An international oil and gas company that operates a liquid natural gas (LNG) terminal on Italy’s Adriatic Sea coast recently encountered a...
Partnerships address increased needs of water utilities
In less than ten years following IRS rule changes permitting private sector involvement in and operations/capital management of public water/wastewater infrastructure, the number of contracts for long-term operating and management services of public sector water and wastewater systems has tripled to more than 2,400. Although the majority of the nation’s municipal water and wastewater systems are still operated by municipal forces, those entering into public-private partnerships must break from years of established operating structures and external procurement choices.
As public-private partnerships have matured, so has the development of comprehensive contractual relationships that provide public clients access to the private sector skills of conserving capital, managing down capital costs and the traditional public sector risks associated with scheduling and performance of new, expanded or upgraded water/wastewater facilities. This growing number of public-private partnerships and their demonstrated increases in operating efficiencies, advanced technology applications and reductions in operating costs averages 20% to 40% below budgets prior to the IRS ruling.
While the number of public-private partnerships continues to grow, the full potential of private sector involvement has yet to be realized. Elected officials today face hard demands to accommodate growth; demonstrate environmental compliance; and renew, expand or replace aging infrastructure or a combination of all three factors. These demands are compounded by deadlines, both practical and imposed, that require decisive action plans. Increasingly, traditional procurement processes are not responsive to such deadlines.
Using the private sector to elicit forward-thinking technical designs, compete for proposed operating and capital costs, and complete an appropriate transfer of technical, schedule, cost and performance risk—risks that most continually plague municipal budgets—may not be the only responsive option available to communities. But for some it may be the only viable option to meet goals in accordance with schedule needs.
These possible service relationships with the private sector are evolving, with performance and financial guarantees offered. Yet institutional misconceptions, obstacles and resistance to private sector involvement (from employee unions to fearful municipal staff to public policy debates philosophically opposing private sector involvement) are hampering the measurable benefits already being seen. This is due to private sector involvement being misconstrued as privatization. By their nature, public-private partnerships do not involve the sale or transfer of ownership of public assets to the private sector. The private partner does not take the place of the municipal client as owner or ultimate responsible party, nor does it assume the public sector’s charge to provide services. The private partner is expected to bear all reasonable risks for cost, schedule and performance issues within the scope of its direct control. With all public-private partnerships, the public partner:
Most successful public-private partnerships offer savings that serve to infuse more efficient practices and processes while maintaining the necessary personnel/resources to assure optimized performance. Private partners provide a contracted service as specified in a contract with the public partner. Typical services include operating, maintaining and managing water/wastewater facilities. Contracts can also include design, build and operate services for new/expanded/upgraded facilities to design, build, finance and operation of new infrastructure.
The relatively young nature of public-private partnerships is an advantage to public partners—particularly those who may at first be reticent to pursue contracted services—given the lack of “off the shelf” agreements. Each successful partnership is precedential. Lessons learned from preceding efforts provide a new template for the public partner to use in defining the role of the private partner to best complement its budgetary needs and administrative infrastructure. Each new project is addressed to provide what is best for the public partner, be it to reduce life-cycle costs, obtain financial assistance for capital improvements or upgrade a poor credit rating. Once in place, cost tends to be a driving factor.
In one instance, the borough of Boyertown, Pa., entered into its first partnership in 1994 with the goal of improving process control programs and reducing costs. The private partner reviewed the borough’s preliminary plans for additional tankage and filters and helped the borough conduct a cost/benefit analysis to determine whether the most cost-effective option would be an increase in operating costs or a capital expenditure. The private partner proposed that a capital program was unnecessary and the borough agreed. Patricia Spaide, borough manager for Boyertown noted, “[Our private partner] has reached our cost objectives. The first year was a little high because they had a lot of work to do to get the sewer plant in compliance and operating correctly. In doing so, they eliminated the need for half a million dollars of capital improvements that the borough was considering.”
Subsequently, unneeded trickling filters and multimedia filters were removed from service, saving the borough $60,000 annually while improving plant discharge quality. Additionally, drinking water treatment was optimized by changes in chemical treatment, automation and employee development and training. In 2003, the borough renewed its private partner’s contract for an additional five years.
Such savings are one way for public sector to offset shrinking municipal budgets and restricted access to government capital funding it requires to repair, replace and upgrade its facilities and services. The private sector has grown to offer proven tools that meet the public sector’s growing demands. Working together, the public-private partnership is essential to addressing the needs of aging facilities, regulatory requirements and growing public demand for optimized, cost-effective services.
Nick DeSantis, the city of Glen Cove, NY’s director of public works concurs. “Government is downsizing more and more, so I want to concentrate on the broader infrastructure responsibilities of the city and not operate a wastewater plant. It is easier to have a [private partner] to keep up with all of the DEC requirements for operating a sewerage plant. I did believe that I could achieve operating cost reductions, but [the private partner] is doing multifaceted jobs with the workforce, which the city was not able to do.”
Competition among private sector companies is driving the industry. Coupled with public sector insistence of costs, schedules and performance guarantees, the private services industry must innovate efficiencies in its own procurement of design and construction services to replace costly design/ build contingencies with managed risk backed by sureties, adding further cost value to the public sector client.
For example, Fulton County, Ga., solicited proposals for the DBO of its Camp Creek wastewater facility expansion with guaranteed inclusive costs offering the county more than $20 million in savings below the original budgeted estimate. Tampa Bay Water selected a firm fixed-price proposal from its private partner to build a surface water treatment facility that offered more than $20 million in savings.
To ensure predictable public-private partnership success, the private sector and contracting communities must carefully examine and understand the role each must play and their respective responsibilities. With contracts forming the basis of relationships over the next five to 20 years, clearly defined public sector goals based on realistic expectations are essential to an agreement that is equitable and will deliver on its stated promise. The more open exchange of goals with the private sector, and the more opportunities private sector companies are given to input to an intended process, the more likely it is that meaningful, cost-effective public-private partnerships will flourish and grow into the 21st century.
For more information, phone 202/466-5445.