xvEPA
United States
Environmental Protection
Agency
Office Of Water
(4204)
EPA 832-R-97-001a
July 1997
Response To Congress On
Privatization Of Wastewater
Facilities
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Contents
1. Introduction 1
A. Purpose of Response 2
B. Summary of Potential of Public-Private Partnerships 2
C. Organization of Response 3
2. Overview of Privatization 4
A. The Privatization Process 5
B. The Appeal of Privatization 6
C. Types of Privatization 7
3. Factors Affecting Privatization 14
A. Financial Factors 14
B. Non-Financial Factors 17
4. Federal Requirements Affecting Privatization 21
A. IRS Regulation/Tax Law Affecting Use of Tax-Exempt Municipal Debt 22
B. EPA Regulations and Procedures 22
C. Executive Order 12803 - Infrastructure Privatization 23
5. Impediments to Privatization 25
A. Financial 25
B. Non-financial 25
C. Federal requirements 25
6. Privatization Case Studies 27
Indianapolis, Indiana 28
Miami Conservancy District, Franklin, Ohio 30
Cranston, Rhode Island 33
Dale City, Virginia 35
Charlotte, North Carolina 37
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I. Introduction
For approximately 40 years, the federal government has been a full partner with
the states and local governments in meeting the Nation's wastewater treatment needs.
Since 1972, more than $67 billion of federal funds have been invested in wastewater
treatment works through the Environmental Protection Agency (EPA) Construction
Grant Program. In 1987, Congress phased out the construction grants program,
replacing it with the Clean Water State Revolving Fund (SRF) program.
The SRF program provides low-interest loans to communities for the
construction of water pollution control infrastructure projects. Federal and state
investments to date of more than $20 billion ensures that the SRF program will play an
important role in funding water pollution control projects into the future. However, even
with continued capitalization, the SRF program will not address all local government
water pollution infrastructure needs, now estimated to be about $137 billion, of which
$47 billion is for wastewater needs. As a result, it is important to fully explore other
approaches to meet funding needs at the state and local level.
One approach to consider is the use of public private partnerships that utilize
private sector resources to finance wastewater treatment needs. The private sector
has historically been involved in providing wastewater-treatment-related services to
local governments. Whether providing basic wastewater treatment supplies (e.g.,
chemicals), maintaining a portion of the collection or treatment system under contract
or providing contract operation and maintenance for all of the municipal facilities, the
private sector has served a role in the effort to control water pollution across the
country.
In 1992, a Presidential Executive Order (E.O. 12803) increased interest in using
private sector financial resources to meet local government wastewater funding needs.
E.O. 12803 directed federal agencies to remove regulatory or procedural obstacles to
privatization that were under their control. At the same time, the Executive Order
protected the existing public wastewater investment by requiring that (1) privatized
federally funded facilities continue to serve their original purposes, (2) user charges
remain reasonable and (3) lease or transfer prices be reviewed by federal agencies to
help determine that they are fair and reasonable.
Although the vast majority of municipal wastewater facilities are publicly owned
and operated, there are many examples of successful privatization arrangements.
Privatization should be viewed as an option for providing wastewater treatment
services that will work in some communities and not in others. The decision to
privatize should be made by local governments and reflect a balanced evaluation of the
financial, non-financial, and other issues and the needs of the community. However,
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when federal funds were used to construct the wastewater facility, EPA is required
under E.G. 12803 to review and approve lease and sale privatization arrangements of
states and local governments.
A. Purpose of Response
This response was developed to address a U.S. House of Representatives,
Appropriations Committee's request to examine the use of public-private partnerships
as a source of funds to meet current and future wastewater infrastructure needs. The
Committee was concerned about the significant costs that local, state, and federal
governments must finance to meet projected wastewater needs and the potential of the
private sector to play a significant role in accomplishing this task:
"Therefore, if qualified and experienced private sector entities can finance,
build, own, operate and/or maintain wastewater treatment facilities in an
equal or more cost effective manner and with the same or better
environmental results, the Committee strongly urges the Agency to do
everything it can administratively to remove impediments to such
public/private partnerships and encourage the state and local
governments to look to the private sector instead of the Federal
government as a financial source of choice." (Omnibus Consolidated
Recissions and Appropriations Act of 1996)
B. Summary of Potential for Public-Private Partnerships
The private sector has the potential to be a significant partner in the
development of wastewater infrastructure in this country. Theoretically, the private
sector has ready access to financial markets which could be made available for
wastewater infrastructure needs when a local government enters into a private
partnership arrangement to lease or sell its public wastewater facilities. Financial
markets may find these investments attractive because the local government
guarantees that it will pay its private partner a fixed service fee for wastewater
treatment. The local government's guarantee also provides a form of assurance to the
private lenders that their loan will be repaid by the borrower.
The decision by the local government to privatize its wastewater needs involves
an evaluation of many financial, non-financial, and other factors. A primary
consideration is that any wastewater capital funds obtained through either government
or private sources must be repaid by the wastewater users. Privatization is simply
another source of capital funds available to local governments that must be repaid to
the lenders. Thus, privatization is never a source of "free" capital.
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The Agency believes the decision to privatize should be made by the local
government based on its circumstances. In anticipation that some local governments
will choose privatization, the Agency has worked closely with the Internal Revenue
Service and the Office of Management and Budget to remove federal administrative
impediments to the privatization process. In addition, the Agency has streamlined its
administrative procedures to assist wastewater construction grantees in complying with
grant and E.O. 12803 requirements by delegating its review and approval authority to
the Agency's Assistant Administrator for Water.
C. Organization of Response
This response provides an overview of the wastewater public-private partnership
process. It presents the most common partnership arrangements, the financial and
non-financial and other issues associated with privatization, the impediments to
privatization, and several case-studies of public-private partnership arrangements. The
major sections of the response are:
• Overview of privatization - discusses the history, the current industry position,
the benefits, privatization's increasing popularity, and the most common public-
private partnership options.
• Analysis of the factors affecting privatization arrangements - discusses the
financial, non-financial, and other factors encompassing public-private
partnership arrangements.
• Federal requirements affecting privatization - discusses the impacts of tax
regulations, Executive Order 12803, and NPDES regulations on public-private
partnerships.
• Impediments to public-private partnerships - provides observations about the
factors that influence the decision to privatize wastewater facilities.
• Public-private partnership case studies - provides actual examples of
communities that have successfully implemented public-private partnerships or
are currently negotiating them. It also presents one case of a community that
used a public employee contract.
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II. Overview of Privatization
The term privatization encompasses a broad range of private sector participation
in public services. Partnerships between the public and private sectors in the water
and wastewater industry range from providing basic services and supplies to the
design, construction, operation, and ownership of public water and wastewater
facilities. The primary focus of this response is local government's use of the private
sector to finance and operate their wastewater facilities. The basic reasons that the
public sector historically privatized services were to realize cost savings, utilize
expertise, achieve efficiencies in construction and operation, access private capital,
and improve the quality of wastewater services.
As the pace of constructing water pollution control facilities escalated in the
1970s, due to federal and state environmental legislation and EPA's Construction Grant
program, so too did the interest of the private sector in wastewater operations. In the
1980s the availability of tax incentives (tax-exempt debt and tax-deductible interest
payments) for private investment stimulated interest in privatization of publicly owned
treatment works (POTW). However, the Tax Reform Act of 1986 removed many of the
tax incentives for public-private partnerships and reduced interest in certain types of
privatization.
