The United States faces a huge shortfall in funding for renewal of water and wastewater infrastructure — while at the same time public money is scarcer than ever. Under these conditions, how will cities, towns, villages and water authorities find the money to upgrade treatment plants and repair decaying underground piping?
Consensus is growing that part of the solution lies in public-private partnerships. Such partnerships provide municipal and utility agencies with access to private capital, operational resources, or both, so that they can accomplish their goals while investing their own limited dollars in other priorities.
The partnership concept has been widely used in Europe and elsewhere but has seen limited application in the United States. The current fiscal climate has helped bring the idea of partnerships to the forefront.
Two representatives of American Water, a private water services provider that also designs, builds and operates wastewater and water facilities for public-sector clients, discussed the concept in an interview with Treatment Plant Operator.
Kathy Pape is president of Pennsylvania American Water and is responsible for the financial and operational performance of the company’s systems in 36 counties and 390 communities, representing about 650,000 water and wastewater customers. Mark Strauss is senior vice president of strategy and business development at the company’s corporate headquarters in Voorhees, N.J.
TPO: Why are public-private partnerships getting greater attention today?
Strauss: The financial pressures governments are facing have sparked a renewed interest in public-private partnerships. There is not much dispute about the existence of a shortfall of investment in water and wastewater in the United States.
When Congress was funding the Clean Water Act, a lot of our infrastructure was delivered in the 1970s, 1980s and early 1990s. But that has dried up and, bluntly speaking, a lot of that infrastructure is wearing out. What are we going to do about replacing it while addressing new needs? Public-private partnerships are an avenue that can be followed to leverage private-sector financial and operational resources and help public agencies do what needs to be done.
TPO: Is it a misconception that these partnerships amount to a takeover of what historically have been public functions?
Strauss: Yes. It’s important to note that in such a partnership the public entity does not surrender oversight and control of the assets. They bring in the private sector to help define the objectives of the facilities they need to have operated and let the private sector go to work to make that happen.
The public agency sets the standards and objectives and then monitors the private entity’s compliance and progress. This lets the public entity free up financial and managerial resources to focus on those big-picture issues, rather than having to drill down into the day-to-day of every detail. It’s not a question of competency — many municipal treatment plants are very well run.
TPO: If times are so hard, and there is “no money,” and we “can’t afford” this or that, and we’re “broke,” how can public-private partnerships help?
Pape: That’s the issue: The money is not there, so what are we going to do about it as opposed to just wringing our hands? Over time, the private sector has shown that it can bring efficiencies and innovation, and most important it has access to capital and can bring that to many of the wastewater projects that need to be done.
It’s important first of all that the private and public sectors be able to sit down at a table and talk about how to find a solution. You can’t use a cookie-cutter approach. Depending on what the issue is, between what the public and private sectors can offer, you can come up with a solution. But first you have to be talking about it.
TPO: In general, what do public-private partnerships look like?
Pape: A variety of arrangements are possible. One of them is to use a public-private partnership to regionalize to resolve issues. Once you invest the capital, the more customers you have to spread those costs over, the more the per-unit cost goes down.
On the surface it appears the public sector should be able to do that, but in many cases, communities are not willing to work together and regionalize to solve water and wastewater issues, even if they know that could be one of the ways to keep rates lower.
Many times it goes back to very local issues and rivalries, like who beat whom in a football game a number of years ago. Many times it gets down to a question of who’s going to have control of the facility.
This is where sometimes a private-sector owner or operator can come in and bring together three or four communities, put a plant in and provide service, and it seems to be all right. In this scenario, the communities are happy to join together.
Strauss: There’s a model that’s referred to as a concession approach where a private-sector entity provides the financing for a project, in return for which they receive a long-term operations contract for, say, 20 to 30 years.
During that time the private company takes on the overall operational responsibility and recovers all the costs in rates. This concept is by no means fully developed in the United States. It’s something that’s still being explored. It enables the community to monetize some of its assets and apply the funds to support other needs.
TPO: When you say monetize, are you saying the public entity would essentially sell its assets to the private partner?
Strauss: It’s more analogous to a lease. The private entity makes an up-front payment. Repayment on that amount gets built into the rate structure. Municipalities have a lot invested in water and wastewater facilities, and here is a way to recover some of that investment and deploy it elsewhere.
