A-3628/S-2412 (Greenwald, S. Kean/Sarlo, Kyrillos) - "Water Infrastructure Protection Act" is being roundly criticized in some corners of the Internet, where some are alleging that water is being privatized in NJ by the governor. I decided to have a quick look at the law and to comment here in a dispassionate manner.
Disclaimer: I am neither a lawyer nor a policy expert - I just happen to know a great deal about the water/finance nexus.
Facts
Facts first: the bill allows public bodies at the municipal, county, or regional level to "lease or sell" water assets to private operators if they meet so-called "emergent" conditions. Here a water asset is a building, plant, or structure that is used to deliver water or treat sewerage (pipes, plants, pumps, etc...). This means that a private operator can either:
- pay a lease to operate assets on behalf of a public authority - in this case only the operations are privatized. Both the assets and the resource remain in public hands. This is a fancy form of outsourcing.
- purchase the assets outright, including any debt attached to them, and operate them under a contract with public authorities. Here the water assets are privatized, but not of the water resource itself. This is an important and crucial distinction.
Why the private sector can help
There are several problems with the bill, but I will first give some arguments for private sector involvement in water utility operations. Large water operators (Veolia, Suez, Sembcorp, United Water, etc...) operate water systems around the world. In theory, these operators can:
- bring experience and staff from other locations to bear to a new contract, and so help resolve operational issues
- use their in-house experts and R&D teams to improve operations, finance, collections, technology deployment, etc...
- reduce costs with their strong purchasing power for things like chemicals, power, etc...
- run the utility for a lower cost while improving service and maintenance, all while netting a profit.
And in the majority of their contracts, they do a fine job.
How the bill fails
Regulatory body
The main problem with the NJ bill (as it stands) is that it fails to appoint a strong regulator. This is bad enough to make the whole bill unworkable. Based on my professional experience, here is why.
Partnering with professional operators is tricky and the contracts are complex. There is often a significant knowledge gap between the public servants entrusted with securing the best deal for the public and the teams of in-house lawyers and financial modelers working for the private sector.
On the private sector side, the lawyers, engineers, and financiers are well-versed in these types of deals: it's what they do. On the public side, it's likely a public servant will do one or two deals in his career, particularly if contracts are long. It's unlikely to be a fair fight (or negotiation).
The knowledge and skills gap extends beyond the contract signature and into the operations phase. During operations, the private operator must report on his actions, investments, decisions, etc... to the public authority. It is crucial that the public be represented by experienced, savvy technocrats who can go toe-to-toe with their private counterparts, lest the contract terms be easily sidestepped.
The solution is to create a regulatory body with strong in-house competency to oversee the privatization processes, review and approve contract terms, and supervise the operations and yearly reporting of the private operators. The regulator is present throughout the life of the contact, from the RFP to the operations, so that it can be ascertained that contractual obligations are, in fact, met.
Recruiting from inside private operators can help ensure that the playing field is level - that the tricks of the trade are known on both sides.
Tariffs
The other problem with the bill is that it puts no obligations on public servants to set tariffs at a cost-recovery level (including debt coverage) prior to private sector involvement. Imagine a case where tariffs have not been raised, or raised too little, for a long time period - resulting in significant yearly losses for the utility and in lower-than-needed maintenance (this is common).
Tariffs will have to rise, independently of private sector involvement. Waiting until a deal is made to raise tariffs can create the false impression that tariffs are rising to line the pockets of the new operator, when in fact they are just catching up to where they should have been for years. This can result in a public-relations disaster for both the public and private parties, jeopardizing the entire collaboration.
As a corollary, since only relatively "healthy" systems are interesting to private operators, the bill will likely fail at recruiting private sector help where it is most badly needed: for failing systems with heavy debt burdens.
Length of contract
France ended its history of long (25+) year lease contracts a few years ago because it was clear that the contract length was a significant impediment to innovation, an invitation to overly cosy relationships between private operators and public servants, and a bad deal for consumers overall. As a result, contracts in France now typically run 8-12 years, which is significantly better for consumers.
The bill does not make any recommendations or impose any maximum contract lengths. This is a major failing.
Staff
Running a water/sewerage utility is increasingly a people business. Yet, no mention of staff is made in the bill. Taking over a publicly run utility, together with all of its staff, is a major challenge for a private company. Significant cultural gaps exist between the public and private sectors, and water utilities are no exception. If a private operator thinks that it can waltz into a public utility and revolutionize the way that the staff works in a few months, it is sorely kidding itself.
The bill should lay out a framework for the responsibilities of the private operator as it takes over municipal, county, or regional staff, particularly as relates to contracts, incentives, etc... - this is not to protect public staff at all cost, but to ensure smooth operations over the long term.
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