Executive Order 12803 was issued in 1992 to simplify federal requirements
related to the sale or lease of federal grant-funded infrastructure facilities. Among its
more important features, the Executive Order allows state and local wastewater
treatment investments to be recovered from the proceeds of a lease or sale prior to any
claim by the federal government for funds provided by EPA construction grants.
Repayment of federal grants only occurs to the extent that the transfer price under a
sale or concession fees under a lease is higher than the total state and local
investment in the facility. Also, grants are recouped at their depreciated value. So in
the event that all EPA construction grants are fully depreciated, there would be no
federal grant recoupment.1
Other Executive Orders that affect privatization include E.O. 12875, which
directs federal agencies to review their regulatory requirements with respect to
wastewater privatization, and E.O. 12893, which encourages agencies to seek public-
private partnerships and for agencies, in conjunction with state and local governments,
to remove regulatory and legal barriers to privatization.
'The 1996 Water Resources Development Act included a provision that allowed EPA to
forgive federal grant repayment for five lease arrangements.
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This response discusses the sale or lease types of privatization that are
addressed by the Executive Orders. The response also examines contract operations
of local wastewater treatment facilities, which is currently the most common type of
privatization.
A. The Privatization Process
Historically public wastewater collection and treatment services have primarily
been provided by local governments. However, small subdivisions and trailer parks
have traditionally used privately owned and operated wastewater services since their
inception. Unlike utilities such as electricity or natural gas, which have been viewed by
the public as necessities to every household and local business, the demand for water
pollution control most often reflected a region-wide need to address the threat of water
pollution to public health. As a result, while the private sector often provided the utility
services for gas and electric to the public, local governments provided wastewater
services to ensure health protection for its citizens from municipal and industrial
pollution.
Over time the participation of the private sector in directly providing water-
related services has grown within the United States. Public drinking water systems are
frequently owned by a private company (over 40 percent of drinking water systems are
private systems). Privatization of public wastewater treatment has been less common.
It is somewhat difficult to obtain exact growth estimates for wastewater privatization
because much of the information is proprietary. Recent industry newsletters and
reports give a general indication that growth is occurring. One report indicates that in
terms of dollars spent, less than 2 percent of the wastewater industry is privatized.2
Reports indicate that there are 280 small to mid-size (1 to 10 mgd) facilities and 40
large facilities (over 10 mgd) now using private partners for wastewater operations.3
Public-private contract operations are reported to have grown annually at a rate of 15-
20 percent, and produced revenues of $0.4 billion out of the $23 billion expended for
POTWs.4 Nearly all of the privatization has been in the form of contract operations.
While many communities have explored the outright sale of facilities to private entities
as allowed under E.O. 12803, this option has not been used in the wastewater area
primarily because of discharge permit and tax-related issues. These issues are fully
discussed in this response.
2 William Reinhardt. Public Works Financing, "Special Water Issue," 1996, page 24
3 David Sherman and Michael Stayton. Infrastructure Finance, "Better Than Expected,"
October/November 1995, vol. IV, No. 5, pages 13-14
4William Reinhardt. Public Works Financing, "Special Water Issue," 1996, page 24
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B. The Appeal of Privatization
In recent years, there has been increased interest in public-private partnerships.
Local governments are becoming more focused on the benefits of privatization at the
same time that the private sector is anxious to expand markets and revenues. Reasons
for the increase in local government interest in privatization include the desire to
increase efficiency of local government operations, reduce costs of providing services,
improve environmental protection, and access private capital for infrastructure
investment.
Increased efficiency
Private companies may be able to operate facilities more efficiently than public
entities that have limited expertise or resources. The private companies often will
employ innovative operation and maintenance methods and equipment for wastewater
treatment that often require significant capital investment. Also, the private sector is
able to draw on substantial experience in the operation of treatment facilities and take
advantage of wholesale prices of supplies and materials needed for a facility's
successful operation. The private company can frequently use its management
expertise to stabilize user fees for the time period of the privatization agreement.
Cost reduction
Often the opportunity to realize cost savings is the primary reason that local
governments are attracted to privatization. In many cases, private ownership/operation
makes sense because it lowers costs. Depending on the type of privatization selected,
surveys indicate the private treatment systems can operate at costs savings compared
to public treatment systems. Capital cost savings can be substantial when the private
partner uses advanced technology coupled with streamlined procurement and
construction practices.
However, local governments that are able to identify and implement the cost-
saving management techniques that would be undertaken by a private company may
be able to reduce costs as much or more than the private sector. This can occur
because the public sector has several cost-related advantages over the private sector.
First, the public sector does not have to make a profit on operations and capital
investments. Second, the public sector has better access to tax-exempt debt financing
that results in lower borrowing costs for capital projects. The Charlotte, NC case
included in Section VI of this response illustrates this point.
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Environmental benefits
Some government facilities may have problems complying with discharge permit
limits because of needed capital improvements, maintenance costs that exceed
budgetary allocations, or difficulty in maintaining skilled personnel. Where local
governments have had difficulty meeting permit limits, privatization may result in real
environmental benefits. Private companies can readily make capital investments
under the conditions of the service contract and dedicate highly skilled personnel to
ensure efficient operation and compliance with facility discharge permit requirements.
Access to capital
One of the major benefits of privatization is that it provides access to private
sector capital. This may be an attractive feature of privatization for communities with
limited access to capital markets. However, as with public financing, the use of private
capital will require that user fees are increased sufficiently to recoup the capital
investment plus interest. When privatization arrangements include capital investments
in the form of an up-front transfer of funds (e.g., transfer price in an asset sale or
concession fees in a lease arrangement), it can be viewed as a loan from the private
sector to the public entity comparable to the "home-equity" loans popular with home
owners across the country. Up-front fund transfers from the private sector, or "facility-
equity" loans, that are part of a privatization arrangement mean local wastewater users
must repay the up-front funds plus interest to the private firm. An increase in user fees
can result when the transfer price or concession fees exceed the outstanding local debt
on the wastewater treatment facilities because of the "equity" that is taken out from the
facility.
C. Types of Privatization
Municipalities seeking public-private partnerships have a range of options to
consider from the status quo of continued municipal ownership and operation to
complete private ownership and operation. Often a local government will evaluate the
expected cost of continued public operation with various privatization proposals.
Currently the most widely discussed types of wastewater privatization include contract
operations, leases, and asset sales.
The specific application of each privatization type will vary by location, since
local governments do not have the same conditions and requirements. For example,
some communities may find privatization attractive because they are having difficulty
meeting permit requirements due to lack of skilled personnel or extremely challenging
water pollution treatment conditions. Other communities may wish to evaluate
privatization when undergoing major facility expansions or rehabilitation in hopes of
MMW
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achieving greater economies, by attracting competitive facility design, construction and
operation bids from the private sector. Because privatization situations are not
identical, this response focuses on a presentation of the general structure of widely
used types of privatization and the factors leading to the selection of a privatization
type.
