August 1, 2005

Expert panel renews call for major investment to restore, maintain Ontario's water, wastewater systems

Restoring Ontario's existing water and wastewater systems to a state of good repair, and keeping them that way, will cost an estimated $30 to $40 billion over the next 15 years, says a government-appointed expert panel. Moreover, the current method of organizing, managing and financing water systems has to be changed before these investments can be made.

This should include increasing the scale and capacity of water systems, establishing user-pay mechanisms for recovering costs, encouraging innovations in technology and training, creating a new independent economic regulator, and revitalizing the Ontario Clean Water Agency by changing its mandate.

These are among the more than 50 proposals presented by the Water Strategy Expert Panel in Watertight: the Case for Change in Ontario's Water and Wastewater Sector. Its report, released July 22, follows a year-long review of the organization, governance, investment, financing and pricing related to Ontario's water and wastewater systems.

"It is clear the status quo is not an option," stated Dr Harry Swain, who headed the three-member panel. He pointed out that "governments, both provincial and municipal, have neglected essential investments in the province's water systems for over thirty years."

The panel found that some municipal water systems are still using pipes that are more than a century old; in fact, some wooden pipes are still in use. In Toronto, for example, half of the water network is at least 50 years old, and 8% is more than 100 years old. Some of Ottawa's watermains went into the ground in the 1870s.

The older the pipes are, the more likely they are to break. Between 2001 and 2003, for example, the rate of watermain breaks increased by 22% in Toronto and by 45% in Thunder Bay in a period of only two years.

Clearly, major investments are needed to bring systems into a state of good repair and to permit expansion. And while the scale of investment is huge, inaction will also be costly. For example, just a few months ago, a burst water pipe in Toronto flooded a power station and blacked out a large part of the downtown area. In 2003, a broken watermain severely flooded a residential street in Hamilton. Similar incidents are occurring in towns and cities across the province.

In addition, there is a slow, steady drip of lost revenue from watermain breaks and leakage. One estimate puts the lost revenue at more than $150 million a year. On average, Canadian municipalities typically lose 20 to 30% of their water through leaky pipes. Worse yet, some water infrastructure problems may pose broader public health issues.

Current needs are not the whole story. By 2031, Ontario's population is forecast to grow by nearly four million people. Investments must be made to help ensure sufficient supplies of clean, safe drinking water.

Ontario has more than 700 municipally-owned water treatment facilities and approximately 450 wastewater treatment facilities. The report calls for increasing the scale and capacity of water systems, including consolidating smaller water systems in various parts of the province into larger regional utilities.

"Larger water systems will provide the scale to make the large capital investments that are necessary, and do so at a cost that's much more affordable," said Dr Swain. "In fact," he continued, "studies show that water systems that serve populations of more than 100,000 provide not only lower-cost water, but greater quality control and therefore consistently safer water than smaller systems.

"That's a key factor in recommending larger-scale systems in parts of the province that currently are served by a plethora of small networks," he explained. By joining together, says the report, systems can better manage risks, increase the depth of their expertise, gain economies of scale and scope, and help the highest-cost customers.

The diversity of conditions and situations across Ontario, however, means that local communities must develop local solutions, and an objective, professional regulator must ensure that those solutions are comprehensive and rigorous, it adds.

Systems governance must be strong and effective, states the panel. In its view, a municipally-owned corporation would be the best vehicle to own water and wastewater systems, especially after consolidation into larger units. For transparency, the finances of water services should be kept separate from those of their municipal owners. Finally, the report says water services need the flexibility and tools to achieve cost savings through contracting out and other delivery options.

Regulation should be results-based and as light-handed as is compatible with the goal of safe, affordable water services. This, says the panel will require a new style of regulator that looks at business plans and proposed rates from the perspective of optimal scale and scope, and measures performance to produce improvement. To fulfill this function, the report recommends the creation of a new regulatory body called the Ontario Water Board, reporting to the government through the Minister of Environment.

Another recommendation proposes amending the Safe Drinking Water Act (SDWA) to include a licensing and certification procedure for wastewater operations, modelled on the province's drinking water quality management standard. Furthermore, once a water or wastewater system operator has been licensed under the SDWA and is operating under a business plan approved by the Ontario Water Board, it should no longer be required to obtain a certificate of approval for any system addition or modification approved by a professional engineer.

