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Cities plagued by poorly functioning or outdated water systems may want to look to public-private partnerships for solutions, which have enabled a number of jurisdictions across the country to improve water quality and distribution. Failed water management can lead to complaints about the taste of water, inability to meet environmental and quality standards, and inefficiencies that significantly raise costs. But improvements are not cheap. Despite the estimated $1 trillion spent on water management in the past 20 years, the Environmental Protection Agency estimates that an overhaul of the nation's mostly World War II-era water facilities would cost taxpayers $25 billion per year through 2020.

Partnering with private industry can help towns save money while accessing industry expertise, necessary capital, and efficiencies at the same time. And, "incentive-rich" contracts, where utilized, have ensured that partnerships deliver on their promises of improved water quality and customer service as well as visible increases in capital investment and the replacement of aging facilities. The first such partnership, between Burlingame, Calif., and the private firm Veolia Water (originally Envirotech Operating Services), was established in 1972 and continues today after multiple renewals. Since then, public-private partnerships in water management have flourished in more than 1,000 communities around the country.

"The city of Indianapolis and Veolia Water have created a successful public-private partnership that is bringing economic and environmental benefits to our entire community." -- Former Mayor Bart Peterson, Indianapolis

Indianapolis' agreement with Veolia Water, which has allowed the city to freeze water rates for five years, is a more recent example of public-private partnerships. Established in 2002, the partnership leaves the ownership of the system in public hands, but has the private sector manage the system. It is one of the largest privately managed waterworks systems in the country, serving nearly 1 million residents in Indianapolis and surrounding counties, and overseeing 11 water treatment plants, 26 pumping stations, six well fields, numerous water tanks, miles of water mains, and countless fire hydrants. Unlike many other cities, water management has been privately owned in Indianapolis since the 19th century. However, when a former owner sought to sell the waterworks system to the city in 2001, the government had the option of taking it over. Instead, while local government retained rights to the water as a public resource, under the leadership of Former Mayor Bart Peterson, the city chose to enlist a private firm to operate the waterworks, ensure its upkeep, and oversee customer service and payments.

The contract the city signed includes strong links between performance and compensation. A portion of the fees (about $10 million per year) are contingent on successful water quality improvements and adherence to certain efficiency standards. If the private firm fails to meet these goals, the government will not pay them in full for their services.

Loss of control over public resources is one of the primary reasons some local governments worry about entering into a contract with the private sector. Indeed, opponents to public-private partnerships in water management and other utilities argue that private companies are only concerned with their bottom line. Yet, strict contracts ensure that the bottom line is in the public interest.

Under the Indianapolis contract, for example, the contractor must ensure that costs only increase at the rate of inflation, and, in fact, the costs have averaged 53.9 cents per 1,000 gallons, below expected costs. Moreover, the partnership will reportedly save local governments $85 million during the 20-year contract. It has also greatly improved an outdated and problem-ridden billing system, enabling customers to pay online or by phone, and to access a customer service hotline 24 hours a day, seven days a week. As a result, customer complaints have gone down from 500 in 2001 to an annual average of 30 in subsequent years.

As local governments confront aging facilities while managing tight balance sheets, public-private partnerships offer a fiscally responsible way of improving water management.

Resources For Action

Indianapolis Water
http://www.indianapoliswater.com/USFIWSplash.aspx

National Council for Public Private Partnerships
http://ncppp.org/

Southwest Florida Water Management District
www.watermatters.org

Urban Water Council, U.S. Conference of Mayor
www.usmayors.org/uscm/urbanwater/

Additional Reading

"Future Investment in Drinking Water and Wastewater Infrastructure," Congressional Budget Office, November 2002
www.cbo.gov/showdoc.cfm?index=3983&sequence=0

Exhibit 12 "Incentive Criteria," Management Agreement between the City of Indianapolis and U.S. Filter, City of Indianapolis, March 2002
www.indygov.org/NR/rdonlyres/66D5B6EE-7B11-
4847-BBB9-8695C8D3E4F1/0/mgmt_agreement.pdf

Contacts

Jan Mazurek
Director
Energy & Environment Project
Progressive Policy Institute
600 Pennsylvania Ave. SE, Suite 400
Washington, DC 20003
(202) 547-0001
(202) 544-5014 (fax)
jmazurek@ppionline.org