Long-Term Lease of Treatment Systems Becomes an Option

About the author: Dan Soltis is the associate editor of Water Engineering and Management magazine.

When Franklin, Ohio, sold its wastewater treatment plant to a private firm in 1995 as part of a special EPA demonstration project, many thought this well-publicized test case would provide the answer to the growing problem of this country's deteriorating water and wastewater infrastructure. The problem was when other municipalities tried to duplicate the Franklin strategy, they found that current tax law, as well as regulatory, policy and political issues, make selling public wastewater assets unrealistic.

Long-term lease arrangements, however, bypass many of the complications associated with public wastewater asset sales while leaving capital investments for infrastructure improvements up to the private sector. The City of Cranston, R.I., has enacted a 25-year transaction with the private sector with these benefits in mind.

Cranston's Lease

Approved by the Cranston City Council on March 5, 1997, and signed on March 7, the city's long-term lease arrangement is designed to provide an innovative solution to meet all of the city's intermediate and future wastewater objectives. The private sector will be responsible for making improvements to the infrastructure and providing up-front cash to the municipality to retire debt and address other spending priorities. Poseidon Resources Corp. of Stamford, Conn., will serve as the lessee.

The lease arrangement is valued at $400 million, making it the second largest public-private partnership for municipal water/wastewater treatment in the United States.1 In addition to serving as lessee, Poseidon will arrange financing to provide Cranston with a contract payment of $48 million. Professional Services Group, Inc. (PSG), of Houston, Tex., who has been operating, maintaining and managing Cranston's 23 million-gallons-per-day wastewater treatment plant since 1989, will continue to provide these services for the entire system. Metcalf & Eddy, Inc. (M&E), of Branchburg, N.J., will provide a treatment facility upgrade as well as design/build services for capital improvements.2

The $48 million contract payment to the city will be used to retire general obligation debt, repay borrowing from the city's general fund, provide funds for its wastewater system upgrade and generate excess cash for the sewer enterprise fund. Approximately one-third of Cranston's outstanding debt will be removed by this transaction.

"The city just wanted to get out of the wastewater business," said Doug Herbst, vice president-corporate development for PSG. "The city will still own and oversee the facility."

This long-term lease will provide all members of the operating and renovation team with opportunities to expand their businesses. PSG will continue operating the facility under the new plan, Poseidon will earn equity through its leasing and financing and M&E will expand its potential for design/build opportunities.

"The plan goes way beyond privatization," said Peter Alviti, Cranston's Director of Public Works. "In addition to optimization and maintenence, the plan gets into issues on financing, collection systems maintenance, design/build, default provisions on water quality standards and performance guarantees."

Upgrades and Benefits

Ten improvements have been scheduled over the next two to three years. (See Table 1.) Federal grant funding sources under the Clean Water Act that would have gone toward making these improvements dried up years ago. This is another reason why the long-term lease was so attractive to Cranston. Private companies use their own funds to make the improvements necessary to bring the plant into compliance with the Safe Drinking Water Act.

Besides complying with government regulations, these improvements could lead to an improved agency rating that would yield future financial benefits to the city. Raising the plant's agency rating can result in lower interest rates for the city, Herbst said. This will allow the city to save money in future bond issues.

As far as the consumer is concerned, this arrangement will mean that there will be no immediate increase in user rates. This transaction also hopes to provide for stable, predictable rates for the next 25 years.

The City Retains Control

The lease team will be responsible for operating, maintaining and managing the entire system, for making the improvements listed in Table 1 during the early years of the lease and for making any future upgrades, expansions or system modifications for the term of the contract. However, the city of Cranston gets to make all the executive decisions.

"For the entire term of the contract, the city can make capital improvements to the plant or can choose to make design, build and finance improvements," Herbst said. "The city can either have PSG and the team implement the improvements or can implement the improvements themselves if need be. They have the best of both worlds."

The city does have a wish list of possible future improvements, but Cranston will wait until the initial upgrades are completed to decide which of the items on the list are more necessary and feasible.

"We are pleased to be part of an industry first," said PSG President and CEO Pat McMahon. "This public-private partnership can serve as a model for other cities because it is truly a win/win partnership for all parties. The city has entrusted its system to PSG and we will continue to deliver reliable, high quality and cost effective services to Cranston for the next 25 years."

The contract's approval period ended with the financial closing of the deal in mid September. The project's implementation began immediately thereafter.

FOOTNOTES

The largest public-private partnership in U.S. history was PSG's PRASA Contract. Under this contract, PSG took control of the water and wastewater treatment plants for the entire island of Puerto Rico. A total of 69 wastewater and nearly 130 water treatment plants were covered by the deal. The 5-year project is still on-going.
PSG's OM&M contract is valued at $5.7 million per year, or approximately $143 million (exclusive of inflationary factors) over the contract term. The M&E contract is valued at approximately $15 million.

Table 1:

Cranston's Ten Initial System Improvements

These planned system improvements are scheduled for the first two to three years of the long-term lease project. After the completion of these improvements, the City of Cranston will be in full compliance with the Safe Drinking Water Act. The leasing companies will use their own funds to make these improvements.