What is the outlook for contract operations?

The optimism of the 1990s when the potential growth of the sector attracted heavy investment from the European private water giants, was followed by a series of disappointments, from Atlanta (from which United Water withdrew in 2003), to New Orleans (where the city dropped plans for private-sector participation after a tortuous tender process) to Stockton (where a rear-guard action by trades unions and anti-privatization activists forced the cancellation of high-profile design-build-operate contract). There have been no new big city contracts for more than 10 years. Business development teams and lobbying budgets have been cut back, reducing costs, but at the same time scaling back the ambitions of the sector. Veolia Water North America, United Water, CH2M Hill OMI, American Water, Severn Trent Services and SouthWest Water have got by on a miserable diet of small towns, military deals, and each other’s lunch. To make matters worse, winning contracts is often as painful as losing them because in the competition for the meager deals that are on offer, the terms always heavily favor the client.

 

That is why industry leaders like Veolia’s Laurent Auguste and American Water’s Jeff Sterba have been thinking creatively about alternative models that are good business for them and good business for their clients. Auguste believes that rather than focusing on small cities for contracts with a broad scope, it makes more sense to go after big cities for contracts with a narrower scope (for example. improving water meter performance) and a more transparent upside for the client. Sterba has not yet made clear what American Water’s new approach is, but there is something in the pipeline. “We’re looking at a number of different mechanisms. We’ve got one in the final stages of negotiation right now, which I think is much more along the lines of what we would be looking for in the future, where the operating costs move up the food chain,” he told GWI last month.

 

We seem to have turned a full circle. The optimism of the 1990s gave way to first retrenchment and then defeatism. Now with new executives in charge (and, in the case of American Water and SouthWest Water, new owners as well), the seeds of optimism are being planted again. It is the right moment for them to germinate. America’s cities are having to think ever more creatively about how they manage their budgets while continuing to deliver the services that are expected of them. If the major players in the contract ops market are also thinking creatively – and expansively, there is potential for growth again.