As standards for clean drinking water and sewer outflows get more stringent, the need for new treatment technologies and upgraded capital (pumps, pipes, etc.) increases. Raising the money to invest in these improvements is difficult, especially in smaller towns. By contracting with a private firm, a town or city can get capital upgrades financed by the private firm, and reduced operating costs, which make improvements possible without dramatic increases in the customer's rates.

Trends

The second annual Public Works Financing (PWF) survey of contract operation and maintenance (O&M) of water and wastewater facilities shows that 1997 saw gradual but steady growth. By one estimate as many as 200 -new municipal ant industrial clients in the United States issued requests for proposals (RPFs) for contract O&M in 1997 About half of them were for systems of less than 1 million gallons per day (mgd).

For systems larger than 1 mgd, industry sources say that were about 110 new RFPs during the year Of those-about 15 percent of which were for O&M of industrial plants-14 were aborted, and over 40: percent of the others are still pending. The roughly 55 RFPs that resulted in signed municipal contracts in 1997 added $50 million per year in gross revenues to the annual 0&M base of about S1.1-$1.2 billion.

PWF's most recent survey confirms those estimates. The 13 firma that responded in January 1998 reported signing contracts in 1997 for 46 new -facilities or systems comprising about 467 mgd of new capacity in 60 water and/or wastewater treatment plants (see figure). Adding the 120 mgd Tolt River water filtration project in Seattle to the list increases-the design flow added last year to 587 mgd.

Given the low rate of reversion to municipal operation reported by the private operators, the new clients added in 1997 represent about 6 percent growth in the number of privately operated facilities and about 12 percent growth in terms of design flow. About half of that -capacity increase is represented by two water plants: Tolt River, to be designed, built, and operated by the U.S.-Canadian team of Camp, Dresser & McKee (CDM) and Philip Utilities Management Corporation (PUML), and the 160 mgd treatment facility at Buffalo, New York, to be operated by American Anglian.

Long-Term Focus:The modest pace of growth last year is due in part to the diversion of private resources to compete for riskier--and more-profitable--long-term contracts allowed under new IRS rules. Hoping to grab an early edger many of the major industry players devoted substantial effort to complex procurements in Seattle; Buffalo; Taunton, Massachusetts; Franklin, Ohio; Evansville, Indiana; Cranston, Rhode Island; and Wilmington, New Haven, Bridgeport, and Danbury, Connecticut. Many also stretched marketing budgets to prospect in Canada, with little to show so far.

Many of the procurements suited in 1997 are still undecided. Where it used to take six months complete the bidding process for a five-year O&M contract, it now can take 18 months-or much longer-to compete, negotiate, and gain political aim regulatory approval for the long-term full-service management contracts being offered. That is especially true for large utility-systems and for those governments seeking to include capital investment, private operation of underground infrastructure, billing, and customer service in traditional O&M service contracts.

A number of governments-including Franklin, Cranston, Fairbanks, and Danbury successfully navigated the lease transaction reviews required by the U.S. Environmental Protection Agency and Office of Management and Budget under Executive Order 12803.

The early efforts to push the contract operations envelope produced results. The PWF survey shows that nine different firms signed fixed-price contracts with 17-new municipal clients in 1997 for long-term 0&M of publicly owned facilities Most of those contracts move the risk of O&M, repair and rehabilitation, and, in fewer cases, capital upgrades or expansion from the public sector to the private sector.

The longer-amortization periods and greater control given to the private sector allowed a total of $73.45 million to be paid up-front to municipal governments (as concession fees and reimbursements) and $55 million of new investment capital to be committed as part of these 17 new service agreements in 1997.

Reversions and Contract-Renewals: Of the 13 firms reporting information, each had an average of one facility revert to municipal operation in 1997, suggesting that the performance of private-secror firms -is favorably viewed by their clients. The survey also showed that the large majority of the contracts for operation of 1,200 facilities in 775 municipalities were renewed via sole-source negotiations with the incumbent operator That is largely due to the high cost of reprocurement and the political risk of switching to a new customer service provider.

