What went wrong in Atlanta

The contract to run Atlanta's water system is the largest, most complicated and most challenging that government has ever awarded to a private company in America, contends the chairman and chief executive officer of United Water, Michael Chesser.

While he is new to the company, and therefore has no personal experience with Atlanta and its privatization history, United Water's money-losing experience here is a textbook example of the difficulties the private sector has in moving into the public. Its experience parallels those of charter school organizers and of private-sector companies managing public schools.

At the core, any change in the status quo invites opposition. Just as education bureaucrats have no initial incentive to see competition succeed, water department employees have no reason to demonstrate that the private sector can do their job better or more efficiently. So the relationship, from the start, is ambivalent at best.

One example is that United Water agreed to provide service for $21.4 million a year based on a set of assumptions. One assumption, for example, was that 1,171 water meters per year would break, requiring repairs. The reality was 11,108. Another was that 101 main breaks would occur in a year; the reality was 279. Still another was that 734 fire hydrants would require repair per year; the reality was 1,633.

Amazingly, the city had no records to establish the baseline. Either they weren't kept, weren't kept accurately or existed but were deliberately underreported in one of those bureaucratic subterfuges planted to invite private sector failure. All companies bid on the same assumptions and the four bids were close, ranging from $21.4 million to $25.9 million per year for 20 years. The middle two bids were about $23 million.

But then, even without any negative action by bureaucrats, Atlanta and United Water were destined to hardship. Atlanta didn't privatize the water department. That is, it didn't turn the franchise over to United Water to run as a free-enterprise business. Nor did it hire United Water to manage its business on a cost-plus basis -- that is, for a fee United Water would manage whatever it was given.

Instead, a hybrid was created, neither fish nor fowl. It's not privatization, nor cost-plus management. That's important because it seeded the troubles to follow.

In Atlanta's case, the hybrid meant that United Water had the technical expertise but Atlanta had political constituencies. Give a publisher a newspaper and he would run it based on industry standards. Invite an outsider to intervene or overrule and without an ironclad, point-by-point contract, the two will clash. Throw in politicians and bureaucrats, with other constituencies and other agendas, and disaster awaits.

That's where Atlanta and United Water are. United Water may have been too eager and overly optimistic. It may even in retrospect have lowballed the bid, as one of its competitors alleged at the time -- a charge officials then and now deny. But whether it was United Water or some other company, the hybrid "privatization" model required far more accurate information and a far more detailed contract than these two negotiated.

Attempting to abandon the contract would be a mistake for Mayor Shirley Franklin. The smarter approach is to follow the state's path with natural gas deregulation: fix what's broken and that means, for one thing, writing a contract that could be given to a Martian and he would know its terms.

Anybody who thinks going back will be an improvement has a terribly short memory.