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ESTABLISHING PUBLIC-PRIVATE PARTNERSHIPS FOR

WATER AND WASTEWATER SYSTEMS

A Blueprint for Success

About the Water Partnership Council

The Water Partnership Council seeks to partner withcitizens, local governments, and organizationscommitted to strengthening this country’s water andwastewater infrastructure. Our members are theleading providers of operational services for water andwastewater systems in the United States.

Member Companies

To learn more about public-private partnerships and theWater Partnership Council, please contact us:

Water Partnership Council1220 Nineteenth Street, NW, Suite 300

Washington, DC 20036(202) 466-5445

[email protected]

© 2003 Water Partnership Council, Inc. All rights reserved.This blueprint is intended to provide a descriptive overview of important factors for you to consider inestablishing public-private partnerships for water and waste-water systems. It is not intended to substitute forsound advice from your own experts, persons experienced in public-private partnerships and the potentialprivate partners themselves. Each community and each system will have its own needs and requirements, which should be addressed in each case by persons knowledgeable about your special circumstances.

This handbook was prepared by the WaterPartnership Council to offer guidance tocommunities on whether and how to formand manage partnerships to meet theirwater and wastewater needs.

Chapter 1 describes what we mean by apublic-private partnership. Chapters 2through 4 document the benefits that morethan a thousand communities havederived from partnering with our membercompanies. Chapters 5 through 9 providedetails on how your community canachieve the benefits and avoid thepotential pitfalls.

This guide reflects the collectiveexperience of the members of the WaterPartnership Council and the communitiesthey serve. To prepare the guide, theCouncil staff conducted over 30interviews. We thank the many publicofficials and other communitystakeholders who graciously shared theirinsights with us. We note with particularappreciation those from the followingcommunities and labor unions whosecomments are highlighted in thishandbook:

Augusta, GeorgiaAvalon, CaliforniaBiloxi, MississippiBoyerstown, Pennsylvania Canastota, New YorkChickasha, OklahomaCoos Bay, OregonCortland, New YorkCranston, Rhode IslandDanbury, ConnecticutEaston, PennsylvaniaEdison, New JerseyExton, PennsylvaniaFairfield, CaliforniaGlen Cove, New YorkGrants, New MexicoHoboken, New Jersey Indianapolis, IndianaJersey City Municipal Utilities

Authority, New JerseyKarnes City, TexasLewes, DelawareLong Beach, MississippiMilwaukee, WisconsinOak Ridge, TennesseeOklahoma City, OklahomaPasadena, TexasSugar Land, TexasTampa Bay, Florida

Unions:American Federation of State, County andMunicipal Employees (AFSCME),Indianapolis, Indiana

Paper, Allied-Industrial, Chemical andEnergy Workers (PACE), Oak Ridge,Tennessee

Acknowledgements

Table of Contents

Chapter 1 – Understanding the Basics . . . . . . . . . . . . . . . . . . . . . . .9

Chapter 2 – Realizing Cost Savings . . . . . . . . . . . . . . . . . . . . . . . . .17

Chapter 3 – Taking Care of Employees . . . . . . . . . . . . . . . . . . . . . .25

Chapter 4 – Promoting Environmental Stewardship and Other Community Values . . . . . . . . . . . . . . . . . . . . . . .33

Chapter 5 – Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Chapter 6 – Conducting an Effective Procurement Process . . .55

Chapter 7 – Addressing Key Contractual Issues . . . . . . . . . . . . .65

Chapter 8 – Providing Effective Management and Oversight . .79

Chapter 9 – Staying the Course . . . . . . . . . . . . . . . . . . . . . . . . . . . .87

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91

E S TA B L I S H I N G P U B L I C – P R I VAT E PA R T N E R S H I P S F O R WAT E R A N D WA S T E WAT E R S Y S T E M S

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C H A P T E R 1

U N D E R S TA N D I N G T H E B A S I C S

In 1972 the wastewater treatment plant of a San Francisco suburb wasplagued with effluent discharge violations and unpleasant odors. Thecommunity’s leaders tried several approaches but nothing seemed to work.Then, they got creative and established a contractual partnership with aprivate company that specializes in operating water and wastewatertreatment systems. Thirty years later, that community is still reaping thebenefits of its public-private partnership.

CHAPTER 1

Private involvement in public infrastructurehas been an American tradition for more than200 years. As the need to upgrade facilities andservices increases, public-private partnershipsare gaining favor. Partnerships are not privati-zation. In a partnership, the public partnerretains ownership and control of the assets.Well-managed partnerships benefit the com-munity, and when these partnerships are builton sound contracts and reinforced by mutualtrust, the resulting benefits are significant.

Back to the Future

The history of public infrastructure develop-ment from as far back as 1789 reveals thatinfrastructure projects have nearly always reliedon joint public and private involvement.1 Thiswas particularly true up until the early 1930s.The form of private involvement has varied

over the years. It has included investment, equipment supply, tech-nology, engineering design, construction, operations, repair, andmaintenance – alone and in combination.

The needs of the 21st century call for greater private involvementonce again. Water and wastewater facilities are aging. Regulatoryrequirements and public demands for services are increasing.Public-private partnerships offer the most practical and cost-effec-tive means to meet the need to repair, replace, and upgrade facilitiesand services.

Public-Private Partnerships Grow in NumberOver 30 years ago, the City of Burlingame, California, became thefirst U.S. municipality to transfer the operation of a publicly ownedwastewater facility from a municipal government to a private com-pany. By 1980, approximately 100 publicly owned water and waste-water facilities were being operated by private partners. Since that


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“The benefits of this partnershiphave been measurable. Threeyears ago we were looking at amunicipal division that wasdraining us financially, badly inneed of repair, and not capableof delivering water efficiently.Today, this division is no longera financial burden, is almostcompletely refurbished, and isable to adequately andefficiently serve our residents.”

Mayor George Spadoro, Edison, New Jersey, 2001

U N D E R S T A N D I N G T H E B A S I C S

time, increasing numbers of municipalities andwater/wastewater authorities have experiencedthe value of tapping private-sector innovation,investment, and initiative for the operation andmaintenance of publicly owned systems. In 2002,private firms operated more than 2,400 publiclyowned water and wastewater facilities for nearly2,000 municipal clients.2

Those Who Try It Like ItRenewal rates attest to the popularity of public-private partnerships. Of the 489 partnerships thatcame up for renewal between 1998 and 2001, 91percent elected to continue with a partnershiparrangement. In addition to the Burlingame,California relationship, partnerships that havethrived for more than 14 years includeFayetteville, Arkansas; Key West, Florida;Hinesville, Georgia; Twin Falls, Idaho; Brockton,Massachusetts; Grants, New Mexico; Bartlesville,


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NUMBER OF PARTNERSHIPS MORE THAN DOUBLED IN FOUR YEARS

Source: Public Works Financing

NUMBER OFPUBLIC–PRIVATEPARTNERSHIPS

775

1997 1998 1999 2000 2001

959

1,5281,746

1,881

“Some people have suggestedthat while municipalities maynot actually give up ownershipof their facilities throughcontract OM&M [operations,maintenance, and management],they may lose control over them.This is simply untrue. It is ourplant, it is our permit, andultimately our responsibility.”

James D. Couch, Director of Water andWastewater Utilities, Oklahoma City,Oklahoma, in APWA Reporter, 1997

CHAPTER 1

Oklahoma; Gresham, Hood River, Lebanon, and Roseburg,Oregon; and Sugar Land, Texas. Larger cities like Oklahoma City,Indianapolis, and Milwaukee are also engaged in long-term, suc-cessful partnerships.

Public-Private Partnerships Are NOT Privatization

Although the terms public-private partnership and privatization areoften used interchangeably, they are not the same. Privatizationinvolves the sale or transfer of ownership of public assets to the pri-vate sector. In sharp contrast, under all public-private partnerships,the public partner:

• Owns the assets• Controls the management of the assets• Establishes user rates.

The private partner provides the services speci-fied in a contract with the public partner.Those services typically entail operating andmaintaining water and wastewater facilities andsystems. The agreements also can includedesign and construction; meter reading, billing,and customer services; maintenance andreplacement of distribution and collection


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“[Our private partner] helpedour wastewater treatmentbudget by $1 million annuallywhile improving the servicesprovided to our citizens.”

Johnny Isbell, former Mayor, City ofPasadena, Texas, 2000

NEARLY ALL PARTNERSHIPS ARE RENEWED

Source: Public Works Financing (Renewals from 1998-2001)

RENEWED BYCOMPETITION16%

OTHER1%

RENEWED BY NEGOTIATION75%

RENEWED BY NEGOTIATION75%

NOT RENEWED 8%


infrastructure; operation and maintenance ofbiosolids facilities; and various other public worksfunctions.

Well-Managed Public-Private PartnershipsBenefit All Stakeholders

Public entities have a responsibility to providehigh-quality water and wastewater treatmentservices to their citizens in the most cost-effec-tive, most environmentally sound, and safestmanner possible. Thousands of public officialshave found that by effectively managing a public-private partnership rather than engaging in day-to-day operations, they reap many benefits andbetter fulfill their responsibility to their con-stituents.

Lower CostsA public-private partnership typically results inannual operating cost savings of 10 to 40 percent,3

allowing municipalities to avoid or mitigateincreases in water rates. A sample of such part-nerships realized average savings of 24 percent over the period1992–1997 as reported in a joint publication of the Association ofMetropolitan Sewerage Agencies and the Association ofMetropolitan Water Agencies (AMSA/AMWA)4

Paradoxically, lower cost with no compromise in quality is a directresult of the private partner’s need to generate a profit. That needmotivates the private partner to operate more efficiently withrespect to power consumption, chemical usage, maintenance, andtechnical support. Private partners take advantage of economies ofscale through bulk-purchasing discounts. As specialists, privatepartners also bring new technologies, tools, techniques, and provenprocesses for lowering costs while maintaining or improving servicequality. The profit motive also dictates sound maintenance becausewell-maintained assets function at peak efficiency, and maintenancecosts are almost always lower than the costs of repair or replace-ment of assets allowed to deteriorate.


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"From what we have seen andheard from several of ourformer employees, they arehappy and excited to beworking for your organization[private partner]. Teamworkand unity within thewastewater department isevident… empowerment tomake decisions has instilled ahigh degree of ownership andthe [private partner's] staff isto be commended for a jobwell done.”

City Manager Bill Grile, Coos Bay,Oregon, 2000

CHAPTER 1

Contract provisions guarantee that the publicpartner's water and wastewater budget is pre-dictable month after month. In addition, pri-vate firms can help plan, manage, and pay forcapital improvements, generally when the con-tract is of sufficient duration so that the invest-ment lowers life-cycle costs. Funds from theprivate sector, factored into the firm's contract,can alleviate a public partner's need to issuebonds or raise user fees for capital improve-ments. (See Chapter 2)

Enhanced Career Opportunities for EmployeesPrivate operation typically results in better edu-cational and training opportunities for employ-ees and improved worker safety. For both theprivate partner and the public facility owner,enhanced training and safety translates into

better-run, more efficient, and environmentally sound facilities. For the employees, enhanced training means more opportunities forprofessional growth and advancement. (See Chapter 3)

Environmental StewardshipA private firm's reputation and ability to secure new contracts restssignificantly on its ability to maintain safe, clean water in compli-ance with federal and state standards. The firm will work closelywith environmental stakeholders and regulators to keep the systemsin compliance with stringent regulations at all times. The privatepartner takes responsibility for regulatory compliance through aservice agreement with specific performance standards. If the firmcauses a permit violation, it pays the penalty. (See Chapter 4)

Decreased Liability RiskIn many municipalities, significant operational, financial and envi-ronmental risks go along with managing water and wastewater sys-tems. By sharing those risks, the private partner helps to reduce itspublic partner’s liability.


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"I continue to be a proponent ofprivate-sector partnerships,and the relationship we havewith [our private partner] onlyreinforces the value ofcooperative programs. Thesuccess story at the Messerlyand Spirit Creek plants is ashining example of value forthe ratepayer."

Mayor Bob Young, Augusta, Georgia,2003


Excellent Management Is Key

To derive the full benefit of a public-private part-nership, the public partner must manage the con-tractual relationship effectively, and managing thisrelationship is fundamentally different from pro-viding water and wastewater services. (SeeChapters 5-8) The public partner selects the pri-vate firm, establishes by contract how the part-nership will function, and monitors the perform-ance of the private partner.

The contractual relationship must be built onmutual trust and open communication, begin-ning with the procurement process and continu-ing through the life of the contract. Public entities and private firmsthat have entered into public-private partnerships have identified sev-eral guiding principles to foster trust:

• Public-sector commitment to the project prior to issuing the requestfor proposal (RFP)

• Contract scope clearly defined by the public partner• Objective, balanced criteria for selecting and awarding contracts

made public in advance of any RFP• Equal treatment of competing firms• A procurement process that is stable, reliable, and predictable to

actual and potential proposers, procurement officials, and the public• Independent engineering verification of the efficacy of design, espe-

cially for design-build-operate (DBO) contracts• A system open to technological change and improvements• Sound financial analysis over the life of the contract• Clearly defined roles, responsibilities, and risk-sharing frameworks• Open communication among all stakeholders• A specific methodology for evaluating performance.

Is a pubic-private partnership the right choice for your community?This handbook will help you decide. If your answer is yes, you willfind guidance here to ensure that your community realizes the consid-erable benefits that partnerships can produce.


