http://www.reason.org/commentaries/segal_20030121.shtmlBefore privatization operating costs ran about $50 million a year with poor service and a major need for modernization. Then Mayor Bill Campbell decided to privatize water operations as a way out, although he did not generally support privatization. In general, there was not much initial public support for the proposal. However, it went forward and United Water was eventually selected with a winning bid of $22 million.
Entering the contract negotiations phase the city had little idea of the exact location of water mains in the city, or their condition. The city did know that a high percentage of treated water was not billed, and probably leaked out between the treatment plant and meters. United Water (UW) insisted that the city make warranties on the system, but ultimately the city held firm and none were made.<15>
United Water took over operations of the system on January 1, 1999.
Fast forward to this summer, Mayor Shirley Franklin issued formal notice to contractor UW that they were not in full compliance with the terms of the 20-year contract reached in 1997. She noted that problems included: staffing levels, bill collection, and meter installation and repair. This came as UW was seeking an additional $80 million dollars for services they claim were provided outside of the contract.
However, city officials also say that they are saving less than $3 million a year, and there is no room for additional payments. UW officials dispute this claim, state that the city was paying $49 million for water services before privatization, and the contract only pays UW $21 million—an annual savings of $18 million. While there may be some monitoring and oversight costs associated with the contract, it should not be in the neighborhood of $15 million. If the city is only seeing a net decrease of $3 million, money must be flowing into other areas or swallowed by bureaucracy.
UW was given 90 days to “cure” complaints in four key areas: insufficient maintenance, poor bill collection,<16> tardy meter installation, and an improper letter of credit. As of October 31, 2002, the city reported that performance had improved but more improvement was needed. A scorecard will be used to evaluate the performance, which both sides agreed to, since it will be measuring actual outputs and outcomes rather than subjective measures.
In early October, another issue sprang up regarding the requested $80 million in change orders. UW produced letters that had been signed by then Mayor Bill Campbell authorizing the payments of nearly $80 million just before he left office. The letters would have reimbursed UW more than $10 million for work it claims to have done without compensation and increased the company’s rates by more than $4 million for each of the next 17 years. Franklin has contested the validity of the letters and has called for an investigation. Ultimately, UW rejected the notion that the letters weren’t valid, but has since dropped its claim for the additional money rather than fight with the new mayor.
Still at issue in Atlanta is whether or not UW deserves more than the $21 million a year they are paid. UW is contending that the city grossly underestimated basic repairs and maintenance. Assumptions were built into UW’s fee proposal. For example: that 1,171 water meters per year would break, requiring repairs—but in reality, 11,108 broke; another was that 101 main breaks would occur in a year—actual equaled 279; and yet another was that 734 fire hydrants would require repair—when 1,633 needed it. Essentially UW assumed that the system would require one level of repair, when a different much higher level of repair was needed.
Ultimately the problem resulted from poor data, or in some cases no record keeping. The city did not have good records to establish a baseline—either data wasn’t kept, wasn’t kept accurately, or existed but was understated due to bureaucratic malfeasance. However, some of the blame must fall on UW. All of the bidders knew about the lack or quality of data ahead of time before they bid. Furthermore, UW has a lot of experience running old systems (older and larger than Atlanta ’s) and they should have built that expertise into their proposal.