 Good morning, and welcome everyone. I particularly want to applaud all of you Who've made an effort on a very difficult weather day to be here and be part of this Including our distinguished visitor who's an alum of this school and this university who came all the way from Texas to be here And a great Michigan winter scene My name is Barry Ray. I'm a professor here at the Ford school and direct the Center for local state and urban policy One of the partners with the Ford school on this initiative and we're delighted to welcome you to this discussion this conversation About water system finance. I particularly want to thank our other partners in this activity Are there sponsors sees the school for environment and sustainability? the environmental law and policy program the Graham Sustainability Institute, and I particularly want to thank the Ford school for support through our conversations across difference initiative More on that in a moment. I also want to thank Alums of the public management class performance management a number of students who are here today Amelia as in stat and Ali waters joined by Tom of Aco from close-up Please note that you have an opportunity to participate in the conversation here through completion of clear and cogent Questions on cards that will be picked up by members of our close-up team as we proceed today And we'll try to get to as many of them as possible once the formal presentation is complete Amelia and Ali will be posing questions after consultation about how to structure them Again, we'll try to get to as many of those as possible knowing that there's great interest on a range of questions that might be addressed here We also have included in the brochure that you've received a copy of an assessment tool Which we would very much ask you to complete as in all events here We were looking for ways to get to get feedback and and response And so encourage you to drop those off on the table probably most easily the table in the foyer outside outside this this room Finally, let's just turn briefly to the topic and one of the reasons we were interested in this question of Water system finance really relates to this broader issue of policy questions that link to water But also the initiative that Dean Barr has launched called conversations across difference at a time where American society and global society is finding greater and greater difficulty in Launching and sustaining constructive conversations on many of the great policy and political questions of our time Not just partisan divides, but other kinds of divides as well the conversations across differences initiatives supported by funding from the provost office is Allowing us to consider a number of possible initiatives in terms of events speakers like today Teaching opportunities and the like and one of the things that we are realizing as we begin to explore What do we mean by conversations across difference is it means many things to many people that can be? Bipartisanship or the lack of bipartisanship other things that fracture and divide society It also means for people for many folks differences between sectors public versus private Across governmental levels federal state local international borders and boundaries how we begin to sustain serious Conversation toward development of effective public policies to cross all of these divides. Where do those conversations begin? Obviously there are a Relentless number of possible candidates policy questions that begin to emerge Water among them and it's so interesting to think about the evolution of water policy and water governance Certainly in a state like Michigan where water has long been taken for granted Water scarcity unlike many parts of the world in many parts of the United States is not seen as an issue and Think of the way that Communities in this state and for that matter across the nation Think about water particularly drinking water quality in the aftermath of Flint It changes the conversation the issues have all been there There are great many communities facing substantial risks both urban and rural But post-flint how do we begin to think about these issues? How do we consider governance? How do we can put together serious conversations across differences for the future of water policy? As we began to think about these questions It was very easy to think about who would be an exceptional person to lead this part of the conversation for us And I am absolutely just delighted to welcome back Manny Teodora to this school and to this campus Manny holds a phd in the dual program between the Ford school and the department of political science I had the great great fortune of working with him as a member of his dissertation committee just a few years ago He now is the faculty at Texas A&M university in the department of political science And Manny has done some really really interesting things. I could actually fill a buster your remaining time But I'm not going to do that In areas of public management and bureaucracy including issues of bureaucratic ambition the title of an award-winning book that Emerged from his dissertation about how bureaucratic careers evolve and what impact that has for political and policy development But an enormous amount of Manny's published research And policy engagement has been in the area of water and water quality Long before flint Entered the re-entered the american political lexicon as synonymous with a water disaster Manny was on the front lines looking at water governance water policy the many institutions Organizational players that deal with these issues in state after state And his life is indeed changed after flint because that that topic of great long-standing importance Has reached even greater saliency So he has graciously enjoyed agreed to join us today and begin this conversation Looking at water system finance the political pitfalls of public private partnerships Please join me in welcoming Manny teodor Thanks barry that that's a really really wonderful introduction It is it is great to be back in an arbor. I had a little bit of a Flashback walking into this room. This building opened during my last semester here in an arbor. It was 2007 And I gave a little talk. I think I sat right over there It was part of a day-long program and it's so it's it's just terrific to be back here admittedly The weather has me missing texas a little bit today Uh, that I could not let the weather go unnoted. I should have been maybe more strategic in choosing a date to visit Uh, but but it is it really is an extra special honor. I I get to Give give a number of visiting talks here and there, but it's this is particularly special I I finished my degree 12 years ago Uh, and it's it does it feels like oh, I get to give a talk at the Ford school I've arrived it took me 12 years, but I'm but I'm here I'm finally somebody So anyway, thanks for having me. It's it's wonderful to be here and I want to also thank, um, Bonnie Roberts Are you still in the room? Bonnie? I don't know. She she arranged everything for me So I really appreciate her help and also this is the best publicity poster I've I've ever seen So now you now you feel like you got what you were advertising Okay, so my talk my talk today is is as you as you see it's the political pitfalls of public private partnerships water system finance And this is part of a project. I've been working on with one of my graduate students Mellie Hader. She's a phd student As as Barry noted, I have been interested in in water management policy for a long long time And maybe the most astonishing thing is as as Barry alluded to the the evolution of this issue in the american consciousness over the past couple of years Maybe the most Surprising thing to me is that you can fill a room like this full of people to hear about water system finance That this was not something people cared about for the first 10 years or so of my academic career I had to begin every talk I gave by explaining to people why they should care about water utilities I don't have to do that anymore for all the wrong reasons people get it. Uh, and and it's It's uh, it's both gratifying and uh, and exciting to be living at this moment We are at an extraordinary moment for water infrastructure For the first time in a generation people are thinking about this stuff working on it Talking about it the country faces daunting replacement needs This graph I think I think is going to Show a lot of what i'm talking about the water systems that serve most of the of america At least the the urban areas of the united states were mostly built either in a couple of waves first Maybe like a hundred years ago when the first water systems were being put in place And then the as as drinking water standards and and environmental regulations came along in the 1970s There was a huge boom in and construction of water facilities and as this graph suggests to you This is federal spending on water infrastructure. It it uh, it really exploded in the 1970s in the early 1980s It was just