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“A 12-month review of [theprivate partner’s] performanceby MMSD shows the NewJersey-based contractor notonly saved the district money,but it also exceeded allenvironmental qualitystandards. …”

Pete Millard, The Milwaukee BusinessJournal, 1999

C H A P T E R 2

R E A L I Z I N G C O S T S AV I N G S


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Communities most often cite cost savings as their reason for formingpublic-private partnerships. Public-private partnerships typically result incost savings of 10 to 40 percent, with no deterioration in service quality. In fact, service often improves. Can a public entity achieve similar resultson its own? In principle, yes, but in practice, the time and effort needed aregreater, and results are not guaranteed.

CHAPTER 2

Two Choices

Public-private partnerships have set the benchmark for efficient andeffective operation of publicly owned water and wastewater facilities.According to an AMSA/AMWA publication,5 private operators, on

average, deliver services of comparable quality at24 percent lower cost than public operators.The choice for the public sector is, therefore,either to emulate private operators or to partnerwith one. Both options require commitmentfrom local government leaders. Significantchange is required under either option. Leadersin most communities need to make this choiceif they are to repair decaying infrastructure,meet increasingly stringent regulatory require-ments, and still keep competitive and reasonableuser rates.

Public-Private Partnerships Facilitate ChangesNeeded for More Efficient Operations Change in any organization is difficult toachieve, and so it is with changes to improvethe efficiency of water or wastewater treatment.Some staff will resist change, and this is truewhether the changes are introduced by a privatepartner or by a public agency.

Private partners have the advantage of years ofexperience in change management. They alsohave the know-how that enables them to oper-

ate cost effectively, to meet or exceed the objectives set by the publicpartner, and to ease the transition for operating personnel. Privatepartners can point to the success of other partnerships to demon-strate that efficiencies can be realized without any sacrifice in servicequality or environmental stewardship.

Public officials attempting to emulate private operators cannot pointto a record of success. They also face greater difficulty in gaining thenecessary support for changes in operating procedures that runcounter to “the way we have always done it.”


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“Government is downsizingmore and more, so I want toconcentrate on the broaderinfrastructure responsibilities ofthe city and not operate awastewater plant. It is easier tohave a [private partner] to keepup with all of the DECrequirements for operating asewerage plant. I did believethat I could achieve operatingcost reductions, but [the privatepartner] is doing multifacetedjobs with the workforce, whichthe city was not able to do.”

Nick DeSantis, Director of PublicWorks, City of Glen Cove, New York, 2003

R E A L I Z I N G C O S T S A V I N G S

Public-Private Partnerships Overcome Institutional Barriers toOperational Efficiency A few public agencies have achieved cost reductions comparable tothose achieved by private operators. Public-private partnerships,however, bring about cost efficiencies faster and more easily. A keyreason is that the public-private partnership is free of institutionalbarriers that impede the public entity’s ability to operate more effi-ciently. As identified by AMSA/AMWA,6 these barriers include:

• Bureaucratic requirements and procedures that often hamper pursuit of least-cost options

• Restrictions on procurement and capital expenditures• Limits on pay rates• Prohibitions against incentive compensation.

None of these barriers is insurmountable, but all can be overcomemost rapidly with a public-private partnership.

Public-Private Partnerships Provide Guarantees, Not Just Promises

The private partner guarantees performance. Ifdecreased operating costs are promised, the pri-vate partner is bound by contract to deliver. Coststo the public partner increase over time only asallowed by the contract. These prescribed increas-es are typically tied to inflation indices and tounforeseen changes in demand or changes inenvironmental laws or regulations. Because con-tract terms ensure a level of predictability, privateoperation provides elected officials with greatercontrol than public operation over the user ratesrequired for a self-sustaining enterprise.

When a public agency attempts to reduce costs, itcannot guarantee that a specific level of savingswill be achieved. If the promised savings are notachieved, the only recourse available to the com-munity is to increase rates or begin the process ofseeking a private partner.


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“Contrary to what manybelieve, city workers are notinherently inferior. Themonopolistic and bureaucraticsystem in which they work iswhat makes them inefficient.The public system, not publicemployees, is the problem.”

Mayor Stephen Goldsmith,Indianapolis, Indiana, Competing for aChange: Market Approaches to StateGovernment, Washington ResearchCouncil, January 1993

CHAPTER 2

Private firms are financially motivated toachieve results. Prior to pursuing partnershipopportunities, private firms ask themselves thequestion, “Can we improve operations suffi-ciently to provide significant cost savings with-out compromising the quality of services to thecommunity?” They will submit a bid only ifthey can answer that question affirmatively andwith some degree of confidence. Cost savingsare essential to providing an adequate return oninvestment, and quality services are essential tomaintaining the kind of reputation necessary tostay in business.

In addition to financial motivation, privatefirms are legally bound to produce results interms of operational improvements, quality ofservice, and environmental compliance. If the

private partner fails to meet its contractual obligations, the publicpartner can impose sanctions up to and including contract termina-tion. A performance bond or other form of surety often can providethe public partner with additional financial protection.

Private Operators Apply Technology and Know-How to Achieve Cost Savings

The three largest cost elements in operating water or wastewaterfacilities are labor, energy, and chemicals. Private operators achievecost savings by implementing such measures as:

• More efficient work practices• Cross-training of staff• Process automation and instrumentation • More efficient energy use• Reduced use of chemicals• Bulk purchasing to obtain discounts• Predictive and preventive maintenance.

Other than bulk purchasing, public entities could adopt similarmeasures, but according to the AMSA/AMWA handbook on how


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“Under Jersey City’s partnership,the City is benefiting from thecompany’s managementexpertise while retainingownership of the utility’s assetsand the ability to set rates forservice. All the things we werelooking for – water quality,service, low cost, and goodrevenue – we are getting.”

William Macchi, Executive Director,Jersey City Municipal Utilities Authority,New Jersey, 2001


municipalities can become more competitive, public agencies areconstrained by entrenched work practices and lack of in-houseexpertise.7

Automation, energy efficiency, optimization of chemical usage, andpredictive maintenance require a level of techni-cal expertise that few public water or wastewaterutilities can afford to maintain in-house. Theyneed to rely on outside consultants, who maylack hands-on operating experience and typicallycannot be responsible for the overall system per-formance. The private partner is not burdened bythis disadvantage. The private firm can afford tohave all of the necessary specialists in-housebecause it can spread the costs of these expertsacross all of the facilities it operates.

For most local governments, providing water andwastewater services to the community is not acore competency. In contrast, the private partnerexists for that very reason – to operate and main-tain water and wastewater facilities and systemsefficiently and effectively. That is what their busi-ness is all about.

The use of automation by publicly owned andprivately operated wastewater treatment plants isillustrative of the advantages of the private part-ner. Alan Manning, a well-regarded consultant towater and wastewater utilities, comments in arecent paper,8 “In public wastewater facilitiestoday, typically only 50 percent of the automationor information systems is being effectively uti-lized. In many cases, the automatic portion isturned off because operators and managers donot believe it will work.” He further notes that in privately operatedwastewater facilities, 100 percent of the automation is being used toimprove productivity and lower costs.


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“[Our private partner] has beeninstrumental in helping theVillage reduce sewer rates bya third by not only reducingoverall system operating costsbut also by increasingindustrial sewer revenues byimplementing an aggressiveindustrial pretreatmentprogram. The value they haveadded goes way beyond simplyeffecting incremental costreductions. Their ability toanalyze problems andrecommend solutions with along-term view, and thenmanage them effectively day today, can be measured inhundreds of thousands ofdollars a year in cash flow tothe Village.”

Todd Rouse, Mayor, Canastota, NewYork, 2002

CHAPTER 2

According to AMWA and AMSA, when a public agency attempts toreduce costs significantly, the reinvention process normally takesthree to five years to become fully operational. The process, asdescribed in the AMWA/AMSA case studies,9 typically requires theuse of an outside consultant. One of the consultant’s functions is toinform the public-sector client of the best practices and associatedcost savings of privately operated facilities. These become thebenchmarks for the public sector’s reinvention initiative.

The consultant can play a valuable technology transfer function, butfew consultants can effect that transfer as well as a public-privatepartnership. In a partnership, the private partner shares with thepublic owner and existing staff a wealth of hands-on, practical expe-rience in running efficient operations. In order to achieve compara-ble savings without a private partner, public officials need to re-invent operating processes that the private operator has already per-fected through trial and error and has put into practice elsewhere.

Time Is Money

Generally, partnerships achieve cost savingsmore quickly than a public agency acting alone.For those agencies that may be able to matchthe current performance standards of partner-ships, in the three to five years that it takes todo so, partnerships will have reduced costs stillfurther. In comparing cost savings achieved bypublic agencies with those achieved by partner-ships, accounting for how quickly the savingsare achieved is an important variable.

Partnerships can accelerate the implementationof cost-saving capital improvements. Even though the public partner often retainsresponsibility for funding major capitalimprovements because of its access to tax-

advantaged debt, private partners invest in capital improvements inapproximately one-third of operation and maintenance (O&M)contracts with a five-year life and in close to 100 percent of longerterm contracts. The private partner is likely to invest its own funds


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“[Our private partner] hasreached our cost objectives.The first year was a little highbecause they had a lot of workto do to get the sewer plant incompliance and operatingcorrectly. In doing so, theyeliminated the need for half amillion dollars of capitalimprovements that the boroughwas considering.”

Patricia Spaide, Borough Manager,Boyerstown, Pennsylvania, 2003


in capital improvements if the operating cost reductions offset itscost of capital over the life of the contract. The longer the contract,the more likely such capital improvements will be undertaken.This is one of the many benefits that communities derive fromlonger-term contracts. The private partner is not subject to politicalapproval processes or public bidding requirements that might delaya comparable investment by a public agency. The sooner capitalimprovements are made, the sooner cost savings are achieved.

In some instances the private partner is able to eliminate the needfor capital expenditures by using advanced technology. Often, theprivate partner can reduce the magnitude of required capital invest-ment with more effective procurement and construction practices.

In addition to investing in capital improvements to reduce life-cycle costs, the private partner may provide its public counterpartwith financial assistance. The public partner may request assistancefor such reasons as:

• Exceedance of the local government’s debt ceiling• Desire to retain debt capacity for other necessary public services• Expected delay in obtaining approval for a bond issue or for loans

from the state revolving loan fund• Poor credit rating.

In providing financial support, if operating cost reductions do notallow a positive return over the life of the contract, the private part-ner would expect to recoup its investment via an additional servicefee that it charges the local government. The longer the length ofthe contract, the more years over which the investment can beamortized, and the smaller the amount of the annual service fee.

Although the private partner may provide financing, the publicpartner typically retains responsibility for funding major capitalimprovements. The public partner can utilize tax-exempt bonds orcan borrow from state revolving loan funds, both of which usuallycarry lower interest rates than private debt. The private partner canoften provide advice to the public partner on the type and level ofcapital investment required, taking into account life cycle costs.


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C H A P T E R 3

TA K I N G C A R E O F E M P L O Y E E S

In addition, private partners typically offer employees better training,enhanced safety procedures, more incentives, and greater opportunitiesfor career advancement. Private partners can and want to make thesecommitments because they know that the existing employees providethe best source for knowledgeable and motivated employees. Privateoperators do not maintain a "pool" of employees who can be sent to var-ious locations to "take over" operations. Instead the private operatorsprefer to hire local experience and skills. In addition, private partnerstypically offer employees better training, enhanced safety procedures,more incentives, and greater opportunities for career advancement.Private partners can and want to make these commitments because theyknow that the existing employees provide the best source for knowl-edgeable and motivated employees. Private operators do not maintain a"pool" of employees who can be sent to various locations to "take over"operations. Instead the private operators prefer to hire local experienceand skills.


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Employees have the most to gain from a public-private partnership, but as thepeople who will be most directly affected by the change, they are also often themost apprehensive. Most firms that compete for public-private partnershipsreadily agree to contract terms that protect existing employees: • All current employees receive job offers• No one is dismissed, except for cause• Employee compensation is equivalent or greater• Staff reductions, if any, occur only through attrition, termination

for cause, or transfer• Unions are recognized as bargaining agents for those employees

who are unionized.

CHAPTER 3


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Private partners typically offer employees better training, enhancedsafety procedures, more incentives, and greater opportunities forcareer advancement. Private partners can and want to make thesecommitments because they know that the existing employees pro-vide the best source for knowledgeable and motivated employees.Private operators do not maintain a "pool" of employees who canbe sent to various locations to "take over" operations. Instead theprivate operators prefer to hire local experience and skills.

Public-Private Partnerships Lead to Enhanced EmployeeBenefits

Once the partnership goes into effect, employees are generallypleased with the enhanced benefits in terms ofcompensation, training, and opportunities foradvancement.

Compensation Is Equivalent or BetterContracts generally require the private partnerto hire public employees at the same or equiv-alent salary and benefit levels. Private partnersalso often introduce innovative compensationpackages such as incentive pay plans andbonuses tied to performance. These allow for-mer public employees to earn even highercompensation.

A recent IRS ruling generally allows employeeshired by the private partner to continue to par-ticipate in a public pension system. Where thepractice is permitted by state law, the privatepartner can thus opt to make contributionsinto a public employee pension system insteadof transferring employees to a new system.Employees may choose the pension systemthey prefer.

“The contractor we brought inhad an awareness of thefeelings of the people we hadworking for us at that time.They put in place a goodbenefits package and improvedtheir working conditions. Theymade employment opportunitiesavailable to all the employeesprovided they could pass thedrug test. Our experience wasthat three months after thecontract started some folkswent on to other employment.You have to find a company thathas leadership that you feelcomfortable with, communicatewith and can build arelationship.”

