United States
                               Environmental Protection
                        Office of
            EPA 832/A-93-001
            Reprinted May 1993
  Privatization   Of

  Public  Facilities:

  Panacea  Or  Pipe

 By Michael Ancell, Staff Editor, The National Utility Contractor
 Reprinted with permission from the March, 1993 issue of The National Utility Contrao^r published by
 the National Utility Contractors Association, "NUCA." NUCA is an Arlington, Virginia-based association
 of nearly 2,000 contractors and suppliers who build, maintain, and supply materials for sewer, water
 and gas underground utility systems throughout the United States.
To some, the privatization of public water and wastewater facilities represents am elixir to the nation's budgetary
and environmental ills. They envision battle-hardened private companies, with white hats, riding in to save towns
being held hostage by burgeoning pollution problems and government regulations. But others see a darker, more
ominous picture. They fear that privatization strips valuable assets from the public domain, erodes accountability
for vital services, and costs hard-working people their jobs. In reality, both sides; miss the mark! The privatization
of water and wastewater facilities, though not a panacea, provides a viable alternative for financially strapped states
and local governments to address their environmental needs.
Simply,  privatization entails a
public-private partnership created to
efficiently deliver services that are
traditionally supplied by a public entity.
The nature of these partnerships varies
widely, as do the techniques and
activities that they encompass. This
article explores the basic types of
privatization  partnerships; the many
issues and  impediments to be
resolved; the benefits and drawbacks
for municipalities, contractors, and
other private parties; and the past and
future of privatized water and
wastewater facilities.
A Brief History

Privatization in the United States dates
back to the nineteenth century, when
privately owned and operated toll
roads and bridges were common. But
privatization of water and wastewater
systems received little attention until
the late 1970s when private investment
in  infrastructure was enhanced by
changes  in the federal tax code.
Increased private-sector access to
tax-exempt debt and tax-deductible
interest  payments on that debt
substantially reduced borrowing costs.
Private involvement was  further
buoyed in the early 1980s by  the
pro-market strategies of the Reagan

Privatization momentum was stalled in
1986 by tax reform legislation that
discontinued the investment tax credit
and reestablished longer depreciation
schedules on most infrastructure. The
reduced tax incentives significantly
decreased private interest in owning
public facilities.   .'.'•'    • .,;

Looking to rekindle interest  in
privatization and bolster the economy,
the president  issued an executive
order last April that removed many
regulatory  impediments  and
encouraged  state  and  local
governments to sell or lease
infrastructure assets obtained with
federal assistance. The president
ordered the EPA to issue policy
guidance to permit increased private
participation in wastewater treatment
facilities as well as the privatization of
existing  plants. Citing tremendous
environmental needs, the president
sought to help local governments fund
                                                                   Recycled/Recyclable '
                                                                   Printed on paper that contains
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facilities critical  to  economic
development and clean water.

"Private enterprise and competitively
driven  improvements are the
foundation of our nation's economy
and economic growth," the president
stated in the  order. "Federal financing
of infrastructure assets should not act
as a barrier to  the  achievement of
economic  efficiencies  through
additional private market  financing or
competitive practices, or both."

Types Of Privatization

Privatization partnerships vary greatly,
but in the water/wastewater field, they
can generally be divided into three
categories: design and construction,
operation and maintenance, and
Private design  and construction of
treatment plants and collection  and
delivery systems are commonplace in
the U.S. The typical scenario includes
a private developer with a  parcel of
land to develop and a municipality that
lacks the money or the incentive to
provide the necessary  clean water
support. Financing  and  risk are
allocated in contract negotiations and
are generally shared to varying

 Basically Business As
 M.A.  Bongiovanni, Inc.,  a  NUCA
 contractor based in  Syracuse, N.Y.,
 was part of such a relationship in 1989
 when it built a new sewage treatment
 plant to replace a small, outdated one
 in Maryland  City,  Md.  A large
 Washington, D.C.-area developer was
 looking to build on a piece of land that
 had no existing utilities or capacity. The
 developer put up 80 percent for the
 construction of the  plant and the
 connections, which entitled him to 50
 percent of the flow and enabled him to
 develop his land. The plant is owned,
 operated, and maintained by Anne
 Arundel County.
 According to Mike Bongiovanni,
 company president, the job was similar
to other jobs, except the checks came
from the developer  rather than the
county. The project was competitively
bid, and the company had a contract
with the county and was held to county
regulations. "For us, it was pretty much
a normal deal," Bongiovanni said. "The
only real difference was that the
developer was more involved  in the
planning and  scheduling  of the

Michael  Deane,  of  the  EPA's
Alternative Financing Section, agrees
that this type of privatization has little
impact on contractors. "Our feeling is
that the contractor will be just as happy
vorking for Company X as opposed to
Community Y," he said. "Working for a
private company might be  better
because they can usually bring you on
board more quickly  and  process
change orders faster."

