The good news this week is that the Water Advisory Committee (WAC) decided to televise their hearings. This is crucial, because what they are being asked to do in the next five to ten months is far beyond what was envisioned when the body was formed.
The issue of televising meetings was important, but at the same time it was clearly a side issue. One of the points made by Councilmember Wolk when the council was discussing water-related issues was the need to determine early on whether or not we want a private or public option for the operator portion of the DBO (Design-Build-Operate) process.
While I think the public versus private question is important, I am actually much more concerned at this point that we properly scrutinize the operation portion of the three bidders.
When the Joint Powers Authority/Agreement discussed this matter a few months ago, it was unclear how far they intended to go into an investigation of the ethics and related issues of two of the potential operators – United Water and Veolia.
At this point, a jury trial is set to commence on August 6 of this year to determine whether United Water committed federal crimes when it may have tampered with E. coli bacteria monitoring results. The indictment alleges that United Water conspired to ” ‘tamper’ with the required E. coli monitoring method by changing the levels of chlorine administered at the plant before and after taking samples for E. coli.”
While it is unclear as to whether such a conviction would imply “game over” in terms of a JPA contract, there is actually a more concerning finding, and that is the record of failure that we have found involving both United Water and Veolia.
When the WAC begins to take a look at the private-public issue, they should focus clear on the ability of these private companies to private quality service in a competitive bid environment.
There are actually two clear examples that illustrate the pitfalls here. One was just down the road at the Fairfield-Suisun Sewer District. They signed a contract with United Water to operate their sewage system in 2004, and in January of 2008, the District would unanimously vote to bring its system in-house and cancel its contract with United Water.
Audits done by independent auditors found that they could reduce their operational costs by as much as 10 to 15 percent and at the same time offer their employees better benefits.
Their audit report found: “The district would achieve these savings by removing overhead costs associated with the company’s profits, which were expected to be as much as 20 percent of the value of the contract.”
Likewise the report from Indianapolis involving Veolia illustrates a similar problem.
In 2002, Veolia would sign a massive 20-year, $1.1 billion contract to provide water service to more than one million people.
However, three years later, a federal grand jury would subpoena four Veolia employees as part of an investigation into allegations that the utility falsified water quality reports.
What the investigation would find is that the company had cut back on staffing, water testing, treatment chemicals and maintenance.
“We did lose money, more than we anticipated,” then-Veolia President Tim Hewitt told the Indianapolis Star in 2005. In reference to the ardent public opposition to the deal, he added, “We’ll get through this but have a black eye.”
Except they did not get through it, and the city had to ultimately pay the company additional money while reducing the company’s responsibilities. Amazingly, “Indianapolis then sought to raise rates by 35 percent to pay for these additional expenses along with costlier capital improvement projects.”
The city would eventually turn to a nonprofit Citizens Energy Group to run the operation of their water service.
Going to a public or a non-profit represents one alternative.
What both of these examples illustrate is the pitfalls of a competitive bid process that forces companies to try to be able to underbid their competition. When push comes to shove and they have to cut costs, they do not cut costs at the expense of their profit margin but rather at the expense of their employees, which impacts the level of service.
One report argued that, overall, “Private operation of municipal water and sewer systems often forces consumers to pay more for worse service.”
It adds, “Across the United States – from Fairfield, California, to Houston, Texas, to Gary, Indiana – cities have found that public operation is a better deal for residents. They have reclaimed their water systems, canceling contracts with United Water, to reduce costs and improve services.”
Now, the DBO process is supposed to fix this problem by putting the risk on the bidders rather than the city. Moreover, as part of the process, the JPA and staff consultant would audit and analyze their finance plan and their costs to determine and ensure that corners are not being cut.
The problem is that if the project is about to fail, the JPA is the one that has the vested interest in ensuring that it does not and that may undermine part of the protection.
The other problem is that we are essentially relying on companies with questionable track records – in part because there are only a limited number of companies that can actually provide the full DBO service.
We should at least explore the possibility that we have a Design-Build process, with the possibility that either a non-profit, a public agency like SMUD or the city itself operate the water supply project.
But, from our standpoint this is not simply a public-private question, rather it is a question that calls for scrutinizing the companies that are putting in the bids and promising to do the work.
—David M. Greenwald reporting
Agree the DBO aspect is very worthy of study by WAC. My question is whether their scope is to study the merits (pros/cons) of the DBO OR investigate the 2 bidders in our case, as you have outlined there are questions about them. That is two different agendas
Didn’t the JPA consultants determine there were no ethical problems to bring forth? I have always been wary of that assuming I am right.
[i]we have a Design-Build process with the . . . cities themselves operate the water supply project.[/i]
Exactly. Separating ‘operation’ should expand the number of qualified bidders as well.
Following WAC guidelines, my comments are purely my own, and do not in any way speak for the WAC, where I am an Alternate.
David Greenwald said . . .