Robert Bass, Mayor, Long Beach,Mississippi, 2003

T A K I N G C A R E O F E M P L O Y E E S

Safety Procedures Are EnhancedEnsuring safe operations is of paramount impor-tance to private operators of water and waste-water facilities. They employ rigorous safety pro-tocols that have proven effective at the manyfacilities they operate. Each employee undergoesintensive safety training, and updates andrefresher courses are regularly scheduled andrequired of all employees.

The following exhibit shows the dramatic declinein lost-time accidents for the Indianapolis waste-water system since the public-private partnershipwent into effect in 1994.

Similarly, the safety program developed by theprivate partner in Vancouver, Washington, hasresulted in 11 years with no lost-time accidents.Under the terms of the contract, the city is


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LOST-TIME ACCIDENTS DECLINEDUNDER INDIANAPOLIS’ PUBLIC-PRIVATE PARTNERSHIP

“[The private partner] offeredequal salary and benefits to allplant employees. In the firstyear, the firm conductedintensive training. Manyemployees attended a localcollege to prepare forcertification, with tuitionreimbursed by [the privatepartner]. Employees who didnot choose to work for [theprivate partner] could remainwith the City.”

EPA case study on Oklahoma City,Oklahoma, 1998

(Environmental Financial AdvisoryBoard/Environmental Financial Center Guidebook,http://www.epa.gov/efinpage/guidbk98/gbk4b.htm)

NUMBER OFLOST-TIMEACCIDENTS

BEFORE PUBLIC-PRIVATE PARTNERSHIP

SINCE PUBLIC-PRIVATE PARTNERSHIP

72

130

190

1910

24

4130

23 31 23

91 92 93 94 95 96 97 98 99 00 01

CHAPTER 3

responsible for paying workers' compensationinsurance. Thus an added benefit to the city hasbeen a significant reduction in the cost of thisinsurance.

Employee Grievances DeclineThe public-private partnership for theIndianapolis wastewater system also resulted in adramatic decline in the number of employeegrievances.

Employee Ideas Are Welcomed and RewardedPrivate partners readily agree to a no-layoffs poli-cy because they value the knowledge and experi-ence of existing employees with the specific sys-tem they operate. Many private partners rewardemployees’ noteworthy or creative ideas with aspot bonus program. The program is typicallyadministered at the facility level so that the


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“All workers were involved inour receiving the Award ofExcellence from the TennesseeLabor Management Associationin August 2001. It takesteamwork to win this award.[Our private partner] worked toget this award … Any time youget an award like that, you areproud of it … I wish all of mycompanies were as good as [ourprivate partner].”

Rick Gallaher, Union President,Paper, Allied-Industrial, Chemical andEnergy Workers (PACE), 2003

EMPLOYEE GRIEVANCES DECLINEDUNDER INDIANAPOLIS’ PUBLIC-PRIVATE PARTNERSHIP

NUMBER OFGRIEVANCES

BEFORE PUBLIC-PRIVATE PARTNERSHIP

SINCE PUBLIC-PRIVATE PARTNERSHIP

49

4139

1 0 0 1 0 4 28

91 92 93 94 95 96 97 98 99 00 01


bonus can often be paid immediately. Private partners not onlyencourage and reward employees' ideas, but also stimulate a flow ofideas by training employees to think like business owners. Thisemphasis on encouraging and rewarding operational innovations isnot often found at publicly operated systems due to the inhibitinginfluences of bureaucracy and municipal regulations.

Opportunities for Career Advancement Are GreaterEmployment by the private partner presents employees with oppor-tunities for upward mobility. These opportunities extend beyondthe local partnership to other operations that the private partnermanages. Ambitious employees often take on increased responsibil-ities or go on to other projects. Some private partners belong toorganizations that operate worldwide. Employees who are willingand able to relocate may qualify for higher level positions in otherparts of the U.S. or abroad.

Union Representation Continues

Many public water and wastewater employees arerepresented by unions like the AmericanFederation of State County and MunicipalEmployees (AFSCME). Although AFSCME hasgenerally opposed public-private partnerships atthe national level, at the local union level, con-cerns over the impact of change usually prove tobe unfounded. For example, Stephen Fantauzzo,Executive Director of AFSCME Council 62, com-mented on the wastewater public-private partner-ship in Indianapolis one year after it went intoeffect. He wrote:

“I can honestly say that I never thought I would be in the position of now endorsing thepublic-private partnership which now existsbetween the city, [the private partner], andAFSCME Council 62.


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“We would like to thank theMayor, City Council, and CityManager for sending us to workfor [our private partner]. [Ourprivate partner] has given us achance to expand our careers,learn, and express ourselves.We now feel we have thesupport to better serve theresidents of Grants.”

Project Team, Grants, New Mexico, 1994

CHAPTER 3

Working together with [the private partner], the parties have notonly negotiated a new successor agreement which was over-whelmingly ratified by the employees, but also:

• Established a new career ladder for employees providing skillenhancement and salary improvement opportunities;

• Eliminated frozen job salary rates;• Minimized the use of outsourced contractors through employ-

ee training programs;• Offered employees the opportunity to participate in the com-

pany’s programs nationwide; and• Established a new pride in their workforce through employee

involvement and empowerment programs.”

Addressing Employee Concerns

The prospect of transferring from public-sec-tor to private-sector employment often pro-duces anxiety among employees, as would theprospect of any new “boss.” While the partner-ship contract typically addresses the most com-mon sources of employee anxiety, in most suc-cessful transitions, both public and privatepartners make additional efforts to alleviateemployee anxiety.

The private partner typically extends job offersto all current employees who want to continueworking and who pass a drug and alcohol test.Existing employees are usually protected bypartnership contracts that not only prohibitlayoffs, except for cause, but also limit staffreductions to attrition and transfers. Attritionmay occur through voluntary resignations,normal retirement, or the acceptance of attrac-

tive early retirement packages. Transfers may be to new jobs in thesame or other municipal departments or to other parts of the pri-vate partner’s organization. For those employees who prefer to con-tinue public employment, the public partner can ensure that they


PA G E 3 0

“When [the private partner]came to the ETTP site [OakRidge, TN] in 1998 to assume thecontract for utilities, PACE and[the private partner] formed awin-win partnership. We formeda number of teams, includinghealth and safety, communityinvolvement, and training. Theseteams give all bargaining unitassociates a chance toparticipate.”

Dennis Pennington, Chairman of PACE(Paper, Allied-industrial, Chemical, andEnergy Workers), 1998


are made aware of openings in other departments,and that they receive preferential treatment incompeting for those jobs.

Partnership contracts also typically protectemployees’ existing compensation either by pre-cluding reductions in salaries and fringe benefitsor by requiring equivalent total compensation.Contracts also preserve union rights.

The public partner may require the private partnerto establish a transition process that encouragesopen communication with employees. The privatepartner should not only be available to respond toquestions and concerns, but the public partnershould also ask the private partner to take the ini-tiative to solicit feedback from employees who arenot forthcoming. Employees often need to bereassured that they will not be fired, laid off ortransferred involuntarily to another location. Tofurther assist in the transition, many private part-ners provide their new employees with open andconfidential access to their counterparts at other partnership loca-tions so the new employees can find out first-hand how they willbe treated by their new boss.

Most Employees Adapt Readily to Public-Private Partnerships

Although most partnership contracts address typical employee con-cerns, this does not mean that a partnership represents a continua-tion of business as usual. The workforce will experience change.Adjustments to this change may take as long as a year. Not allemployees will choose to stay. Some may leave because they do notwant the additional responsibility. Others leave because they likeworking for the municipality and do not want to experiment withworking for a private company. Those who do remain usually cometo view the changes made by the partnership as beneficial to thecommunity and to themselves.


PA G E 3 1

“I can honestly say that [ourprivate partner] is the bestcompany that I have worked for.The morale has turnedcompletely around since [they]started to run the plant. Theirmanagement philosophy reallydoes work, and they actually dowhat they say they will do. Ihave had a chance to meet andtalk to other [of their] associatesfrom various locations and Ihave not heard one bad thingabout [them].”

Dennis Ostlund, Operator, UnionSteward, Fairfield, California, 1996



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C H A P T E R 4

P R O M O T I N G E N V I R O N M E N TA LS T E WA R D S H I P A N D O T H E R

C O M M U N I T Y VA L U E SImproving environmental stewardship is the second most often cited reason thatmunicipalities give for establishing public-private partnerships. Manycommunities with environmental compliance issues have resolved those issuesrapidly and cost effectively by working with a private partner. Evencommunities that are in compliance can benefit because the private partnermay be able to improve environmental performance, and generally assumes therisks of paying fines, while also reducing overall operating costs. Privatepartners also contribute to their communities socially and economically in waysthat go far beyond contractual obligations.

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PA G E 3 4

Concern for the Environment

Private partners have the technical know-how to apply up-to-datetechnology and the management tools for ensuring cost-effectiveregulatory compliance. The private partner will bring to a partner-ship a detailed understanding of current and proposed regulations,an in-depth knowledge of the options available for complying withthem, and sufficient hands-on experience with each of the optionsto select the best one and apply it effectively. In addition, becausemany private partners operate multiple plants in the states wherethey do business, they not only understand the regulations thor-oughly, they also maintain good working relationships with theagencies that enforce the regulations.

Public officials must recognize, however, thatthere are real limits to what a private partnercan accomplish with a system that is antiquated,inadequate, or improperly designed. Althoughthe private partner's operating and environmen-tal expertise may help mitigate environmentalproblems, the public partner needs to be willingto make the commitment to solve the issues.No private partner is ready to assume liabilityfor fines for a facility that cannot meet environ-mental standards.

For some communities, environmental steward-ship means more than just meeting regulatorystandards. These communities may producewater with added margins of safety and generatewastewater discharges that are substantiallycleaner than required. In these situations, theprivate partner usually commits to maintainingthe same quality standards. In fact, because ofthe private partner’s operating know-how, thequality of water and wastewater effluent usually

“Since having entered into apublic-private partnership forour wastewater plant in 1990and our water plant in 1993, Ihave more confidence that theplants will stay in compliance. Icould see from the way wewere operating that the impactof new regulations could put usout of compliance if we did notengage a partner. Our privatepartner has relieved the city ofall the hassle and potential forfines that result from operatingthe facilities directly.”

Larry Shelton, City Manager, Chickasha,Oklahoma, 2003

P R O M O T I N G E N V I R O N M E N T A L S T E W A R D S H I P A N D O T H E R C O M M U N I T Y V A L U E S

improves, regardless of the level of past perform-ance under public operation.

Private partners have three powerful incentivesto conduct operations in full compliance withenvironmental regulations and to minimize dis-charges that could damage the environment:

• Contract terms• Responsibility for payment of fines for non-

compliance• Protection of reputation.

Contract Terms Require Attainment of StandardsUnder the terms of a contract, the private partnerusually accepts responsibility for operating afacility in compliance with all applicable federal,state, and local environmental regulations. Wherethe public partner’s past performance has beenbetter than required by law, the contract mayrequire that these higher performance standards be met.

Responsibility for Payment of Fines for Non-complianceThe private partner typically has responsibility for paying any finesassociated with non-compliance, and the threat of fines provides afurther incentive for compliance. This responsibility normallyrelates to non-compliance events that are within the control of theprivate partner. Events that would typically be considered beyondthe control of the private partner would include influent loadingsthat exceeded the capability of the plant or failure of the publicpartner to fund promised capital improvements that both partnershave agreed are necessary for compliance.


PA G E 3 5

“The manager of amunicipality needs to wear alot of different hats. Our waterand wastewater facilitieswere beginning to get rathercomplex compared to twentyyears ago when theregulations were not sostringent. Our private partnerutilizes people who stay ontop of the regulations.”

Patricia Spaide, Borough Manager,Boyerstown, Pennsylvania, 2003

CHAPTER 4

Protection of Reputation Growth is a business imperative. In order togrow, a firm must retain its existing client baseand win new contracts. Meeting both of thesechallenges requires a solid reputation. Theimportance of corporate reputation, the desire toachieve customer satisfaction, and the competi-tiveness of the water partnership market worktogether to create strong incentives for maintain-ing environmental compliance. Private partnerswill not be selected by public officials if theyhave a lackluster reputation, and nothing tarnish-es a firm's reputation more than having regulato-ry problems at the facilities it operates. This sim-ple fact of business stands behind the outstand-ing record of accomplishment of almost all pub-lic-private partnerships.

Public-Private Partnerships Get Results

Under the stewardship of private partners, environmental violationsdecline, the need for capital improvements to achieve compliancecan be reduced, and operating efficiencies improve environmentalperformance while reducing costs.

Environmental Violations DeclineA survey conducted by the Hudson Institute in 1999 documentsimproved environmental performance by private operation of pub-licly owned facilities. The survey covered 14 public-private partner-ships at drinking water facilities in the U.S.10 Four of the 14 (29 per-cent) had not been in full compliance with environmental regula-tions at the time the partnerships were formed. One year later, thefour non-complying facilities were meeting or surpassing regulatorystandards. The other 10 continued to be operated in compliance.The results were achieved through operational improvements based


PA G E 3 6

“With our public-privatepartnership now in its third year,we are delighted with theprofessional and exemplaryenvironmental management ofour wastewater treatmentfacility that [our private partner]provides our City. We lookforward to partnering with[them] in future endeavors.”