Contract operations
For many years municipalities have used the flexibility of contracting out
selected governmental functions ranging from janitorial services to vehicle fleet or
equipment maintenance. Municipalities have found that contracting can be a good way
to obtain services needed for a limited period of time, tap into specialized skills not
available in the local pool of employees, or as a way of introducing competition into the
governmental services arena.
In the area of water pollution control, municipalities have employed different
levels of contract operations. In full contract operations, the private entity operates and
maintains the wastewater treatment facility in its entirety, whereas, in partial contract
operations, the private company operates only certain areas of the facility.
Under contract operations, facilities are operated for a fixed length of time. Until
recently, Internal Revenue Service "management contract" rules for wastewater
facilities financed with tax-exempt municipal bonds allowed a maximum of five years for
contract operations without affecting the status of the bonds. Private companies and
local governments generally viewed this term as too short and limited the economies
that could result from long-term contract arrangements. For example, with the
assurance of a longer term contract, private companies are able to make a long-term
commitment of expert staff to operate and maintain a facility. Recent rule changes from
the IRS (January 1997) have addressed this concern by allowing "management
contracts" for wastewater treatment facilities of up to 20 years.
Longer term contracts make it more attractive for private companies to invest in
capital improvements in a facility, since the investments can be recouped in the form of
cost savings. Such investments may result in the private company having partial
ownership in the facility or an encumbrance on the facility. If this occurs, local
governments will need to obtain approval for the privatization agreement under the
EPA construction grant regulations and E.G. 12803.
The contract operations approach is the most prevalent form of wastewater
privatization. Since 1987, reports indicate that contract operations of the entire
wastewater facility has increased fourfold with approximately 86 percent of these
contract operations occurring at facilities with flows of 1 to 10 mgd.
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Figure 1
Contract Operation
capital
improvements
Facility
Local
Government
(Owner) ^
user fees
service
fees
Service Area
Private
Partner
Under contract
operations a local
government maintains
ownership of the facility
(Figure 1). The local
government retains
control over and
responsibility for capital
investment in the
wastewater facility,
setting rates, collecting
user fees, and
enforcement of the
municipal industrial
pretreatment program.
The local government
maintains primary
responsibility for
interaction with the v '
public and state
regulators. The private
partner is paid a Service ^^^^^m^^mm^m^^f^^mmmmm^^^^mi^^^^mi
fee to cover operation
and maintenance. Performance is maintained through close monitoring by the public
partner and strict contract clauses that stipulate actions taken in the event of
nonperformance including financial penalties.
Leases
Historically, leases have been popular tools for local governments. The most
common form is generally called an operating lease. Operating leases have provided
governments with a way to obtain long-term use of equipment ranging from office
equipment such as copying machines and desk top computers to heavy machinery for
public works departments. Under this form of a lease the private leasing company, the
lessor, purchases equipment and leases it to the government, the lessee. The lessor
receives tax benefits related to depreciation of the equipment while the lessee is not
required to treat the lease payment as debt, as would occur if the equipment were
purchased.
In addition to operating leases, tax-exempt leases, have been widely used by
state and local governments. Tax-exempt leases are used by local and state
governments as a way to purchase equipment or buildings. Several of the key reasons
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cited for use of tax-exempt leases are: 1) leases are a way to purchase equipment
when local debt restrictions or need for local voter approval make it cumbersome to
obtain required equipment or facilities, 2) leases do not have transaction costs that are
experienced when issuing local bonds. Under the tax-exempt lease, the local
government makes lease payments that are defined as principal and interest to the
lessor. Under federal tax law the interest portion of the payment is viewed as tax-
exempt so lessors are willing to charge a lower interest rate to lessees. This tax
advantage results in lower costs for the local or state governments.
The lease concept currently being applied to privatize wastewater treatment
facilities differs from operating and tax-exempt lease structures. The wastewater lease
structure being proposed in several locations across the country calls for the local
government, the owner of the facility, to enter into an agreement to lease the facility to
a private partner. The private partner, as the lessee, pays a lease payment for the right
to operate the facility for a specified period of time. The lease payment may be one up-
front payment referred to as a concession fee, or it may be periodic payments over the
life of the lease. The local government then pays the private partner an annual service
fee to operate and maintain the facility. This annual service fee is comparable to the
service fee paid under contract operations, however, the service fee under a lease
includes an annual payment on the debt incurred by the private partner for concession
fees and capital improvements. The lease arrangement can allow the local government
to retain responsibility over wastewater rate setting, collection of user fees, and the
municipal industrial pretreatment program. However, the private company may have
the responsibility for capital investments under a lease arrangement, as illustrated in
Figure 2.
An arrangement involving lease payments and, or private capital investments
must undergo formal review by EPA to determine compliance with the specific
requirements and overall intent of Executive Order 12803. A lease arrangement of this
type was approved in May of 1997 for Cranston, Rhode Island (see section VI)
The duration of the lease may be affected by the presence of outstanding tax-
exempt municipal debt on the wastewater treatment facility. If the local government
used tax-exempt municipal bonds to finance any portion of the leased facility, then the
term of a service contract may be restricted by federal IRS tax regulations just as they
limit the term under a contract operation.
If the local government has no outstanding wastewater facility tax-exempt debt,
or pays off wastewater facility debt prior to entering into the lease agreement then the
term of the lease can be longer since the IRS requirements do not apply. It may be
possible for a local government to retire outstanding debt out of available financial
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capital
improvements
Lease
, ^
Local
Government
(owner)
user fees
Facility
lease
payments
service
fees
Service Area
O&M
costs,
capital
improvements
(optional)
Private
Partner
resources or ••••••
a lease/ Figure 2
concession
payment
that is used
to retire
debt. The
result, is
essentially
refinancing
of
outstanding f
debt; by I
swapping
tax-exempt
debt for
payments to
the private
partner that
reflect the
private
"investment" "l^^^^^^^^^^^™ll«^^^™^^^^^™^^^^^^«"»"
in the local
government. This approach may be beneficial to the local government if the private
partner is able to guarantee lower annual costs for the long-term than could be
expected under continued governmental operation.
Asset sales
Asset sales have received a great deal of attention as a result of E.G. 12803 -
Infrastructure Privatization. Under an asset sale (Figure 3), a local government sells a
wastewater facility to a private partner. Revenue from the sale of the facility can be
used to retire outstanding wastewater facility debt, for infrastructure investment, or for
general property tax relief. In combination with the sale transaction the private partner
and the local government enter into a multi-year service contract under which the
private partner is paid an annual service fee for treatment of the wastewater. The
private partner has control over the facility and is free to modify the equipment or
treatment processes as necessary to reduce costs and/or improve performance. If the
costs for capital expansion are passed on to the public in the form of higher fees, the
services contract will stipulate a process to determine the selection and implementation
of facility modifications. A partial asset sale occurred in June of 1995 under E.G.
12803, when the Franklin Area Wastewater Treatment Plant (Franklin, Ohio) owned by
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Figure 3
Asset Sale
Local
Government
capital
improvements
user fees
Facility
transfer
price
service
fees
Service Area
O&M
costs,
capital
improvements
Private
Partner
(owner)
the Miami
Conservancy
District was
sold to
Wheelabrator
EOS, Inc. (see
section VI).
