xvEPA
United States
Environmental Protection
Agency
Office of
Water
EPA 832/A-93-001
Reprinted May 1993
Privatization Of
Public Facilities:
Panacea Or Pipe
Dream?
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
administration.
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
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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
ownership.
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
degrees.
Basically Business As
Usual
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
project."
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
dollar."
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
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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
maintenance."
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
machines."
Knowledge Gap Slows
Progress
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
year."
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.
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Indianapolis Explores
Options
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
authority.
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
needs.
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.
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