Mayor Gene Eriquez, Danbury,Connecticut, When the partnership wonthe Excellence in Public-PrivatePartnership Award, 1999


on the prior experience and expertise of the private partner. Noadditional capital expenditures were required.

Need for Capital Improvements Is ReducedPrivate partners have the expertise and experience to identify andaddress the root causes of non-compliance. By so doing, they oftenachieve compliance without the need for major capital improve-ments. For example, Augusta, Georgia, entered into a public-privatepartnership in 1999 for its Messerly Wastewater Treatment Plantlargely because the state had fined the city $160,000 and identifieddozens of deficiencies to be corrected. The private partner foundthe root cause of the problem to be violation of pretreatment stan-dards by industrial facilities hooked up to the city’s system. Thecity had been lax in imposing and collecting fines. In contrast, theprivate partner has issued 844 notices of violationto 40 facilities and has collected $354,380 in fines.The fines have served as a wake-up call. Now,more companies are providing adequate pretreat-ment before discharging wastes to the sewer sys-tem. The improved influent quality has reducedthe costs of operating the plant in compliance withenvironmental regulations.

Local industry was outraged by the private part-ner’s actions. The public operator had been reluc-tant to come down hard on an important politicalconstituency. In this instance, the private partneracted as a buffer between the public partner and itsindustrial constituents. Environmental perform-ance improved, sewage rates stabilized, and thepublic partner was provided with a level of politi-cal cover.


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“I believe that [our privatepartner’s] expertise andguidance is going to keep usfrom being in violation of ourpermits and help keep us out oflitigation. I think what we’redoing here is a win-win-winsituation – for the City, for itsemployees and for [our privatepartner] – and we should add afourth win for our neighborswho must live with ourenvironmental practices.”

Tom Goldsmith, Mayor, City of Easton,Pennsylvania, 1999

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Operating Efficiencies Improve Environmental Performance While Reducing CostsCommunities enter into public-private partnerships for two mainreasons. The first is cost reduction. A close second is ensuring envi-ronmental compliance. Three examples illustrate that communitiescontracting with a private partner primarily to improve environ-mental performance also derive economic benefits.

Vancouver, Washington, Benefits from theEnvironmental Stewardship of Its Private Partner.Compliance was the driving force that ledVancouver to forge a public-private partnershipfor its wastewater facility. The private partner’sknowledge and experience with new technology,combined with its strong business managementskills, have reduced costs by 15 percent whileachieving full compliance with environmentaland safety regulations. Following installation of aprocess control system, the facility has incurredno major fines or penalties in 22 years of privateoperation.

Oklahoma City Complies with RegulationsWhile Keeping Rates Reasonable. Oklahoma Cityhad received several federal administrative ordersin the three years prior to entering into a public-private partnership in 1988. The private partnerintroduced operating efficiencies that haveimproved effluent quality and increased wet-weather peak flow capacity. There have been nocompliance issues or fines since the partnership

was formed. And the community has saved $150 million since thepartnership was initiated.

Mount Vernon, Illinois’, Design-Build-Operate (DBO) ContractPays Dividends. Economic growth was stymied in Mount Vernonwhen the city entered into a 20-year DBO partnership with aprivate contractor in the mid-1980s. The EPA had imposed a ban


PA G E 3 8

“We needed to change theculture of our water andwastewater operations and theway we were doing business.[Our private partner] has turnedeverything around. Ourrelationship with [our partner]has been outstanding. [Theyhave] helped us regain thecommunity’s respect for whatwe are doing and also helped ussignificantly gain the respect ofregulatory agencies at the stateand federal level.”

Michael McFadden, Easton’s BusinessManager, Easton, Pennsylvania, 2001


on new sewer connections because the wastewater treatment plantwas out of compliance. The DBO partner completed an upgradeand expansion of the wastewater facility ahead of schedule. Sewerrestrictions were lifted after completion of the first phase of con-struction. Effluent quality is now better than required by permit,and the city has attracted $300 million in private investment.

Public-Private Partnerships Win Awards for Environmental Stewardship

Publicly owned and privately operated facilities have won multipleawards for exemplary environmental performance. For example:

• The Corning, California, facility operated by a public-privatepartnership has been named Plant of the Year many times by theNorthern Sacramento Valley Section of the California WaterEnvironment Association (CWEA).

• The public-private partnership in Milwaukeereceived the High Performance Award from theAssociation of Metropolitan Sewerage Agencies(AMSA) for perfect compliance with environ-mental permits at two treatment facilities from1998 through 2002 – the first time in their histo-ry that both plants won this award for five con-secutive years.

• The public-private partnership in Athens,Tennessee, received the Pollution AbatementAward of the Kentucky-Tennessee WaterPollution Control Association.

• The public-private partnership in Woonsocket,Rhode Island, received the Maguire Award forOutstanding Achievement in Water PollutionControl from the Narragansett Water &Pollution Control Association.


PA G E 3 9

“Although I don’t believe[contracting out] is always theanswer for improving cityservices, our longstandingpartnership with [a private firm]has proven to be an unqualifiedsuccess. By building state-of-the-art treatment plants withmunicipal revenue bonds and[contracting out] the operations,we were able to comply with themost stringent regulations andstill keep our rates veryreasonable.”

James Couch, City Manager, in Oklahoma City upon receiving the2001 NCPPP Award

CHAPTER 4

One Water Partnership Council member has received over 250awards for operations, laboratory, and safety excellence in the lastthree years. Protection of the environment is a major concern in theU.S. Private operators of publicly owned facilities have proven thatthey have the will and the skill to meet the challenge.

Private Partners Care About the CommunitiesThey Serve

In addition to promoting environmental quality,private operators and their employees live andwork in the communities they serve, and theycontribute to the well-being of their communi-ties in a variety of ways that far exceed contractterms.

• In Corning, California, the private partner pro-vided the labor for a city revitalization project,constructing dozens of brick planters andbenches to enhance the appearance of thedowntown area.

• In Indianapolis, the private partner purchases20 percent of its goods and services from localwomen- and minority-owned businesses. Theprivate partner also employed 30 local highschool students as interns, and received theMartin Luther King Jr. 25th Annual HumanRights Award in 1998 for the city’s most out-standing school/business partnership.

• In Hoboken, New Jersey, the private partnercollaborated with secondary school teachers todevelop a wastewater treatment curriculumcombining classroom teaching with studenttours of the facilities.


PA G E 4 0

“[The public partner] has beeninvolved in various communityoutreach programs over time.They have sponsored teams.They have always been willingto participate, whether it is aplanting-the-trees program or anadopt-a-highway initiative.There are programs in the areathat could not survive withoutthe participation of privatecorporations. When [the privatepartner] first came on boardthere were a lot of statementslike, ‘Why do we want to hire afirm from [a different State]?’Now for all intents and purposesthey are a local company.”

Fred Pocci, Executive Director, NorthHudson Sewer Authority, New Jersey,2003


• In the Kingswood area of Houston, the private partner for waterand wastewater systems has awarded over $2.2 million in contractwork to local minority- and women-owned businesses.

• In Bessemer, Alabama, the private partner has donated over$20,000 in equipment and computers to the two local elementaryschools.

• In Williamson, West Virginia, the private partner sponsors LittleLeague softball, baseball, and basketball teams; donates to theKiwanis Golf Tournament to raise money for college scholar-ships; and participates in a community barbeque to raise fundsfor the local Railroad Museum.

As these examples attest, public-private partnerships are more thana business proposition for saving money; they are also aboutadvancing the values of protecting the environment and buildingstronger communities.


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C H A P T E R 5

G E T T I N G S TA R T E D

Nearly 2,000 municipalities and water districts are enjoying the benefits ofpublic-private partnerships described in the preceding chapters. Could apublic-private partnership benefit your community as well? The followingchecklist will help you decide.

CHAPTER 5


PA G E 4 4

Question Yes No

Are your rates higher than those in neighboring communities?

Is your community considering rate increases?

Do you want to control the future costs of providing waterand wastewater services?

Have you recently been cited for non-compliance with anyenvironmental regulations?

Do you foresee having problems meeting new regulatory stan-dards?

Have water customers complained about taste, odor, orappearance?

Do you have high employee turnover?

Is your safety performance lower than the industry average?

Is your treatment plant or collection and distribution system inneed of capital improvements?

Does your utility receive subsidies from general revenues?

Could limited system capacity stall growth?

Is your billing collection rate worse than the industry average?

Could updated automation and control systems improve youroperations?

Are you unable to get budget authorization for needed opera-tional improvements?

Are you concerned that your staff may not be able to make thenecessary improvements to your system?

Should Your Community Consider a Public-Private Partnership?

G E T T I N G S T A R T E D

Even one yes answer warrants consideration of apublic-private partnership. This chapter will helpyou get started.

Starting Out Right

Starting out right goes a long way toward ensur-ing that the anticipated benefits of a public-pri-vate partnership will be achieved. The right startentails developing answers to key questions:

• What are the water and wastewater serviceneeds of the community?

• What changes must be made to meet them?• What are the options for bringing about the

necessary changes?• Who will champion the change effort and gen-

erate consensus for a partnership among stake-holders and decision makers?

• What steps will be taken to garner stakeholder support?

Addressing such questions is important, but how they are addresseddepends on the community. Many communities address themusing an informal process. Others, particularly larger jurisdictions,use a more formal and systematic approach as outlined below.

Determining Water and Wastewater Service Needs Local officials should first conduct a needs analysis. Officials willproject the community’s future water and wastewater servicesneeds, determine whether they can be met by maintaining thestatus quo, and if not, develop a plan for bridging the gap. Typicalneeds include:

• Providing quality service to users, taking into account projectedincreases or decreases in the residential, commercial, and indus-trial base over a meaningful planning horizon

• Ensuring compliance with current and anticipated future envi-ronmental regulations, taking into account the capability of staff


PA G E 4 5

“You need a good educationprogram; you need to putarticles in the localnewspaper to explain all thepartnership issues. Thebiggest problem is fear of theunknown on the part of thecitizens and some of thecouncil members. They thinkthey lose control, but inactuality they gain control.”

David Carrothers, City Manager,Karnes City, Texas, 2003

CHAPTER 5

to stay on top of changes in regulatory requirements, to keep upwith new technology available to meet them, and to negotiatepermit conditions with regulatory authorities

• Protecting the value of the assets, taking into account the need torepair aging infrastructure, the current value of the assets, and thecosts of maintaining them at a desired level of functionality

• Ensuring stable and predictable user rates.

Meeting the first three needs can be straightfor-ward if cost is no object. The challenge is to meetall of these needs while ensuring affordable serv-ice rates for the consumer.

Defining the Changes that Must Be MadeFor many communities, system operating costsmust be reduced if the community is to ensurestable and predictable rates, while at the sametime maintaining quality service, staying in com-pliance with environmental regulations, andmaking the necessary investments to protect thevalue of the assets. Needs assessments for waterand wastewater systems typically project over atime frame of 5 to 20 years all costs attributableto operating and maintaining the system, includ-ing labor (both salaries and fringe benefits), ener-gy, chemicals, equipment, depreciation, and costsof borrowing to meet projected capital needs.Because most public officials want their systemsto be self-sufficient and not draw on subsidies

from the general fund, officials can use the needs analysis to deter-mine the user rates necessary to support the projected costs. A real-istic assessment of needs usually means either raising rates or oper-ating more efficiently or both. Therefore, defining how best tomeet needs includes a determination of the optimum mix of costreduction measures and rate increases.

Evaluating Options Where municipalities and water districts have a record of unsatisfac-tory operation of water or wastewater systems, or where current


PA G E 4 6

“We are not wastewatertreatment experts; it is not ourcompetency. The employees atthe wastewater treatment plantknow how to run the plant, butthey are not people who knowhow to change the operation tomake it more efficient. They donot understand newtechnologies and do not knowhow to come to the Board andsay, ‘If we change this, we willsee a five or ten year benefit incost reductions.’”



rates are not sufficient to meet future needs, thenlocal officials face two choices other than raisingrates. They may either partner with an experiencedprivate entity or undertake an initiative to intro-duce a more businesslike approach to public oper-ations. The latter is a daunting task.

“Managed Competition” Does Not Help toEvaluate Options Some communities have used “managed competi-tion” to “jump start” the change process. Undermanaged competition, public employees are giventhe opportunity to compete against private-sectorproposers in a bidding scenario.

Managed competition can be wasteful of both timeand money for the public employees, the privatesector proposers, and the proposal review team. Iflocal officials come to a consensus on the benefitsof a public-private partnership, then the commu-nity should request proposals from qualified pri-vate firms. If local officials are convinced that con-tinued public operation can and will becomeequally or more efficient than private operation inan acceptable time frame, then the public employ-ees should be asked to develop an implementationplan. The choice is not easy. The community mustdecide between the proven benefits of a public-private partnership and the unproven possibilitiesof a public sector reinvention initiative. Managedcompetition delays the decision but does not makeit any easier to make.

In a managed competition, all proposers respondto the same RFP. However, the proposal prepara-tion process is so different for the public operators and the privatefirms that the proposals are not comparable. Since the public opera-tors are inexperienced in preparing proposals and in reducing oper-ating costs, they usually rely on consultants to develop their pro-


PA G E 4 7

“North American water andwastewater servicesorganizations should comparethemselves to the mostefficient, world-classorganizations that can beidentified. Within the water andwastewater services industry,there are a few, very large,multinational private sectorcompanies that providecontract operation andmaintenance (O&M) andsupport services to the waterand wastewater industryworld-wide. Through years ofoperating in a competitiveprivate sector environment, notconstrained by many public-sector rules and procedures,these firms have developedand refined business practicesthat usually result in the lowestcost of service delivery.”