The
transfer price
paid for the
facility
represents an
investment in
the facility by
the private
partner. The
partner will
need to recoup
its investment
plus interest
through the —|^«^••^^^••^^^^^•^••^^^^^^••i
service fees it
charges to
operate the facility. As a result it is inappropriate to view an asset sale as a way to free
capital for other investments. It is, in fact, another financing source available to local
governments comparable to individual homeowners borrowing against the equity in
their home.
A simplified example helps to illustrate this point. If a local government sells a
wastewater facility for a price of $1,000,000 and has the facility outstanding debt of
$400,000, the government will receive net cash of $600,000 from the sale. However, a
private partner will require repayment of its total $1,000,000 investment plus interest.
So as part of the annual operating fee payment, the private partner will receive
repayment of the $1,000,000 investment plus interest.
In summary, any payments a local government receives from the sale or lease of
a wastewater infrastructure asset represent a loan from the buyer or lessee which must
be repaid with interest by the wastewater users in the form of additional user fees.
Thus, the value of any concession fees or sales price which exceeds the current debt
on the wastewater infrastructure represents additional debt the wastewater users must
repay.
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If a local and state government wants to recoup all of its investment in a facility
and sets a transfer price or concession fee to reflect that amount, the resulting annual
service fees to the buyer or lessee could be very large and result in significant
increases in user fees for all the wastewater treatment users.
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III. Factors Affecting Privatization
This section presents a discussion on the financial and nonfinancial factors that
affect a decision to privatize. A review of these factors helps to clarify what incentives
and disincentives local governments have to privatize their wastewater facilities.
Financial factors address issues of cost savings, tax status of debt, capital
improvements, economic risks, and local/regional economic impacts. The non-financial
factors include regulatory compliance, labor, response to capital improvements,
municipal control, accountability, and rate stability.
A. Financial Factors
For any public-private partnership to be successful, a number of financial issues
must be resolved to the satisfaction of all participants. Specific financial concerns
including outstanding municipal debt, user fees, and the cost of private capital have
important implications on privatization agreements. Each participant in the
arrangement, the local, state and federal governments and the private operator, has a
different perspective on the financial structure of public-private partnerships.
Cost savings
The ability of the private sector to reduce operating costs beyond what is
practically achievable by the local government is a critical factor affecting the
privatization decision. Private companies reduce costs by applying their expertise to all
areas of engineering, construction, operations, and maintenance. Frequently, private
companies can construct new treatment facilities at lower costs than is possible for
local governments since the companies can streamline design, procurement and
construction practices. Private companies may be able to apply advanced operating
skills to reduce the use of chemicals and electricity in a facility while meeting or
exceeding permit requirements. Private companies also may be able to lower
operating costs by expertly maintaining the facility and, as a result, find it possible to
operate the facility with fewer workers. In some circumstances local governments can
use the same techniques to reduce operational costs.
User Fees
The attraction of lower or stable user fees over the period of the privatization
contract is one to the main reasons local governments explore privatization. Often
privatization will result in a reduction in user fees with a guarantee that service charges
from the private partner will remain stable with increases occurring only to reflect
inflation or to reflect increased costs stemming from changes in regulatory
requirements, treatment processes, or facility upgrades/expansions. Contract
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conditions that clearly state why and how changes in service fees will occur are
important to the privatization process.
Capital costs
The tax status of existing and future wastewater debt is a factor in determining
the ultimate costs and benefits of any privatization agreement. The ability of the
existing wastewater debt to remain tax-exempt will depend on how the specific
conditions of the privatization arrangement relate to IRS tax rules. In developing a
privatization agreement, the parties must carefully follow IRS tax rules to avoid
changing the status of existing tax-exempt municipal bonds to taxable private activity
bonds. The IRS has defined very specific types of action local governments must meet
to maintain the existing tax-exempt status of municipal bonds.
When private companies must acquire capital to fund improvements to the
wastewater facilities, lease payments, concession fees, or transfer prices, the debt is
usually acquired in the form of taxable private activity bonds. However the IRS has
defined certain limited situations where private companies can finance wastewater
treatment facilities with the proceeds of tax-exempt "qualified private activity bonds".
Even though the nominal interest rate differential between tax-exempt and
taxable bonds may be significant, the actual costs of the capital may not have a great
impact on the privatization decision. The private party may be able to offset the higher
capital costs by the tax deductibility of interest costs and depreciation expenses.
Up-front payment (concession fee, lease payment, or transfer price)
Up-front payments from a private partner to a local government may occur in
privatization. In a lease arrangement it is usually called a "concession fee." It could be
an initial payment or installment payments made as part of a lease arrangement or, in
an asset sale, the transfer price provided up-front to complete the privatization
transaction. Municipalities may use these up-front payments for other infrastructure
investment, to refund outstanding debt, or for general tax relief under E.O. 12803
privatization arrangements.
As discussed in the previous section, it is important to note that the transfer
price, lease payment, or concession fee are equivalent to loans from the private partner
to the local government. Any funds provided by the private partner would be recouped
through future user fees. Simply stated, up-front payments (transfer price or
concession fees) are analogous to the home equity loans that are used across the
country today. A private company provides a payment that reflects some level of the
municipal investment in a facility and then the private company recoups the payment
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plus interest as a part of annual service fees charged to the municipality. As a result,
privatization should not be viewed as a way to obtain sources of "free" capital. Instead,
privatization should be viewed as one more source of capital financing for municipal
wastewater investments.
Tax-exempt status of local debt
Most municipal wastewater debt is in the form of tax-exempt general obligation
or revenue bonds, SRF loans, and other bonds or loans received to build and maintain
the wastewater facility. As long as a municipality maintains ownership of the
wastewater facility and the privatization agreement meets the conditions allowed by
IRS "management contract" rules, government issued debt can remain tax-exempt over
the repayment term. Tax-exempt public debt is repaid at attractive interest rates,
currently around 6-8 percent.
The IRS rules that have recently been released provide additional flexibility to
communities that wish to have their facilities operated under contract for an extended
period of time while maintaining the tax-exempt status of their wastewater bonds. The
new rules allow certain management contracts for "public utility property" (including
wastewater treatment plants) of up to 20 years without endangering the tax-exempt
status of outstanding municipal debt under certain operations arrangements.
Capital improvements
Capital improvements usually represent modifications to the wastewater facility
to meet new discharge requirements, replace old infrastructure, provide services to a
growing residential area, or meet economic growth needs by expanding the service
area. Capital improvements are often costly and impose a financial burden on the local
government. In privatization, depending on the terms of the privatization agreement,
capital improvements may become the responsibility of the private sector. The private
partner recovers the costs of its investment in capital improvements through increased
service fees paid by local governments. The private partner's ability to use tax-exempt
financing plus different engineering, procurement and construction practices can have
a significant influence on capital improvement costs. The overall costs that result from
capital improvements under privatization are important to consider and compare to
costs that would result from financing and construction under continued public
ownership and operation.
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Economic impacts
The local/regional impacts will vary depending on the type of privatization
agreement. Overall impacts can include potential increases in local unemployment and
loss of local government control over hiring of operations personnel. Privatization has
often resulted in a reduction in the staffing levels because the private firm is able to
efficiently manage the facility with fewer workers. This action will potentially affect
union relations, local income levels, and the local businesses that the local labor forces
patronize. However, to address this concern, the private partner will normally agree to
hire most of the current employees, cooperate with labor organizations to secure job
training and placement for the workers, and reduce the workforce through attrition.