Some of the important details of the survey include:


• Firms report a high degree of success in renewing existing programs and contracts. Some report a 100 percent success rate.
  
  
• Sole-source, negotiated renewals are the dominant approach for achieving renewals with these private-sector firms.
  
  
• Some municipal clients are turning to formalized "reprocurement" of services. Often these municipalities are using outside consultants to augment staff expertise in an apparent attempt to level the playing field for the competitors. This was the approach in Taunton, New Hedford, and Lynn, Massachusetts; Fairfield, California; Oklahoma City; and Houston.


The survey did not address topics such as the pricing of the renewal contract, the bundling of additional services and/or concession lees, or capital usage to successfully gain renewals Analysis of these areas will be attempted with next year's survey of 1998 results.

Looking Ahead: As evidenced by the results of the 1997 survey, the private sector plays an expanding role in delivering fundamental infrastructure services. The imperative to change and the competition for providing services continue to accelerate in the U.S. marketplace. The deregulation of electric -utility services and the new ability to "wheel" water through another water utility's conveyance system are but the most recent examples.

Public-sector utilities have also awakened to the challenge of providing efficient and effective services using a customer-centered approach. Examples abound of significant improvements in service quality and reductions in cost by these public utilities. Equally significant, public-sector water and wastewater utility directors now openly share benchmarking and cost-cornparison information as part of their self-improvement efforts. These utilities are establishing vehicles for the transfer of not only technologies but also management techniques and systems. In fact; one of the private sector's most effective advantages, the ability to assimilate technologies and cost-effectively employ expertise at multiple facilities, may be shrinking as a result of these cooperative public-sector efforts.

Figure 1. Privately Operated Water and Wastewater Facilities

Source: 2nd Annual Report on Water/Wastewater Contract Operation, Public Works Financing.

Notable Privatizations in 1997

Two good examples of privatization activity in smaller cities can be seen in Connecticut. In 1997 the city of Bridgeport gave Professional Services Group (PSG) responsibility for operating the city's 30 mgd and 10 mgd wastewater treatment plants and 500-mile combined sanitary sewer system under a five-year contract valued at $43 million. The firm guarantees compliance with all applicable regulatory-agency requirements. The partnership is expected to save the city approximately $10 million annually over the contract term, or about 20 percent compared to the city's previous budget.

PSG also signed a five-year contract worth over $19 million with the city of New London to operate its water and wastewater systems. The contract includes meter reading, customer service, billing, and collections. This partnership is expected to save New London $6 million over the contract term, or $1.2 million per year - a savings of 27 percent compared to the city's current budget. In addition, a comprehensive meter replacement program, to be carried out by PSG during the first 12 months of the contract period, is expected to increase city revenues by more than $200,000 annually. The city had been experiencing 17 percent unaccounted-for water loss.

In both cities, all existing city water and wastewater employees have been offered employment with PSG at comparable wages and benefits.

However, the big news has centered on big cities. For years the only large city that had privatized a large part of its water or sewer system was Indianapolis, but that changed in 1997. The city of Buffalo led the way, selecting American - Anglican Environmental Technologies (AAET) to operate, maintain, and manage the city's water supply and treatment facilities, including billing and record keeping. The firm expects to save the city $22.5 million over five years by reducing unaccounted-for water losses and improving maintenance programs and employee training and development programs. AAET also will upgrade and computerize records and systems.

The contract guarantees the city an annual operating cost of $9.8 million with a Consumer Price Index (CPI) inflator, and the water division's 160-person workforce will continue as city employees with a job guarantee for five years. American Anglican will supply five managers and has negotiated labor contracts with the four unions representing water division workers. The city will pay all workers, and American Anglican will reimburse the city. Grievances will be adjudicated by Buffalo's commissioner of public works.

