More Cities Continue to Move Towards Privatization
(excerpted from HSBC Washington Analysis)

The U.S. Conference of Mayors recently completed a survey of water and wastewater systems in 261cities. On average, 40% of cities surveyed said they now have some form of private sector participation in their water and wastewater systems. Thus far, this has mostly been in design and con struction services, rather than operations of facilities. Of those that dont have public-private partnerships, 14% of water supply systems are actively considering some sort of privatization, particularly in billing and meter read ing, and 11% of wastewater systems are actively considering private sector participation. The following table illustrates some of the survey's findings.

What is driving cities to consider privatization?

Finances: Money remains the most important factor. In dozens of cities around the U.S.. such as St. Louis and Miami, new plans have recently been put in place for needed upgrades to municipal water and wastewater systems. The big question is how to pay for these capital improvements, as well as rising operating and debt services costs, with the smallest discom fort to rate payers. As municipal bond financing gets tight for some cities, many are looking to securitize up front the "savings" offered through private contract efficiencies so they can get cash for needed capital investment, while other cities are looking to private sector operators to make direct capital investments in municipal water systems.

Environmental compliance: Some municipalities have systems that are so old and outdated that they are often out of compliance with federal and state regulations. Consent orders and fines are one motivation that can send city councils seeking assistance from the private sector. For example. the City of Atlanta pays $7.2M annually in environmental fines for inappropriate discharges, and this is one of the many factors leading the city man agement to consider privatization as part of a long-term solution (see previous story).

Politics/ideology: Leadership from the mayor's office continues to be impor tant. In the case of Indianapolis, the City had a clear, committed champion eager to prove that the City should not be in the sewage treatment business (among many others). Mayor Goldsmith of Indianapolis privatized more than 70 government services in addition to the wastewater facility, and many other mayors are increasingly looking to outsource city services in order to save money.

Not just operations contracts: In spite of all the talk of privatization many municipalities will never privatize operations of their sewer or water systems. However, they may still need to buy equipment as well as engineering design and construction services from the private sector as they meet the requirements for plant reinvestment or growth. Many of these jobs are small and have typically gone to local engineering and equipment contractors, but consolidated equipment and services firms such as U.S. Filter are now trying to establish themselves as turnkey suppliers who will be in a better position than the traditional engineering and construction firms if the city does decide to privatize some services in the future.

Recent issues of Engineering News-Record project 1998 water and sewer construction contract awards to be up 5% over 1997's level of $150B to $16.75B. Public water and sewer spending, among other public works projects like schools and hospitals, is expected to help mitigate the general decline in total construction spending.