Frequently, the private partner has the ability to lower and stabilize wastewater rates
which can contribute to the ability of the community to encourage economic growth.
Performance and liability
There are economic risks associated with meeting National Pollutant Discharge
Elimination System (NPDES) permit standards and the costs resulting from unexpected
wastewater flow and loading variations. When a private partner assumes operating
responsibility, they assume responsibility to meet permit limits under typical operation
conditions. Often this responsibility is reflected by making the private partner a
copermittee with the local government on the NPDES permit.
When a facility is privatized, the interests of both the local government and the
private partner can be protected by defining normal operating conditions and stipulating
what actions are taken to adjust service fees under different conditions, such as floods,
atypical pollutant levels, or amendments to environmental regulations that increase
operating costs.
B. Non-Financial Factors
In addition to financial factors, there are non-financial factors that affect the
privatization decision. These factors include: regulatory compliance, local control,
accountability, personnel impacts, and response to capital improvements.
Regulatory compliance
When evaluating privatization, local governments must determine if private firms
can operate the wastewater facility in as legal manner that maintains the facility's
publicly owned treatment works (POTW) status. This is achieved when the local
government retains ownership and the private operator is a copermittee on the NPDES
permit. Under these conditions, the service contract would clearly assign performance
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responsibility to the private operator. In the event of nonperformance, the contract
would specify financial penalties to the private firm that would escalate in the event of
continuing nonperformance.
In the circumstances of an asset sale, where all components of the facility are
sold to a private partner, the facility and any industrial dischargers to the facility would
be regulated under the Clean Water Act and may be subject to requirements under the
Resource Conservation and Recovery Act (RCRA). The private ownership status
means that industrial pretreatment requirements under the POTW status of the Clean
Water Act may be replaced by RCRA requirements. In such a situation, higher
treatment costs may occur if the wastewater treatment facility is designated as a RCRA
hazardous waste treatment, storage or disposal facility. When an asset sale occurs the
private partner will have to apply for a new NPDES permit under its own name. The
permit limits under private ownership will likely be similar to those of the previous
POTW's permit. In the only asset sale/lease that has occurred to date under E.O.
12803, the facility retained its POTW status by the local government retaining
ownership of a portion of the wastewater treatment process under a lease arrangement.
Local control
Under a public-private partnership, local governments yield control over the
facility's daily operations to the private partner. However, through the service contract
local governments can maintain control over important local issues such as user rates,
industrial pretreatment programs, capital improvements/expansions, and modifications
to the service area. Local control will vary depending on the type of privatization.
Under an asset sale the local government yields ownership to the private partner and
relinquishes control over the facility except in the event of a failure of the owner to
perform as required. One significant issue that may affect an asset sale is the potential
for oversight from state Public Utility Commissions (PUCs). PUCs often regulate
investor-owned utilities such as privately-owned public water systems. PUC oversight
governs a variety of cost related activities including user rates and debt issuance. The
local government's control will be significantly reduced if the facility is subject to PUC
oversight.
The level of oversight for the private partner will vary to reflect the level of
concern that local governments have about the private partner's performance.
Oversight activities such as periodic performance reporting to the local government or
use of an oversight board consisting of local authorities are negotiated as part of the
privatization service agreement.
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Public accountability
When a private company operates a local wastewater facility, there may be
concern or a perception that they will not be as accountable as a public operator.
Communities that have opted for privatization of their wastewater facility indicate that
contract requirements with specific performance levels for the private operator in all
areas of operations have worked to protect the public interest and to assure a high
level of accountability. All service contracts established with private companies need to
incorporate specific performance assurances that protect the environment. Local
government may require a performance bond from the private partner to add additional
assurance of performance. Under an asset sale, where PUCs have jurisdiction over
privately owned public wastewater facilities, the private operator would be regulated
and held accountable for PUC requirements.
Personnel impacts
The private company and local government need to consider how privatization
will impact current wastewater plant personnel. Any expected reduction in staff,
including the timing of the reductions and out-placement activities must be included in
contract negotiations. Because of the potential for significant personnel impacts, local
governments have found it important to involve workers and unions in deliberations
about privatization to explore any plans for personnel adjustments including new hires,
salary and budget changes, and staff reductions. Current privatization arrangements
have generally used attrition or transfers as the primary way to reduce the work force.
Capital improvements
Capital improvements or wastewater capacity expansions contribute to the
continued economic success of the wastewater facility. The privatization agreement
may address specific scheduled capital improvements during the life of the contract,
including responsibility and financing arrangements. The contract negotiations
determine who has the lead on capital improvements and it will vary according to the
specific situations.
State laws and regulations
State laws and regulations often have significant impacts on the form and
conditions of privatization agreements like the type of service, term of contract, and
contracting entity. These laws and regulations vary significantly across the country but
most appear to be oriented toward allowing privatization of wastewater facilities. In
cases where the form of privatization desired is not explicitly allowed under state laws,
local governments will find it necessary to seek the necessary legal opinions on the
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feasibility of the specific desired privatization arrangement.
Overall administrative complexity of the transaction
One of the overriding issues that affect privatization is the overall complexity of
designing a privatization arrangement, negotiations between public participants and the
private partner, and execution of the formal contract. In cases where there are multiple
facility owners or participants in a wastewater treatment system, the privatization
process is likely to take a longer period of time to accomplish. In the case of extremely
large regional facilities with many participating communities the process may become
so complex that it would be difficult to implement.
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IV. Federal Requirements Affecting Privatization
Although many of the factors affecting privatization are local in nature, there are
certain federal requirements that impact those decisions. IRS regulations, NPDES
permit requirements, and Executive Order 12803 come into play in choosing the type of
privatization. Some of the federal regulations restrict certain privatization activities.
For example, tax law restricts the use of tax-exempt debt for privately owned facilities.
Other federal requirements present a challenge because they require that local
governments seek approval for changes to ownership/operation of their POTW. EPA
requirements apply only if the local government received federal wastewater
construction grants. For example, sale of a facility that received construction grants
through the Clean Water Act requires the local government to apply for a deviation
from the EPA grant regulations and E.O. 12803. Various federal requirements can
potentially add additional time for the local government to complete the privatization
agreement. As a result they are often cited as impediments to privatization. Each of
the requirements and their influence on decision-making are discussed below.
A. IRS Regulation/Tax Law Affecting Use of Tax-Exempt Municipal Debt
In 1986, the Tax Reform Act influenced private investment in public
infrastructure by removing or limiting many tax incentives. Specifically, the amendment
eliminated the investment tax credit, scaled back accelerated depreciation and limited
the use of tax-exempt debt financing. These changes virtually eliminated several
"lease-buy" privatization arrangements and severely restricted the duration of
management contracts under contract operations to five years. The main reason
generally cited for these changes was that the financial incentives given to the private
sector represented a very significant loss of tax revenues to the federal treasury.
As previously mentioned in Section III, recently released IRS rules provide
additional flexibility to communities that wish to have facilities operated under a
contract arrangement without the loss of the tax-exempt status of the wastewater
bonds. The new rules allow certain "management contracts" for wastewater treatment
plants of up to 20 years without endangering the tax-exempt status of outstanding
municipal wastewater debt. For example, a 20 year "management contract" is allowed
if at least 80 percent of the compensation provided to the private partner is in the form
of a periodic fixed amount. This has the effect of limiting the amount of net profit that
may be provided to the private partner.
