WATER & THE FISCAL CLIFF

In addition to the year-end talks regarding a national fiscal cliff, there was also ongoing press about the startling reports produced by the State Budget Crisis Task Force. The task force is co-headed by Paul Volcker, former Chairman of the Economic Recovery Advisory Board and Richard Ravitch, former Lieutenant Governor of New York. The lead report warns of calamity at the state level if states choose to continue on their current financial trajectory. Select municipalities across the country, including three in California, are also threatening bankruptcy protection filing or have already declared bankruptcy. Just 12 months ago, the United States witnessed the largest municipal and county bankruptcy filing in its history ? Jefferson County, Ala. ? due to a poor financial structuring to pay for a much-needed and U.S. EPA-mandated massive sewer overhaul.

Within the U.S. municipal water and wastewater infrastructure and service arena, the financial investment needs continue to increase. According to reports issued by the EPA, the country is reaching close to a $900 billion investment need for municipal water and wastewater systems over the next 20 years. With generous loans and grants from the federal government drying up, and state and municipal budgets functioning via a tight leash, select municipalities around the country have sought to address their evolving water and wastewater infrastructure renewals and expansions via public-private partnerships (PPPs).
Here are examples of how some proactive municipalities are addressing their fiscal challenges:

Santa Paula, Calif.

Several years ago, there was extensive media focus on the Santa Paula wastewater project in California in which the city council elected to enter into a finance-design, build, own, operate, transfer (F-DBOOT) 30-year concession agreement to replace an aging wastewater facility that had been built in the 1930s. The city was specifically required to comply with the waste discharge requirements set by the Los Angeles Regional Water Quality Control Board, which required it to build a new wastewater treatment facility or face more than $8 million in fines.

The city elected to pursue the alternative F-DBOOT approach when they realized that the traditional design-bid-build approach would not meet their tight timeline or budget requirements. The multi-million dollar project was completed in mid-2010 and has been successfully operational since. The success of this concession-style project served as a confirmation of the proactive role of private financing resources as a viable funding option for much needed municipal water and wastewater system renovation and replacement. Consequently, it was anticipated that more municipalities in California and across the country would seek to embrace the F-DBOOT model.

While there was strong interest by the various mayors and city councils to study the Santa Paula model, fiscally challenged municipalities in California and around the country did not jump on the bandwagon and embrace this alternative delivery method as was initially anticipated. Nevertheless, it is now time to start cheering again for the success of the alternative project delivery method. There are currently three municipal and/or county water-related projects that have recently reached closure or are close to final agreement ? all of whom are embracing a form of the F-DBOOT concession-style delivery method.

Rialto, Calif.

In March 2012, the City of Rialto, Calif. entered into a concession agreement with Rialto Water Services (RWS) ? a special purpose vehicle (SPV) that includes Table Rock Capital and Ullico in partnership with the city as well as Rialto Utility Authority (RUA). Veolia Water has been retained as the O&M operator for this 30-year concession.

The RWS concession is charged with addressing the city?s aging water and wastewater systems and will provide the necessary capital to fix and/or replace the water and sewer lines, develop or implement the much needed infrastructure and seismic upgrades (roughly $41 million capital improvements), and improve cost efficiencies. As the O&M operator, Veolia Water will be responsible for delivering all the water and wastewater services including billing and customer service.

Under the RWS concession, the public partner (the city and the utility authority) retains full ownership of water and wastewater systems, retains all water rights and supply and possesses the rate-setting authority associated with the facilities. Essentially, RWS provides the financial backing, oversight and concession services for the life of the agreement while Veolia delivers all water and wastewater services, including billing and customer service, and oversees a $41 million capital improvement program to upgrade aging facilities.
Prior to the signing of this concession agreement, Veolia already had a long-standing relationship with the city as the contract operator of its wastewater facilities since 2003 (the company also operates the oldest PPP contract in the state of California in Burlingame. In 1972, it became the first municipal wastewater PPP contract in the country).

The RWS concession is slated to make annual lease payments to the City of Rialto, in addition to a $35 million upfront payment that is specifically committed to key jobs creating economic development projects in the city. The question remains: Will other cities in California carefully study this latest concession contract and seek to duplicate?

Bayonne, N.J.

On the other side of the country, the municipality of Bayonne, N.J., approved a 40-year concession agreement that involves United Water. The company will now be in charge of running the city?s water and sewerage operations including the collection of payments from city residents. According to the terms of the contract, the Bayonne Municipal Utilities Authority (BMUA) will receive an upfront $150 million payment from the Bayonne Water Joint Venture LLC, which is a joint venture between the United Water Operations Contract and the investment firm Kohlberg Kravis Roberts & Co.

The concession contract enables the municipality to pay down the city?s debt obligations as well as the municipal water authority?s debt. It also provides for an annual re-occurring capital investment in the system that was not previously taking place. Additionally, it delivers a depth of professional management that BMUA could not previously afford. Some of the upfront $150 million payment will also go toward a $14.5 million capital improvement plan over the next two years, which includes replacing aging water meters and introducing a high-tech system to monitor water usage centrally.

Bayonne Water Joint Venture will not only take over the daily O&M function of the municipal water/wastewater and sanitation system, but it will be responsible for implementing all repairs for the authority?s water, sewerage and sanitation systems. The contract also outlines water rate predictability, and with the signing of the contract, the municipal residents will be immediately subjected to an 8.5 percent increase for both water and sewerage bills. The BMUA will have oversight over the contract and purchase water, as well as pay sewerage treatment fees.

Carlsbad, Calif.

Back on the west coast, a 10-plus year desalination project in the making has finally won approval. The desalination plant will be built adjacent to the Encina power station along the Pacific Ocean as early as 2016. It would ultimately deliver roughly 7 percent of the region?s water supply. The goal of the project is to eventually provide an added reliable water supply for the San Diego County region, particularly in the drought years, as well as to reduce the region?s dependence on the Metropolitan Water District and the vulnerable controversial water supplies from the north. Essentially, the Carlsbad Desalination project will provide San Diego County with a locally controlled drought-proof supply of high-quality water that meets or actually exceeds all state and drinking water standards.

Construction of the plant will create about 2,300 jobs in the region, with ongoing operations supporting about 575 jobs. In addition to creating jobs, the project will help protect the region?s economy from the devastating impact of water shortages. The cost of the project is roughly $1 billion and it is positioned as the largest seawater desalination project in the country and the plant would be the first in California for public use.
Local residents should expect to see an increase in their water bills since the cost of desalinated water is twice what local municipal water authorities currently pay for water. The desalination plant, however, will be recognized as a reliable local water source.

The project developer for this desalination initiative is Poseidon Resources and IDE Technologies is the EPC (engineer-procure-construct) contractor, equipment supplier and plant operator as part of the 30-year concession. Stonepeak Infrastructure Fund serves as the equity partner. The off-take water purchase agreement for the desalinated water has been signed with the San Diego County Water Authority.
All four of these F-DBOOT project examples deserve applause. Moving forward, will more municipalities around the country finally begin to understand and embrace the merits of PPP project structures including the F-DBOOT alternative funding and other project delivery options? Stay tuned.

Kathy Shandling is the executive director of the International Private Water Association (IPWA) and a frequent contributor to UIM.

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