U.S. water privatization effort trips in Atlanta
Reuters, 01.29.03, 3:04 PM ET

By Kristin Roberts

MIAMI, Jan 29 (Reuters) - After signing on to a massive water utility privatizaton plan three years ago, Atlanta's decision to scrap that program raises questions for other U.S. municipalities looking to outsourcing as a way to save cash.

Privatization supporters said Atlanta's experience should not be viewed as the beginning of the end for water privatization, but rather an example of what cities should avoid in negotiating outsourcing contracts.

"The concept is still the way to go. It's still the model," said Geoffrey Segal, director of privatization and government reform policy at the Reason Public Policy Institute. "But the manner in which it was executed in Atlanta is not the way to go. The process was flawed and too politicized."

Atlanta and United Water, a unit of French utility firm Suez   last week abandoned an agreement signed in 1999 for the company to provide the city's water services at a cost of $21.4 million a year -- then a blockbuster deal representing the largest public-private partnership for water operations in the United States.

It had been heralded by advocates of government outsourcing as a model for reducing costs and generating efficiency. But the arrangement ended up generating just $10 million in savings, or roughly half as much as originally expected, according to city officials.

Both sides said the agreement as signed under a former city administration was unworkable, providing too few details on needed upgrades and performance requirements.

Privatization advocates fault Atlanta's selection process, which included a technical merit selection and then two "best and final offer" rounds, which pushed the cost estimate to a level that was inadequate given the state of the water system.


U.S. cities have traditionally hired private companies to design and build water and wastewater facilities while operating the systems themselves. But tight revenue and the increased cost of federal clean water regulations drove many local officials to consider privatization.

About 40 percent of drinking water systems nationwide are now private, regulated utility systems, according to Reason Public Policy Institute, a think tank advocating privatization and smaller government.

By the end of 2001, almost 1,300 local governments had outsourced the operation of wastewater systems, and 1,100 did so with their water systems operations, the group said.

After dissolving the agreement with United Water, Atlanta this week created a water bureau within the city's Watershed Management Department to operate the system. The department will rehire 350 people.

But the mayor said Atlanta would not likely be able to provide services more cheaply, and privatization supporters said they expect a double-digit rate increase this year.

"We are not saying that it will be cheaper," Franklin said in announcing the contract termination. "We are saying it will be high quality."

Other U.S. water privatization efforts have met more success, as measured by contract extensions, water management experts said. Less than 6 percent of water outsourcing contracts signed over the last two decades have been turned back over to public control.

Next month, local lawmakers in Stockton, California, are expected to vote on a water outsourcing agreement negotiated with OMI-Thames, a partnership between Colorado-based Operations Management International Inc. and the U.K.'s Thames Water Plc, part of German utility RWE AG

After rejecting outsourcing bids in October, New Orleans' water and sewerage board is poised to revisit the issue this month. The board now includes new members who were named by the mayor to replace two who voted against privatization.

"Just do everything completely the opposite of what Atlanta did," Segal said of those cities' efforts.

Copyright 2003, Reuters News Service