The new rule, which was released in February 1997, substantially extends the
time limits placed on "management contracts" in previous IRS rules. In the past,
"management contracts" were only allowed for up to a five-year period. The availability
of longer contract terms provides local governments and private partners with
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additional flexibility to determine the contract length that meets the needs of both
parties.
B. EPA Regulations and Procedures
The Clean Water Act established the regulatory structure for local governments
that received EPA grant funds to construct water pollution control facilities under the
Agency's construction grant program. Through the Clean Water Act, local governments
have received billions in federal construction grant funding to build POTWs that meet
wastewater discharge permit limits established under the NPDES. The NPDES
requirements of the Clean Water Act establish pollutant limits for discharges from
POTWs and privately owned wastewater treatment facilities.
NPDES Permittee Designation
NPDES regulations require that a local government obtain an NPDES permit to
discharge water from its wastewater treatment facilities. Under privatization, the private
operator may be a copermittee or the permittee of record. If the facility becomes
privately owned, it will no longer be a POTW and the owner will be required to obtain a
new NPDES permit under its own name.
POTW Designation
An important privatization consideration is the POTW status of the wastewater
treatment facility. When a wastewater treatment facility loses the POTW status it is
classified as a privately owned treatment works that is no longer subject to the
requirements of a municipal industrial pretreatment program. A privately owned
treatment facility may also be designated as a hazardous waste treatment, storage or
disposal facility under RCRA and subject to more strenuous treatment standards.
Local governments and private companies have indicated that the threat of losing the
POTW status has been a significant concern when evaluating asset sale and lease
arrangements.
Grant Deviation Procedures
EPA's construction grant regulations specify that when a grantee sells or
encumbers ownership by leasing a facility that received grant funds, the grantee must
request a deviation from certain grant regulations and possibly repay the grant funds.
The grant deviation process is used to manage the federal interest in facilities after the
award of the federal construction grant.
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C. Executive Order 12803 - Infrastructure Privatization
In 1992, Executive Order 12803 on infrastructure privatization establishes a
framework for privatization of facilities funded with federal grants. The order has five
purposes: (1) assist local privatization initiatives; (2) remove federal barriers to
privatization; (3) increase the financial incentives for state and local governments by
relaxing federal repayment requirements; and (4) protect the public interest to ensure
reasonable user charges and (5) that the facility will be used for its intended purpose.
E.O. 12803 significantly modifies the federal construction grant recoupment
process. Under E.O. 12803 the local and state governments are the first to receive
proceeds from an asset sale or lease concession fees. If the transfer price or
concession fee for the facility is higher than the state and local investment, then federal
construction grants are repaid at their depreciated value (to maximum of the transfer
price or concession fee). Federal grants are depreciated using IRS accelerated
depreciation schedules. The Executive Order results in repayment of federal grants at
a much lower level that would have resulted under construction grant regulations.
When an EPA construction grantee decides to pursue an asset sale or lease
under the Executive Order, it will be necessary to submit a request to EPA for approval
under E.O. 12803 in combination with a grant deviation request as described above.
Submissions for approval under E.O. 12803 and the grant deviation request address:
• Proposed privatization arrangements - ownership structure, permit status
• Responsibility for the industrial pretreatment program
• Current and proposed user fee rate structure and arrangements for future
increases
• Federal construction grant history and depreciated value of grant
» State and local investment in facility
• Facility transfer price and proposed distribution of proceeds
• Assurance that facility will be used for its original intended purpose in the
event that the purchaser/lessee becomes insolvent
• Assurance that user charges will be consistent with any current federal
conditions that protect users and the public by limiting the charges
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There has been one partial asset sale and one lease that has occurred to date
under E.O. 12803. The sale of the Franklin Area Wastewater Treatment Facility
(Franklin, OH) was completed in 1995. The lease of the Cranston, Rhode Island
wastewater treatment system occurred in 1997. The experience gained through the
Franklin and Cranston cases will be important as other requests are submitted to EPA
for approval. Several local governments are in various stages of seeking EPA approval
for their privatization arrangements.
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V. Impediments to Privatization
This response describes the wastewater privatization arrangements that are
available today and the financial, non-financial, and federal regulatory factors that
affect a local government's privatization decision. An examination of the factors that
influence current privatization activities leads to the following observations about
potential impediments affecting privatization of wastewater facilities.
A. Financial
In many situations, financial factors may provide the biggest incentive for local
governments to implement a privatization agreement. As illustrated in several case
studies presented in the next section, there are numerous examples of communities
realizing significant operational cost savings and obtaining new sources of capital from
privatization arrangements. However, financial factors may also be impediments to
privatization in cases where a private partner simply cannot achieve operational cost
savings over efficient public operations. The private partner needs to make a return on
its investment, and may incur higher capital borrowing costs when tax-exempt financing
is not available for new infrastructure needs.
Another financial impediment can be encountered in circumstances where
communities receive large sums of money when they sell or lease a facility. Such large
up-front payments may require the private partner to charge higher service fees in
order to recover its investment.
B. Non-financial
Some communities may believe that providing wastewater treatment is an
important service that should remain under direct government control to assure
responsiveness to changes in environmental regulations or local conditions. Some
governments may be concerned about potential staff reductions that could occur under
privatization. Others may feel that because there are multiple facility owners or
participants, the process to evaluate options and conduct privatization contract
negotiations would be prohibitively complex and time-consuming.
C. Federal requirements
Federal requirements including IRS regulations, NPDES regulations, EPA
construction grant regulations, and E.O. 12803 compliance influence the privatization
process but do not represent an impediment to the successful implementation of
privatization arrangements. The recent changes in the IRS regulations facilitate long
term contract operation arrangements by maintaining the tax exempt status of local
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debt. EPA and delegated states have extensive experience in addressing permit
requests under the NPDES and deviation requests under EPA construction grant
program. This experience translates into such requests being processed as normal
operational events. The Executive Order 12803 process will be improved and
streamlined to facilitate privatization activities as local, state and federal governments
gain additional experience.
The Agency has delegated final approval of privatization arrangements from the
Administrator to the Assistant Administrator for Water and established a privatization
coordinator within the Office of Wastewater Management to expedite approval of
privatization requests. The coordinator will interact with EPA decision-makers and
OMB as necessary to shorten the time to review proposed privatization arrangements
under E.O. 12803. The coordinator will also serve as an important point of contact for
state agencies, local governments, and private companies that are seeking information
on requirements related to E.O. 12803 and the privatization process.
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VI. Privatization Case Studies
To illustrate the successful application of privatization arrangements this section
presents five case studies that summarize the experience of communities that have
used different forms of privatization. The Cases studies include:
• Indianapolis, IN (contract operations)
• Miami Conservancy District (Franklin, OH) (asset sale/lease)
• Cranston, Rl (lease)
• Dale City, VA (private ownership)
• Charlotte, NC (contract public operation)
Each case study description describes the privatization agreement, the benefits
realized by the community and the barriers to privatization experienced by the
participants.
