A New Twist on Partnerships

Like many other cities in North America, Winnipeg, Manitoba, found itself in need of updating its wastewater infrastructure to keep pace with growth and age, as well as meet regulatory requirements. In all, the city was looking at a $751 million price tag on a capital improvement program for sewage treatment construction costs.

Naturally, the City wanted to build the work efficiently and for the least possible cost, but it also wanted to ensure that meant for the least life-cycle cost ? not just initial cost. As officials began exploring contracting and management options for the new facilities ? public-private partnerships, design-build-operate, project alliancing, performance contracting ? they realized that a model didn?t exist that would meet their needs.
Until now, that is.

Under an innovative agreement signed by the City of Winnipeg and Veolia Water North America in April, the City will tap into the expertise of the private company for the long term, while retaining operational control of the facilities using existing city staff. The model is based on the project alliancing contracting mechanism popular in Australia, but with an added component. In the Winnipeg contract, Veolia will stay on board for a 30-year term to assist with the operation and maintenance of the facility ? well after construction of the new facilities is complete.

By leveraging the expertise of the private sector ? in this case Veolia, which operates in 67 countries around the globe, managing more than 3,200 wastewater projects ? the City of Winnipeg hopes to reduce capital costs to build the facilities, as well as reduce operating costs over the life of the assets. Perhaps at the top of Winnipeg?s list of priorities, the facilities will be under public-sector management, unlike typical public-private partnership arrangements which are managed by private-sector employees.

?In the early phases of our discussions, there was concern over the facilities becoming privatized,? said Barry McBride, Director of Winnipeg?s Water and Wastes Department. ?So we wanted to make sure that we entered an agreement in which the City owned and operated the assets. With this agreement, we were able to do that.?

Shared Vision

The City of Winnipeg must adhere to provincial regulations in the operation of its sewer treatment plants. To keep up to date, the city embarked on a $751 million program that included renovations to convert activated sludge secondary plants to biological nutrient removal plants at its North End and South End treatment works. In addition, the City needed to construct a new biolsolids facility to convert treated sewage into compost, fertilizer or pellets that can be burned to generate electricity. Construction estimates were approximately $400 million for the North End plant, $200 million for the South End plant, and $150 million for the biosolids facility.

?We were looking at alternative methods of procuring engineering and construction services because there was some dissatisfaction from previous experience using design-bid-build, particularly issues related to cost overruns,? McBride said. ?We initially considered some sort of public-private partnership, but we found that approach probably wouldn?t work well for the North End plant because it would involve re-deploying employees, and we felt like it would be best to apply the same approach across both plants.

?Additionally, we think we do a very good job of operating the plants, so we invited companies involved in partnerships to see if there was a way we could develop a plan where we operated the facilities but still
shared risk.?

As a result of an RFP and a period of negotiation, the City and Veolia developed the novel approach. Under terms of the agreement, the City and Veolia share any cost savings associated with construction and operation of the facilities compared to mutually developed target costs. For example, if the construction of a plant comes in $10 million below target cost, the City and Veolia split the savings ? $5 million each.
On the other end of the spectrum, cost overruns are shared as both parties collaborate on planning and design. ?It is a shared risk,? McBride said. ?If there is a mistake made, we have no reason to blame each other. We?re in it together.?

In addition to potentially earning compensation by construction savings compared to target costs, Veolia can earn financial incentives for meeting targets related to health, safety and environmental performance.

Long-Term Thinking

The 30-year contract with Veolia was introduced to help ensure that plans were being made for the long term. ?We wanted the pain and gain sharing agreement to apply to operating costs and improvements that may be needed down the road,? McBride said. ?The concept is that both parties needed to be on the same wavelength regarding their approach to whole life cost. It is not in our interest or in Veolia?s interest to buy a low-cost piece of equipment that is going to require replacement in five years.?

Laurent Auguste, President and CEO of Veolia Water Americas, sees this model as a potential game-changer for water utilities, particularly in North America where municipal officials have more challenges associated with implementing public-private partnerships compared to their overseas colleagues. ?When I look at some of the challenges regarding municipal water and wastewater services, I believe that the private sector can really add value,? he said. ?Not only in the traditional way with engineering and being an advisor, but being on board with them in terms of project delivery.

?The public-private partnership delegation in North America can face resistance for a number of reasons, which leads to the fact that the public sector is not getting as much input or support from the private sector as it could. And at a time when you have more and more infrastructure and financial challenges ? with the regulations getting tougher and with infrastructure getting older ? the private sector can provide a lot of value to the public sector. And this model should make it easier for municipalities to consider involving the private sector because they don?t need to think about transferring staff, which is often a big concern.?

One of the keys to success over the long term will be developing an integrated approach between the City and Veolia. Open-book accounting practices allow for transparency, and staff will share offices to promote communication and a spirit of partnership, according to McBride.

?We are optimistic about this approach,? McBride said. ?It is a different way of working, and we will have some cultural difficulties, but there are a lot of advantages. Like any partnership, both parties must be willing to move forward and make it work, and we have the attitude that this is going to work.?

Another key to a successful partnership is having clear priorities and expectations. ?You have to know what to expect from the other party,? Auguste said. ?In this case, Winnipeg was clear from the beginning in terms of its limitations and expectations, so we were able to design the agreement around those conditions. It?s all about finding the right balance between risk allocation and risk benefit, and getting aligned so that it is a win-win for both sides.?

Jim Rush is editor of UIM.

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