03 March 2017 / Keith Hays
What’s holding up Public-Private Partnerships in US Municipal Water?
Pittsburgh’s mayor has announced the city will explore the viability of contracting a private firm as a full financial and operational partner to Pittsburgh Water and Sewer Authority (PWSA). Bluefield Research has recently published market insight on public-private partnerships (P3s) highlighting both the rationale and the challenges for a move to outsource the utility’s management. The reoccurring issues of underinvestment, water quality events, and lead service lines seen in several US cities plague Pittsburgh. Pittsburgh considers the private sector may be able to shoulder more capital investment and provide needed operational expertise. This all sounds reasonable – but in the past five years there have only been five major P3s in the municipal water sector, which Bluefield evaluated in a previous report on private sector participation. What’s the hold up? It generally boils down to three key sticking points regarding a municipality’s expectations and the realities of the contractual relationship:
The Lure of Up Front Payments
Most municipalities’ default option is to manage water and sewer services publicly, such that evaluating a PPP is often a measure explored under dire financial and operational circumstances. In this context, mayors and city councils place a high premium on advancement of large sums to shore up municipal budgets, often at the expense of more rigorous long-term planning. This approach resulted in a $30 million concession payment in Rialto, $212 million in Allentown, and $150 million in Bayonne. The misalignment of election cycles, operating contract duration, and debt tenors does little to incentivize a more consistent approach — and high up front investment requirements often deter more private sector interest.
Calibrating Rates and Capital Improvements
Often P3s falter because over-optimistic revenue estimates result in capital improvements that cannot be financed through the agreed rate structure. Just ask Bayonne, where over five years the city has had to raise rates by 33%. The local utility, as is often the case, was operating at a deficit so sooner or later, rates had to go up. Rate adjustment, and the contract re-negotations that often produce them, are relatively common for water P3s around the world, which unfortunately makes selling a P3 to the public increasingly difficult when rates are being hiked shortly after the ink dries on the initial contract.
Achieving Public Buy-in
Mayors and city councils can make very plain to the public that coffers are empty and they are backed into a corner only private finance can solve — but that obviously doesn’t create a warm fuzzy feeling in approaching a P3. Public advocates continually cite rate hikes, poor quality of service, and job losses as hallmarks of private water management. Recent accusations of operations mismanagement targeted at Veolia, an experienced P3 concessionaire, diminish public trust. The prospect of union layoffs to reduce operating costs also adds to public perception challenges.
Finding Win-Wins in P3s
Designing a successful P3 requires addressing all three of these challenges robustly: thoughtful planning of capital improvement plans, realistic revenue expectations, and strong public outreach. Easier said than done. This may result in smaller scope contracts, and a heavier focus on performance indicators. Pittsburgh may have a solid case for a workable public-private partnership – but both the city and the private sector must approach a contract with a clear-eyed understanding of the challenges ahead.
What’s your Bluefield strategy?
Keith Hays is Vice President and co-founder of Bluefield Research, a market research and insight firm focused exclusively on supporting companies addressing opportunities in water. Bluefield has individual reports on US water utility strategies and CAPEX forecasts, municipal wastewater and reuse trends, and investor-owned utility market trends.