Water Industry News

Money down the drain?

New Orleans questions $5.7 million spent on consultants

By Martha Carr

When the idea of privatizing New Orleans' water and sewer systems was proposed in 1999, the cost to study the concept didn't seem all that outlandish.

For $100,000, consultants said, they could determine whether private management would help make the Sewerage & Water Board more efficient and save ratepayers money.

That was five years and several budget requests ago.

Now, as Mayor Ray Nagin prepares to call an end to the board's controversial privatization drive, records show the price tag for exploring the concept has ballooned to more than $5.7 million, with about $4 million in public dollars landing in the pockets of many of those same politically connected consultants.

So what did taxpayers get for their money? That depends on whom you ask.

Privatization supporters say ratepayers have realized millions in savings, simply because of efficiencies achieved by water board employees fearful of losing their jobs to a private management firm.

"I see no loss at all," said City Councilman Eddie Sapir, who serves on the water board and spearheaded the privatization drive. "Bottom line, we've recouped those dollars in savings and created more efficiencies. That was the goal to explore it."

Critics, however, say millions were wasted, partly because of behind-the-scenes politicking that caused the process to drag on years beyond what it has taken other communities to settle the issue. They also say the work produced by the board's consultants was confusing and lacked key documents, such as a technical analysis of the first round of bids and a report showing what it cost the water board to run the system -- a crucial figure, without which it was impossible to accurately project savings.

"It was an extraordinary amount of money spent for the end product," said Janet Howard, president of the Bureau of Governmental Research. "The process was sloppy, it was long and drawn out, and both are factors that contribute to increased cost."

Nagin's assessment falls somewhere in the middle. The mayor said he thinks taxpayer money likely was wasted on a process that was slow and mired in politics. Still, Nagin said, the agency now has independent analysis of its water and sewer systems from two private companies and a group of employees who bid on the job, and it can use that information when it comes to further restructuring in coming years.

Nagin revived the privatization drive in January 2003, several months after opponents on the board staged a surprise vote to reject all bids. Last month, the mayor said he will call an end to the process in the next few months and will hire a new executive director to re-engineer the agency as needed.

"I think that there probably was a lot of wasted time, energy and money," Nagin said. "But I think as a result of this, the board now understands a lot more about what is potentially going to transform this operation. Keep in mind we have detailed books from several different companies that came in and studied our operations."


Looking to save money

When Sapir initiated the effort in 1999, he presented privatization as a way to stave off rate increases by holding down costs at the troubled water board.

At the time, the agency had signed a deal with the U.S. Environmental Protection Agency to spend more than $200 million repairing leaky underground sewer pipes that were polluting Lake Pontchartrain. Board members knew that the cost of the 14-year job -- the price tag has since grown to $650 million -- would mean substantial rate increases. So they began investigating private management as a way to save money.

Then-Mayor Marc Morial became the effort's key proponent and went on to shepherd the 20-year, $1 billion contract through its first incarnation.

Observers found plenty to criticize. Millions in taxpayer dollars went to lawyers and engineers who drafted the bid proposals, while two major companies interested in the job -- United Water and USFilter -- put politically connected consultants on the payroll.

Critics also said the bid documents were poorly constructed, and they accused the board's consultants of being controlled by political factions favoring privatization.

The effort ended abruptly in October 2002 with a 6-5 vote to reject bids submitted by the employees, United Water and USFilter, now known as Veolia Water North America Operating Services.

Despite the controversy, Nagin chose to revive the beleaguered drive, promising to put the process on the fast track and solicit new bids by February 2003. More than a year later, the water board has yet to issue a second bid document. That's because there aren't enough private companies showing interest in the job to ensure the water board would get a competitive price, Nagin said.


Consultants reap rewards

Throughout the process, it appeared the biggest beneficiary of any deal would be whichever private company won the estimated $1 billion job. That company also would be required to reimburse taxpayers for any money spent to explore the idea.

But now, with most companies scared off by laws that require a public vote before a privatization contract can be approved, consultants appear to be the big winners, and taxpayers are left to pick up the tab.

Topping the list of big money makers is the team of consultants hired by the water board, first led by the Washington, D.C., law firm of Verner, Liipfert, Bernhard, McPherson & Hand, then later by some of the same lawyers who left to join the D.C. firm of Sullivan & Worcester.

Verner Liipfert was hired in 1999 on Sapir's recommendation without going through a competitive selection process. In 2001, several lawyers from the firm left to join Sullivan & Worcester and took the water board contract and a $1.8 million annual City Council contract with them.

Once they were selected, the lead consultants hired the national accounting firm Deloitte & Touche, the Metairie engineering firm Camp, Dresser & McKee, and Essential Environmental Engineering of New Orleans to work on the team.

