Jan 10, 2018

P3 Perspective

Paving the way for public-private partnerships

Bob Crossen writes on public-private partnerships in the water industry

With the tax bill behind it, Congress’ focus likely is to turn to an infrastructure plan in the first quarter of 2018. President Donald J. Trump’s initial plan called for $200 billion allocated in the budget to be used to leverage $1 trillion in private sector investments. When it comes to roads, bridges and rail infrastructure for transportation, public-private partnerships (P3) have been a critical step in getting projects completed.

In the water and wastewater industry, however, these kinds of partnerships are rare. Some cities have entered into agreements with companies to manage their water systems. For instance, the Atlanta-Fulton County Water Resources Commission signed a multi-year agreement in 2016 with Veolia to manage its water system, and late last year, the Pittsburgh Water and Sewer Authority (PWSA) signed a contract to have CWM Environmental manage its laboratory.

With the direction of the Trump adminstration in terms of infrastructure, adopting the P3 models that have been successful in other infrastructure industries may be the best way to get outdated and failing pipe replaced in the U.S. Alberto Cogut, P3 specialist and consultant and former infrastructure advisor to the U.S. Department of the Treasury, said the structure of these agreements ultimately determines their effectiveness.

“Both public sector entities considering implementing P3s and private companies interested in them have to prepare in order to undertake this kind of project,” Cogut said. “They are different to public procurement.”

Foundation & Structure

Political will, financing and a viable contract are the three cornerstones to a successful P3, Cogut said. Given the expected private investments in President Trump’s proposed plan, financing and contracts will be the hurdles municipalities and companies will have to clear.

When it comes to financing, project financing is the typical model. In this setup, the loan is provided to a special purpose vehicle in a non-recourse or limited recourse financial structure, meaning debt and equity that finances the project is paid back from the project’s cash flow. The project’s assets, rights and interests are held as collateral.

The contractors, manufacturers and equipment providers together form the special purpose vehicle—the project company—whose sole purpose is carrying out the project by subcontracting most aspects of the construction and operations contracts. Should something go wrong, the project sponsors are not liable.

“Under project finance, the loan would be to the special purpose vehicle,” Cogut said. “If something goes wrong, they cannot go after you, after the technology supplier, after the operator. It’s just the cashflow of the special purpose vehicle.”

Cogut said there are accountability measures in place should things not go as planned. The cashflow can be diminished due to fines, or it can cease if the contract is terminated.

Because the risks and loan are put on the private entity in a P3, municipalities are more likely to invest in them. The long-term agreement and investment is easier to manage than an up-front capital cost. Private entities also get paid based on performance, so efficiency and quality of work become additional upsides to these partnerships.

Cogut said P3s also allow innovative technology to be implemented or tried out in real-world scenarios. As such, P3 investments extend to investment opportunities for manufacturers looking to showcase their newest and best products outside a laboratory.

“The public sector is a bit slow at adopting new technologies and approaches to solve problems, while the private sector is much more prone to innovating,” Cogut said.

The downside, Cogut said, is the specialized nature of these partnerships. The financial structure has to fit the correct mold, which can be expensive to implement, and as such, smaller projects do not work well with the project finance model.

“The banking industry is not interested in financing those [smaller] projects because of the huge amount of resources—time, personnel, money—involved in these transactions,” Cogut said.

More Than Just Infrastructure

Not all public-private partnerships center on infrastructure improvements, however. Since the lead issues in Flint, Mich., were brought to light two years ago, consumers have been more worried about their water than ever before. Requests for lead tests have increased for water authorities throughout the country, and state environmental protection agencies have become more strict with compliance.

Some labs, like the PWSA, lost testing certification, leading them to seek outside help to return to compliance. And with a massive increase in requests—from less than 30 annual requests in the years before Flint to close to 16,000 in 2017—PWSA needed a way to keep up.

In November 2017, PWSA signed an agreement with CWM Environmental for that purpose. CWM will provide supervisory and onsite management services for its testing laboratory for two years with the aim of bringing the laboratory into compliance.

Mike Rizzo, director of marketing for CWM Environmental, said the increased demand for testing, problems with laboratory personnel turnover, loss of testing certifications, and the stricter limitations imposed on water and sewer authorities necessitated PWSA to seek outside help.

“We’re going to help them re-establish an in-house laboratory. We won’t do everything, but we’ll do a lot of their testing,” Rizzo said. CWM Environmental’s ultimate goal is to provide quality control and teach employees who work with the authority how to maintain certifications after the contract ends.

The agreement sets up a relationship in which CWM and PWSA personnel will work in tandem with one another rather than having CWM take over the entire laboratory. PWSA Interim Executive Director Robert Weimar said working with CWM will expand the authority’s capability to monitor water quality and maintain compliance.

“We envision CWM bulding PWSA’s internal capability and capacity to more efficiently use our existing laboratory resources, help our staff increase our ability to deliver the water treatment plant (WTP) performance tests that we need, and to effectively improve PWSA’s WTP laboratory and staff capability to meet regulatory water quality and compliance standards.”

Dave Kohl, president and owner of CWM Environmental, said about one quarter of the contract amounts to operations and personnel in the lab, with the remaining three quarters focused on testing.

Creating a Foundation

CWM Environmental has extensive experience working with municipalities—around 230 in western Pennsylvania and eastern Ohio—in this way, and is clear in its approach to create a foundation for the authorities to build upon.

“We’re going to hand it back to them, hopefully, in a few years,” Rizzo said. “The unique part is we’re helping them get to a stable state.”

“We’re going to teach them to fish, not just give them the fish,” Kohl added.

PWSA has laboratory space and equipment, but much of its testing was sent to an outside lab. With CWM Environmental’s help, the authority hopes to bring that testing in-house with some new equipment, but more notably new standard operating procedures and updated manuals, which had been out-of-date for PWSA.

Rizzo said these issues are common among municipalities. Keeping manuals and lab equipment up-to-date is expensive and can fall between the cracks. And contracts like the one between CWM Environmental and PWSA is one solution to that problem.

About the author

Bob Crossen is managing editor for Water & Wastes Digest. Crossen can be reached at [email protected].

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