massive federal funding and a lot of the drinking water systems of in the united states were paid for by Uncle sam on 90 10 Uh matching grants so local governments would pay 10 cents uncle sam would pick up 90 cents on out of that dollar And those facilities those programs went away by the early 1980s We've seen a long and steep decline in federal spending on a drinking water The idea behind these programs was that local governments would match But then local governments would be respond would be responsible local governments at ran utilities would be responsible for maintaining Upgrading over time. They would take ownership. The federal government was there to help them get going And there's there's something very important about the timescale here about the about the timeline these federal grants came as part of the clean water act and the safe drinking water act 1972 and 1974 respectively the The federal grants were part of those laws And I think about that a lot because I was born the same year as the clean water act So I'm very keenly aware of how long ago that was And when engineers build drinking water systems, they're usually designed to last 40 to 50 years Well, guess how long it's been We are at a stage now where infrastructure is failing In a lot of these systems and they have not been adequately maintained. The bill is coming due the american waterworks association Estimates that we have roughly a trillion dollars in infrastructure backlog in the water sector alone over the next 20 years As a result water and sewer rates have climbed rapidly across the country And the the um aim The some of the most egregious needs or the most severe needs are are in rural areas Uh, it was we when I decided to think about how to how to phrase there how to frame this talk in terms of conversations across Difference the obvious one is public and private sector and we're going to get to that But a part of what a big part of what i'm going to talk about today is urban and rural Large systems small systems and the very different ways in which we provide water to different communities of different sizes Main point is that there's an overdue infrastructure bill in this country And that the bill is coming due There is something else going on berry also alluded to this This is the the public face of drinking water in america now I think it's yeah, I don't have to tell an michigan audience about the flint water crisis But you may be surprised I don't have to tell anybody in the united states about the flint water crisis You talk to anyone across the country about drinking water the first word it's going to come out of their mouths flint This this is how people think about drinking water and it is it has changed the way people relate to their utilities I've I've done some interesting little research on utilities In different parts of the country actually think about their own drinking water systems in terms of flint So it's it's uh very much a drinking water quality issue But of course flint is not just about drinking water Quality it's also about poverty and it's about race It's about environmental justice It's really hard to overstate how important the flint has been for changing the national conversation about water I tell people look this is the this is the kayahoga river fire of our generation Drinking water didn't didn't suddenly become important when the flint water crisis happened. It was always important It's just now people are paying attention. It's the same way the kayahoga river fire Inspired the clean water act Brought national attention to water pollution flint water crisis is doing something very similar about about drinking water I want to show you just a couple graphs. I was going to study that I published a couple years ago on on the relationship between race socioeconomic status and And safe drinking water act compliance on the left hand side you see The percent black population on the right hand side We've got the percent hispanic population of communities and then on on the y-axis we've got We've got the percent of the population below poverty and what you see here is those Those those violations or safe drinking water act violations tend to happen in the places that are Predominantly non-white and predominantly poor. So we've got in addition to the traditional supporters of infrastructure We've now got a coalition of folks recognizing. This is a social justice issue. It's an environmental justice issue That that drinking water is also about race and poverty So over the last three years hardly a week has gone by without a major News outlet running a story on drinking water that i'm telling you is weird I've been working on this stuff for a long time. It used to be obscure now. It's front page news And someone else has noticed too You just don't recognize this handsome guy. This is this is Gavin Newsom. He's the new governor of california Just earlier this month Governor Newsom Took his entire cabinet meeting out on a tour of rural water systems Your own governor your your new governor here has who ran on a water infrastructure platform Right that was a convenient thing for someone in michigan perhaps, but it's convenient for folks elsewhere, too President trump's infrastructure plan last year included a large section on water infrastructure people in the water industry We're not used to presidents giving this kind of love to our to our sector. You tend to talk about Infrastructure in terms of roads and bridges roads and bridges roads and bridges We I've got this term. I call Rosen bridges Which is the way that politicians tend to think about infrastructure because roads and bridges are very visible politicians are paying attention to water senator harris also in the news recently for her ambitions introduced a bill on water affordability last year And you know, you don't have to be a political scientist to know that when politicians ambitious politicians are talking about an issue It's because they know that the public perceives the issue to be important None of these people is a renowned water geek. Okay, none of these folks is a water engineer They are drawn to this topic because it is now publicly important. Okay So There is a growing consensus that existing infrastructure funding Funding institutions are failing. That's the whole reason we've got a crisis so Much of the conversation at this point is what do we do about that and a couple of the options that are Getting a lot of attention, especially in the white house's infrastructure plan our privatization and perhaps public-private partnerships That's going to be the focus of my talk today Pure privatization is when infrastructure in this case a water system is owned by a private individual or an investor owned corporation privatization can bring an instant instantaneous capital infusion to a struggling water system when a private corporation buys a water system It takes it takes on and owns that system literally owns the pipes and the reservoirs and the treatment facilities And can bring to bear an enormous amount of funding immediately A big part of privatization's appeal is that any immediate cash and flute infusion But also that private corporations bring uh an expertise and and their profit motive is supposed to drive efficiency But of course privatization especially in something as as essential as water also it gets to be an emotional issue And it sort of conjures some negative images think about about what evil robber barons, right? A lot of mustache twirling and so on with with private corporations So I think there's a fear of visceral and understandable fear about private corporations owning Something that is as essential literally essential as drinking water By contrast, there's the public-private partnership It's a main topic of today's talk So these things I'm going to call them sometimes p3s or triple p's public-private partnerships The word partnership, right partnership sounds good Who could be against a partnership partnership public-private partnership? Seems the like the idea of coupling private expertise and efficiency with democratic governance That all seems very appealing public-private partnership seems like mom and apple pie, right? It's very difficult to to disagree with the idea of a public-private partnership And I think there's a tendency in the discussion of p3s to focus on finance and in efficiency and we should those things are very very important But I'm today going to focus on the off to overlooked political Dimension of public-private partnerships and try to trace out the political incentives that that p3 institutions create So as a policy scholar, I am interested in operational and financial dimensions of p3s But as a political scientist, I'm interested in the way public-private partnerships incentivize Behavior. All right, so here's where we're going for the balance of the talk today. I'm going to start by Tell you all a little bit about the water sector in america how it's structured And how the economics and governance of water utilities is very different from other kinds of utilities I'm going to talk about the institutions and incentives for public utilities private utilities and public private partnerships What I'm going to be talking about today. I'm going to keep using the word utility. What I mean is water utility Okay, that some of what I'm saying can also apply to other kinds of utilities But I'm going to focus on on water and uh and wastewater today Then I'm going to show you some analysis of how ownership relates to safe drinking water act compliance and which kinds of models Are generating the the sort of the best water quality outcomes Talk about the implications broader implications and applications of these ideas So let's start with the uh with system ownership So I think when when you talk with most people about certainly before before flint when you talk with folks about utilities They tend to tend to think immediately of electricity. Maybe gas Uh, and that's because historically those have been more expensive services. Maybe we think about telecom We don't spend as much time thinking about water And water is in a lot of ways very very different from energy and it's it's different different in a lot of ways But but i'm going to point out just a couple that are interesting from organizational perspectives First thing to know about water utilities is there's a lot of them There's just a lot of water systems in the united states depending on how you count things There are between three and thirty three thousand and thirty five hundred Electrical utilities in the united states three thousand to thirty five hundred somewhere in that range There are fifty thousand Community water systems in the united states So we're talking about an order of magnitude more than an order of magnitude more organizations Serving serving the american public about 85 of americans get their drinking water from a local government That's the other difference that ratio is almost exactly opposite about 85 in energy About 85 of americans get their electrical utility service from a private corporation About 85 of americans get their drinking water service from a government So the organizations that are providing these services are very different and and corporations and governments face very different kinds of constraints and incentives So in sheer numbers We're talking about a huge difference and a difference in ownership the other thing to know about these systems Is that the overwhelming majority Of drinking water systems are very very small So this is how things break down by size. These are size categories that the epa uses for various record keeping and regulatory purposes You see about half of the u.s. Population is served by 434 utilities It's it's a very small number of very very large systems that serve a lot of people 40 000 systems are tiny. They serve fewer than 3300 people And organizationally those those systems are very different. They tend to if they have any full-time staff at all There's maybe one or two people in a pickup truck, right? That's who's running those systems So, uh, the the other system, you know, we see about about half of the the country served by these sort of small and medium-sized systems Between 30 350 000, but the the main thing to point out here again 40 000 of these systems 40 000 of the roughly 50 000 systems are really really small That's a very different kind of setup is from what we have in the energy sector The focus of my talk today is going to be on these large and medium-sized systems I think the Structural issues with very very small those tiny tiny systems. They're very different I mean they're they're they're in most cases not Autonomous organizations at all. So in some ways it's very difficult to talk about management and policy challenges at that scale They are worth studying and evaluating, but my talk today is going to be focused on 3300 and up Which covers most of the u.s population Finally, here's how size and ownership relates Those large systems are are mostly are mostly public Well, actually all of the systems are mostly public, but there's a correlation between ownership and size as size increases Private ownership decreases. So most of the private private utilities tend to be of the small and medium-sized Systems and the thing to know about public private partnerships is they're relatively rare. There are not a lot of them However, more and more communities are considering public private partnerships It's certainly and the water industry the private industry side is is promoting a public private partnerships as a as a path forward So at this point, it's probably time for me to to define what a p3 is, right? 20 minutes into the talk or 15 minutes. I probably should define my key my key topic So public private partnerships now it's a it's a surprisingly difficult Thing to to to to define if you look at the literature and public private partnerships There are lots of definitions and it's hard to pin down because They come in near infinite varieties public private partnerships take a lot of forms and a lot of different sectors of the economy It's very hard to to come up with a universal definition So what i'm going to talk about instead of trying to come up with a universal definition I'm going to talk about the most common form of public private partnership in the water sector So water and wastewater systems They there tends to be the typical form for a public private partnership and it looks like this It's usually the form of some kind of a contract agreement between a local government and a private corporation And here's how the relationship works the local government owns the facilities the water facilities That's the treatment plant the pipes the meters The the the reservoirs anything all any of the physical capital that's necessary to deliver water The government also makes investment decisions. It decides when to expand when to maintain And critically for our purposes. It also makes the pricing decisions. It decides what water costs It decides on the water rate structure The private partner private sector partner is private corporation that will operate the facilities So it acts as a as an operator. They have the people who actually run the system The extent to which the private operator carries out different elements of the of the system depends on the contract So each public private partnership is a little different These things are negotiated on an ad hoc basis by the lawyers for for local governments and for For the private firms that contract with them P3's they go by various names But you'll sometimes see them called simply operating contracts. They'll say they have an operating contractor. Sometimes this is called a franchise agreement Very if if it involves a newer or larger project It might be called a dbo if you ever hear that that abbreviation that stands for design build operate Where you're you're contracting the private firm to design the facility build the facility operate the facility They have a bunch of different names, but this is the most common model of p3 and water There are other models, but this is the one you see most often Now when governments engage in public private partnerships or at least when they're considering them We usually see a combination of rationale behind the choice to pursue a p3 And there's a pretty robust literature in economics public management If you've ever heard the phrase new public management was very interested in in what contracting arrangements could do And the rationale usually goes like this You go to a p3 because a private firm can bring human capital in ways that improve quality Especially if you're a smaller government a large corporation has a lot of expertise They can bring to bear on your small system that you may not have in your local community So that's that's a big improvement in quality potentially Second we hear a lot about the profit motive right that the profit like a profit seeking for a profit maximizing firm ought to be efficient That market discipline will cause them to operate efficiently a way that local governments maybe don't And then we like to say well, but what we get the benefit of democracy local control Essential service essential good water. We want to keep control over that that thing We want to control control over pricing. We want control over investment signing decisions And so that that we we get to retain that local democratic control and that's that mom and apple pie Right we get all these nice things with public private partnership And it sounds good. It appeals to labor and management alike Republicans and democrats cats and dogs. Everybody likes p3s Now as you saw earlier the overwhelming majority of public water systems are owned by local governments Those systems therefore are managed and operated by local bureaucrats The system policies are set by local elected officials Mayors city councils county commissions special district boards Crucially for our purposes we keep remembering it's this it's the pricing and investment decisions fall to public Agencies so these decisions are made out of city hall the governance for Public water utilities are made in city halls and board rooms around the country Private investor owned utilities are owned by private firm managers And employees those policies are set by corporate executives and corporate boards of directors But crucially investment decisions in the private utility are made jointly between the utilities management and a public utilities commission These things take different names in in different states But here's the california public utilities commission. That's one of the biggest Pricing and investment decisions are made with the puc So private corporations that serve the purely private water utilities don't get to just set prices whatever they want They have to work with public utilities commissions more on that in just a moment Actually, not just a month. We'll do it right now Pricing for private water to look this is gonna have to get down in the weeds just a tiny bit because this is really important to Understand the broader point. I want to make Utilities are natural monopolies if we let the if we let a privately owned water utility Just charge whatever it wanted for water water would be inefficiently expensive because they would just take advantage The private ownership would take advantage of its its monopoly position and just charge people a lot of money for water And so we have laws in the united states that require A utility prices to be set at what's called cost of service So we they require cost of service pricing and the public utilities commission puts a limit on how much the utility can charge And here they follow a formula get very complicated, but it all boils down to a very simple formula They're allowed to charge the operating cost of the facilities So if it costs me a million dollars to run the water system, I get to charge a million dollars to the customers of the water system In addition to my operating cost I get to make a profit Because i'm a private ownership. I'm a private because of private ownership I get to make a profit but that profit is limited by statute The public utilities commission allows me to earn a rate of return Maybe something like four percent or five percent or ten percent some percentage Multiplied by the capital rate base the capital rate base turns out to be really important That's the money I put into the system if it costs me Uh, uh, a hundred thousand dollars to buy a piece of equipment and i'm allowed to earn five percent Of rate of return that means in addition to my operating cost. I get five thousand dollars So i got a hundred thousand dollars times my rate of return five percent I get five thousand dollars on top of my operating cost. That's the way cost of service pricing works That's going to become very important in just a moment For now, let's go to p3's p3's are effectively governed by a combination of local governments and courts utilities commissions are not involved In public private partnerships So the the courts are involved in so far is they have to adjudicate over the contracting relationship Between the local government and the private firm. So the private firm operates the system in exchange for a fee Or the right to collect revenue. They get they re for a million dollars a year We'll run your water system The local government makes the investment in pricing decisions and the courts just adjudicate conflicts Now for purposes of environmental quality, all of them are subject to the same environmental regulations Safe drinking water act applies to all these utilities regardless of ownership There's one more key thing to know about water systems Let's lay out the ground worker one more key thing To know about water as a matter of public policy that makes it very different from say roads and bridges and that is With water the cost or the price is much more visible than quality Drive over a pothole, you know it Most of the contaminants in drinking water are invisible to us Unless water gets really really really really dirty. You don't know if it's contaminated However, the price of water is very easily and immediately observable I may not know what contaminants are in my water unless I'm some kind of a chemist But I for sure know what I'm paying for it. I get my bill at the end of every month I see what it costs me. So the price is very visible the quality Not so much unless there's a water main break on my street unless I get a boil water notice I probably just kind of more or less figure the water's fine Right and it's uh, and so I don't really have a good sense of quality. All right That's that's the big wind up. I think it's a long wind up. We're gonna get to the get to the pitch here now What does all that mean for institutions and incentives? Let's get political sciencey for a minute Trace through the incentives that these institutions create for water quality Let's start with public incentives. I'm going to draw from a Kind of an obscure but really brilliant little article by a guy called cotton lindsey in 1976 Who traced out a logic of public enterprises like like water utilities public enterprises anytime the government operates something that operates on On a government owns and operates something that that uses a fee for service basis like uh, like a public university That's a public enterprise so He's got we're like like any political sign. He was an economist But like any like most political scientists he began with the assumption that the people who make Decisions are elected officials and their goal is reelection But we just assume that the the people who govern these systems want to get reelected And the way you do that if you're running a water system you want to do two things You want to minimize the price and maximize quality, right? People like to pay low prices and they like to get high quality things That's not just true for water. That's true generally. We like high quality and low prices So the politician Who wants to get reelected wants to minimize price and maximize quality? However, we observed a moment ago That price is much more visible than quality It's very difficult for people to gauge the quality of their water is very easy for them to gauge the price that leads to Ignoring the quality dimension and focusing on price the decisions that follow then are to reduce operating costs Minimize capital investment and defer maintenance. The result is Long run low prices, but also low quality in many ways this article from 1976 Pressaged the drinking water infrastructure crisis we have today There's no political incentive To it reinvest in a water system if it's going to cause rates to go up And there's every incentive as an elected official to think What are the odds that i'm going to have a flint water crisis during my time in office? Probably pretty small That's my successor's problem. Not my problem And so this we end up with low prices and low quality and lindsay argues Inefficiently low prices inefficiently low quality if people had the alternative to make private market decisions They would pay more and get higher quality Maybe says something about the appeal of kiosk or bottled water Private utilities face a very different decision logic And i'm going to introduce you to a couple of more economists in a more famous model the average johnson model So professor's average and johnson Observed that unlike unlike public agencies the goal of a private firm is profit Right or growth they want to grow revenue. They want to make a profit to maximize profit Of course, they want to maximize price and to maximize growth. They want to maximize quality by having high quality You can appeal to more customers. You can expand your your market So from a management's perspective the decisions that follow are to have moderate operating costs You don't want them high because that that'll eat into your profit, but you don't want them too low because that'll hurt quality You want to maximize capital investment and maximize maintenance and your reason why you remember that cost of service formula The rate of return Multiplied by your rate base is the profit that you are allowed to make These two things capital investment and and maintenance go into your rate base If I put a million dollars reinvest a million dollars into my system that goes into the rate base I get to earn a rate of return on that million dollars So I have every incentive to invest and invest and invest And the public utilities commission will allow me To earn a rate of return and set my rates in such a way as I make a profit on that investment The result say average and johnson is high prices, but also very high quality But they're inefficiently high prices because it creates an incentive to what they they call it gold plating They'll gold plate the system instead of having a double redundant Reservoir I'll have a quadruple redundant reservoir. It'll be a wonderful wonderful reservoir And it'll be able to handle the 2,000 year flood But the prices are going to be very very high so inefficiently high prices So those are the incentives in place and there's a good body of empirical and theoretical research affirming both of these findings We know that empirically this tends to be the case private water Higher priced a lot of research that shows that but I've had some recent research that shows They also tend to generate higher quality than the public sector. What about p3s? About the incentives for public private partnerships Or remember that in theory a public private partnership is supposed to combine these nice things human capital a profit motive for Efficiency and local control for democracy. There's a lot of reason to think that human capital that works I've got some other research. I'm not going to talk about today But there's a lot of a lot of evidence that human the private public private partnerships are delivering on human capital However, the profit motive and efficiency and efficiency the local control and democracy that's the subject of my My concern today for the public part of the p3. Here's how it looks. I'm going to look at the government side Here we still have a reelection incentive But now quality is no longer the local government's concern They've contracted with the private firm the private firm is now responsible for water quality So their only goal is to minimize price Which means they want to reduce operating costs and they're going to do that by working with the private firm But they still have an incentive to minimize investment. They still have an incentive to minimize maintenance expenditures So that they can achieve the outcome of low prices because remember under these p3s The pricing is decision is still with the local government so the smart decision Is to keep prices low and put the squeeze on your private contractor Let's turn to the private contractor for a second Now they of course still want to maximize rates and maximize quality, but they don't control rates anymore They don't even get to work with the public utilities commission. Now the local government sets rates They might still want to maximize quality, but the decision the smart decision now Is is to reduce operating costs because they have no way to control capital investment and maximize maintenance They can go to the local government and say hey local government We'd really like to reinvest in the system, but that decision is up to the local government Not to the private contractor Now recall that these contracts work on a fixed fee basis. You pay me a million dollars to run your system The only way I can grow my profit Is to reduce operating costs I know that i'm only going to get a fixed amount of money each year The only way I can grow my profit is to reduce operating costs So I now have every incentive to run at the bare minimum get the least skilled employees I possibly can so I don't have to pay them very much Maintain as little as possible take care of the system as little as possible the more I do that the more money I make So the outcome will be Low prices I won't be able to raise this to high prices But now I'm balancing my goal of maximizing quality to grow my market share against my need to make a profit And my incentive to reduce operating costs So you put that all together and these models suggest that p3s are going to result in low prices High quality management to the extent that they private firms bring a lot of human capital to the equation But still low water quality and still systematically under invested capital under investment in capital Now I don't have the time or the data to go into every dimension of this model So I'm just going to focus on the quality dimensions for the remainder of my talk as I mentioned earlier the main Law governing drinking water quality in the United States is the Safe Drinking Water Act of 1974 It's like most environmental laws in the United States and involves series of technology based standards I'm going to take a very complicated law and boil it down to two things health standards and management or monitoring standards Health violations on the Safe Drinking Water Act occur when you exceed the maximum allowable Contaminants in the drinking water or you fail to use approved treatment technology management violations occur if you fail to take appropriate water samples report in a timely fashion and and Give information about water quality to your community So those are the two kinds of violations that it can occur two species of violations can occur Under the Safe Drinking Water Act We're going to look at both of them because they tell us different things So health violations tell us about water quality management violations tell us about management quality because they're strictly procedural They have to do with management systems Based on what I've just laid out about p3s. Here's what we would expect About p3 performance relative to the public We'd expect health violations to be about the same because the incentives in place are about the same as they are For public sector, but we'd expect management violations perhaps to decline because we're getting human capital from the private sector so We uh to to to get after this we analyzed Safe Drinking Water Act compliance data for eight years 2010 to 2017 Our data source was the epa Safe Drinking Water Information System We were interested in the different kinds of utilities different sizes or water sources ownership Of course we're focused on ownership in this analysis And we're focused we're going to look at the violations and compliance with the Safe Drinking Water Act because we know a lot about the way demographics Predict drinking water quality. We also use the American Community Survey to get some demographic controls And uh, we we do a bunch of statistical modeling and Hocus pocus with statistics and we we uh, we did some analysis to see the correlation between ownership What was the relationship between public private p3 models and outcomes with the Safe Drinking Water Act? I'm not going to bother you with more gory details of statistics. I can answer questions if you want for now Allow me to lay some results upon you This is health violations under the Safe Drinking Water Act evaluated at a population of 4200 those Smallish systems where the small systems where pup p3s are really growing Here is average health violations for the publicly owned privately owned and public private partnerships As you can see here private investor owned utilities experience significantly fewer violations per year This is the this is a modeled number of violations per year annual health violations Safe drinking water act the private is getting about a 0.11 on average compared to 0.17 for public Thing to know about health violations there. These are rare events. Happily they don't happen very often but They happen significantly more often In publicly owned utilities than in privately owned utilities and that's consistent with what earlier Findings what what I found in the past what other scholars have found in the past the difference is percentage terms is pretty Significance about a 35 percent difference to put it in another way The difference between public and private is about one violation per decade versus one violation every six years So that's that's a pretty substantial difference But you notice public private partnerships. We're not getting a significant difference between public and and p3s You know, it's a huge confidence interval because there are not a whole lot of public private partnerships But we also don't see a very big substantive difference between the two Here's a marginal effects plot showing the same thing. This is private versus public You're not used to looking at marginal effects So what this is telling you is over the Over the the scale of population of the range of population of utilities What difference is there between private and public? Remember small numbers are good. We don't want violations It's like golf. You want small scores, right? The change in between private and public is negative across the range That's telling you that private is committing fewer violations than public and the biggest differences are at the low end of the distribution Here's a p3s versus public Again substantively not much difference. No statistically significant difference in health violations. Let's move on To management management violations. We see a different story The first thing we see at the what we'd expect the difference between public and private we get fewer management violations management violations are much more common than health violations That's good in as much as we don't want health violations But management violations much more common But we see now at both a sub we have we see a large substantial drop in management violations with public private partnerships And that I think tells us something about that human capital story that's going on. You're getting much more professional management, we just barely miss statistical significance, but uh, but in substantive terms, that's that's pretty good Statistical significance by 95 percent standards Uh, here's the marginal effects plot again. There's public versus private or private rather versus public And here's a p3 versus public in which is barely scraping that uh, that statistical significance line So important to couple to acknowledge a couple things about this analysis First of all with the data at hand I cannot rule out the possibility that the the utilities that have p3s are qualitatively different in some important way It could be the case that the p3 systems are absolutely horrible when the private corporations take over operations And it maybe things would have been a lot worse without them. I can't rule that out IRB is not going to let me randomly assign ownership to to water utility system So it's very difficult for me to say with confidence Exactly what the causality is uh here So that that is one possibility for those of you who care about the English things we have tried Propensity score matching and waiting and we see the same results It's difficult to imagine what an instrument or instrumental variable for utility ownership might be so So it's it this is the best we can do with observational data These things change ownership so so seldom that it's very difficult to get traction over time in that sense There is plenty of qualitative evidence however that the political logic tied to rates is a big part of what's driving public private partnerships We see case after case where this kind of logic is at play that it's the politics of pricing Not the politics of water quality that drive p3 decisions To show you that i want to show you something i just ran across three days ago It's a marvelous representation Evidence of the logic at hand. This is a i found a website called p3guide.com. Is it dot com? Yes dot com p3guide.com. This is developed apparently by some some researchers at the kennedy school Who apparently have a lot of experience? Fostering public private partnerships and they set up this website to help local officials decide whether a p3 was right for them So they have a bunch of decision tools We can click through and it'll ask you questions like do you care about this or more than that? Do you care about that more than this and it'll go through and tell you whether a p3 is a good idea for you or not One of the things that's wonderful. They have decision tools about pricing decision tools about capital investment But they have a political decision tool as well Here's the first question that comes up on the political decision tool Okay, so you can't read it. It says does the project span multiple political jurisdictions? And is it likely to affect multiple political stakeholders? And i want to show you the last the last sentence here It says if the project impacts multiple political stakeholders like organized labor Environmental community permitting agencies and so on you may want to shift the burden to the private project developer to avoid political impacts No mention of quality no mention of pricing Do you want to avoid political responsibility for this infrastructure? The p3 is right for you my friend How about this this is the next question do you anticipate crippling constituent dissatisfaction or pressure? Your constituents will no doubt be displeased if you raise their taxes and user fees to create new fees tolls and charges for services They used to receive for free or if you use to charge them 30 a month for water and sewer you charge them from 90 dollars a month They're going to be really unhappy if so you may consider deflecting the political the potential constituent displeasure to a private project developer I just published a paper Still forthcoming with a couple of my grad students called political decoupling and it would look at the The conservation performance of public and private utilities in california We found that private utilities out conserved public utilities during the drought and we trace it back to this logic Private utilities they can set the prices whatever they want the puc is going to let them set the prices But if you are a public utility and you save a bunch of water during the drought because it's an emergency But then you don't sell a bunch of water so you lose a bunch of money the constituents are going to be angry at you And I cannot tell you as a political scientist how rare this is We sort of spin Machiavellian tales in our heads about how political decision makers think about things We so rarely have the logic spelled out in black and white for us right here My god, it's the conspiracy theory put in right there online for us Do a p3 it'll let you avoid political responsibility So for community struggling with water system finance Facing daunting infrastructure need i'm going to close with a couple of thoughts here on the implications of all this And and I think it's important to think about The political incentives that p3s create because goodness knows the p3 proponents are thinking about the politics here So are p3s good good or bad idea? I think it's most useful to ask what they're good for and what they're not good for It's not that they're necessarily in themselves good or bad But there are some good reasons and some bad reasons to pursue them. So what are some good reasons to pursue? Uh public private partnerships. I think there's really one very very good reason to pursue a public private partnership And that's human capital There are parts of the united states where there are counties in the united states where you cannot buy a qualified water operator Or our civil engineer for any price In those contexts where you are severely lacking in human capital, especially in a smaller system A public private partnership is a way to get expertise into your community Very quickly very very effectively. It's a very good way to retain high highly qualified individuals And we know that they can help utilities perform better Big company can run lots of small and medium sized systems I think we're accustomed to thinking about economies of scale in terms of brick and mortar and pipes But there's enormous economies of scale to organizations as well Bad reasons to pursue public private partnership. I'm going to just talk about two of them very briefly The first is I often worry that the main reason that people pursue public private partnership is a bad reason Not a good one and they think that it's going to cause money to fall from the sky Privatization and public private partnerships are not sources of capital In the end the money comes from the same people It's going to come from the water customer How it gets from the water customer's pocket to the utility Changes depending on whether you've got public private or public private partnership But one way or another the money's coming from the same people It is not a capital financing alternative. It is an organizational model But public private partnership will not instantaneously create money Under public private partnerships the rate increases are still going to be needed to fund infrastructure Or else the systems will continue to fail We will not solve the infrastructure problems and that brings us maybe to the worst reason of all to pursue a public private partnership Thank you to p3 guide for letting laying it out so clearly and that is to avoid accountability P3s are not privatization light They very create and sustain very different political incentives from pure privatization And it is so it is a fundamentally different institutional arrangement bottom line. I as you probably have Gathered i'm not a big fan of public private partnerships in the water sector I think there are some very strong arguments for private Ownership and management. I think there are some very strong arguments for public ownership and management I do not see in most circumstances public private partnerships providing long-term solutions And those have nothing to do with economies of scale or organizational organizational management They have everything to do with the political incentives that are in place with p3s p3s often touted as offering the best of both worlds. I think in many ways they offer the worst But so I think am I on time? I'm a little little over. I've got some time for questions. I guess. Yeah, great Thank you Hi, thank you so much for speaking to us today. My name is Amelia essence dad I'm a second year masters of public policy student here at the ford school and I Took dr. Raebs public management class last year One question we have is how can we make quality more visible to consumers and voters? That is a great question and it's it's one. I'm thinking about a lot How can we make quality more more visible I actually just I just I just blogged about this recently The state of new jersey just passed something called the water quality accountability act And it is the first state to adopt a statewide law requiring that all public utilities post performance information on a variety of dimensions In a way that makes Their performance not just safe drinking water act compliance, but things like system water loss Exact levels of chemical contaminants in various dimensions number of water main breaks all these kinds of things will be publicly um publicly available And what that's going to do is allow us the research community to draw a clearer line between an investment decision and the water quality impact I was part of a team that proposed an nsf A project that sadly was not funded That would have it was on a multiple multiple disciplinary team where we were going to use sort of cloud-based micro data on things like Purchases of pepto bismol and water system quality Right and and people getting on facebook and twitter and complaining about being sick And then water system performance And our goal with all of this is to try to draw that line more brightly One of the things I think is so fascinating about water 100 years ago 125 130 years ago when americans were not accustomed to getting drinking water Politicians used to brag about building and investing in drinking water systems anybody here from saginah Only from saginah So saginah is I love telling the story about saginah. So saginah built a drinking water plant in uh, I want to say an 1912 1913 something like that about a hundred little over a hundred years ago And I've read an article about this about the 100th anniversary of the saginah drinking water plant And it's wonderful to look at because there's these old grainy black and white pictures when they open this treatment plant and they had a parade Like with marching bands And they had people used to have to pump water from the middle of town in these these hand pumps And they had it as part of the parade a hearse with a hand pump in it And they ceremonially buried the hand pump and there's this picture of the guys with the black top hats and And they're shaking hands and and they're burying this thing and there's a huge crowd and they're applauding and And the sign of the saginah on front of saginah water treatment plant branding plant says the world's best water And one of the three guys in this picture is the mayor one of them is the governor of michigan And they're all there celebrating with this huge crowd politicians love to claim credit for stuff What's happened in the intervening hundred years is politicians no longer want to claim credit for water. They want to avoid blame Avoiding blame is a very different kind of incentive Now the game is not claim credit for bringing you better health and a better life now the game is You know, it's like it's playing it's like playing a game where you're holding the timer and you don't want it to go off And then you like you hand it to the next person hope that it goes off while they're holding it's like a hot potato game So how can we make things more visible? I think the answer is a lot of data transparency and analysis I have a lot of friends who work in the water utility industry. They're very very nervous about this prospect They don't like the idea of people looking at a lot of performance information on the at their systems But I think we need to change that we need to make Performance information something that we celebrate so it gives people a reason to claim credit for good performance Not just avoid credit for avoid blame for bad performance. So lots and lots of data transparency. That was a long answer Data there's the short one Great. Thanks. Um, my name is Allie waters. I'm also a second year mpp student and took dr. Raibs class Last year, um, but also have a background in my undergrad in economics and environmental studies. This is really interesting talk for me Um, so thanks for being here. Uh, we have A question about um competing public utilities and specifically how competing public utilities Contribute to the future of p3s in your opinion. So for example, uh, la metropolitan versus san diego county water authority Um, what kind of role does that play for p3s future? Boy, that's not something i've thought about before Water systems are natural monopolies. So we don't see a lot of competition Right, you're never going to see a consumer choice model for water the way you see would say telecom Credit goes to a student from dr. Raibs class for asking that stumping question Yeah, like there's no spot market for water. That's the other thing. There's no national grid for water The state of michigan better hope it stays that way because the rest of the country's coming for your lakes The uh, yeah, I don't know because I get The two examples that you mentioned the question mentioned are wholesalers They are not retail water utilities la metropolitan and san diego county valley accounting water authority are our Our wholesalers. They don't have Private customers. They sell to other water utilities. So they own big Resource Works and reservoirs and then they sell water to the local governments and private utilities in their area And so they can compete to some extent. I had not thought about what that would mean for quality so I I don't I don't have a good answer for you on that because Yeah, these agencies are more or less insulated. Um, they don't they tend to be governed by appointed boards not elected officials So I I don't know I think Good question But I guess though that the the really short answer is there's not a lot of competition in reality Except in some weird kind of border cases People won't compete for water companies. You don't move into Ann Arbor and decide. Well, do I want Ann Arbor water? Do I want Detroit water right? Do I want Lansing water? You you got the water you got Um another question from a current student How do you think rural areas or even urban areas of depleting populations can best tackle declining infrastructure and higher costs? Even when they don't have enough people to serve the system or make it less costly. Yeah Really really hard problem Really hard problem the stranded capital problem Right, you have a city like Detroit that's designed for two or three million people and instead it has what seven 800 000 There's no easy answer to this one The best you can do is is I think what we've seen in in michigan, which is a regionalization Spread that cost over as large a population as you can. It's not a panacea All right, but it can it can help That the you know, you you have very little you can do certain things to try to control the numerator in this problem You can try to control costs. You can try to gain efficiencies But our levers are are much bigger on the denominator, right? We can we can try to expand the number of customers through regionalization But in the end, I mean in these in the cases with extreme population loss in the short term that may be a case where You know state or federal intervention for for capital support is going to be Maybe the only alternative to solve these water quality problems So this one I think speaks a bit more to the community aspect of Managing these problems and what the public can do So do you imagine that public pressure could ever effectively alter the incentive structure? particularly for Politicians in such a way that would improve quality of water Yeah, I think I think you can't I I'm basically an optimistic guy And I like to think that presented with enough information people will care about these things Look drinking water is not a real ideological issue Right, whatever your partisan leanings you like to drink water and cook and flush your toilet and take a shower That's not particularly partisan. So I think this is a case where I think presented with the right information and framed in the right way There will be public support for these things. Let me and I think a lot of this Let me get I'm also going to circle back. I think this relates to this question about stranded capital and what these things really cost Look water prices are going up. They're going up dramatically They're going up fast for people who are economically marginalized It's a real challenge that the difference between 40 a month 60 a month makes a lot of difference if you're living Close to or below poverty if you're we're if you're earning at the minimum wage, that's a lot of money. However For most of us Water is still probably the best bang for the buck of anything you ever buy. You're drinking water service Probably cost you depending on where you live, you know between 60 and 110 bucks a month for that money You get instantaneous 24 hour delivery of a life-sustaining liquid Every day all the time Think about what you pay for your cell phone or your cable or your latte Right, this is this is a lot cheaper. You know that the mayor of newark just came out recently they've got a lead service line problem in newark just like in flint and They're estimating soon to cost 75 million dollars To fix it during the government shutdown Newark politicians were calling on the federal government. Hey, don't build the wall build Build our lead service line replacement program for newark. That's the only way we can do it We need federal help I stopped and looked at and started to think about