John F. Williams
Sr. Vice President
HDR Engineering Inc.
We have all read and heard about the "miracles" of alternative delivery, privatization and the reengineering of publicly operated municipal water and wastewater facilities. Most such claims are based on savings calculated over 20 years. That talk is dangerous because often it is linked to discussion of all of the great things a community can do with the money once it is saved.
For example, commissioners from one major county in the southeast leapt at the prospect of saving nearly $50 million over a 10-year period through efficiency improvements in their water and wastewater system. Before the utility's presentation to the board was complete, demands were being made to use the money to expand street re-paving efforts.
The enthusiasm meeting projected savings could be compared to the wild gyrations in the stock market. While fortunes are being made based upon dreams of what could happen tomorrow, when all is said and done you get what you pay for.
Cost savings often come from cutting some corners on service or quality, assuming more risk (including risk from staff reductions) or shifting control. The cuts may be appropriate, but the owner should be aware of how money is saved and agree to the cuts required.
Informed Buyers
If you truly understand what it is you wish to buy relative to level of service, product quality, performance, risk/compliance and asset control, you should be well positioned to secure the desired results at the lowest possible cost from either the public or private sectors.
Informed buyers should understand what they are getting and how much it costs. Imagine shopping for a car with a complete set of specifications and full cost data. Which dealer you buy from is less important than knowing what the outcome should be. That is similar to what is happening in the City of Seattle with the development of the new Tolt River Water Treatment Facility.
The City of Seattle initially used a traditional design-bid-build approach to develop the new water treatment facility. When the estimated costs (more than $100 million) were presented, however, there was a cry to find another way to deliver the facility for less money. The city decided to use a design-build-operate form of procurement, but the facility being constructed is very different from the one officials originally had planned. Private contractors are building a smaller facility and have made more aggressive assumptions regarding its performance.
By using design-build-operate, the city shifted part of the burden for performance to the vendor and let the vendor design for risk with which it was comfortable. In the public sector, there tends to be zero risk tolerance and over-design for regulatory compliance. The vendor's approach should end up saving the city tens of millions of dollars in capital. The ultimate savings generated by the project will not be known, however until the end of the contract term.
Savings from alternative delivery are derived from the exploitation of "gray" areas that exist in the customer's purchasing plans. These areas often include the level of redundancy designed into the facility, provisions for future upgrades or improvements, crew comfort, aesthetics, backup systems, equipment enclosures, and byproduct disposal provisions. Many design-construction-operation teams can find ways to save money.
Hold the Line
Public utilities need to understand what is really important to their customers and be motivated to hold the line on expenditures that go beyond the desired results. If customers are concerned most about cost, for example, that should be the focus of infrastructure development efforts.
Two years ago in a northern California county plans were being finalized to develop a new solids handling facility. The county-managed process called for significant investments in aesthetics, backup systems, standby power, storage and crew comfort. When a presentation was made to the county council, more than one vendor rose from the audience to object on the basis that he "could deliver the same results for 20 percent less." The county went back to the drawing board to find that it, too, could match those results for a lot less money.
The key to savings for either the private vendors or the county was realizing everyone's expectations relative to aesthetics, backup systems and comfort. In the end, the value desired by the county had more to do with throughput capacity than it did with having significant standby power (considering the plans also provided significant storage capacity).
One county official said he learned an important lesson from the process when he discovered that public policy makers are more concerned about wringing performance results out of local tax dollars than they are about incorporating brick fascia into building facades. Ultimately, he said, the county almost lost the privilege of delivering the new facility by misreading what its customers really felt was important. The project remains stalled over the question of whether to go public or private and reiterates the importance of addressing costs objectives early in a project.
Tracking the Savings
Long-term savings are nearly always linked to plans for reduced spending on labor, chemicals and energy. It is possible that those cuts could translate to reductions in service, quality or an increase in risk. That is not necessarily bad as long as the customer understands and agrees with the cuts as a savings strategy.
Recent performance analyses of long-term contracts in Atlanta, Indianapolis and Milwaukee confirm that savings are primarily linked to reductions in staffing, consumables and other operational changes. In the case of the Atlanta Water System, the estimated savings for 1999 include approximately $20 million (77 percent) in personnel; $3 million (11.5 percent) in materials and supplies; and $3 million (11.5 percent) in motor equipment services.
In the City of Indianapolis Wastewater System, privately operated since 1994, public statements indicate that savings were derived from reductions in staffing, the use of modern preventive maintenance practices and upgrades in equipment. One operational strategy included the abandonment of an ozonation process for disinfection. There also have been a number of disputes relative to cost characterizations between what are "capital improvements" versus corrective maintenance. Of the $189 million in projected savings as a result of privatization, a significant portion of the savings were offset by the added cost of redundant personnel that were absorbed by other city payrolls under the original operations agreement.
The Milwaukee Metropolitan Sewerage District expects to save approximately $140 million over a 10-year period via staff reductions, operational changes and decreased energy usage.
Because private companies generally are not required to specify how they will achieve savings, it is difficult to judge whether the savings are associated with desired strategies. In these examples, none included strategies that could not have been implemented under the original public operations scenario. Often, public operators lack specific policy direction to make decisions such as reducing workforces or expanding the level of operating risk the community is willing to incur.
One benefit of privatization is that many of the decisions traditionally governed by institutional rule are made on the basis of what will provide the best results for the operating company. This plan may be more efficient, but often there were some good reasons for the institutional requirements that justified their original adoption by policy makers.
Reengineering in both the public and private sectors holds great promise for savings. Those savings also are often counted at the completion of planning efforts (generally calculated over a five-year period). As with the other techniques, level of service, quality, risk and control linked to expenditures for staffing, chemicals and energy are the savings common denominators. Unknown circumstances can influence ultimate savings with reengineering as well. It is important to note that reengineering savings come from the implementation of new strategies and changes to the way business is conducted. Without change, there will be no savings. That change cannot be temporary.
Prepare to Deliver
It is not sufficient to win a bid based upon a low dollar yet fail to actually deliver the promised savings. The Charlotte (North Carolina) Mecklenburg Utility Department (CMUD) understood this point when it submitted bids for the operation and maintenance of water and wastewater treatment plants. In 1996, its combined bid was nearly 20 percent lower than the lowest private bidders.
Employees of CMUD would acknowledge that their work really began after the bid was accepted. The ongoing capital improvement work at one of the facilities (which was to include the completion of the SCADA system) was not completed until nine months into the operating agreement. However, employees still were expected to produce the bid-based savings in spite of the lack of computer-aided controls.
Without the continuing performance monitoring program and constant attention by the losing bidders, CMUD realizes it would have been easy to slip back into "business as usual." Like the private sector, however, it has a service agreement that is very specific as to what is expected and when.
Saving money means doing things differently. It may also mean doing less than you used to do. Sometimes less is good but most people want to know when they are getting less. They also want to be the ones to make the decision as to what they get for what they are willing to pay. As water and wastewater utilities struggle to squeeze more from limited budgets it is going to come down to level of service, quality, risk and control. Armed with those facts, it will not matter whether you use alternative delivery, privatization or reengineering - you still will reach your goal.
About the Author
John F. Williams is Senior Vice President, HDR Engineering, Inc., White Plains, N.Y. He is Managing Director for HDR's Management Consulting Practice.