Together, the consulting companies earned almost $4 million in five years.

Verner Liipfert also hired attorney William Broadhurst, one-time law partner of former Gov. Edwin Edwards and one of Sapir's closest associates. Even though Broadhurst, who was doing business as Americus Consulting, stayed on the payroll briefly and earned only about $16,000, the appointment stirred controversy.

Conflict also arose when it became public that Kim Henry, sister-in-law of Troy Henry, then president of United Water New Orleans, was working on the consulting team.

Henry eventually dropped out, but he rejoined the group after Nagin restarted the process.


Employee group's team

Next to the board's consultants, the biggest beneficiary of S&WB money was a team of consultants hired by the employee group that bid for the project. Those consultants, in contrast to the board's advisers, were chosen competitively, after proposals were sought from several companies, said John Wilson, who headed the Managed Competition Employee Committee.

The winning bidders also were screened for political connections to water board members, he said. S&WB employees feared that if they hired a company with political allegiance to privatization proponents, it would undermine their attempt to win the private management contract, Wilson said.

"We were very cautious to allow any political officials to influence us as to who to hire," he said. "Frankly, we were afraid of any of those firms having an ulterior motive."

The MCEC's consultants included management advisory firm HDR, public relations firm Multi Image Resource Group, and law firms Harges & Fuller, Many & Lococo, and William J. Oberhelman Jr.

HDR is based in Omaha, Neb., and the remaining firms are based in New Orleans.

Together, they were paid more than $1.6 million.


Public vote cited as burden

Despite criticism from the BGR and others that the process was mired in political dealings, Sapir said he never got "that deep" into it and that he has always followed the will of the majority of water board members.

"Eddie couldn't do anything alone, and this is something the board voted on to do," he said.

What really killed the prospect of private management, Sapir said, was not a faulty process, but a city ordinance that voters amended to require a public vote before any large privatization contract could be approved. That stipulation was later codified in state law. At least one company, United Water, said it lost interest in bidding a second time because of the public vote requirement.

"If anything ran companies out of here, it was the fact that they would have to face a future referendum and spend millions on a PR campaign," Sapir said.

The referendum was the brainchild of former City Councilman Jim Singleton, who served on the water board and ran for mayor in 2002. Singleton said he pushed for a public vote because he felt that the process was corrupted from the start.

"I think the first premise was the fact that there were some people lurking around looking for how much money could be made, and how much money certain consultants could make," Singleton said. "It got worse from that point. The whole idea was about people making money as opposed to how you could fix the problems at Sewerage & Water Board."

Former water board member Ron Guidry also said he became increasingly concerned about the process, even though he initially supported the idea of private management. Guidry instigated the surprise 6-5 vote to end the privatization drive the first time around.

"This thing turned bad almost immediately," said Guidry, an insurance agent who was replaced by Nagin shortly after the vote. "If you look at what the board initially agreed to spend to look at (privatization), it was only a couple hundred thousand. It was nowhere near the $5 million. The process of doing this became an industry in and of itself. And a lot of people were having some very expensive lunches at the expense of ratepayers."


Missteps on documents

Howard of the BGR said her group was most concerned with the quality of the documents -- or lack of them -- produced by the board's consultants. First and foremost, she said, the consultants should have provided the board with an analysis of how much it cost to run the agency under public control so residents could determine whether any savings could be achieved by private companies vying for the job.

That wasn't done until after the bids were rejected and Nagin restarted the process. Even then, the BGR took issue with the consultants' methodology.

Consultants also failed to provide the board with a technical evaluation of the bids showing which company provided the superior proposal, Howard said. And a special evaluation committee of community members created to analyze the bids failed to rate or rank the proposals, leaving the public without a clear picture of which group offered the best deal, she said.

"Despite the $4 million expenditure, the city never obtained a technical analysis of the bids," Howard said. "The only professional analysis of the bids was done by BGR."

Even with those problems, water board member Sidney Evans said he was prepared to hire a private company if the coup had not been staged a few minutes before he arrived at that fateful meeting in October 2002. Looking back, he recognizes the flaws in the process but said the board still learned a great deal.

"It was the arduous political process that the consultants were forced to deal with that really ran the costs up. These were hourly paid lawyers and accountants," he said. "But to look at a $1 billion job and to spend $4 million doesn't seem to be unreasonable. The employee group knows a hell of a lot more about water and sewer than before the process, and I think the board itself had made a lot of progress in the way it operates."

Nagin agrees.

"Did we get good value for the dollars we spent? Probably not," he said. "But we did get something out of the process that we can use going forward."

Martha Carr may be reached at mcarr@timespicayune.com or (504) 826-3306.