[PEN-L:34240] Frontiers of Privatization

[michael perelman <michael@xxxxxxxxxxxxxxxxx>]

A Deal All Wet: Atlanta's Plan
For Water Privatization Failed

By RICK BROOKS
Staff Reporter of THE WALL STREET JOURNAL


ATLANTA -- Four years ago, Atlanta's move to privatize its water system
was seen as the wave of the future for city governments. But now that
Atlanta officials and a unit of French utility company Suez SA have
ended their partnership and returned water operations to the city, both
sides acknowledge that expectations were too high from the start.

With city officials about to inherit the enormous challenge of
modernizing the sprawling utility, the deal's collapse shows how an
eagerness to embrace privatization can blind both sides to the
complexity of municipal institutions and politics. "It was just a bad
contract for both parties," said Clair Muller, chairwoman of the Atlanta
City Council's utilities committee.

Last week's breakup came four years into a 20-year contract that
promised Atlanta annual savings of about $20 million and an overhaul of
the city-owned water system's reputation for hit-or-miss customer
service. Atlanta saw privatization as the best hope for its increasingly
overloaded network of 2,400 miles of water-distribution lines, some
dating almost to the Civil War.

At its start, the $21.4 million-a-year contract was the largest
water-privatization deal in U.S. history. It quickly became a model
elsewhere for bringing bottom-line management into municipal services
that traditionally move at much slower speeds, winning a nationwide
"public-private partnership" award from the U.S. Conference of Mayors in
Washington.

But the determination to reach an agreement to transfer Atlanta's water
system to private control seemed to cause city officials and Suez's
United Water unit, based in Harrington Park, N.J., to make mistakes that
would haunt both sides.

United Water won the Atlanta contract by making the lowest bid among
five competitors; some complained privately about incomplete city
records that made it difficult to estimate how much it would cost to run
the water system. After taking over, United Water saw how bad its
calculations were: It had to repair 10 times as many broken water meters
and three times as many ruptured water mains as expected.

Suez now complains it was stuck fixing a water system in surprisingly
bad condition. "The initial contract as it was signed. ..didn't reflect
the actual status of the system," said Jacques Petry, a Suez executive
vice president. "There were some missing elements in the proposals."

Several privatization experts said United Water didn't scrutinize
Atlanta's creaky operations as closely as it should have. And the
company won almost no sympathy from Atlanta residents, who blamed it for
an outbreak of brown tap water and low water pressure.

City audits also concluded that United Water simply wasn't doing its
job. The company failed to collect $33 million in unpaid bills, more
than twice as large as the pile before United Water took over, and shut
off water to only about a dozen delinquent customers during one 20-month
stretch. The company said city officials had told it in the past not to
pursue at least some residents for not paying.

United Water acknowledged other problems including delays in water-meter
installation and maintenance, and succeeded in improving its operations
during the past five months. But it was too late. With the takeover
generating only half as much savings as expected, Atlanta Mayor Shirley
Franklin decided that the city could run an efficient water system on
its own.

Experts are divided on the likely impact of Atlanta's failure on other
local governments wrestling with the issue of privatization. In October,
New Orleans rejected a proposal to shift its water and sewer systems to
private management but is now planning to reconsider the idea. Stockton,
Calif. , officials are expected to vote next month on a privatization
plan. "Atlanta has to be a red flag for any community that is
considering going down this road," said Hugh Jackson, a policy analyst
at Public Citizen, a research group opposing privatization efforts.

Adrian Moore, vice president of research of the Reason Foundation, a Los
Angeles think tank, said privatization still would appeal to governments
struggling with the looming costs of modernizing their utilities.
Federal officials estimate governments will need as much as $1 trillion
during the next 20 years to fix or upgrade drinking water and wastewater
facilities. In Atlanta, "the devil was in the details," he said.

So far, about 1,100 local water utilities have been privatized. About 8%
of governments with private-sector contracts up for renewal from 1998 to
2001 took back control of their water systems, according to Public Works
Financing, an industry publication. "Privatization isn't meant to be a
cure-all for any system," said John Incorvaia, an analyst at Moody's
Investors Service Inc. "Sometimes it works, sometimes it doesn't."

Write to Rick Brooks at rick.brooks@xxxxxxx

Updated January 30, 2003 8:53 p.m. EST


--

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx