BUSINESS MANAGEMENT: Privatization - Opportunity or Liability?

For the nation's decaying wastewater treatment facilities, the trend toward privatization offers business opportunities as well as challenges. In recent years, support for wastewater privatization has gained momentum for various reasons. However, despite the benefits to privatization, companies should be aware of potential liabilities and develop efficient risk management.

One reason for privatizing is the cost of upgrading. Economists estimate the worldwide market to treat water for drinking and industrial use is $25 billion per annum. In the United States, to meet treatment requirements, costs are more than $130 billion. And, because federal upgrade funding is limited, public facilities are seeking private sector capital.

A recent Internal Revenue Service (IRS) regulatory change also may have helped the privatization push. Until recently, the IRS could remove municipal bond tax-exempt status if it were used to fund a private contract for a term greater than five years. Now, a public facility may sign up to a 20-year contract without jeopardizing the tax-exempt bond status.

To take full advantage of potentially lucrative opportunities, private companies and public entities should know the liabilities of privatizing wastewater treatment. The switch of public to private ownership can create challenges that did not exist under the public structure.

For example, one challenge occurred when court decisions weakened the Sovereign Immunity Defense, which gives government immunity from lawsuits. Although public entities continue to benefit from tort liability immunity, private companies now will not receive the same benefits. This gap leaves private companies vulnerable to third party claims.

Additionally, public utilities are exempt from the Resource Conservation and Recovery Act's (RCRA) Domestic Sewage exclusion. However, private companies treating hazardous waste may be subject to expensive RCRA oversight and reporting requirements. These requirements would add to operating costs and limit disposal options.

Adding further complication, little is known about the potential implications of RCRA on private companies operating wastewater treatment facilities. The Environmental Protection Agency (EPA), Washington, D.C., says it will extend RCRA exemption to private companies case-by-case. So, private companies must decide whether the potential benefits of partnerships with public wastewater facilities outweigh the risks of RCRA requirements.

As well, liability risks are not limited to private companies. When a public entity enters into a contract with a private firm, it remains party to the agreement, therefore, sharing in the risk. For this reason, public entities share in the vulnerability of RCRA regulations and third party claims.

Today, companies and municipalities are developing risk management strategies that will help minimize losses and reduce liabilities. The key to any risk management program is to prevent potential losses from becoming actual losses. For example, be aggressive when deciding which practices are too risky and which can be safely implemented. Since many liability risks have no precedent, like RCRA requirements, it's important to plan for multiple scenarios.

For an effective risk management plan you should: Identify potential environmental exposures. Environmental assessments or audits help pinpoint problem areas. Look at area businesses, the materials used in their operation, and their daily procedures. All of these suggestions can uncover potential environmental incidents.

Minimize and control identified exposures. For example, train employees properly on handling material, waste minimization and recycling activities.

Apply for an National Pollution Discharge Eliminations System (NPDES) permit. The U.S. Public Interest Research Group, Washington, D.C., says 20 percent of the 4,000 publicly-owned water treatment works do not comply with the Clean Water Act. A risk management program can help prepare the NPDES permit and recommend how to combat noncompliance issues.

Purchase comprehensive insurance coverage. The insurance coverage should insure both the governmental authority and the private operator. Also, the policy should include professional liability covering the cost of required upgrades. Lastly, a general liability policy should insure water as a product in case of water pollution.