Association of Metropolitan SewerageAgencies (AMSA) and Association ofMetropolitan Water Agencies (AMWA),Thinking, Getting, & StayingCompetitive: A Public SectorHandbook, 1998, Page 35

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posal. The consultants typically propose costreduction initiatives similar to those used in pub-lic-private partnerships, but the initiatives maynot be based on experience, and the consultantswill have no responsibility for implementingthem. In contrast, the private proposers haveexperience to prove that they can reduce operat-ing costs, and the same people who will haveresponsibility for managing facility operationsalso prepare the proposal. Moreover, privateoperators can guarantee performance throughfinancial instruments and contract mechanismsdesigned to ensure accountability; public opera-tors cannot.

An Effective Change Process Requires a ChampionAssessment of current and future water and wastewater needsalmost always points to the need for change. Whether change is tobe brought about through a public-private partnership or an inter-nal competitiveness initiative, a champion is necessary to guide theprocess from conception through implementation.

A report published by the General Accounting Office (GAO) onlessons learned by state and local governments that have enteredinto public-private partnerships explains, “[A public-private part-nership] can be best introduced and sustained when there is a com-mitted political leader to champion it.”11 Similarly, the AmericanWater Works Association in discussing internal initiatives states, “Ifthe utility needs to change, it must be led by a champion at a highlevel who has the full support of the governing body. The far-seeingmanager will encourage staff participation at all levels to developand implement a plan. The public must also be involved in thismovement for change in order to win their approval and support.”12

The champion might be the mayor, a member of the city council,or an elected or appointed individual who has the respect of gov-ernment decision makers and the community. The most effectivechampions are well versed in the issues that mandate change andare capable of presenting an argument for change clearly and per-


PA G E 4 8

“The public has to beincluded from day one. Thegeneral public, particularlythe 20 percent that is againsteverything, can have troublegrasping the savings if it’snot explained carefully.”

Peter Alviti, Public Works Director,Cranston, Rhode Island, AmericanCity and County Magazine, May 1998


suasively to both stakeholders and decision makers. If the decisionis made to form a public-private partnership, an effective championwill need to be enthusiastic about its potential benefits but remainsensitive to stakeholders’ concerns.

Stakeholder InvolvementTime and money are often saved by involving keystakeholders from the start and throughout thechange process. Stakeholders include representa-tives of municipal government, user groups (resi-dential, commercial, and industrial), unions, non-unionized employees, and citizen activist groups.One approach to stakeholder involvement is toform a stakeholders committee. A few communi-ties have used such committees to good effect,although smaller communities will typically take aless formal approach.

In successful situations, the stakeholders commit-tee will advise on the change process, air concerns,and make recommendations for addressing them.A skilled facilitator is important to keep the com-mittee focused on its assigned tasks and to guide ittoward consensus. All meetings of the committeeshould be open to the public. The stakeholderscommittee should review the needs analysis, veri-fy the objectives, and evaluate the pros and consof a public-private partnership versus an internalstrategic change initiative. A credible expert, withno stake in the outcome of the process, can behelpful in explaining the alternatives to the com-mittee in detail. The committee may also find ituseful to invite potential private partners to dis-cuss their experience in other jurisdictions andtheir thoughts on how the community might goabout developing a partnership.

Ideally, the committee can come to a consensus. If that is not possible, all committee members


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“A relatively long-termcontract, such as our 10-yearagreement, puts a significantamount of responsibility andpressure on a contractoperator to maintain the facilityat a peak level. Since [ourprivate partner] has a 10-yearcommitment to operate theplant, they have introduced anumber of routine andpreventative maintenanceprograms that reflect theirdesire to ensure that the plantand equipment will operate atmaximum efficiency for thatentire period. Since the Citystill owns the plant andequipment, we are ultimatelythe direct beneficiaries of thesavings realized from thosemaintenance programs.”

A. J. Damiano, Director, Administration& Finance, City of Cortland, New York,2000

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should at least feel that their concerns have been heard and takeninto account in the final decision. Depending on the charter of thecommittee, its recommendations may be advisory only or may formthe basis of the actions of the community.

Selecting the Best Contractual Arrangement

If the elected officials of a community decide that a public-privatepartnership is in the community’s best interests, then the champi-on, with the help of the stakeholders committee, must consider thetype and scope of the contractual arrangement most suitable formeeting the community’s needs.

Many types of contractual arrangements are possible, althoughsome may be prohibited or restricted by state law. The contractscope may be limited to the water or wastewater treatment facilityor may cover a more comprehensive suite of services such as meterreading, billing and collection, maintenance and repair of the distri-bution system, and biosolids processing and disposal. A more com-prehensive scope can result in lower costs through better laborresource utilization.

The table below introduces five optional contractual arrangements:


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Option Primary Average Term Application (years)

Contract O&M

Design-build-operate(DBO) or O&M with design/build

Design-build-finance-operate

Concession/lease

Build-operate-transfer(BOT)

New or existing systems

New or existing systems

New systems

Existing systems

New systems

1-5

15-25

20

10-20

25


The two most common arrangements are contract operation andmaintenance (O&M) and design-build-operate (DBO). O&M withdesign-build for capital improvements is becoming increasinglypopular.

Contract O&M The public entity contracts the day-to-day management, operation,and maintenance responsibility to a private partner—in whole orpart—for its water or wastewater utility. Contract terms typicallyrange from one to five years. Since the change inthe tax law in 1997, longer term contracts, up to20 years, have become more common. Close to athousand local governments use this type ofarrangement for wastewater treatment.13

The private partner may invest its own capital ifit can improve the efficiency of operations overthe life of the contract. The longer the contractterm, the greater the opportunity for the privatepartner to recoup its investment through costsavings.

Design-Build-Operate or O&M with Design-Build The public agency contracts with a single firm ora consortium of firms for the design, construc-tion, and long-term operation of facilities. Thepublic partner provides a set of performancespecifications, and the private partner has considerable latitude inmeeting them. DBO typically applies to development of new facili-ties, whereas contract O&M with design-build for capital improve-ments is a popular option for upgrading existing facilities. Contractterms average 15 to 25 years.

DBO arrangements yield the greatest cost savings. By providingsingle-point responsibility, such arrangements ensure that thedesign takes construction feasibility and operational efficiency ofthe system into account. Such arrangements minimize finger point-


PA G E 5 1

“In our view, because of ourunusually high debt load andconsidering a company comingin to control the debt load andmake the plant more efficient,the longer contract entices theapplicant to give a good bid.They have a longer time to beable to amortize out theirinvestment.”

Todd Rouse, Mayor, Canastota,New York, 2003

CHAPTER 5

ing between the designer, the builder, and theoperator if the system does not functionaccording to specifications. The private partnerhas powerful incentives to optimize life-cyclecosts by striking the right balance between capi-tal and O&M costs.

The savings resulting from the DBO model canbe substantial. Because the private partnerknows that it will be able to apply its operatingexpertise, it can size the facility and select tech-nologies that it might be reluctant to employ ifthe plant were to be operated by a publicagency. Under a conventional arrangement,where a public agency contracts separately fordesign, concern over potential liability oftendictates that engineers design facilities that willperform regardless of the quality of operation.Historically, this has led to over-sized and over-designed facilities, resulting in both higher cap-ital and operating costs.

Several states do not allow DBO procurements.Restrictive statutes force communities to relyon the traditional design-bid-build process thatrequires separate procurements for design, con-struction, and operation. These restrictions,however, are gradually being lifted.

Massachusetts law, for example, restricted the city of Taunton fromusing a DBO contract for making the necessary capital improve-ments to its wastewater treatment plant. Convinced of the manyadvantages of DBO, Taunton lobbied successfully for special statelegislation that allowed the city to proceed.

The remaining contract options involve financing by the privatepartner.


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“Using a DBO method is thebest way you can capture totallife cycle costs. Our principalconcern was when we do aclassic design-bid-buildscenario in the public arena, weare forced into a low bid type ofanalysis that frequently gives usa capital product that is lessthan what we want for long-term operations costs. We usethe DBO method to try toimprove the capital portion ofthe product we are acquiring.We know from our experiencewith DBOs that the teams will …invest more capital upfront tolower long-term operating costs.As they do this, it accrues toboth parties’ benefit.”

Jerry Maxwell, General Manager, TampaBay Water, Florida, 2003


Design-Build-Finance-Operate The public entity contracts with a private partner for the finance,design, construction, and long-term operation, maintenance, andmanagement of new facilities. The contract term is typically 20years or more.

Concession/Lease The public entity contracts with a private partner through a conces-sion or lease arrangement. This contract type usually includes apayment by the private firm to the public owner for the right tomanage the facilities. The private partner can be responsible forcapital upgrades, expansion, and a broader range of functions.

Build-Own-Operate-Transfer The public entity contracts with a private partner for the finance,design, construction, and long-term operation of facilities. In thiscase, the private partner owns the facilities and transfers ownershiprights after a given period, typically 25 years.

All options, except the last, have three characteristics in common:

• The public partner retains ownership of the facility• The public partner retains responsibility for setting or approving

rates• The private partner serves at the pleasure of the public partner

within the terms of the contract.


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PA G E 5 5

C H A P T E R 6

C O N D U C T I N G A N E F F E C T I V EP R O C U R E M E N T P R O C E S S

You have defined your current and future operational needs. You haveclarified objectives with the advice of stakeholders. You have decided to enterinto a public-private partnership, and you have selected the type ofcontractual arrangement that best fits your needs. Now you need to attractpotential private partners to participate in a procurement process that willresult in a “good deal” for the community and its stakeholders.

Dos and Don’ts of Effective Procurements

CHAPTER 6


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Do: Don’t:

Clearly define the desired scope ofservices

Plan on awarding a contract at theend of the process

Disclose the rules of the process inadvance

Establish a transparent proposalevaluation process

Develop an RFP that invites inno-vative approaches to meeting per-formance objectives

Involve stakeholders in all aspects ofthe process

Benefit from the advice of commu-nities that have entered into part-nerships

Establish a balanced, fair contractthat shares risks and rewards

Keep it simple

Use the RFP as a fishing expeditionto check prices or capture improve-ment ideas

Expect proposers to spend time andmoney to participate in a procure-ment that may not result in theaward of a project

Define the rules after the process isunderway or modify the rules dur-ing the process

Keep proposers in the dark on howtheir proposals will be evaluated

Specify how objectives are to bemet

Allow stakeholder concerns to fester

Allow private consultants andlawyers to delay the process undulyand increase costs unnecessarily

Shift all risks and liabilities to theprivate sector

Introduce unnecessary complexitythat can stifle competition, increasecosts, or delay the process

C O N D U C T I N G A N E F F E C T I V E P R O C U R E M E N T P R O C E S S

The ABCs of Procurement

Each successful public-private partnership beginswith a well-planned procurement process. Toooften, procurement processes that are not wellconceived result in unnecessary expenditures oftime and resources for both the public entity andpotential private partners.

After taking the actions discussed in Chapter 5,the next steps are to:

• Decide on the procurement approach• Evaluate the proposals• Award the contract.

Decide on the Procurement Approach

Communities can approach a procurement inseveral different ways. The simplest approach, if allowable by appli-cable state law, is a sole source or qualifications-based procurement.The most common approach is a two-step request for qualifica-tions/request for proposal (RFQ/RFP) procurement. Alternatively, arequest for proposal (RFP) may be issued directly without firstrequiring submission of a statement of qualifications from prospec-tive proposers. Many variations on these basic approaches are possi-ble depending on the specific needs of the community.

Qualifications-Based ProcurementsIf not prohibited by law, some communities negotiate a sole sourceprocurement rather than conducting a formal RFP process. Forexample, public decision makers might discuss their needs withpotential private partners in a series of meetings and work out con-tractual details with the one deemed to be most qualified. Thepractice is more common for one-to-five year O&M contracts inmunicipalities serving populations fewer than 20,000 than it is inlarger cities with more complex needs.


PA G E 5 7

“A successful procurementwill attract competitiveproposals from qualifiedparties, obtain attractiveterms that meet procurementobjectives and result in anequitable contract that fairlyserves both parties.”

James J. Binder, President,Alternative Resources, Inc., NewEngland Environmental Expo, WorldTrade Center, Boston,Massachusetts, April 29-May 1, 1997

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Many states allow sole source procurements forprofessional services and have ruled that con-tract operation and maintenance of water orwastewater systems is a professional service.The decision is usually made by local electedofficials with the advice of internal legal coun-sel.

Two-Step RFQ/RFP ProcurementsMany communities use a two-step RFQ/RFPprocess. Using an RFQ first has three potentialbenefits:

• It indicates the level of interest in bidding on the project• It is far less costly to prospective proposers to prepare an RFQ

than to respond to an RFP• It allows the pubic entity to pre-select only the two-to-five most

qualified firms to receive the RFP.

The process has greatest value if the submitted statements of quali-fication (SOQs) differentiate the private firms sufficiently to limitthe number invited to submit proposals.

RFP ProcurementsWhether the RFP is issued after evaluation of qualifications state-ments in a two-step process, or issued directly, it should be writtenin a way that:

• Attracts competitive bids• Minimizes questions after the RFP has been published• Creates a level playing field for evaluation of bids• Minimizes the number of issues that need to be negotiated before

awarding the contract.

