater and water is that you’re talking about managing infrastructure, and [a company’s] interests aren’t the same as the city’s,” said Elliot Sclar, an urban planning professor at Columbia University.
Experts have estimated that at least 15 percent of the nation’s waterworks are run by private companies, most commonly in the Midwest. The number of privately run agencies climbs by about 7 percent each year, and with city officials looking for ways to cut costs, San Diego’s agencies could be added to that tally.
The timing of Sanders’ proposal to raise water and sewer rates, which the City Council will vote on Feb. 26, could cause the mayor’s proposal to outsource water and wastewater operations to become the first specific privatization scenario to garner significant debate since Proposition C’s passage. The proposition, for which Sanders campaigned heavily, changed the city’s bylaws to allow businesses to compete with municipal employees for city jobs, a process known as “managed competition.”
Sanders said that the water and sewer agencies will, like other departments in the city, be reorganized to make them efficient enough to compete with the companies that could potentially bid on the work. Despite the eminent rate hikes — which would boost water fees by 29 percent and wastewater fees by 35 percent — the departments would not compete with companies for at least a year, the mayor said.
Sanders has said the improvements — such as replacing pipeline, constructing treatment plants, and building pump stations — are necessary in order for the city to meet court- and government-imposed deadlines for upgrading the systems. In total, Sanders plans to spend $1.4 billion on construction and repairs for the agency’s aging infrastructure in order to meet federal and state health guidelines.
But groups that are studying his proposal with a careful eye want a guarantee that the money is being spent efficiently before the higher set of fees show up on San Diegans’ bills. Forcing the water and wastewater functions to compete with other companies is one way, they say.
“If it means ratepayers don’t have to put up some of the capital for system upgrades, then why not?” said Carl DeMaio, president of the Performance Institute, a think tank that trains government officials on using private business in their operations.
DeMaio opposes the increase, saying that he would support holding a referendum to strip back the increases if the council approves them without first cutting overhead costs such as payroll. With those savings, San Diegans wouldn’t have to pay as much for the infrastructure costs, he said. “As other cities and counties have discovered, you can tap tens and hundreds of millions in financing for water and sewer upgrades, so why not explore it if it has worked?” DeMaio said.
But the rosy illustrations that DeMaio depicts for water and sewer systems that have undergone private control are not the observations of others.
Critics of privatizing water and sewer operations point to instances in Atlanta, New Orleans, Milwaukee and Indianapolis, from where news accounts have detailed illegal sewage discharges, dirty drinking water, falsified reports, unresponsive customer service and poor maintenance.
Some of those same cities, however, are touted as award-winning examples of public and private partnerships. For instance, Atlanta’s system won an award for best tasting drinking water in the state of Georgia, but critics highlight the instances when dark, briny water flowed from the city’s faucets when the waterworks was under a French company’s control.
Sclar, the Columbia professor, said it is difficult to measure the success of outsourced work unless it is a specific finite job. For example, if a private company is hired to paint a wall, it is simple to tell that the wall was painted. But the oversight that is needed to gauge the success of a privatized government service is often complicated, which can diminish the benefits of outsourcing.
“You essentially have to add another layer of management to the system because you have to manage the managers of the enterprise,” he said.
Peter Gleick, president of the Oakland-based Pacific Institute, a think tank that studies water issues, noted that the city doesn’t necessarily have to privatize the services to make them more efficient. Just holding a competition between the interested companies and the department will force the current employees to minimize their expenses for the sake of keeping their jobs. He used his local water agency as an example.
“It’s a very well-run public agency in part because it’s made serious efforts to improve efficiency and effectiveness and in part because of the debate of privatization,” Gleick said. “Now there’s an incentive to become more efficient.”
The city of San Diego’s wastewater agency currently has a program, known as “bid-to-goal,” that requires its employees to meet certain goals for cutting costs and improving service. The program has won awards and saved $90 million over five years, according to the city.
Gleick said he has concluded through his own research that “there is no significant difference in the rates between a well-run public agency and a private company,” but added that the city’s managed competition could still create more savings for the public agency.
“I’m not opposed to considering private management of water, but there’s no reason why a well-run public agency can’t provide the services as cheaply and as effectively as a private company,” he said.
But others disagreed. National Council on Public-Private Partnerships Executive Director Rich Norton said that there are still efficiencies held by companies that single agencies will never achieve.
For example, if a company handles operations for multiple agencies, they can rotate their high-priced engineers around to other job sites as they’re needed, receive a larger discount for treatment chemicals by buying in even larger quantities, and be more eager to shoulder the risk of innovating new technologies than public agencies can, he said
“One of the advantages you have because of a public-private partnership is the large variety of resources that become available,” said Norton, who estimated that 95 percent of all outsourced water and wastewater contracts are renewed by the agency.
Locally, critics and supporters of Proposition C said city officials’ minds can’t be made up about outsourcing the water and sewer department until after properly studying the idea.
“Hopefully, we’re no longer in campaign mode so we can have public policy discussions about what makes sense here,” said Donald Cohen, executive director of the liberal-leaning Center on Policy Initiatives.
“I think it’s critical to look at other cities and see what has worked and what hasn’t,” said Lani Lutar, president of the San Diego County Taxpayers Association. “We want to see savings, but we don’t want to see the process done hastily.”