By Tim Adams, Contributing Editor
Water municipalities, lacking the federal funds they had 20 to 30 years ago, are exploring less traditional approaches in construction, operation and management to meet their capital investment needs and to comply with federal regulatory standards. One alternative contracting approach that has found a great deal of approval is the design-build-operate (DBO) method.
"The public-private partnership is something that is going to be needed for the (municipal water) industry to deal with the backlog of work that is currently out there; the traditional approach is not going to cut it in all cases," said Dan McCarthy, President of Black & Veatch Water Americas, which is currently involved in an 80 mgd Lake Pleasant (AZ) water treatment plant DBO project.
The $336 million operation, according to Black & Veatch, is the largest DBO project in North America.
The DBO procurement method streamlines the traditional design-build (DB) delivery approach. The DBO procurement method grants a single contract agreement to a single private entity that is chosen to design, construct and operate either a new facility or any major capital improvement to a facility — while the municipality retains ownership.
In a DB, the private entity may only focus on up-front cost-savings and not consider the treatment plant's long-term efficiencies and cost-savings. In a DBO, however, the private entity must focus on the treatment plant's long-term goals because the company will ultimately be responsible for the cost-savings and efficiencies over the next 10 to 20 years. For example, the DB procurement method may allow the private entity to purchase a piece of equipment at a lower price for up-front cost-savings, but if the equipment is a tremendous user of electricity, the municipality's operational costs will significantly increase, thus negating any savings made by the purchase.
The ability to offer such contracts results from recent federal and state regulatory changes (IRS Revenue Procedure 97-13), which now enable long-term public-private partnerships. With the decrease in federal funding and the increase in governmental regulations, many municipalities are looking at the DBO procurement approach for a number of reasons: reduced capital and maintenance costs, use of advanced technology and equipment, more appropriated risk management, shortened delivery schedules, working within one contract rather than multiple contracts, performance guarantees and significant end-user savings.
"When you have separate companies doing the design-build and the operate, you always encounter challenges. There is not that 'buy-in' from the operators that you will get when it is all within one company. The design-build-operate process is more seamless," said John Lucey, General Manager and Executive Vice President of USFilter, which designed, built and now operates the 67 mgd Tampa Bay (FL) water surface treatment plant valued at $153 million.
Industry Impact
As noted by William Reinhardt, editor and publisher of Public Works Financing, there were approximately 2,400 publicly owned water and wastewater facilities under private contract operations in 2002. Of those facilities, 97 percent with renewal options during 2002 chose to renew their contracts, which contributed to a 17 percent increase in accrued revenue for the water and wastewater outsourcing industry.
Reinhardt stated "the average project life-cycle cost-savings of 22 current DBO projects is 26 percent" and "the average capital cost-savings of 19 of those projects, where the capital cost component is separately identified, exceeds 39 percent."
Although these statistics only represent 22 of the current DBO projects in the United States, savings similar to these have been seen throughout the industry, according to recent examples.
Take, for instance, the Seattle (WA) Public Utilities, which is currently involved with two DBO contracts (Tolt River Project and Cedar River Project). Seattle Public Utilities has already seen significant savings and benefits for both the municipality and the end-user credited to the DBO procurement method.
The Tolt River Project, a 120 mgd water treatment facility, was given a $171 million benchmark by the city of Seattle. However, American Water Services/CDM procured the 25-year project for $101 million, which saved the city approximately $70 million, or 40 percent, in municipal funds as compared to more traditional methods of procurement.
These savings also hold true for the Cedar River Project, which will be capable of treating 275 mgd or 70 percent of Seattle's water. This 15-year project was benchmarked at $159 million by the city and procured by CH2M-Hill Constructors, Inc. for $109 million, a savings of $50 million or 30 percent.
Seattle's end-users have seen immediate benefits from this procurement method and delivery process, according to Scott Haskins, Deputy Director of Seattle Public Utilities.
"Ratepayers have seen a dramatic improvement in water quality with no significant rate increases," Haskins said.
Seattle's ability to achieve this improved water quality is credited to the private sector's ability to provide state-of-the-art technology that the public sector did not have access to before entering into the DBO contract.
"We were able to achieve the higher level of water quality at a minimal cost because of the new technologies the private sector already had access to and could provide us with. Without the private sector's inclusion, we would not have had access to the chosen technologies or the experience needed to operate them, which would have resulted in higher capital and operational costs," Haskins said.
DBO Challenges
In order to achieve results as positive as Seattle's, most industry professionals will note that there are always risks and uncertainties that occur.
"One of the most important things a municipality can do is preparing for the joint venture in advance with a thorough planning stage," said George Kush, a consultant for the Water Partnership Council.
"If a municipality enters with very little concept as to what it is they want, they will receive bids that they ultimately cannot compare," he said.
Kush also believes that research is essential to the DBO process. Municipalities considering the DBO approach must discuss what has worked and what has not worked with other municipalities that have previously experienced the DBO process. Although determining what was successful for one municipality might not mean that it will be successful for another, knowing what guarantees and incentives were used, as well as any obstacles encountered, will help negotiate expectations and reach positive results.
An additional factor in procuring a successful DBO project is "knowing what the proposing entities' resources are, as well as whether or not they are going to be around in 20 years or so and still meeting those guarantees," Lucey said.
Determining what each entity's proficiencies are will enable the municipality to build a stronger contract with specific environmental standard requirements, performance guarantees and incentives.
"Another important area, which possibly has the greatest impact on the process, is risk allocation. Both the municipality and the contracted entity must be able to communicate clearly, as to which risks each are able to afford in the design phase, construction phase and operation phase," Kush said.
Conclusion
"Right now the DBO approach is a very viable delivery method and there are plenty of opportunities in the marketplace, especially with such tight constraints on municipal budgets in the current economy," McCarthy said.
As with any alternative contract approach, it is an ever-evolving process. Each new DBO contract offers lessons for municipalities considering the approach, which will ultimately assist the municipalities in operating more efficiently — the key objective.
"Although the DBO approach might not be appropriate for every municipal water treatment plant, it is part of a toolkit that the public sector utilities need to have. It allows us the opportunity to rethink issues and how best to deliver quality products, ultimately for the public's benefit," Haskins said.