[i]”There are actually two clear examples that illustrate the pitfalls here. One was just down the road at the Fairfield-Suisun Sewer District. They signed a contract with United Water to operate their sewage system in 2004, and in January of 2008, the District would unanimously vote to bring its system in-house and cancel its contract with United Water.
Audits done by independent auditors found that they could reduce their operational costs by as much as 10 to 15 percent and at the same time offer their employees better benefits.
Their audit report finds: “‘The district would achieve these savings by removing overhead costs associated with the company’s profits, which were expected to be as much as 20 percent of the value of the contract.'”[/i]
Regarding the above point, my personal experience in Health Care Information Processing is that if Fairfield-Suisun conducts an audit of the operational costs of their self operation of the sewage system since 2008, they will find that those costs more than likely did not achieve the 10 to 15 percent savings. The reason I believe that is simple. One of the greatest “hidden” costs for hospitals and physician practices when trying to do their own IT cost-effectively comes in 1) “lost knowledge,” 2) training and 3) recruitment.
The above three issues are inter-tied. The principle reason for lost knowledge is that there is no upward career path for an IT professional anywhere in the hospital/practice outside the IT department. If an employee gets to the point where s/he wants more challenge, more pay and/or more responsibility there frequently is no such opportunity within their own employer, and as a result they seek employment with either A) a larger healthcare entity, or B) one of the large healthcare service organizations. When that employee give his/her 2-week notice his/her “knowledge” walks out the door. All the accumulated “value” that employee built up during his/her employment has to be replaced by the organization, and frequently operational efficiency declines.
Further, the cost of recruiting a replacement is particularly high for smaller organizations. The jobs they offer simply aren’t attractive enough to interest available job seekers as much as similar jobs in larger healthcare entities or private sector healthcare employers. Bottom-line, the big fish in the employment sector get the good candidates.
In addition, when they finally do hire a candidate, that new employee must be trained up to the level of the “lost” employee. Unfortunately, many organizations do not make the appropriate investment in training, and the replacement employee frequently remains less productive than the old employee was. Over time, on the job training closes that productivity gap . . . just in time for the replacement employee to hand in his/her 2-week notice.
Rarely do those costs of inefficiency, employee recruitment and training ever appear in the kind of projections that Fairfield-Suisun did. Further, auditors rarely are able to identify the impact of those costs because metaphorically they are “death by 1,000 cuts.”
I can hear you asking, “Why isn’t that the case for a contracted operator?” The answer to that is simple. Because they operate many different facilities of different sizes, the employee that is looking for more challenge, more pay and/or more responsibility has a very clear career path inside the company. A natural byproduct of career development within such contract operators is to identify those employees who are ready to “graduate” from a smaller (less complex) customer contract site to a larger (more complex) customer contract site within the customer base. Early identification of employees ready for promotion is one of the keys to success, because it allows the contract corporation to identify a successor within their employee complement and supplement that successors already existing knowledge/experience with targeted training. As a result there is virtually no A) recruitment cost, B) lost knowledge, and C) decreased operational efficiency. Further, when the time does come to recruit new employees, they have the pick of the candidate pool because the candidates see such a clear, positive, continuous career path.
In the end, what I expect Fairfield-Suisun will find is that a contract provider generates the lion’s share of its profits from effectively handling the employment life cycle.
***********************************************************
With all the above said, let me be very clear that I STRONGLY support adding at least one additional “O” bidder to the process. I also believe one or more of the current three bidders may end up reconfiguring its bidding partnership to address the ethics issues that have been raised.
Neutral said . . .
[i]”Exactly. Separating ‘operation’ should expand the number of qualified bidders as well.”[/i]
Unfortunately, for all the reasons I’ve outlined above, I don’t think that will be true.
If the cities (JPA) decide to operate the plant themselves, they start with virtually no current employees with the needed skill sets. They will have to compete in the job market for those very scarce skills, and in effect with “one hand tied behind their backs” because the plant will be so small when compared to the other plants that are competing for employees in the job market.
[quote]they should focus clear on the ability of these private companies to private quality service in a competitive bid environment.[/quote]
What did you mean to say here???
[quote]One report argued that, overall, “Private operation of municipal water and sewer systems often forces consumers to pay more for worse service.”[/quote]
Source?
[quote]Now, the DBO process is supposed to fix this problem by putting the risk on the bidders rather than the city. Moreover, as part of the process, the JPA and staff consultant would audit and analyze their finance plan and their costs to determine and ensure that corners are not being cut.
The problem is that if the project is about to fail, the JPA is the one that has the vested interest in ensuring that it does not and that may undermine part of the protection.[/quote]
I’m not following you here…
In other words, does the JPA allow the project to fail or do they pump in more money in hopes of shoring it up like they did in Indianapolis?
[quote]Agree the DBO aspect is very worthy of study by WAC. My question is whether their scope is to study the merits (pros/cons) of the DBO OR investigate the 2 bidders in our case, as you have outlined there are questions about them. That is two different agendas [/quote]
The scope of the WAC is wide open. Tune in and take a look…
Thanks Elaine. Now that they will be televised, I can. 🙂
[quote]Thanks Elaine. Now that they will be televised, I can. :-)[/quote]
You are more than welcome!
