Handbook Provides Tips to Tailoring Public Private Partnerships to Fit Local Needs

In the seven years since IRS rule changes permitted true, long term private sector investment in, and operations/capital management of public water/wastewater infrastructure, the number of public/private partnerships has tripled to some 2,400 nationwide as public officials increasingly involve the private sector to help reduce operating budgets and improve capital spending efficiency.

The Water Partnership Council (WPC), a Washington, D.C.- based association of private management services companies, recently released a handbook for the public sector, "Establishing Public/Private Partnerships for Water and Wastewater Systems – A Blueprint for Success".

According to the WPC, the handbook is intended to provide public officials a better overall understanding of the array of possible service relationships with the private sector, evolving role risk transfer and performance and financial guarantees offered, measurable benefits to be expected and an overall guideline to the "dos and don'ts" of soliciting and structuring successful partnerships that best meet the expectations of communities.

Service arrangements described in the handbook range from contracts to operate, maintain and manage (OM&M) publicly owned water and wastewater facilities and systems, to full service contracts to design, build and operate (DBO) new/expanded/ upgraded publicly owned water and wastewater facilities, to design, build, finance and operate new infrastructure (DBFO).

The handbook immediately sets straight one of the most common misconceptions about private sector involvement – public/private partnerships are not "privatization", a term reserved for the sometimes controversial instances where publicly owned infrastructure is sold to the private sector.

Public/private partnerships describe a contract relationship whereby the public sector entity remains the owner of the assets, controls management of the assets through the contract, and continues to set rates and provide strategic long term planning. The private contractor simply becomes the executor of public policy, a contracted extension of public resources planning and management, and only one element of the overall municipal budgeting process.

These relationships are not new. In fact, the first such contract was implemented 30 years ago by Burlingame, CA. Numerous other communities such as Key West, FL, Fayetteville, AR, and Twin Falls, ID, have been serviced by private contractors for almost 15 years. And industry's records indicate a high level of satisfaction by municipal partners, pointing to a contract renewal rate of 91 percent of the 489 public partners that came up for renewal between 1998 and 2001.

The industry cites four major reasons behind the growth in public/private partnerships: continued public sector ownership and control; lower overall costs of service; decreased liability through the transfer of cost, schedule and performance risks to the contractor; and environmental stewardship through increased regulatory compliance. All four reasons are referenced within numerous endorsements interspersed throughout the handbook by mayors, city managers, public works directors and other public sector stakeholders.

Not surprisingly, cost reduction, particularly of operating budgets, often leads the list of benefits expected by communities faced with pressures to not only hold to current budget levels, even declining budget levels, but to maintain service quality as well. Industry statistics indicate that private operations historically generate 10-40 percent operating cost savings without loss of service quality, and often with quality enhancements as well.

The handbook references a joint study by the AMSA and AMWA indicating cost savings of contracted operations averaging 24 percent between 1992 and 1997. The study indicated that public inefficiencies were rooted primarily in bureaucratic process inhibitions to pursuing least costly options, restrictions against incentive compensation and more expensive public procurement expenditures.

According to the industry, cost savings are generated through more efficient work practices, cross training staff to reduce redundancy, process automation and instrumentation, more efficient energy and chemical use, bulk purchases to obtain discounts and reducing maintenance expense through predictive and preventative maintenance.

Similar cost savings of 20-40 percent or more can be released when the private partner manages certain capital improvements, like the design/construction and operation of a new water or wastewater treatment facility. In such structures, the private partner can manage down traditional cost allowances for extra contingencies, design conservatism and excess schedule (see sidebar concerning Bessemer, AL) and pass those savings through to the municipality.

The handbook stresses that cost savings are not just estimated, but guaranteed in order for the prospective client to lock in proposed benefits and transfer a risk that has plagued municipal budgets from the beginning – operating and capital cost overruns, and guarantees of construction schedules, which also correspond to avoided cost overruns. These guarantees in turn are back by sufficient performance bonds to assure promises are delivered.

Another concern addressed regards community concerns for a smooth and fair transition of operations to a private contractor, particularly for former municipal employees. The handbook notes that generally speaking, employee apprehensions quickly disappear with demonstrations of equitable compensation and benefits and policies of employee satisfaction based on motivation through greater reward/recognition/advancement and personal development through more diverse training.

In the initial transition, where allowed by state regulation, private companies can take advantage of recent IRS rulings that allow former public employees to continue participating in their public pensions. The industry also underscores its points by pointing to reductions in employee grievances and on the job injuries after a contract is implemented, even with unionized labor, such as with Indianapolis where grievances dropped from an average of over 40 per year in 1993 to one or less in 1994 and subsequent years.

For communities thinking about considering a public/private partnership, the handbook chapter, "Getting Started" contains a questionnaire and discussion that helps guide communities to assess and conclude whether a private partner should be considered. Included in the recommendations is that communities consider forming a "stakeholders committee" that enables critically important issues surrounding such a decision, like airing employee concerns, to better define procurement requirements, to better assure that a community consensus is reached and held going forward.

The handbook devotes an entire chapter to conducting an effective procurement process to first guide decisionmakers in identifying preliminary local needs assessments and decisions that help define the type of partnership that best meets local needs. Specific guidance is also given in how to structure a procurement that best ensures targeted and responsive proposals and how to avoid certain pitfalls that can sidetrack a procurement, like failing to constructively manage the concerns of opponents or allowing lapses of consensus that can lead to compromised leadership and lack of resolve.

"Establishing Public-Private Partnerships for Water and Wastewater Systems" is intended to be an owner's manual to clear away some of the misconceptions about public/private partnerships and provide municipal leaders more understanding of how to structure successful public/private partnerships for everyday applications.

The handbook is available through the Water Partnership Council, 1220 Nineteenth St., NW, Washington, D.C 20036, or through the website, www.waterpartnership.com