Think twice about privatizing drinking water


Miami-Dade County has big plans to rebuild its exhausted infrastructure. In September, Mayor Carlos Gimenez shared his vision with a room of hundreds of builders, lobbyists, financial institutions, and large corporations. He wants to tap the private sector to finance, build, and operate essential public goods, including a new transit line and courthouse.

“It used to be Miami-Dade County wanted to operate everything,” he said. “I don’t want to operate anything.”

A new drinking water treatment plant in South Miami Heights is already working its way through the approval process. The county is growing fast and must upgrade and expand water and waste water capacity. But the devil is in the details.

We’ve learned a great deal from water privatization projects across the country, but Mayor Gimenez only has to look in his own backyard for lessons. The privately operated Hialeah water treatment facility has been a disaster. Promises were made that the plant would be cheaper, better, and faster, but all its delivered are mechanical failures, leaks, and acid water that must be boiled before using.

Before Miami-Dade privatizes a portion of its drinking water supply — or anything else — policy makers and taxpayers should ask hard questions.

One is whether the higher cost of private financing is offset by other forms of value. The county contracted with a private consulting firm, Public Resources Advisory Group (PRAG), to perform what’s called a Value for Money (VFM) analysis. But there’s a fundamental issue with VFMs that must be considered. It’s important to make good projections, but multi-decade forecasts always involve assumptions that would take decades to assess. And it’s impossible to compare the difference in costs with a scenario that never happened.

In one of the most comprehensive assessments anywhere to date, the Auditor General of Ontario Canada conducted a thorough review and audit of 75 Ontario infrastructure projects just last year. Ontario is the highest user of “public private partnership” (P3) procurement among Canadian provinces. A review of their findings uncovered common issues with VFMs. There was no empirical data supporting the key assumptions used to assign costs to specific risks. Some risks included in the analyses were inappropriate — such as an increased cost for public procurement — because they assumed publicly managed assets wouldn’t be maintained to the same standard as those procured through the P3 method.

The Indianapolis City Council recently hired an independent analyst to test the assumptions, methods, and modeling of a VFM performed for a new courthouse and justice center. The new analysis concluded that public financing and operation would cost $516 million less than a P3. The original analysis, performed by multinational auditor KPMG, found the opposite. The city council study found fault with assumptions that overly favored a P3 by using inflated estimates on public operating costs and the private sector’s discount rate.

Miami-Dade County has already paid for one VFM for the new water treatment plant, but they have decided — with good reason — to contract with a different firm for a second analysis. The first analysis raised serious questions, and the basic assumptions clearly needed unpacking. PRAG assumed lower staffing, wage, and benefit levels, concluding that, “The private sector should be able to operate the plant at a lower cost through integrated design lean staffing levels, and employee overhead    partially offset by the requirement for private sector operating profit.” And PRAG failed to take into account effective labor management programs that Miami and other cities have used to generate significant savings. Miami-Dade’s POWER program between 1997 and 2001 reduced operations and maintenance costs by $52 million.

There’s no doubt that Miami-Dade needs to innovate to keep up with growth, eliminate poverty, and prepare for climate change. But the county can do so without privatizing their water supply. They could use public, tax-exempt financing, which provides the most flexibility for agencies and is the lowest cost of capital. But if commissioners feel the need to tap the private sector to finance projects more quickly, there’s no reason to hand over control of drinking water facilities to private operators. Vital public infrastructure should be operated and maintained by the county government with public employees accountable to the people of Miami-Dade.

Roads, transit, water systems, and other core public assets are the foundation of a healthy region. They are a lifeline for communities, economic drivers, and great opportunities to create jobs that lift families out of poverty. Whether financed publicly or privately, infrastructure must be under the public’s control to ensure that all those aims are achieved.

Donald Cohen is the founder and executive director of In the Public Interest, a national resource and policy center on privatization and responsible contracting.