Of course, that is only one possible approach. If the municipality is not interested in that kind of financial arrangement, the project could be what is referred to as a design-build-operate. The private entity delivers a facility funded by the municipality and then operates it for an extended time. Here it’s simply a case where the public entity believes they can get a lower cost of operation than they could with direct municipal services.
TPO: What would be another example of the public-private partnership model?
Pape: Some large cities in particular built water and wastewater facilities for a population that’s no longer there: people have moved out to the suburbs, so the city now has excess capacity. That capacity can be sold to a private provider who has the capital to put in pipe to get it out to the suburban areas where the growth is occurring. So the city monetizes that excess capacity and converts it to an earning asset.
TPO: Who handles all the politics of making these partnerships happen?
Pape: Everybody handles the politics, and sometimes that can be a bigger issue than the capital. You need to have some leadership on the part of the municipality — somebody has to be a champion. Somebody has to see a vision where it will be better for the economy and better for quality of life if you break out of the parochial model and look ahead at what the private sector can bring.
TPO: Can you cite some examples of where partnerships of this kind have been created in the United States?
Strauss: A good example is the city of Fillmore, Calif., north of Los Angeles. They needed to replace their wastewater plant. They were not meeting their permit, with very strict discharge requirements imposed by the state.
The city decided the best way to approach this was to go to the market and say, “These are the standards we have to meet. You tell us, private sector, what it would take for you to design, build and operate for 20 years a plant that meets these requirements.” Being progressive, the city came up with a concept where they would reuse the plant effluent, and the plant had to meet the reuse standards.
Our company delivered a new membrane filtration plant that went online two years ago. It has won several awards. We treat all the wastewater and operate the plant, and they use the water to irrigate parks, open spaces, greenways and neighborhoods and reduce demand on potable water. That’s a real partnership. In this case, the vast majority of capital was from municipal financing.
Pape: Another case involved Coatesville, Pa., a high-growth suburb of Philadelphia. They were under a consent order from the state Department of Environmental Protection, and they were under a building moratorium. Rather than apply city capital to address those issues, they sold their wastewater facilities to Pennsylvania American Water, which signed a consent order with DEP.
Last year we placed online a $50 million wastewater treatment plant that enables the community to meet all DEP standards. In addition, now that the treatment plant has adequate capacity, community growth can resume, just at the time we are coming out of the financial crisis and homes are starting to be built.
TPO: Can this type of partnership apply not just to a treatment plant but also to rehabilitating a collection system?
Strauss: Absolutely. Capital is capital and facilities are facilities. A deteriorating collection system will have huge impacts on your treatment plant if you have major I&I problems. It might be that the most effective way to address the treatment issue is to address the collection system.
TPO: What would you say are the top objections to these partnerships?
Pape: One thing we used to see is the idea that somehow the private sector will get its hands on water and wastewater and will own it, and we as the municipality can’t let that go. I think that perception is now going away.
Water and wastewater are assets of the commonwealth; the city owns them. As a private-sector partner, we are a steward of those assets. We work hand in hand with our public-sector clients. For example, when doing collection system repairs or water pipe replacements, we coordinate our schedule with the street department so we are only digging up the road one time. There’s a binding together, a cooperation to work for the good of our customers and the city’s constituents.
TPO: How do these types of partnerships affect wastewater operators? What’s in it for them?
Pape: I think many younger people coming into the field today want to do more than stay with one community for an entire career. With a private company, where jobs all over the country are posted, they have an option to stay in a small town, or they can get experience in a larger system, and that might mean moving to a system in another state. Or they might want to move from the wastewater sector to the water sector, or move up into a supervisor or manager role. A private company affords more of those kinds of opportunities.
Strauss: They can do these things while keeping their length of service and maintaining their ties to the same organization. You’re not taking as big a risk, and you have a career track.
TPO: What about perceptions of these partnerships among the customers of the water and sewer systems?
Pape: There needs to be a focus on customer education. That’s another way we have been partnering with communities. At the end of the day, this is all about infrastructure that community residents can’t see. Sometimes you can get someone to focus on a tank or a treatment plant, but no one wants to think about the pipes because they are hidden.
Many of the assets in water and wastewater are hidden, so it’s important for community leaders and a private company to help residents and customers become better informed about what it takes to move water from a source of supply to the tap, and to collect wastewater from the homes and take it away. The better educated the customers are, the more solutions we’re going to find to the issues we all will face going forward.
