Contract Operators Get Burned in Birmingham
Millions Spent to Propose
-- City Picks Own Staff

reprinted from Public Works Financing
July-August 1999
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Birmingham, Ala., Mayor Richard Arrington Jr. this month accepted the advice of the city’s consultants to adopt its employee’s five-year reengineering plan for the city-owned water and sewer system, rather than privatize it under a five-year management contract. The 20-year incumbent resigned a few weeks later and named his ally, City Council President William Bell, as interim Mayor for three months until elections on Oct. 12.

City Charter rules limited the initial term of a private management contract to five years, with renewal options possible for 10 more years. The consultants’ financial comparison of the private O&M fee proposals and the staff’s budget estimates was based on the net present value of their five-year total cost, using a 6% annual discount rate and 3.5% inflation rate.

Advising the city were Malcolm Pirnie Inc., the engineer of record for Birmingham Water Works and consultant to the utility staff on its reengineering master plan; the local law firm of Haskell, Slaughter & Young; and the city’s former financial advisor, Porter, White and Associates.

Birmingham Water has 192,000 connections serving 265,000 people in Birmingham and about 650,000 in surrounding towns, one third of the state’s population. Arrington was appointed to the water board by the City Council in May 1998 in order to direct the sale or private management of the system.

Elected in 1979 as the city’s first black mayor, Arrington had tried to fund a large capital deficit in Birmingham’s schools last fall by selling the utility system for its book value of $390 million. City voters soundly rejected that plan in November, forcing the Mayor to seek school funds by monetizing savings from a water system management contract.

(Though not polled in the referendum, suburban users did not appear to oppose the sale of the Birmingham Water Works which would have resulted in their subsidizing the inner-city school building effort by paying 22% higher water and sewer bills.)

The defeat of the asset sale undermined the political support for awarding a management contract to one of the consortia prequalified to buy the system. "Anything associated with change after that was going to be all up hill with the public," says Bernard Green, executive director of the Birmingham Jefferson Chamber of Commerce.

Arrington sought a clean, low bid to help him make the political case for moving monetized savings into school capital dollars. He didn’t get it, says a close advisor, which allowed anti-privatization forces to win.

The private operators were so "busy trying to get in front of each other that they missed what this thing was really about," Arrington’s advisor says. "The private guys also missed the Mayor’s personality entirely," he adds. "He wasn’t interested in the frills. He’s only concerned with the essentials."

Of the three prequalified finalists only OMI was lower than the staff budget estimate, by less than 10%, according to the consultants’ report. American Water Works best bid was said to be 24% higher and United Water’s offer was reported to be almost double the staff projection. Based on those results, the consultants concluded that the staff’s five-year efficiency plan would capture most of the savings of privatization.

The water board plan promises to reduce the calendar year 1999 budget from $41.8 million to $39.4 million by fiscal year 2004. Adding proposed capital savings increases the total to $50 million over five years.

Malcolm Pirnie has agreed to explain its bid analysis to United Water whose promotional brochure claimed $252 million in capital savings and $231 million in O&M savings over 15 years— starting at $9.3 million the first year.

Without a draft service agreement for all parties to bid against, "we did the best we could with the information we had," says Garrett P Westerhoff, executive vice president of Malcolm Pirnie. Once the asset sale was taken off the table, he says, Pirnie had nothing to lose if the city had hired a private manager. "Our role would be different but not diminished," he says.

Nevertheless, spokesmen for OMI and United Water question the fairness of the consultants’ bid analysis. Both point to Malcolm Pirnie’s conflict of interest in advising both the Mayor and the water board’s reengineering team while maintaining its role as the water board’s consulting engineer, which supports a 20-person office in Birmingham. "We want to understand how this game really works before we play again," says one of the privatizers.