Another contract with innovative measures to protect public employees was signed in Milwaukee on January 5, 1998. Less than 10 months after issuing a request for qualifications, the Milwaukee Metropolitan Sewerage District (MMSD) signed a 10-year, $350 million operation and maintenance (O&M) contract with United Water Services. This is the largest wastewater O&M agreement ever signed in the United States. It guarantees savings to ratepayers of $145.8 million over the term of the contract.

None of the privatization savings will fall directly on labor, which had been forced to accept large staff reductions during the past three years under public management. In a separate deal cut with the district's unions, United Water agreed to equal or better pay and benefits, plus no layoffs without cause for the full 10-year term of the service agreement. In exchange, the unions agreed to a strict pre-employment drug-testing program and to drop all litigation and grievances, allowing MMSD to sign the contract in time to meet the exacting schedule set by the district's executive director, Anne Spray Kinney.

Union contract talks were set to start in mid-March 1998, with the district's four bargaining units, so the full extent of United Water's business risk has yet to be determined. By all accounts, it is considerable, especially given MMSD’s zero tolerance for strikes. Unlike district employees, United Water employees are allowed to strike. If they do, however, the service agreement will be immediately terminated for cause. This gives the unions far greater negotiating power with the private operator than they ever had with the independent public authority.

With the backing of its unions and Milwaukee's city council, MMSD is seeking a private-letter ruling from the IRS and permission from the U.S. Department of Labor to allow employees who sign on with the private operator to continue to participate in the city's generous defined-benefit pension plan.

United Water has been charged with the job of securing those approvals in Washington, D.C. If it is successful in extending the public-private model to city pension systems, it will create considerable goodwill with the trade and public-employee unions in Milwaukee and elsewhere, and increase MMSD’s budget savings in the service agreement.

Under the agreement, set to take effect on March 1, 1998, MMSD will retain industrial-waste pretreatment, engineering, central-lab monitoring and research, Milorganite sales, marketing and distribution, and field sampling and monitoring, in addition to monitoring contract compliance. United Water Services will provide operation and maintenance of the wastewater treatment plants (with peak hydraulic capacity of 390 mgd and 300 mgd, respectively), the collection system, Milorganite production (52,000 tons per year, yielding over $5 million in gross revenue), and a 30 MW co-generation plant now used to heat sludge.

According to MMSD, the $29.8 million annual fee negotiated with United Water produces 30 percent cost savings, compared to the district's budgeted 1998 spending on comparable services, including all utilities. The savings come mainly from staff attrition, better energy management, operational efficiencies, and reductions in chemical use. In the past, the city's most aggressive internal cost-cutting programs yielded only 5 to 6 percent savings, says MMSD’s Kinney. MMSD’s transaction costs will total a little more than $1 million, or about 0.75 percent of its projected savings. That is the combined fee paid to its consultants. United Water's service fee will be increased annually by the lower of 2.5 percent or the CPI for Milwaukee, plus, if applicable, the percentage of the CPI over 5 percent.

It was an eventful year in other cities as well. The city of Seattle signed a deal with the U.S. - Canadian team of Camp, Dresser & McKee (CDM) and Philip Utilities Management Corporation (PUMC) to design, build, and operate a 120 mgd filtration plant to treat the city's Tolt River water supply. The team's bid was 30 percent below its closest competitor and about 40 percent below the city's independently benchmarked cost of $156 million for traditional design-bid-build construction and public operation for 25 years (the term of the contract).

Atlanta officials began to look seriously at privatization of the city's water and sewer utilities. Consultants predicted that privatization will stave off the need to raise water rates by roughly 70 percent. Full private management of both utilities is expected to trim $35–$40 million from the current $120 million annual budget. It is likely that some action will be taken this year, and other cities may follow suit, making 1998 an even bigger year for water and sewer privatization than 1997 was.