[quote]In other words, does the JPA allow the project to fail or do they pump in more money in hopes of shoring it up like they did in Indianapolis?[/quote]
Why would the city pump more money in – they threaten to sue/sue on the contract…
Matt,
Thanks for your input regarding “loss of knowledge” etc. in public vs. private operation of a proposed water treatment plant. I think I get your reasoning, but fail to understand the parallel between IT personnel, who have tended to be operating in a super growth industry (at least until the economy tanked), and public works personnel who have been running water treatment plants throughout the country for years, with little expectation of huge career advancements.
I understand the rational about loss of “institutional knowledge” that so pervades the discussion about stupendous pay numbers for corporate heads. But running a plant that pumps water out of a river, filters it, tests it, chlorinates it and sends it down the road to Davis is not exactly rocket science. I can’t imagine that the learning curve is so steep that the next guy down the pay scale can’t be taught the ropes in very little time. Publicly operated water treatment plants populate the U.S., and for the most part, public employees seem to be keeping the water clean and flowing.
Good questions roger. First, let me make the parallel clearer. The the top of the IT career ladder within a hospital/physician practice is the CIO. If a hospital CIO feels his/her career is ready for its next step, there simply isn’t anywhere within the hospital structure for that promotion to land the aspiring CIO. His/her skills simply don’t translate to a COO or Administrator position. So s/he has to look beyond the walls of the institution. I suspect (but could be wrong) that very few universities have a Department of Land, Air and Water Resources the way UC Davis does, and that in the current (and escalating) world of “Water Wars” and environmental regulations, the competition for engineers with training in the current water technology that a new water treatment plant will deploy is significant.
Further, my suspicions are (and again I could be wrong) that the kind of public works personnel “lifers” that you describe, are not going to have any inclination to leave their current job and move to a high cost of living location like Davis?
For an interesting discussion of public versus private management see:
[quote]http://www.pacinst.org/publications/essays_and_opinion/public_or_private_editorial.pdf[/quote]
For an interesting discussion of public versus private management of water systems, see the following link: [url]http://www.pacinst.org/publications/essays_and_opinion/public_or_private_editorial.pdf[/url]
Good discussion article Elaine. I can’t help but think how much more we could do as individual’s and as a society if we could get beyond the ideologic warfare behind “public vs private” altogether and be willing to accept ideas and brief trials of change regardless of who proposes them or whether or not they fit our partisan preconceptions.
[quote]Further, my suspicions are (and again I could be wrong) that the kind of public works personnel “lifers” that you describe, are not going to have any inclination to leave their current job and move to a high cost of living location like Davis? — [b]Matt Williams[/b][/quote]When it comes to job recruitment, Davis is actually a low cost of living area by California standards in that there is an abundance of reasonably priced housing within a 10 to 15 minute drive of Davis in West Sac, Woodland and Dixon. Having lived in a number of high cost of living areas, I can tell you that it takes longer than 15 minutes to drive from one end to the other of Boston, San Francisco, or even little Berkeley than it does to drive from Spring Lake, Southport or Dixon to Davis.
I have never lived in a city where the expectation exists that everyone will live in the same township as they work. While it is a great ideal, it is not the norm and the cost of living within 15 minutes of jobs in Davis certainly does not put Davis at a competitive disadvantage in terms of recruiting.
Sue, you are thinking “California-centric.” All of California is a high cost of living area for recruitment prospects coming from most other states. Given the escalating water issues in California, there will be more demand for water engineering skills than there are [u]available[/u] water engineers already residing in California, so recruitment for any new water treatment plant like the one being proposed will be a nationwide search.
For example, here is a cost of living comparison of Davis to Dallas, Texas.
Cost of Living IndexesDavisDallas
Overall_______________14394
Food__________________108100
Housing_______________23772
Utilities_____________118108
Transportation________113102
Health________________112107
Miscellaneous_________99103
“A salary of $100,000 in Davis, California could decrease to $65,806 in Dallas, Texas”
[url]http://www.bestplaces.net/col/?salary=100000&city1=50618100&city2=54819000[/url]
For example, here is a cost of living comparison of Davis to Dallas, Texas.
Cost of Living Indexes__Davis__Dallas
Overall_________________143_____94
Food____________________108____100
Housing_________________237_____72
Utilities_______________118____108
Transportation__________113____102
Health__________________112____107
Miscellaneous___________99_____103
“A salary of $100,000 in Davis, California could decrease to $65,806 in Dallas, Texas”
[url]http://www.bestplaces.net/col/…2=54819000[/url]
[quote]Good discussion article Elaine. I can’t help but think how much more we could do as individual’s and as a society if we could get beyond the ideologic warfare behind “public vs private” altogether and be willing to accept ideas and brief trials of change regardless of who proposes them or whether or not they fit our partisan preconceptions.[/quote]
Well said!