The partnership  worked out well for
both sides. The  developer benefitted
because he was able to develop the
land much quicker than if he had waited
for the county to  update or rebuild the
treatment plant.  The county profited
from top-quality, state-of-the-art
construction at a lower cost and in a
shorter time and  by meeting its
environmental compliance needs and
enhancing community growth. "I don't
 see any  drawbacks for the county,"
 Bongiovanni  said.  "They got a
treatment plant  for  20 cents  on the

 Despite  the rosy outcome  of the
 project, Bongiovanni doesn't foresee a
 great rush of  similar jobs without
 legislative and  regulatory changes.
 "You aren't going to find  many
 developers with that much front-end
 capital or with access to that type of
 financing," he said.

  Operation And
  Maintenance Contracts

  According  to  the  EPA, there are
  currently between 300 and 400 private
  companies operating and maintaining
  publicly  owned treatment facilities
  around the country. This  is up from
  around 100 in the late 1980s. States
and  municipalities, faced with
escalating treatment needs but limited
by fiscal realities, turn to private
companies that can get the job done
more  efficiently.   Competition-
toughened  private companies can
provide  innovative  methods and
equipment, more relevant experience,
and access to bulk prices for chemicals
and supplies. In some cases, private
companies take over existing facilities,
and in others, they design, build, and
run the systems.

In 1988, Howell Township, N.J.,
contracted PKF-Mark III, Inc., a NUCA
memberfrom Newtown, Pa., to design,
build,  and  operate a  3.3  million.
gallon-per-day water treatment plant.
To protect the area's groundwater
supply, the state required the town to
purchase water  from a nearby
reservoir. Howell Township, looking to
maintain control of its water supply,
decided to  build  a treatment plant
rather than purchase treated water.

Given  the time constraints involved,
the town's engineers determined that
contracting the work to a private firm
was the most sensible  course.  The
contract was awarded to PKF-Mark III
for the fixed price of $11.8 million,
which covered  all costs including
design,  permits,  construction,  and
three years of plant operation.  The
plant went into.f ull operation on July 1,
 1990 (right on schedule) and has been
operating successfully ever since,

The advantages for Howell Township
were numerous.  "We've  developed
 certain capabilities and experience that
we used to  benefit the community,"
 said Tim Monsul, marketing manager
 for PKF-Mark III. "They got a very low
 price and a fast  project. Other
 treatment plants built in the area with
 similar  size and  capacity  cost 25
 percent more."

 The partnership will go on saving the
 town money even  after the operation
 and maintenance contract expires.
 Because PKF-Mark III would be paying
 labor  costs for three years, Monsul
 said, "we  looked for—and found—a
 more  efficient solution. We designed
 the plant  to  be manned by two
 employees working  one eight-hour

  shift.  During the other 16 hours, the
  plant is  fully automated. The town
  wouldn't have  chosen  this design
  because they have civil servants to
  man the plant around the clock." To
  minimize operating costs, chemical
  conditioning at the plant is  adjusted
  automatically using sensors and a fully
  computerized control system.

  PKF-Mark III agreed to a fixed fee for
  three years of plant operation because
  they  were  confident  in their
  capabilities. 'That was a risk," Monsul
  reported. "But if  you keep up with
  preventive maintenance, you  can
  control costs. The typical municipality
 fixes  things when they break  and
 doesn't  emphasize  preventive

 The across-the-board success of the
 Howell Township project is  not  an
 isolated case, according to  David
 Haarmeyer, senior policy analyst  for
 the Reason Foundation, a privatization
 research and advocacy organization
 based  in  Los   Angeles,  Calif.
 "Municipalities, especially the small
 towns, don't  have the money or the
 expertise to meet  EPA regulations, so
 they bring in the private  sector,"  he
 said. "Competition enables private
 firms  to do  this work at lower
 costs—anywhere from  10 to 50
 percent lower.  They have  more
 operating experience, and often  not
 just at one facility but at facilities across
 the state, across the nation, or even
 internationally. They save money
 because they can buy in bulk and bring
 in the  most up-to-date methods and

 Knowledge Gap Slows

 State  and federal regulations  and
 municipalities' lack of knowledge about
 privatization  realities are currently
 impeding  the spread of privatized
 operation and maintenance contracts,
 according to Haarmeyer.  "Not many
 municipalities are fully aware of these
options," he  said.  "Or they see
privatization as a loss of control over
what they are doing. They have  no
incentive to privatize."
  Monsul concedes that control is a key
  issue but  reported that  Howell
  Township remained involved with the
  project throughout. 'The municipality
  loses direct control of the project
  because they  haven't hired the
  engineer," he said. "But they had an
  engineer monitoring the entire job, and
  if he saw any problems, he'd blow the
  whistle.  And the township  has no
  hands-on control of the plant, but one
  of their representatives was on hand to
  monitor operations daily during the first
 Private Ownership

 The least  common public-private
 partnership is private ownership of
 water and wastewater facilities. The
 broadest and most encompassing form
 of privatization, private ownership
 generally  entails  private  sector
 planning, design, construction, and
 ownership of the facilities, though, in
 some cases, existing facilities are sold.
 By  selling  assets  such as water
 treatment plants, states and cities reap
 a significant one-time windfall,  put
 valuable properties onto the local tax
 rolls, and begin collecting income taxes
 from the private entities. They also
 benefit from more efficient construction
 and operation, as well as the increased
 ability to finance the cost of upgrading
 facilities and meeting state and federal
 clean water regulations.

