Orr looks to private sector for help with Detroit water department mess

Mar 21, 2014

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Detroit emergency manager Kevyn Orr is looking at potential private operators for the city’s water system.

Orr says the city has been forced to consider leasing the water system to a private operator because talks to create a regional authority with suburban customers broke down.

Orr spokesman Bill Nowling says that a regional authority is still the preferred plan. But if Detroit and suburban county leaders can’t agree on how to do that, the city needs to move onto Plan B: finding a contractor to run the water system.

Right now, the city is in the process of gauging interest among contractors—and Nowling says there seems to be a lot of it out there. Once they have a better idea of who’s interested, a formal bidding process will start.

“The city is looking at the best way to generate income from the department as a key part of the bankruptcy restructuring process," Nowling says. The idea is that a private contractor can bring a major cash infusion to the water system, and run it more efficiently, which in turn would make the department more attractive to capital markets, allowing it to refinance roughly $6 billion in debt at a lower interest rate.

But critics say there’s no evidence private operators do things any better or more cheaply, and they usually end up costing cities more in the long run.

Donald Cohen, executive director of the watchdog group In the Public Interest, says “desperate” cities like Detroit tend to get forced into bad deals.

“It’s all in the negotiations,” Cohen says. “And anyone that walks into negotiations, and isn’t willing to walk away if the deal isn’t good enough…gets taken. That happens over and over again around this country.”

Cohen says for-profit management companies almost inevitably want to raise rates, sometimes significantly. And even if the city retains ownership of the water system, the operator can set terms that limit crucial public oversight.

“When you hand over control to a private operator, whose goal it is to make money while providing the service…these contracts often tie the hands of public officials,” Cohen says.

Though Cohen says there’s no “mad rush,” private companies are increasingly looking to gain a foothold in public water systems, as struggling city governments look to the private sector to manage and repair aging infrastructure.

But Cohen says there’s no evidence that private operators are cheaper or more efficient than public ones. He points to Allentown, Pa., where city officials bid out management of their water system – only to find that another public sector operator offered them the best deal.

Detroit hasn’t started that bidding process yet. But Nowling says that as of right now, Orr is reluctant to impose too many terms on potential contractors.

“We’re looking at whether it makes sense for the city and the region, and creates a positive revenue stream,” Nowling says. Beyond that, “We’re open to ideas. But we’re certainly not going to negotiate with ourselves. We’re going to see where these companies come in at, and then if we think there’s an opportunity to move forward, we’ll select one and begin negotiations.”

In the meantime, Nowling says Orr is willing to reopen regional authority negotiations anytime county leaders are willing to come back to the table. Nowling says Orr must also consider selling the water department outright, but that’s “a very remote possibility at this point.”