Survey Examines Interest in Public/Private Partnerships

Competitive pressures in the U.S. water and wastewater industry have come from a number of directions in recent years. New regulations calling for new or upgraded plants and penalties for non-compliance, deferred maintenance, resistance to rate increases, community fiscal crisis, and the desire to improve the cost-effectiveness of all municipal operations have challenged municipalities to improve their competitive positions.

Competitive pressures in the U.S. water and wastewater industry have come from a number of directions in recent years. New regulations calling for new or upgraded plants and penalties for non-compliance, deferred maintenance, resistance to rate increases, community fiscal crisis, and the desire to improve the cost-effectiveness of all municipal operations have challenged municipalities to improve their competitive positions.

R.W. Beck has been following this trend for several years and recently completed a survey that shows what is on the minds of public agencies across the country. The 1998 R.W. Beck Water Resources National Competitiveness Survey is based on interviews with more than 220 communities, serving populations ranging from 80,000 to more than 3 million.

The survey shows that awareness of competitive pressure in the public sector has increased in the last few years. This is, in part, the result of several highly visible public/private partnerships such as those in Cranston, R.I., the Tampa Bay area and Atlanta, as well as mergers of private water/wastewater companies like American and Continental, and Philadelphia Suburban and Consumers.

In a similar vein are the acquisitions of water companies by companies historically in the electric business, such as Enrons purchase of Wessex, a water utility in the U.K., and, closer to home, NIPSCOs purchase of Indianapolis Water. These were aggressive moves by companies buying their way into the water business. This has brought a new awareness to the industry and given some the cause to ponder their own vulnerability.

The majority of the public agencies responding to R.W. Becks survey said that shrinking budgets and stricter regulatory requirements, combined with the public demand for more service and lower rates, meant that they cant afford to operate "business as usual." In following the trends of competitiveness in other industries, respondents said that they can no longer remain the "silent" utility as ratepayers seeking the best value for their money increase pressure on elected officials to evaluate all options.

In response, numerous utilities are already planning to explore some form of public/private partnership. One example of this process is Seattle Public Utilities Tolt River Water Treatment Plant project, which is based on the design/build/operate model.

In response, numerous utilities are already planning to explore some form of public/private partnership. One example of this process is Seattle Public Utilities Tolt River Water Treatment Plant project, which is based on the design/build/operate model.

A wide array of forms of operation and ownership of water and wastewater facilities fall under the heading of "privatization" or "public/private partnerships." Traditional municipal operation and facilities ownership is at one end of a spectrum, while full, private investor-owned and operated facilities are at the other end. In between are any number of possible options to ownership and operation that can legitimately be called public/private partnerships. Some examples include:

* Private financing alternatives * Contracted operational services * Turnkey facility construction * Long-term leasing of facilities * Design/build/operate * Concession contracts

What these arrangements have in common is that they keep the asset ownership with the municipality throughout the contract, and operation and capital involvement varies depending on the type contract employed. These various forms of public/private partnerships are attractive because large private companies have access to the resources needed to act boldly, quickly and creatively.

Cranston, R.I., for example, is an industrial city that had aging wastewater treatment facilities and needed to deal with regulatory compliance and limited resources. R.W. Beck helped Cranston arrange a public/private partnership with Triton Ocean State, a subsidiary of Poseidon, who is modifying the existing system and providing advanced wastewater treatment under a 25-year operating lease, one of the first of its kind under new federal guidelines. Poseidon was willing to provide Cranston with $18 million in capital improvements and another $48 million up front to help pay off outstanding debt in order to secure the citys wastewater treatment project. The process provided the cash-strapped city with immediate savings of about $30 million and freed funds for other urgent needs.

Private companies entering the industry see both the potential profitability and the stakes involved as high. Often the deals come with the knowledge that there will be extensive capital expenditures added to the cost of acquisition to get facilities upgraded, replaced, or expanded. And because many of the assets may be underground, the private partner may not be fully knowledgeable about asset conditions.

IRS rule changes over the last few years, however, have dramatically increased the attractiveness of developing these public/private partnerships, which may provide sufficient balance to the risks of entering into this type of agreement.

Survey respondents said that the highest operational concern of the public sector for both the short- and long-term is their ability to meet regulations. In fact, many of the recent public/private partnerships have been in part a result of public agencies past inability or perceived inability to meet regulatory requirements. Utilities have used various forms of partnerships to secure regulatory compliance guarantees from the private participants.

However, they seem to be less concerned about regulations in connection with their capital improvements. In fact, in spite of the publicity surrounding the Environmental Protection Agency, American Water Works Association, and other organizations estimates of infrastructure needs exceeding $470 billion over the next 20 years, survey respondents said that regulatory requirements were not the primary drivers. Rather they say that the primary drivers for capital improvements continue to be growth and aging facilities.

Before heading down the road to any form of privatization or public/private partnership and abandoning traditional forms of service delivery, municipalities need to determine their best alternative in order to get the highest overall value. After all, the main objective for any municipal government is to provide its customers with good quality water, or safe and adequately treated wastewater at the lowest possible rate.

Municipalities must evaluate complex factors such as budget, staff capabilities, risk appetite, environmental compliance and penalties, changes in environmental laws, construction costs, financing rates, benefits and pension rights, technological innovation, and capital availability. Assuring that they identify and consider the best option can involve a significant investment in staff time and money on the part of the municipality, and may require the use of experienced, impartial consultants to facilitate or accelerate the learning process, and to reach the desired objective.

Conclusion

Privatization or public/private partnerships are not solutions for every community, but can be very effective in appropriate cases. Municipalities should avoid the "ready, fire, aim" approach to changing the way they do business. Those who have successfully made the transition have proven the value of taking the time and effort to conduct a careful evaluation of their specific water and wastewater utilities, as well as the needs of the communities they serve, to determine if private sector involvement will produce the desired results.

Conclusion

If industry estimates of the capital requirements over the next 20 years hold true, the existing sources of funding, such as bonds, enterprise/reserve funds, special assessments, state revolving funds and so forth, will not be able to finance the billions of dollars required. Consequently, not only will private-sector financial involvement have to play a role, it will continue to affect changes in the industry for many years. Those communities that embrace the competitive environment, and learn to respond creatively to its challenges, are likely to be the real winners in the next millennium.

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