 "Between 1980 and 1986, a dozen or
 so well-known but  smaller projects
 were sold," Haarmeyer said. "But since
 the tax incentives were  removed (in
 1986),  there has been no  sale of
 wastewater facilities."

 In 1983, Auburn, Ala., needed a
 $32.6-million wastewater project, of
 which federal funding would  have
 covered  33  percent.  After extensive
 analysis of the various options, the city
 contracted  a  private firm to fully
 privatize  its wastewater treatment
 plants.  "Auburn  selected  the
 privatization option for primarily
 economic reasons," said  Doug
 Watson, Auburn's city manager. "Even
though federal grant  money was
available, Auburn would have incurred
  $25 million in costs over the life of the
  project because of the need to cover
  the  local share,  the high  issuance
  costs, and future capacity not eligible
  for grant funding."

  Auburn did not have to spend the $25
  million because the privatizer provided
  the capital. Roles,  responsibilities, and
  economic interests of both parties  are
  specified in the contract, which
  provides for a reasonable return on the
  pirivatizer's investment, according to
  the EPA. "Auburn has been extremely
  pleased with the service and savings
  provided by our privatization contract
 for wastewater treatment services,"
 Watson said.
 Change On The Horizon

 Since the president's executive order
 last April, the EPA has been working on
 a pilot  program that  assists local
 privatization initiatives  and pinpoints
 federal  regulatory impediments to
 privatizing assets financed with federal
 grants. EPA is empowered to facilitate
 privatization by granting deviations or
 waivers to grant regulations. "We are
 trying to form an advisory committee to
 help us move forward on privatization
 projects but have been  slowed by
 budget constraints," EPA's Michael
 Deane said. The committee will include
 community officials, state regulators,
 potential investors,  unions,  and
 members  of the  environmental
 community,  and Deane expects  the
 first meeting to be held in March. [EPA
 Note—committee meetings will begin
 in mid-1993.]

 As part of the pilot project, the EPA and
 the advisory committee will review
 three  real-world cases: Indianapolis,
 Indiana;  Miami (Ohio)  Conservancy
 District; and Silverton, Oregon. Many
 private  and public entities will  be
 paying particularly close attention to
the outcome of the pilot program, and
 Haarmeyer expects that privatization
activity will increase once the results
are in.

Indianapolis Explores

Indianapolis has  undertaken a
comprehensive study of the city's
wastewater   treatment    plant
operations, financial management,
and value. The city is the largest in the
country to  openly explore full
privatization as an approach  to
financing  extensive wastewater
treatment improvements.  The study
will explore ways to tap private sector
resources, while at  the  same time,
capitalizing on the city's  existing
resources to address the water quality
infrastructure challenges it faces in the
near future. Deane anticipated that a
draft of the study would be released by
mid-February and ready for review at
the advisory committee's first meeting.

"We view Indianapolis'  study as a
model for how cities should approach
the very difficult problem of funding
infrastructure  and environmental
needs," said Alan  Fox, associate
assistant administrator for water at the
EPA when the project was announced
in November, 1992. "We look forward
to working closely with the city on this
pilot project, which will be a benefit to
the citizens of Indianapolis and to the
country as a whole."

The Miami Conservancy  District  is
looking to sell all or part of its
wastewater treatment system, though
there will be permitting  and other
technical aspects to be worked out with
EPA, Deane  said.  Silverton  is
considering private investment as part
of a public-private partnership.

Many Issues to  Resolve

Everyone interviewed  for  this article
agreed that the implementation of the
executive order will open the door to
more privatization ventures in the near
future.  Still,  even after  regulatory
impediments are lowered, many issues
will have to  be resolved on  a
case-by-case basis. Governments will
have to become more comfortable with
the contractual  terms,  private
companies will have to believe that the
political and legal protections built into
the contracts will work, and financing,
risks, and benefits will have to be
allocated among the parties. Public
employee  unions  and  wary citizens
groups will have to be appeased, as will
elected officials  and bureaucrats
worried  about losing some of  their

Privatization is not a cure-all remedy,
and while  several significant hurdles
still exist, it is certainly  an area worth
watching.  Privatization represents a
huge potential  growth  area for
businesses,   including   utility
contractors, and a possible solution to
many of the nation's clean water

For more information about EPA's
Partners Rebuilding America
initiative promoting public-private
partnerships in wastewater
finance, contact the Alternative
Financing Section in the Office of
Water at (202)  260-4060.