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INDIANAPOLIS, INDIANA
Contract Operations
Wastewater Treatment Plant
Public Partner
Private Partner
Service Population
Treatment Plant Facts
Initiated
Contract Cost
Indianapolis, Indiana
White River Environmental Partnership
850,000
Advanced Wastewater Treatment Plants,
180 mgd (average daily flow)
January 31, 1994
$14 million annually
Synopsis
Indianapolis entered a partnership with the White River Environmental
Partnership (WREP) to improve the wastewater services offered to the community. The
WREP consists of the following corporations: Lyonnaise des Eaux-Rumey,
Indianapolis Water Company Resources Corporation, and JMM Operational Services.
Under the five-year contract the municipality pays an annual service fee of
approximately $14 million in exchange for a more efficiently run treatment facility.
Public-Private Partnership Agreement
After a year of negotiations and selection, Indianapolis signed a five-year
contractual agreement with WREP for the O&M of the Advanced Wastewater
Treatment (AWT) plants. WREP is responsible for the maintenance, personnel, and
daily operational costs. The City retains ownership of the facilities, pays an annual
service fee, is responsible for capital improvements, funds corrective maintenance, and
sets rates. WREP and Indianapolis negotiated with the Association of Federal, State,
County, and Municipal Employees to make arrangements for those employees
displaced by the partnership agreement and train other personnel on the new system.
The arrangement did not require the submission of an E.O. 12803 approval request or
a grant deviation request to EPA, since the agreement did not involve any lease
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payments or additional capital investment by WREP.
Outstanding federal grants and municipal bond debt were not affected by the
privatization agreement. Tax-exempt bond issues did not become an issue because
municipal bond obligations are the city's responsibility and are paid by the collection of
property taxes and industrial fees.
Effects of Public-Private Partnership
The municipality projected savings of over $65 million as a result of the
partnership. After two years of operation, Indianapolis reported over $21.5 million in
cumulative savings for facility operations, and the savings for capital project
expenditures was over $13.3 million. Permit exceedances decreased by 86% and
worker complaints decreased from 38 to one. The labor force was reduced from 328 to
176 workers. Displaced personnel experienced 100% placement within eight months
after privatization occurred. The service area experienced no initial rate increases due
to the cost savings associated with the partnership. The partnership also exposed the
AWT facilities to innovative technological advances that increased the plants'
efficiency.
The city cited the following impediments to privatization: (1) IRS restriction of
use of tax exempt debt, (2) union acceptance, (3) resistence within the city council, (4)
fear of change, (5) bureaucratic resistence, (6) media antagonism and (7) federal
requirements for grant recoupment under the E.G. 12803.
Contact
Tom Olsen
Enterprise Development Division
City of Indianapolis
200 East Washington Street, Suite 2460
City-County Building
Indianapolis, IN 46204
317.327.4794
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MIAMI CONSERVANCY DISTRICT, FRANKLIN, OHIO
Asset Sale/Lease
Wastewater Treatment Plant
Public Partner
Private Partner
Service Population
Treatment Plant Facts
Initiated
Transfer Price
MCD, Franklin, Ohio
Wheelabrator EOS
25,000
Franklin Area Wastewater Treatment
Plant, 4.5 mgd
July 21, 1995
$6.85 million
Synopsis
The Franklin Area Wastewater Treatment Plant (FAWWTP) owned by the Miami
Conservancy District (MCD) has a service area that includes Franklin, Germantown,
and Carlisle and sections of Montgomery and Warren counties. Wheelabrator
operated the plant under contract since 1987 and offered to purchase the facility in
1992 for $6.85 million. The MCD-Wheelabrator transaction has been the only
privatization agreement approved under Executive Order 12803. The sale/lease
required two years of negotiation followed by a one year (eight months - state, four
months - U.S.EPA) government approval process. The $6.85 million, paid to the
communities of Franklin, Carlisle, and Germantown, was used to retire outstanding
local debt pertaining to the wastewater facility.
Public-Private Partnership Agreement
Wheelabrator purchased the facility at the fair market value of $6.8 million in
July 1995. The private operator signed a 20 year sale/lease agreement which provides
MCD with the right to repurchase the facility at the end of the contract. All municipal
approved plant expansions and upgrades are financed by Wheelabrator. Since
Wheelabrator operated the plant since 1987, all current personnel were retained under
the contract. As a municipal asset sale/lease, the MCD-Wheelabrator transaction was
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subject to E.O. 12803 review and grant deviation requirements. The E.O. 12803 review
involved approval for the MCD asset sale/lease from the local, state, and federal
governments (EPA and OMB). Due to the financial terms of the sales/lease,
recoupment of federal grant funds was not required under E.O. 12803. Since the
FAWWTP received construction grants totaling $1.15 million from EPA, MCD was
required to obtain a deviation from EPA's grant regulations to accomplish the
transaction. The OMB had to concur on the transfer price because it was a negotiated
price rather than a competitively bid price. MCD used the sale/lease proceeds to retire
outstanding local debt and had over $2 million remaining for dedication to community
infrastructure projects.
Although, this privatization agreement is described as an asset sale/lease, the
FAWWTP is still considered a POTW. This was accomplished by leaving a portion of
the faculty that is integral to the treatment process in public ownership. MCD
maintained ownership of the collection system, interceptors and a portion of the
treatment process. Wheelabrator owns the remainder of the facility and operates the
entire wastewater treatment process. MCD and Wheelabrator are NPDES co-
permittees. Wheelabrator is responsible for all O&M, monitoring and sampling for the
industrial pretreatment program, and regulatory reporting, while MCD is responsible for
enforcing the municipal pretreatment program.
Effects of Public-Private Partnership
The privatization of the facility reduced rates from a projected $1.85 per 1,000
gallons to $1.34 per 1,000 gallons (a 28 percent decline). Any future rate increases
would only reflect inflationary adjustments. The project was successful because of
local, state, and federal government support, Wheelabrator's familiarity with the plant
and community, and the use of an independent contractor to facilitate negotiations.
The issues encountered by the privatization partnership were categorized as
federal and local in nature. The federal requirements which had to be resolved
included the IRS regulations pertaining to municipal bond repayment once the
treatment is no longer publically owned, NPDES permit status, and the implementation
of the Municipal Industrial Pretreatment Program. Local issues were related to contract
negotiation, specifically user rates and the valuation methodology selected for plant
repurchase at the end of the contract. Participants in the process indicate that the E.O.
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12803 review and grant deviation requirements were not impediments to privatization,
but did require time to first understand the process and then to prepare the materials
for the request for approval under E.G. 12803 and the construction grant deviation.
Contact
The Miami Conservancy District
38 East Monument Avenue
Dayton, OH 45402
800.451.4932
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CRANSTON, RHODE ISLAND
Long-Term Lease
Wastewater Treatment Plant
Public Partner
Private Partner
Service Population
Treatment Plant Facts
Initiated
Lease Payment
Cranston, Rhode Island
PSG-Poseidon
78,000
12.5 mgd
May 1997
$48.1 Million
Synopsis
The need for capital improvements motivated the City of Cranston to pursue a
public-private partnership. Cranston selected the Triton Ocean State L.L.C.
organization that included the Professional Services Group, Inc. and Poseidon
Resources Corporation to operate and maintain the wastewater facility under a lease
arrangement for 25 years.