the size of the city of newark now newark is not a wealthy place But if you break it down you finance 75 million dollars over 20 or 30 years and you divide by the number of customers It breaks down to a little less than five dollars per customer per month So their bills would go from something like 70 dollars to 75 dollars To eliminate lead service line to eliminate lead poisoning for the children of newark I'm thinking that's a pretty good deal Five dollars per month and we can come up with ways to help the people for whom five dollars would really hurt We can find ways to address that through rate structure through assistance programs But I think in general there's been we've been too quick to assume that the answer here is uncle sam Please please please washington bail us out When I think in a lot of ways if you put it to people I don't think people are willing to pay for that something that's this important and this valuable But you have to phrase it to 75 million sounds like a big number Five dollars a month to save the children of newark from lead poisoning Sounds like a pretty good deal to me So I think a lot of this is is framing Framing this is maybe the most valuable thing that your local government does aside from Fire police protection, maybe this is this is pretty high value stuff Thank you What are some public management pitfalls to avoid when pursuing a new water utility strategy in a community? Like channel one of my could you repeat that question? Sure What are some public management pitfalls to avoid when pursuing a new water utility strategy in a community? Some public management pitfalls You know very mentioned during the introduction During my introduction here today. I work on career paths too. It's my when I'm not doing water stuff I do pure credit careers I think human capital is terribly underappreciated So what are the pitfalls? I think failing to think about human capital. Where are you going to get the workers? For your water system and how are you going to keep them? Water utility work has changed a lot you talk to the real old timers in the water utility industry You could get a job in a water utility as an operator You know system operator or a treatment plant operator with a high school diploma And a strong back you could get a job in a water utility and get a pretty solid middle class union scale salary For the rest of your life This is no longer unskilled or semi-skilled work the safe drinking water act requirements now require people to have a pretty high level of Math skill some degree of chemistry and biology training and certainly a high degree of literacy A lot of systems are struggling with With staffing for their utilities because they're thinking about the price of the pipe and the price of the treatment plant And the price of the reservoir and they're not thinking of the price of the person who runs it Water systems are highly technically complex systems now And they're highly automated You and I or anybody in here who's not doesn't have have background in water treatment could be You could get a weeks training and go in and operate the water plant It's so highly automated like your job is to like turn on the computer and sit back and not break anything And that works fine until anything goes wrong And then as soon as anything goes wrong, you need a high degree of technical expertise in order to save your population from getting sick and dying Those people are not cheap and the number of them is shrinking So I'd say the biggest pitfall is failing to remember that you need human capital You got to get highly qualified people. You've got to find ways to train them retain them And that can be politically difficult sometimes in public management I'm going to finish up this the answer with one quick anecdote. I was talked to a utility ceo recently got manages She manages a large utility and she was making a pitch to her city council for investment in an employee development program I want I want mid-career training to get our our staff up to speed with the latest technology And uh her her her I think was her city councilor her mayor so it was the mayor the mayor says to her Well, what if we invest all these all this money in our staff and then they go and leave And she says well, what if we don't invest in our staff and they stay This is a question people forget to ask You know having a an unqualified employee is not a great asset to your organization All right, so get you know investing adequately in human capital. I think it's a common common missed opportunity Thank you. So these are going to be our last two questions. We're almost ready to wrap up But this one is about aging infrastructure in other sectors outside of water as well So the problem of aging infrastructure can be seen many places in this country And whether the infrastructure is owned privately or publicly It really requires an enormous budget to improve infrastructure and and this is a student from very Uh, dr. Rabe's current class who's wondering whether there is A fundamental and sustainable solution to this problem across sectors not just in the water sector A solution probably not Many solutions maybe Look, I'm I'm not a real ideological guy. I think that there's a huge role for the private sector In infrastructure investment Uh, it's it's it's underexploited I think that can be a part of the answer. I Could be surprised politics surprises me sometimes I don't expect the federal government to pass a trillion dollar infrastructure bill But it could happen. I didn't expect The outcome of the 2016 presidential election. Uh, so surprises happen. Look, uh one of the things I think about with infrastructure in I think I think just simply a growing political awareness of it Is the long term sustainable thing and I'm encouraged because we have politicians paying attention to this issue now 2009 We had a 900 billion dollar stimulus bill It's a staggering amount of money Less than I think less than 70 million of that went 70 billion rather went into water and sewer infrastructure The overwhelming majority of it that went to infrastructure at all went to the energy sector, but a lot of that just didn't go to Didn't go to infrastructure at all And I think it's because folks weren't thinking about infrastructure generally and they certainly weren't thinking about about water Infrastructure so to the extent that there's a long term solution It's probably more of a political than a policy question It's it's having a political support for infrastructure much more than it is any one policy policy alternative Thank you. And this will be our last question How likely are we to see another crisis like flint and what can be done to prevent this? Particularly as it relates to water system finance. Yeah, uh, we don't have to wait Crises are happening They're happening every day all the time One of the things that's that's wild For those of us who've been in the water sector a long time flint wasn't the first Wasn't the biggest wasn't the worst wasn't the most racially discriminatory It was just the one that caused That just caught the american imagination. I have no idea why It's like why does one silly youtube video go viral at another one that's just as silly doesn't Like the ice bucket challenge. What was that? Right Why flint? You know people don't know maybe you've studied the environmental history You know this that when the kayahoga river caught fire in 1967 69 69 1969 It was the fifth time the kayahoga river had caught fire Why was it the why did fires one through four not? caused the clean water act I don't know some of it may have to do with ed muskie being in congress and wanting to run for president Maybe that was all it was Why did the flint water crisis catch the public imagination? I don't know but those crises are happening all the time. I mentioned newark corpus christy texas predominantly hispanic city in the in south texas had a a drinking water contamination problem far worse than flint Happening about the same time as the new york times was reporting on flint I was expecting the national media to descend on corpus christy not a peep outside of south texas So those crises are happening. What can we do to prevent them change the structural incentives in place for politicians? Who govern water? Give them incentives to claim credit give them reasons to pursue policy The flints are happening everywhere all the time every day It's It's an unseen and or unacknowledged unfolding ongoing crisis And and one that that the industry is grappling with the water sectors grappling with But it's not an isolated event. It's just the one people noticed Thank you my pleasure I think we could profitably continue this discussion long into the afternoon, but we are indeed at time Thank you all so much would ask you again to please be sure to complete Your assessment form and leave that with us But before leaving and then perhaps many of you were turning out into a very cold environment And please stay safe. Please join me in thanking me at many teodora