Get it Right the First TimeThe most efficient and effective RFP process starts with issuance ofa draft RFP and invites prospective proposers to recommend addi-tions, deletions, and points of clarification. If a stakeholder advisory


PA G E 5 8

“You need to make yourspecifications clear enough sothat when you open your bids,you are getting comparablecosts.”

Larry Shelton, City Manager,Chickasha, Oklahoma, 2003


committee is involved (see Chapter 5), thecommittee may also want to participate inthe development of the draft and meet withsome prospective proposers to discuss ideasfor how the RFP should be constructed.Communities can also gain considerableinsight on how to prepare an RFP byobtaining copies of RFPs prepared by othercommunities that have successful partner-ships.

Involving prospective proposers beforeissuing the final RFP enables communitiesto take advantage of their extensive experi-ence with public-private partnerships. Theybring a perspective to the RFP process thatprivate consultants and lawyers, who havenever operated treatment plants, do notpossess. Prospective private partners areunlikely to take unfair advantage of theopportunity for input. If they try, the stake-holder committee and the public decision-makers should have no difficulty in identi-fying self-serving suggestions.

Extensive use of private consultants andlawyers is usually not necessary in order toget the RFP right the first time. Privateconsultants and lawyers bill by the hourand have been known to add complexity tothe procurement process, to delay it undu-ly, and to increase the costs unnecessarily.Many communities have formed highlysuccessful public-private partnerships rely-ing entirely on in-house technical, manage-rial, accounting, and legal expertise.Existing RFPs and contracts from commu-nities that have established public-private


PA G E 5 9

“We go into every DBO project byhaving a draft of the actual waterpurchase agreement in the RFP.When we put the RFP on thestreet, the contract is in thepackage. If you have not writtenthe actual terms and conditions ofthe partnership and put it into theRFP, you will be opening Pandora’sBox when you open thesolicitations. Bidders have tounderstand how you are going tointerpret their proposal andmeasure compliance with the RFP.We tell bidders that this is ourexpectation, and if you takeexception to any of these terms orconditions, you need to notify usabout these exceptions. This wayyou will eliminate a lot ofarguments. They need to tell meabout any of their concerns even ifit is a definition of a word. We arenot intimidated by a list ofexceptions. We find that two-thirds are to make sure that eachof us has the same definition orunderstanding as to what a wordor phrase means.”

Jerry Maxwell, General Manager, TampaBay Water, Florida, 2003

CHAPTER 6

partnerships for water or wastewater provide auseful point of departure. Each community isin the best position to decide for itself whetherit needs the advice of a private consultant orlawyer, and if so, what specific types of adviceit requires. Contracts with private advisors aremost cost-effective if the objectives, scope ofwork, schedule of deliverables, and fees arewell-defined in advance, and if the public enti-ty actively manages the contract.

Proposers must be given sufficient time todevelop fully responsive proposals. Dependingon the scope, proposers generally require six-to-eight weeks to conduct due diligence, visitthe operations, develop an approach, and pre-pare a written proposal. For smaller communi-ties, a shorter time may be adequate. For larger

communities, or situations where stakeholder complexities or proj-ect needs require longer time frames, complete procurement cyclesmay range from 6 to 12 months or more.

Contents of the RFPThe RFP usually includes:

• Background and objectives• Description of the services desired• Evaluation criteria and their relative importance• Insurance and bonding requirements• Financing responsibilities• Responsibilities for obtaining and complying with permits• Contract duration• Equitable and balanced draft service agreement indicating manda-

tory and negotiable terms and conditions• Instructions for submitting a bid.


PA G E 6 0

“You need to have a strongbackground agreement, butyou cannot have every singlething that you could possiblyencounter during the life ofthe contract in the agreement.You need to have flexibility inthe contract to address theissues that were unforeseenby the two parties.”

Herb Mays, Executive Director, Exton,Pennsylvania, 2003


Performance specifications are generally more effective than processspecifications. In other words, the RFP should specify what isexpected of the partnership, but not how the private partner is tomeet those expectations. If the public-private partnership is intend-ed to reduce operating costs and ensure compliance, the proposersshould be given the flexibility to propose how they will meet theobjectives. An RFP that specifies required plant improvements indetail could prevent the community from real-izing the full benefit of the proposer’s experi-ence and expertise. The best solution may beconsiderably different and less expensive toimplement than that specified by the publicentity.

Bonding and insurance requirements should bebased on a realistic analysis of what could gowrong and what damages the community mightreasonably incur as a result. The requirementsshould provide the community with adequateprotection, but public officials need to realizethat the costs of excessive or unreasonablebonding and insurance requirements will sig-nificantly increase the contract price and mayeliminate competition from small firms entirely.

Evaluate Proposals

The selection criteria must be transparent and specified in the RFP.Both proposers and other stakeholders need to know how each sec-tion of the proposal will be weighted and graded and what consti-tutes an “acceptable range.”

Technical and cost proposals are generally submitted simultaneous-ly, but some communities require that they be submitted in sepa-rate packages. Technical proposals generally include:

• The proposer’s understanding of the objectives of the project• The proposer’s approach to meeting those objectives• Background and credentials of key staff


PA G E 6 1

“We have learned that the lastdollar squeezed from acontractor’s price or liabilityassumption can be the worstbuy a municipality makes.”

Brian F. Wolf, InfrastructureManagement Group, Inc., consultant tomunicipalities, Public Works Financing,January 2001

CHAPTER 6

• Description of the proposer’s qualifications, including experi-ence with similar projects.

Cost proposals generally provide the proposer’s price and accom-panying documentation. Since the term of O&M or DBO con-tracts is usually longer than one year, proposers incur significantrisk in forecasting prices. Therefore, allowance is usually madefor cost escalation based on an economic index such as the con-sumer price index (CPI) or the producer price index (PPI).

Some communities have the technical and cost proposals evaluat-ed by different teams because the skills and background requiredto evaluate each component properly are different. The two teamsthen convene as a group to determine which bids fall within theacceptable range. In most instances, there will not be a clear win-ner. Finalists are invited to make oral presentations. All partiesinvolved in the decision should be present at these interviews,including the mayor, the city council, and the public entity’s engi-neering staff, legal department, and local technical advisor.

For both legal and ethical reasons, the proposal should be evaluat-ed in accordance with the criteria stated in the RFP. The ratings ofthe proposals and the reasons for the ratings should be well docu-mented to allow for a meaningful discussion with the proposerswho were not selected.

Award the Contract

The contract should be awarded on the basis of best value to thecommunity, generally measured in terms of net present value orlife-cycle cost, balanced with the benefits and values offered byqualifications, experience, and technical/innovative approaches.

The practice of negotiating with more than one proposer simulta-neously can be wasteful of time and resources for both parties. Inthe heat of competition, the finalists may lower their bids, but inthe end the community may not benefit. Responsible proposers


PA G E 6 2


will submit initial bids that reflect their best estimate of the coststhey will incur to provide quality service. A community should bewary that going below that level could invite lower quality serviceand poor partnership relations.


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C H A P T E R 7

A D D R E S S I N G K E Y C O N T R A C T U A L I S S U E S

The contract governs the relationship between the public and privatepartners. A well-crafted contract protects the interests of both partners andprovides guidance to the private partner on expected standards ofperformance. A sound contract is the foundation of a successful partnership,and open discussion among all concerned parties is the best way to negotiatesuch a contract.

Basic Contract Provisions

This chapter describes provisions that areoften included in partnership contracts forwater and wastewater systems. However, sinceevery community is different, specific contractterms and conditions must address issues thatare unique to the individual situation. Asnoted in Chapter 6, some public entitiesdevelop a draft contract prior to issuing anRFP and include that draft in the RFP.

Contracts for public-private partnerships aretypically 25 to 50 pages in length. Highlycomplex contracts for large communitiessometimes run several hundred pages.Elements that the contract may addressinclude:

• Contract term• Statement of work• Performance criteria• Employee issues• Method and timing of payment to the private partner• Changing situations including changes in the regulatory

environment• Risk allocation• Contract termination • Insurance and bonding requirements• Contract management and oversight.

Contract Term

The typical term for an operations and maintenance (O&M) con-tract is five years, but contracts for 20 years or more have becomeincreasingly popular since a January 1997 change in the federal taxlaw facilitated longer-term contracts. Most DBO contracts have aterm of at least 20 years. Many variations are possible; one alterna-

CHAPTER 7


PA G E 6 6

“Both sides have to be fairand understanding.Everybody comes to the tablewith what they want to gain.We wanted a good endproduct, and they wanted tomake a buck. If you come inwith an open mind, you canachieve a win-win situation.”

Larry Shelton, City Manager,Chickasha, Oklahoma, 2003


tive is to have an initial contract of four or fiveyears with options for multiple extensions.

A public entity is well advised to consider thelongest-term contract allowable by law. A longerterm not only demonstrates commitment on thepart of both partners, it also reduces the annualcosts to the community by allowing the privatepartner to amortize over a longer period any cap-ital investment it may make to improve the sys-tem. The community also avoids the consider-able expense of frequent procurements.

The community need not fear a long-term con-tract. The private partner has every incentive tomeet the performance objectives of the contract,and the public partner always reserves the rightto terminate the contract for unsatisfactory performance.

Statement of Work

A well-defined statement of work provides the basis for realisticexpectations between the parties. Important considerations include:

• Will the private partner be responsible solely for operating andmaintaining the water or wastewater facility, or will the privatepartner have additional responsibilities?

• What functions are encompassed by “operations,” “maintenance,”and “repair?”

• Who is responsible for environmental compliance, industrialpretreatment programs, permits, and license fees?

• What responsibility does the private partner have for supportinginfrastructure, such as the water or wastewater delivery systemand biosolids treatment and disposal?

• What responsibility does the private partner have for functionsrelated to O&M, such as metering, billing, collections, andcustomer service?


PA G E 6 7

“Anybody who is thinkingabout a partnership needsto make sure that you havea good contract and takethe time to go through allof the ‘what-if’ scenariosand build them into thecontract.”

Kevin Shaffer, Executive Director,Milwaukee, Wisconsin, 2003

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• Who is responsible for equipment replacementcosts?

• Which partner will be responsible for capitalimprovements?

• What are the design parameters and systemcapabilities required for new construction ormajor upgrades of the existing facility?

In some instances, specifying what is notincluded in the statement of work may provideadditional clarity and prevent misunderstandingsduring the contract term.

Performance Criteria

What gets measured gets managed. Conversely,what is not measured tends to be forgotten.Therefore, the contract should state the criteriafor satisfactory performance explicitly and, ifpossible, quantitatively.

The criteria should be tied to the statement of work and will gener-ally include measures for:

• Quality of goods and services provided• Safety• Customer satisfaction• Community relations• Compliance with applicable laws and regulations• Cost control• Adherence to schedule.

The contract might include incentive or award fees for performancethat exceeds expectations, if that can clearly be defined, and penal-ties for performance that falls below the established criteria. Anypenalty clause should be carefully considered and clearly document-ed because it may require the private partner to build in a contin-gency fee to cover events with a very low likelihood of occurrence.


PA G E 6 8

“We wanted the contract longenough so that we had theopportunity to make changesto get things stabilized. Thecouncil did not want thecontract too long in case theydidn’t like the process. Weended up with a ten-yearcontract for water andwastewater O&M. Last yearwe extended the contractwhen we added thedistribution system.”



To ensure mutual understanding and to minimizesubsequent disputes, the contract should providedefinitions of all legal and technical terms. Termsthat can lead to confusion if not defined explicitlyinclude: “unsatisfactory performance,” “uncontrol-lable circumstances,” “force majeure,” “conse-quential damages,” “equivalent compensation,"and “indemnification.”

Employee Retention

The contract must protect the interests of existingemployees without hampering the ability of theprivate partner to operate the facility efficientlyand effectively. Most contracts limit staff reduc-tions to attrition or cause. Private partners are usu-ally willing to accept such limits because theyvalue staff who know the facility well. In addition,contracts typically provide some protection regard-ing compensation, including salary and benefits.Providing for equivalent rather than identicalcompensation allows the private partner to rewardgood performance.

Method and Timing of Payment to the Private Partner

Most public-private partnerships for water orwastewater are fixed price with an annual increasebased on one or more economic indices andadjustments for unforeseen changes in load orflow. The private partner receives periodic servicepayments (monthly or quarterly) over the term ofthe contract. Payments for the design-build phase of a DBO con-tract are usually geared to milestones. In developing an approach topaying the private partner, local officials should be mindful of start-up costs, the purchasing of materials and supplies, and repair costsincurred by the private partner.


PA G E 6 9

“The negotiations were veryeasy. It all boils down to howmuch of a relationship youmake with the people you aredealing with. A lot of trust wasdeveloped because thecontractor came in a sincereway. You need to feel a greatlevel of trust with the peopleyou are negotiating with. If youhave any concerns about howgenuine are the people you arenegotiating with, you should talkto some other company. Theypresented a draft contract to usand our city attorney workedwith the contractor to makeadjustments. It was a commonsense type document and wasnot one of these legalisticdocuments that are 800 pageslong. It had common basiclanguage: This is what we willdo and this is what you will do.”


CHAPTER 7

Start-up Costs Costs to the private partner are generally higherimmediately after assuming operational responsi-bility. The start-up costs may include planning,installation of equipment to improve the efficien-cy of operations, implementation of more effi-cient work processes, and training of personnel.A private partner occasionally loses money in thefirst year or two of the contract.

Private Partner as Agent The contract usually specifies that the privatepartner is acting as the agent for the public part-ner in purchasing materials and supplies used atthe facility. Otherwise, the private partner pays

state sales tax on purchases, and the added cost is passed on to thecommunity.