Public-Private Partnership Agreement
The City of Cranston chose Triton Ocean State as its private partner for the
operation and maintenance of its wastewater facility for a 25-year period. Triton Ocean
State agreed to provide an up-front lease payment which was used to retire debt and
establish a working capital fund. Because leases are included in E.O. 12803, Cranston
had to comply with E.O. 12803. The City had to obtain a federal construction grant
deviation since they received EPA grant funds to construct the facility. Cranston will
pay Triton Ocean State an annual service fee based on defined flow components and
amounts. The service fee will be adjusted in accordance with established inflation
indices.
The City of Cranston received a $48.1 million lease payment as part of the
agreement with Triton Ocean State. The decision to obtain $48.1 million was made
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after extensive public discussion and a consensus of the rate payers. The lease
payment did not result in an increase in existing user fees. The average future user
fees will be equivalent to six tenths of one percent (0.6%) of Cranston's local median
household income. This level represented a low financial burden on local households.
Of the $48.1 million provided to Cranston as a lease payment, approximately $31
million was used to repay wastewater treatment-related debt. About $12 million was
used to eliminate general City debt and approximately $5 million was used for a
working capital reserve fund to enhance the City's future credit standing.
Under section 3(c) of E.G. 12803, the city was required to repay $5 million of its
EPA construction grant funds to the federal government. The EPA forgave repayment
of the $5 million under the authority granted the Agency by section 586 (a)(2) of the
Water Resource Development Act of 1996
Effects of Public-Private Partnership
The City expects the project will accomplish three significant objectives:
• Providing capital funds for up-grading the facility to tertiary treatment.
• Provide a cost-effective means of upgrading the facilities to advanced
wastewater treatment by allowing the private partner to manage the
design, construction and operation of the new treatment system at an
estimated total cost savings of $96 million over 25 years.
• Provide lower wastewater treatment user fees and long-term rate
stabilization.
The City described its greatest hurdles to accomplishing the privatization
agreement as satisfactorily resolving the concerns of rate payers, the city council, and
regulatory agencies that water quality would be protected and wastewater user fees
would remain reasonable. Negotiation with the private partner to achieve the City's
privatization objectives in a contract acceptable to all parties, completed in March 1997,
was very lengthy and complex process.
Contact
Peter Alviti, Director of Public Works
869 Park Avenue
Cranston, Rl 02910
401.461.1000, ext. 3245
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DALE CITY, VIRGINIA
Design. Build. Operate
Wastewater Treatment Plant
Public Partner
Private Partner
Service Population
Treatment Plant Facts
Initiated
Operating Cost
Dale City, Virginia
Dale Services
40,000
Dale Service Treatment Facility
4 mgd (average flow)
1965
$2.8 million annually
Synopsis
Since the 1965 inception of wastewater treatment services in Dale City, VA, the
wastewater treatment system has been privately owned and operated by Dale Services.
Therefore, many of the issues affecting public-private partnerships today are not
applicable to this situation.
Public-Private Partnership Agreement
Dale Services is responsible for all activities pertaining to the treatment of Dale
City's wastewater. Dale Services must obtain all permits, set rates, and fund all capital
improvements. The municipality has no responsibility in the provision of wastewater
treatment services to the public. However, the municipality does have the option to
purchase the treatment facility from Dale Services at market value at any time. Dale
Services is the NPDES permittee for the wastewater treatment facility. All of the
dischargers to the wastewater treatment plant are either residential or commercial.
There are no industrial wastewater dischargers located in Dale City. Dale Services
was not required to have a RCRA permit. Currently Dale Services has not found it
necessary to implement a wastewater pretreatment program.
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Effects of Public-Private Partnership
When Dale Services began providing wastewater services in the Dale City area
in 1965 it served only a small population. The local government provided only minimal
municipal services at the time, so Dale Services provided a desired service to an area.
Since 1965, Dale City, a community outside Washington, D.C., has grown in
population. Dale Services has also grown over time to respond to the needs of the
area. Because of the success of the public-private partnership between the City and
Dale Services, the local government has not been interested in providing wastewater
treatment services.
The local government views the current wastewater system as very efficient with
stable user rates. Dale City is pleased with the Dale Service's operation of the
treatment facility. Any required capital improvements are completely financed by Dale
Services with private sector funding and all capacity expansion must be approved by
the State Corporation Commission. Dale Services has no access to public sector
funding and it is subject to taxation for tap fees as a result of changes in tax laws.
Contact
Norris Sisson
Dale Services
5593 Mapledale Plaza
Dale City, VA 22193
703.590.1111
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CHARLOTTE, NORTH CAROLINA
Contract Public Operation
Wastewater Treatment Plant
Public Partner
Private Partner
Service Population
Treatment Plant Facts
Project Approved
Operating Cost
Charlotte-Mecklenburg Utility Department
NA
540,000
Irwin Creek Wastewater Treatment
Facility, 15 mgd
Julyl, 1996
Approximately $1.1 million annually
Synopsis
To counter the ever increasing costs of wastewater treatment, Charlotte decided
to pursue a five-year contract operations privatization arrangement. However, after
extensive evaluation of various contract proposals, the city opted to continue ownership
and operation of the treatment facility. Its rationale was that continued municipal
ownership and operation over the five-year period, should result in a significant cost
savings over the contracts proposed by the private sector.
Public-Private Partnership Agreement
In January 1996, the Charlotte-Mecklenburg Utility Department (CMUD)
announced a request for proposals for a five-year contract operations agreement. Of
the six bidders, one was a separate accounting unit formed within CMUD. Known as
CMUD Contract Operations or ConOp, this group of employees bid against the private
firms and won. Using an outside firm (HDR Engineering) ConOp successfully bid for
contract operations by taking the approach that they should think and bid as a private
entity.
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Contract operations provided by ConOp will produce cost savings in operations
and maintenance of more than $4 million over the five-year term. The savings is a
consequence of staff reduction, automation, oxidation-reduction potential technology, a
new head works, a plant-wide supervisory control and data acquisition system,
improved digester operations, and a predictive maintenance system. ConOp has a
memorandum of understanding (MOU) with the city that is similar to a contract service
agreement. This MOU provides a measure of ConOp's performance, and if the
conditions are not sufficiently met, the city can terminate the agreement. Due to
increased facility automation, some staff reduction has occurred, which resulted in a
current staff of more technical, highly specialized personnel. Other operational
services which include grounds maintenance, janitorial services, electrical and
instrumentation maintenance, laboratory service, and vehicle maintenance are
provided on a contract basis to ConOp.
This contract operations arrangement did not require the submission of an E.O.
12803 approval request or a grant deviation request, since it involved only internal
units of CMUD. Outstanding municipal bond debt was not affected by the agreement.
Effects of Public-Private Partnership
Charlotte's case differs from the other examples because in this situation, it was
decided that the treatment facility was best left under the operation of the municipality.
Charlotte was prepared to handle the environmental, economic, labor and financial
challenges of retaining control over the treatment facility. The fact that ConOp was
familiar with the facility's operations worked to its advantage.
Contact
Barry Gullet
Deputy Director
Charlotte-Mecklenburg Utility Department
5100 Brookshire Boulevard
Charlotte, NC28216
704.391.5098
adbmg@mail.charmeck.nc.us
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