Public-Private Partnerships in the Water/Wastewater Market

Public-private partnerships have been in existence in the United States for more than 200 years for a variety of government services including transportation, energy and real estate development, according to the National Council for Public-Private Partnerships. However, despite their long history and successful case histories, public-private partnerships (PPPs) are employed on only a fraction of U.S. water and wastewater systems.

To get some insight on why, as well as the benefits of partnerships, UIM sat down with John Joyner, president of Infrastructure Management Group, Inc., based in Bethesda, Md. He has more than 25 years of senior management experience in corporate management, city management and infrastructure project development. He brings extensive experience in negotiating public-private partnerships, implementing utility performance improvement programs and developing water, power and solid waste projects, including alternative infrastructure delivery methods such as Design-Build-Operate-Finance. He has a unique blend of hands-on experience ranging from a municipal official to a private utility service provider.

Prior to joining IMG, Joyner served as the chief marketing officer for United Water, one of the largest U.S. water companies, where he led the development efforts for groundbreaking public-private partnerships in the water industry.

Below are Joyner?s comments on some of the trends and issues involving the use of PPPs for water and wastewater systems, as well as insights into what it takes to create a successful partnership.

What is the state of the PPP market for water/wastewater?

The market is growing but extremely slowly, and the slow growth is attributable to several factors. First, most of the water and wastewater systems have always been owned and operated by public entities ? either a municipality or regional authority ? and to change that is difficult. There is just an opposition to any kind change of change in public policy. Second, there is often not the political will to go forward with a partnership because of the general resistance to change and vocal resistance by unions or concerned employees. Finally, there have been in some cases poor planning and poor execution of the approval process and the structuring of the public-private partnership itself. This includes poor planning and poor public education by city officials, procurement advisors, legal advisors, financial advisors and others, as well as poor performance of the private partner in some cases. But at this point there have been enough lessons learned. We shouldn?t be making mistakes that were made 10 and 20 years ago. There is a nucleus of competent people who know how to plan and execute these PPPs and we ought to be able to do it with ease today.

What is the potential market for PPPs?

The potential is very high. There is about $60 billion a year in expenditures in water and wastewater systems in the United States and roughly 90 percent of the systems are municipally owned and operated. So, there is quite a lot of room for growth in terms of market share.

What is the difference between a public-private partnership and privatization?

There is rarely complete privatization in the water and wastewater market. While the terms are often used interchangeably, in most cases a city isn?t turning over its entire system over to a private company ? there always has to be some level of oversight by the public entity and some involvement in rate setting and risk sharing. So the term public-private partnership came into being because it is a better description of the arrangement and what it should be, which is, in essence, a partnership.

What type of situations lend themselves to PPPs?

Typically there is some sort of driver that exists. It could be a capital improvement that needs to be made. Much of the wastewater treatment infrastructure in the country was built in the early 1970s and a lot of that now needs to be upgraded and replaced, so there is a need for large capital investment. Thousands of miles of underground pipes have also exceeded their useful life. PPPs offer a mechanism to finance and construct capital improvements while minimizing rate increases associated with those improvements. A PPP can offer a method to optimize the capital program from an asset management perspective while minimizing operating costs to help pay for the investments. Innovative financing can be employed to smooth rate increase. In today?s economy it is difficult to raise taxes, so we need to explore innovative approaches to engineer, finance and manage our infrastructure. PPPs may be an option.

How has the market changed in the time you have been involved with the industry?

We really are at a point where some of the capital investments cannot be put off any longer. Some utilities are in such bad shape that they are at a point where they are simply fixing breaks every day. How do you run a utility when you are putting out fires all the time? And to build the infrastructure you need means going out and issuing new debt and additional bonds, the costs of which will be passed on the customer. You just can?t do that anymore; so people are looking at PPPs because there are clearly some advantages.

What is the ideal length a PPP contract?

The ideal length is a minimum of 20 years because only in a long-term contract can the private partner justify making the investment that they should be making to optimize the operating expenses and pay for new technologies. In a typical short-term O&M contract there are usually very strict conditions that establish what the O&M contractor can spend money on. Is this capital or is this maintenance? There is constant arguing about what is capital and what is maintenance. In a long-term, concession-type agreement, the private operating partner has discretion over the capital program so they will invest in those capital improvements that will allow them to optimize the operating expenses and the capital expenses together. It leads to an overall, smarter asset management program.

What are the benefits of a PPP?

The first one would be funding. The private sector, most people would agree, is driven to seek innovative technology that improves performance and reduces expense. There is usually just a greater motivation on the private side to do that. Long-term, concession contracts also allow the private partner to introduce private equity to help smooth out rate increases. This is something that is attractive in distressed cities that need to make the capital investment but can?t take the rate impact right now. A PPP can also optimize operating expenses by introducing technologies that allow for the reduction in chemical consumption, power consumption and biosolids disposal, which can be as much as one-third of the operating expenses associated with the plant.

What should a city do before entering into a PPP?

There are different forms of PPPs, so you need to ask yourself what it is you are trying to accomplish with the partnership. Are you just asking for someone to come in and manage your existing operations, or is there a capital improvement required? Is the objective to minimize rate impact? Or is the objective to build additional capacity in the water or wastewater plant? The most important thing is to do some homework and establish what your goals are. It is critical for the public officials and stakeholders to be aligned around common goals.? Then you need to design the PPP structure and plan out the procurement process itself, including whether you need any legislative changes.

What are some tips for implementing a successful partnership?

One of the most important things is to establish the important terms and conditions of the contract and make sure that the mayor and city council are prepared to accept the partnership if the conditions are met.
The larger cities, the private companies spend a considerable amount of money to bid, and it costs the city a lot of money too, so its important to make sure that you will be able to get approval if the deal is right before issuing the RFP. Some of the issues to consider include what the performance guarantees are going to be, what the damages are for non-performance are, what the formula for increasing the fee to the private partner is and how that relates to the rate-setting. You also need to spell out how you are going to protect existing employees and how risk is assigned.

Are you seeing an increased interest in PPPs, especially considering the current economy?

There are some distressed cities that have a water or wastewater asset that has a lot of value, and there are private investors that would love to have economic ownership ? whether or not they have title ? of a water or wastewater system and the long-term predictable cash flows associated with a lease or concession. But there is a lot of private equity interest and private investor interest in water systems. There has been about $70 billion has already been raised and is ready for infrastructure investing, with water and wastewater being a portion of that total. And of all the categories of infrastructure, I would say that water and wastewater are among the most attractive for private investment.

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