Repair Costs The responsibility for repair costs needs to be defined in the con-tract. Many contracts require the private partner to pay for repairsor equipment replacement costing less than a specific amount, suchas $2,500 per occurrence. Since the vast majority of equipmentcomponents may fall into this category, the private partner has astrong incentive to maintain equipment properly and to performpreventive maintenance. Equipment replacement costing more than the specified amount is usually the responsibility of the publicpartner.

Changing Situations

Changes may occur over the term of the contract that are outsidethe control of either partner but that have an impact on the contractprovisions. Examples include changes in law, regulatory require-ments, and demand for services. Since the specific changes cannotreasonably be anticipated or controlled, the contract generallyshould include a procedure for resolving such situations.


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“Documentation is the key to asuccessful partnershipcontract. If anything occurs toyou during contractnegotiations, which is not inthe draft contract, you need todocument this item andprovide copies to all parties.”



Risk Allocation

Under public ownership and operation, the public bears 100 per-cent of the risks associated with operations. Under public owner-ship and private operation, many of these risks are transferred to theprivate partner. How risks are shared is typically based on the prin-ciple that risk should be borne by the partner better able to manageor prevent that risk from occurring or in a position to recoup thecosts associated with that risk.

The first line of defense for balancing risks between the partners is arelationship of trust. Contract terms and conditions based on a real-istic assessment of risks provide added protection for both parties,


PA G E 7 1

Risks Responsibility

Private Public SharedPartner Partner

“As Is” Condition of the Plant

Non-performance

Deterioration of asset value

Costs in excess of budget

Non-compliance with environ-mental regulations

Quality and quantity of influent

Owner-mandated change orders

Uncontrollables

System repairs and replacements

Indemnification

X

X

X

X

X

X

X

X

X

X

Risks and Responsibilities in a Typical Partnership for O&M Services

CHAPTER 7

but risks by definition cannot always be anticipat-ed. Highly complex contracts based on an unreal-istic assessment and apportionment of risksinevitably lead to unnecessary added costs andthe creation of unrealistic expectations.Agreements built on trust are critical to resolvingunforeseen issues that arise during the contractterm. O&M contracts typically address the risksand responsibilities shown in the table on page 71.

Risks Assumed by the Private Partner

“As-Is” Condition of the PlantThe private partner assumes the risk that thedesign and existing (as-is) condition of the treat-ment plant are adequate for purposes of meeting

contract obligations. However, any risks resulting from latentdefects caused by prior operational practices customarily remainwith the public partner.

Non-PerformanceThe private partner assumes the risk of operating the facility inaccordance with performance criteria for service quality, safety,employee and community satisfaction, and community relations.The private partner also assumes the risk of operating and maintain-ing the facility within its design capacity and capability.

In a DBO contract, the private partner assumes the risk for com-pleting the project on time, on budget, and in accordance with con-tract specifications. Failure to complete the project on time maytrigger liquidated damages since actual damages might be difficult toestimate. Failure to complete the project on budget and the resultantloss of profits would be the sole responsibility of the private partner.Exceptions generally would be made if late delivery or exceedance ofbudget were due to unforeseeable events beyond the private part-ner’s control.


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“The municipality has to bevery clear as to their goals andobjectives, and what the breakpoint is. What is the point thatmakes this a good or bad deal?If you can’t get to the point thatis realistic for both sides itwon’t work. If you beat up onprice, there is no way out; thepartnership will fail.”



Excessive Deterioration of Asset ValueThe contract may require the private partner to perform preventivemaintenance over the contract term and to return the assets in goodoperating condition except for normal wear and tear. Apart fromcontractual obligations, private partners have powerful incentives toinitiate timely capital repairs, even as a contract is coming to an end.Preventive maintenance is invariably in the best interests of the pri-vate partner who is usually responsible for repair or replacement ofequipment costing less than a specified amount. Preventive mainte-nance also reduces the risk of equipment failure. Addressing suchfailures on an emergency basis is more expensive, generates com-munity dissatisfaction, and reduces the chances for contract renewal.

Costs in Excess of BudgetThe private partner guarantees the costs of meeting contractualobligations. Apart from adjustments for inflation, loadings, flow,and other changed conditions as specified in the contract, a privateoperator accepts the risk that its costs may exceed its proposedbudget. A public operator cannot offer the same guarantee.

Non-compliance with Environmental RegulationsThe private partner is clearly responsible for con-ducting operations in compliance with applicablelaws and regulations. The private partner alsoshould pay any fines or penalties imposed for non-compliance, provided that the failure to comply isdue to the private partner’s negligence. The privatepartner typically is not held liable if the fines resultfrom circumstances that are beyond its control, butthe burden of proof rests with the private partner.

Risks Retained by the Public PartnerRisks over which the private partner has no con-trol should be shouldered by the public partner.

Quantity and Quality of InfluentThe quantity and quality of water or wastewaterthat enters the treatment plant has a significantimpact on operating costs and efficiencies.


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“We hold each other harmlessfor our own actions. We havedeveloped a trust relationship.We support their efforts, andthey support ours. We acceptthe responsibility that the plantis ours and are willing to makethe investment to maintain it inproper working condition. Theyhave to make sure they takeour investment and make itwork all the time.”

Fred Pocci, Executive Director, NorthHudson Sewer Authority, Hoboken,New Jersey, 2003

CHAPTER 7

Performance and cost guarantees proposed by prospective privatepartners assume that the raw water input to the water treatmentplant or the sewage that enters the wastewater treatment plant willfall within specified quality and quantity parameters. The contractshould address what will happen if the influent falls outside of thatrange and leads to increased operating costs.

Owner-mandated Change OrdersUnder ideal circumstances, the contract establishing the public-pri-vate partnership would be so well crafted that no change orderswould be needed. Realistically, unforeseen changes in regulatoryrequirements or community concerns might lead the public partnerto seek amendments to the contract. In the spirit of the partnership,such changes and their reasons should be discussed with the privatepartner to determine the cost implications. The private partner mayalso be able to suggest minor operational adjustments and other lessexpensive approaches to accomplishing the change objectives.

Uncontrollable CircumstancesSome risks fall into the category of uncontrollable circumstances, inthe sense that they are not under the control of either partner.Examples are loss of power, floods, storm damage, earthquakes, andunforeseen subsurface conditions that affect the ability of the pri-vate partner to meet the contract terms. Uncontrollable circum-stances typically are covered by a force majeure clause that excusesthe private partner if its failure to perform could not be avoided bythe exercise of reasonable care.

Shared RisksSome risks cannot be assigned wholly to one or the other partner,since both are partially responsible.

System Repairs and ReplacementsAssets deteriorate over time if not properly maintained. Systemrepairs and replacement are a shared responsibility. The public part-ner may want to retain liability for major capital expenditures totake advantage of its lower cost of capital. The private partnerassumes responsibility for the performance and reliability of capital


PA G E 7 4


equipment under its control. The private partner may also bear thecosts of system repairs and replacements that pay for themselvesover the course of the contract. If the partners agree that certaincapital improvements are necessary to prevent future damage, andthe public partner agrees to make them but fails to do so, paymentfor any resulting damages should be the responsibility of the publicpartner.

IndemnificationNeither partner should be expected to indemnify the other for itsown negligence. Indemnification often is proportionately sharedbased on the negligence of each party in a given situation and isoften limited by a monetary cap.

Contract Termination

Contract termination is usually not a desirable outcome for eitherpartner, but it is a contingency that virtually all contracts address.Typically, the public partner wants the option of terminating thecontract under two different sets of circumstances:

• Termination for cause• Termination for convenience.

Termination for Cause Termination for cause occurs when the private partner’s perform-ance is unacceptable as measured by the established performancecriteria. To prevent prolonged dispute, the contract should explicitlystate the circumstances that could lead to termination for cause.Questions to consider include:

• Does unsatisfactory performance on a single criterion for a singleday constitute sufficient cause?

• Should the private partner be given the opportunity to take cor-rective action? If so, how much time should be allowed?

• How will actual damages to the public partner be determined?• How will the issues be resolved if the private partner challenges a

termination decision?


PA G E 7 5

CHAPTER 7

In the event of termination for cause, the public partner needs to becompensated for:

• The costs of correcting the damages resulting from non-perform-ance by the private partner

• The costs of transitioning back to public operation or to anotherprivate partner

• The net present value of the incremental costs of operations by thenew provider.

To ensure adequate compensation, the public partner might require aperformance bond, a letter of credit, a parent company guarantee, orother types of surety. For over 75 percent of existing public-privatepartnerships that require a form of surety, a performance bond is thesole surety. Reasonable upper-bound estimates can be developed fordamages that could result from contract termination. Requiring mul-tiple layers of surety such as combinations of performance/paymentbonds, letters of credit, and corporate guarantees adds unnecessarycosts to the public partner and can eliminate competition from oth-erwise capable and qualified firms.

Requiring proposers to assume unlimited liability greatly in excess ofupper-bound estimates can increase the cost of the contract withoutproviding any additional benefit to the community. Furthermore, noresponsible private partner can agree to unlimited liability because nocompany has unlimited resources. All liability is effectively limitedby a company's net worth. Even insurance firms, whose business isrisk assessment and risk management, do not accept unlimitedliability.

Termination for Convenience When the public partner wishes to end the contract for reasons otherthan poor performance by the private partner or for no expressedreason whatsoever, the termination is considered to be for conven-ience. The public partner indemnifies the private partner in theevent of termination for convenience, just as the private partnerindemnifies the public partner in the event of termination for cause.In both cases the contract should specify the standards that will be applied and the process to be followed to reach a financialsettlement.


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In the event of termination for convenience, the public partner ordi-narily pays the private partner for:

• Demobilization costs• Costs of assistance with transition, if requested by the public partner• Repayment of the private partner’s outstanding debt for capital

improvements and start-up costs paid for by the private partner• Compensation to the private partner for lost revenues and profits.

If the public-private partnership is based on trust,the chances of having to invoke a terminationclause are greatly diminished. Even in the unlike-ly event that termination proves necessary, arelationship of trust can expedite agreement onthe financial terms. Ideally, the partners will beable to settle between themselves. If not, media-tion or arbitration is preferable to litigation.

Insurance and Bonding

Insurance requirements included in the contractshould be based on how risk is to be allocatedbetween the partners. As owner of the facility, thepublic partner typically carries property and casu-alty insurance. The private partner usually posts aperformance bond. Performance bonds are well-established surety mechanisms that are availableat reasonable cost. Communities should be awarethat letters of credit are expensive, and requiringthem as an additional form of surety will unnec-essarily increase service fees.

Contract Management and Oversight

A public partner cannot delegate operations and maintenance to aprivate partner and then walk away. The public partner never surren-ders its responsibility to ensure that residents receive an adequatesupply of clean, fresh water and that wastewater is adequately treatedprior to discharge. Therefore, the contract should specify the report-ing requirements of the private partner and allow for the public part-ner to visit the facility at any time, unannounced.


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“I firmly believe that the mostimportant part was findingsomebody who was sincere,concerned about our problems,and we could work with andtrust. They went out of theirway to help us manage someof our tough financialsituations. If somebody isinterested in a public-privatepartnership, they must realizethat it is all about trust andrelationship building. It is amomentous decision for anycity administration to make.”




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Citizens hold their local government responsible for providing them withsafe drinking water and effective sewage treatment. Local government cannever relinquish that responsibility, but in a public-private partnership,government fulfills its duty in a new way. Rather than managing the day-to-day operations, government ensures that its private partner operates inthe public’s best interests by monitoring and enforcing adherence to theterms of the partnership.

C H A P T E R 8

P R O V I D I N G E F F E C T I V EM A N A G E M E N T A N D O V E R S I G H T

Develop the Plan for Managing the Contract Along With the RFP

The RFP articulates the program objectivesand defines explicit performance standards thatthe successful proposer must meet. During thedevelopment of the RFP, the public partnermust also give serious consideration as to howit will meet its obligation to ensure that thepartnership functions as intended. Questionsthat the public partner must address include:

• What information do we need in order toevaluate whether the private partner is per-forming in accordance with our standards?

• How will we obtain that information?• Who will manage the evaluation process?• What actions will we take if we discover

instances of non-conformance? • How will disputes be resolved?• What resources will be required to monitor

the program effectively?

The answers to those questions may suggestchanges to the RFP, such as clarifying theobjectives or performance standards. Theanswers may also suggest a need to enhancethe contract management skills of the publicemployees who will manage the public-privatepartnership effort.

For large communities, a stakeholder advisorycommittee, discussed in Chapter 5, can pro-vide valuable assistance in the simultaneousdevelopment of the RFP and the plan formanaging and monitoring the private partner’sperformance. All stakeholders, both advocatesand skeptics of public-private partnerships,have a vested interest in ensuring that the pub-

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“The design of the deal canmake an enormous differencein the future success ofmonitoring the contractor.Strategic thinking onmonitoring needs to begin atthe time a deal is structured,not after.”

Tom Olsen, Director, EnterpriseDevelopment, City of Indianapolis,1996

“What you do after you sign thecontract is a very critical area.You don’t want to put the partnerwho is saving you money out ofbusiness, but you don’t wantthem to do anything they please.You need a balanced approachthat protects the governmentinterest, the public, and thecontractor. You can’t just look atit from only a financial basis,trying to squeeze every nickelpossible out of the privatecompany. You can’t monitorwithout a well written contract.”