With the creation of larger water services and implementation of new licensing requirements as envisioned by the panel, the focus of water quality regulation should shift from detailed prescription to the results that systems are expected to achieve. Inspection and enforcement should be carried out by qualified staff with expertise in results-based regulation that takes risk management into account, says the report.

Water and wastewater systems must look to their customers for financial sustainability. The report states unequivocally that consumers should pay the full cost of the services they consume. Accordingly, full metering should be mandatory. This will help to ensure that systems are not overbuilt, conservation is encouraged and nature is respected. Wastewater facilities should be able to charge for sewage handling and treatment, with charges set out in the rate structure developed through the business planning process.

The report points out that legislation already exists which will set the stage for full-cost recovery in the future, i.e. the Sustainable Water and Sewage Systems Act (SWSSA).

With full-cost recovery and improved economies of scale, the panel says most water systems in Ontario will be able to rely on their customer base to maintain and operate their assets over the long term. Only where systems are shown to be unsustainable should the province provide subsidies, and in those cases it should act as trustee of the assets until the system can be made sustainable, it adds.

The Ontario Clean Water Agency (OCWA) is an organization in desperate need of revitalization, the panel continues. Although its front-line staff have a wealth of skills and experience in providing operational services to municipalities, the organization is widely perceived as being top-heavy and too centralized. It has suffered from inadequate direction and declining revenues and contracts, and its board-consisting of five deputy ministers and the heads of two provincial agencies, including the OCWA itself-undermine its stated position as "arms-length" from government.

OCWA, says the panel, needs a revised mandate, a true arm's-length relationship with the province and a business-oriented board, made up of experienced and competent people from the private sector who have full authority to appoint the Agency's chief executive and senior officers. The province should no longer guarantee the OWCA's obligations, nor indemnify its actions. Rather, says the report, it should have all the ordinary powers, responsibilities and liabilities of a normal corporate entity operating in accordance with the Ontario Business Corporations Act.

Finally, innovations in technology and training should be used to reduce costs. The Ministry of Environment (MOE) should provide more resources, on a continuing basis, to assist the timely adaptation of innovative technologies and techniques in Ontario's water and wastewater sector. The Ministry should also ensure that training is more readily available in remote areas, and should work with the Ontario Municipal Water Association and the Ontario Water Works Association to assess the need for skills and to offer training and skills upgrading as needed.

The Ministry of Public Infrastructure Renewal (PIR) estimates that adoption of the panel's recommendations, together with the move to full-cost recovery, could save the province billions of dollars in the longer term. While the estimates are based on certain assumptions, they range from nearly $5 billion at ten years to $8 billion at 15 years and nearly $19 billion at 30 years.

As important is the financial sustainability to be achieved for far more systems than would otherwise be the case. As things stand, PIR estimates that the water services of more than 100 municipalities will become unsustainable over the next 15 years. Adopting the panel's recommendation will cut this number to just seven.

In conducting the review of Ontario's water systems, Dr Swain, together with his panel colleagues, Dr Fred Lazar, an economics professor at York University and the Schulich School of Business, and Jim Pine, a senior administrator more than 20 years of experience in both water issues and municipal government, consulted widely with stakeholders, meeting with representatives from more than 100 municipalities and many other interested parties. (Dr Swain himself is a company director and management consultant and a former deputy minister in the federal government; he headed the research advisory panel for the Walkerton Inquiry.)

The panel was commissioned in August 2004 by PIR Minister David Caplan as part of the government's strategy for implementing the Walkerton Report's recommendations. The PIR Ministry is responsible for developing a long-term investment and financing strategy for water and wastewater infrastructure to help ensure the safety of the province's drinking water well into the future. In conjunction with the panel's work, Ontario also commissioned eight expert studies on a range of water and wastewater issues, in order to have the best research and information available.

The panel's report is posted on the Web sites of the PIR Ministry and the Water Strategy Expert Panel, www.pir.gov.on.ca, www.waterpanel.ontario.ca. Printed copies may also be requested from Publications Ontario, 416/326-5300 or 1-800-668-9938 (toll-free in Canada).

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