Anne Spray Kinney, Former ExecutiveDirector, Milwaukee MetropolitanSewerage District, Milwaukee,Wisconsin, 2003

P R O V I D I N G E F F E C T I V E M A N A G E M E N T A N D O V E R S I G H T

lic partner will manage the contract effectively.Even though public-private partnerships are notprivatization, stakeholders must be reassured thatthe public partner will not relinquish control de facto. A good way to provide that reassurance isto involve stakeholders in the design of the post-contract monitoring and management system.

A public-private partnership is indeed a partner-ship. The most important feature of a good part-nership is trust. The contract is an agreementbetween the partners that reinforces trust. Thepublic partner monitors and manages the contract,not in an adversarial manner but in a way thatseeks to maintain that trust.

Appoint a Qualified Contract Manager

In a public-private partnership, the role of respon-sible public officials changes from service providerto contract manager. Experts have observed thatmanaging a contract requires different skills andabilities than providing the service. ManagingO&M or DBO contracts for water and wastewaterfacilities is particularly challenging because thecontracts are long term.

In successful public-private partnerships, the pub-lic partner designates an individual who will havelead responsibility for managing the contract, andwho will be the primary liaison with his or hercounterpart from the private side.

Criteria for selecting the lead person to represent the public entityinclude:

• No vested interest in returning the facility to public operation• Familiarity with facility operations• Detailed understanding of the contract terms and conditions


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“Communication is the key tomaking it work. You need toconstantly communicate withthe partner’s manager andhave a good relationship withthat person. I am aware thatother communities have hadbad experiences but in myjudgment it boils down tohaving good communication.You can resolve a lot of issuesby just communicating. Thebiggest impediment on the cityside is micro-management.They want to continue to runthe plant after the partnershipis formed. When you have apersonality mismatch with thepartner’s manager you caneasily get a new manager; it isvery hard to replace thedirector of public works whois protected by the civilservice system.”


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• Experience in contract monitoring• Expertise in negotiation• Ability to assess performance objectively• Knowledge of cost estimation techniques• Ability to apply methods of financial analysis• Good communication and human relations

skills • Experience in strategic and tactical planning

and organizational design.

Candidates who meet all of the criteria are rare.Managers from the department who had beenproviding the service may be intimately familiarwith facility operations but may lack the neces-sary skills to work in partnership with a contrac-tor, assess contract performance, and resolve mis-understandings of contract terms. The lead indi-vidual from the office that arranged and awardedthe contract may be intimately familiar with thecontract provisions but may lack familiarity withthe facility operations.

The private partner has the advantage of greaterexperience in contract negotiation and execution.

To ensure a level playing field, the public partner may want to takesteps to enhance the skills and confidence of its managers. Possiblesteps include formal training, executive coaching, and visits withpublic officials in communities that have experience with public-private partnerships.

Employ a Variety of Tools to Monitor the Contract

An effective monitoring program has three basic components:

• Private partner reports• Field inspections• Citizen feedback.


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“I manage the partnership byhaving monthly meetings withthe plant personnel. Themeetings are broken down intotwo facets – operations andmaintenance, and need forcapital improvements. Forcapital requests, they providejustification and if I agree, Iphase it into the city’s budget sothat it is not a shock to the citycouncil. Our private partner alsosubmits a monthly report. Thepartnership has been a lifesaver; they have the expertisethat I cannot afford to have onmy staff.”

Nick DeSantis, Director of PublicWorks, Glen Cove, New York, 2003


Private Partner ReportsMonthly private partner reports, submitted in anagreed-upon format, provide a good basis for face-to-face discussions of progress and problemsbetween the public and private partner. The reportshould be simple and straight-forward. Contentsmay include:

• A comparison of costs versus budget for themonth, year-to-date, and contract inception-to-date.

• Information about lost-time accidents,employee grievances, customer complaints, andinstances of non-compliance with environmen-tal regulations by month, for the current year,and annually since contract inception.

• A brief narrative on problems encountered andhow they were or will be resolved.

Written documentation is essential, but the writ-ten word can also be misinterpreted. For the pub-lic partner, the report should serve as an agendafor monthly meetings with the private partner. Aface-to-face meeting adds a great deal to the writ-ten communication and promotes mutual under-standing.

Field VisitsThe public partner should visit the facility on aregular basis. The purpose of the visits is not topolice the operations but to ensure conformancewith the contract terms and to identify potentialissues before they become difficult problems. Thereview should be based on the performance stan-dards written into the contract. Many communi-ties schedule frequent, short, and informal visitswhile some schedule formal quarterly visits.


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“They give us monthly reportsand come to all the Boardmeetings. They keep theBoard totally informed onwhat they have done and whatis happening at the plant. Theyhave weekly contact with meand their doors are alwaysopen for me or the Boardmembers to visit the plant tofind out what is going on.”

Ruth Ann Ritter, General Manager,Lewes, Delaware, 2003

“I meet with our privatepartner’s supervisor at leastonce a week, and frankly Idon’t have to worry that theplants are not being operatedproperly and complying withall of the current regulations.If I have any questions aboutanything, they are veryresponsive and I never have adifficult time getting ahold ofanybody.”

Patricia Spaide, Borough Manager,Boyertown, Pennsylvania, 2003

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A typical formal visit may begin with a briefmeeting between the public partner’s representa-tives and the facility’s key staff. The reviewersusually explain the purpose of the visit and whatthe review will entail. Usually the visit includes atour of the facility.

The site visit may include:

• Interviews with a representative sample ofoperating staff

• Observation of key operations • Review of records, such as discharge monitor-

ing reports, inspection logs, repairs, traininglogs, standard operating procedures, employeecomplaints, customer feedback, and financialdata.

Before leaving the facility, the review team usual-ly summarizes its findings at a meeting of keyoperations staff. Generally, findings will focus ondocumenting areas of non-conformance with theterms of the contract. These reports shouldexplain for each relevant contract requirementthe factors that led to a finding of non-confor-mance. The on-site staff is usually given theopportunity to challenge the findings theybelieve are incorrect. If a finding is indeed valid,both partners can collaborate on a remedy.

The public partner usually sends a written reportto the facility to recap the findings discussed atthe meeting with key staff and usually the privatepartner responds with a description of the cor-rective measures under way and a timetable forcompletion.


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“I am especially impressedwith the level ofcommunication the [privatepartner] maintains. Throughtheir extensive reportingsystem, the City is informed ofall phases of their operations,including water quality, systemmaintenance and customerservice. In addition [our privatepartner’s] regional vicepresident and senior membersof his staff are readilyaccessible for discussion andresolution of both routine andemergency matters. [Ourprivate partner’s] quality ofservice and communicationgive me the level of comfort Idemand from a municipalcontract. I can focus my timeand attention on other pressingmatters of City business,knowing that water andwastewater systems are invery capable hands.”

A. J. Holloway, Mayor, Biloxi,Mississippi, 1998


Customer ComplaintsThe private partner should keep a log of all cus-tomer complaints and the actions taken to resolvethem. In some partnerships, the public partnerreceives customer complaints and passes them onto the private partner for response. This approachprovides the public partner with first-hand infor-mation on customer dissatisfaction but may delaythe response by the private partner.

Some communities conduct customer satisfactionsurveys in addition to documenting complaints.For water and wastewater services, the benefits ofcustomer satisfaction surveys may not justify thecost. If the water has an objectionable odor, taste,or color, if a sewer overflows, or if invoices areincorrect, complaints will be immediate. If appar-ently clean water flows when the tap is opened,and if the toilets flush, customers give littlethought to how the service is provided or whoprovides it.

Dispute Resolution

Considering the complexity of water and waste-water systems, not all contingencies can be ade-quately addressed in the partnership contract.Over the period of the contract, new regulationsmay go into effect. New technology may becomeavailable. Accidents may occur. Even withoutmajor external changes that can affect operations,disagreements can arise on the interpretation ofcontract language. Therefore, the contract mustinclude a mechanism for dispute resolution.Where the intervention of a neutral third party isrequired, mediation or arbitration is preferable tolitigation.


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“I get a monthly report, but Ipay very little attention to it. Bythe time it comes, theinformation is old and hasalready been taken care of. Wedo not have any formalmeetings. We are a family; wetalk to each other all the time.Typically, I meet with ourpartner’s project manager, butoccasionally with the wholestaff.”

Fred Pocci, Executive Director, NorthHudson Sewer Authority, Hoboken,New Jersey, 2003

“I make frequent visits to thefacility to make sure everythingis being accomplishedefficiently and correctly. Youstill need a monthly report, butyou also need to have sometechnical person whounderstands the operationoverseeing the contract on afrequent basis.”




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You have learned about the benefits that over 2,000 municipalities andwater districts are enjoying from their public-private partnerships, andyou have decided to create a partnership for your community. You mayencounter opposition. If you do, this chapter counters myths with factsthat will help you stay the course.

C H A P T E R 9

S TAY I N G T H E C O U R S E

Opposition to public-private partnerships can come from manydifferent corners for many different reasons. The following tablesummarizes some of the myths that opposition groups haveadvanced and compares them to the facts.

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Myths Facts

Since water is a basic human need,water and wastewater services shouldnot be provided by a private, profit-making entity.

Public-private partnerships invariablylead to rate increases.

Massive layoffs often follow in the wakeof public-private partnerships.

Impacts on labor are always negative.

At times, service and water quality areput at risk due to understaffing.

Since corporations care more aboutprofits than about the public interest,partnerships usually result in decreasedenvironmental performance.

Checks and balances are missing atevery step in the process, from biddingto service delivery.

The private partner gets exclusive waterdistribution rights for 20 years or more.

The public partner retains responsibilityfor safe drinking water and adequatewastewater treatment but fulfills thatresponsibility through a partnership.

The public partner retains responsibilityfor setting rates, and future rate increasescan be minimized because the privatepartner guarantees cost savings. (SeeChapter 2)

There is no evidence of this. Public-pri-vate partnerships protect jobs of existingemployees. (See Chapter 3)

Transition from public to private employ-ment usually increases opportunities fortraining, continuing education, and careeradvancement. (See Chapter 3)

Most contracts require the private partnerto meet or exceed levels of service andquality of water and wastewater set by thepublic partner.

Many communities enter into partner-ships to remedy chronic non-compliancewith environmental regulations. (See Chapter 4)

Most communities solicit input from allstakeholders when they form a partner-ship, and the partnership contract pro-vides for continual community oversight.

The private partner rarely has any rightsto the water or its distribution.

S T A Y I N G T H E C O U R S E


PA G E 8 9

Myths Facts

Once a water or wastewater system ishanded over to a private partner, with-drawing from the agreement borders onthe impossible.

Even if the private partner does not ful-fill its contract obligation, provingbreach of contract is a difficult and cost-ly ordeal.

Very little can be done to ensure that theprivate partner will work in the bestinterests of the community.

The private partner will pay higherinterest rates for capital improvementsthan the public partner. The higherinterest costs will be passed on to therate payers.

Since private firms care only about mak-ing money, the private partner maydecide to export water to areas willing topay more.

The private partner may take too muchwater resulting in ecological imbalanceand destruction.

Most partnership contracts allow thepublic partner to resume operations atany time. Mechanisms are both legal andpractical.

Most contracts include two terminationclauses. Breach of contract (terminationfor cause) is one, but the municipality canterminate for convenience at any timewithout any stated cause. (See Chapter 7)

The performance measures specified inthe contract actually provide the munici-pality with more control than it has overpublic operations.

If the public partner has access to tax-freeand low-interest financing, there wouldbe no need for the private partner to fundcapital improvements.

The municipality always owns and con-trols the water.

The municipality monitors and regulateswater extraction.

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The Water Partnership Council is available to assist local govern-ments considering the formation of public-private partnerships.

Water Partnership Council1220 Nineteenth Street, NW, Suite 300

Washington, DC 20036(202) 466-5445

[email protected]


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N O T E S

1 . John B. Miller, Principles of Public and Private Infrastructure Delivery (Nowell, MA:Kluwer Academic Publishers, 2000) 79.

2. William G. Reinhardt, “PWF’s Seventh Annual Outsourcing Survey,” Public WorksFinancing March 2003: 1.

3. “A Survey of the Use of Public-Private Partnerships in the Drinking Water Utility Sector,”National Association of Water Companies Privatization Study June 1999: 29.

4. Association of Metropolitan Sewerage Agencies (AMSA) and Association of MetropolitanWater Agencies (AMWA), Thinking, Getting, & Staying Competitive: A Public SectorHandbook Gaithersburg, MD: McArdle Printers, (undated) 3.

5. AMSA/AMWA, 3.

6. AMSA/AMWA, 9.

7. AMSA/AMWA, 11.

8. Alan W. Manning, “The State of the Wastewater Utility Industry,” Paper. EMA, Inc. (2000).

9. AMSA/AMWA, 33, 85.

10. “A Survey of the Use of Public-Private Partnerships in the Drinking Water UtilitySector,” 39.

11. “Privatization: Lessons Learned by State and Local Governments,” Report to Chairman,House Republican Task Force on Privatization, GAO/GDD-97-48.

12. “Privatization and Alternative Approaches to Management, Operations and Ownershipof Drinking Water Facilities,” American Water Works Association (1997).http://www.awwa.org/Advocacy/govtaff/privzpap.cfm. (22 April 2003).

13. “Contract Services: Operations and Maintenance,” EFAB/EFC Guidebook. (1999).http://epa.gov/efinpage/guidebk98/gbk4a.htm. (24 April 2003) 4A-7.


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1220 Nineteenth Street, NW, Suite 300Washington, DC 20036(202) [email protected]

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