Water and wastewater utilities face a seemingly insurmountable obstacle as they consider how to fund the infrastructure projects that are currently or will soon become necessary.
As we often report, the necessary budget for drinking water upgrades over the next 25 years is far beyond the funding that currently appears to be available, somewhere in the $1 trillion range, per the American Water Works Association.
What to do when faced with such disheartening realities? Well, there isn’t much choice but to get creative.
According to a recent report from the Environmental Finance Center at the University of North Carolina at Chapel Hill, “The Financial Impacts of Alternative Water Project Delivery Models,” most water and wastewater infrastructure projects are carried out on a “design, bid, build” basis, in which a project is designed and the opportunity to build it is auctioned off to a party that can do it at the lowest cost. However, this approach may have several drawbacks, including the discouragement of innovation, the potential for high operation and maintenance costs in the project’s future, and the risks naturally associated with choosing the cheapest construction plan.
With these concerns in mind, researchers from the Environmental Finance Center, prompted by the West Coast Infrastructure Exchange and funded by the U.S. EPA, wanted to take a deeper look at alternative project deliver methods, namely public-private and public-public partnerships. While such studies have been conducted in the past, this was to have unique focus on costs and where things have gone wrong.
“There is a lot of work going on in this area and we wanted to make sure that we did something that was a bit different and would add to the sector,” said Jeff Hughes, director of the Environmental Finance Center. “Our center … was interested in studying the financial outcomes in more detail and identifying both the successful outcomes of each model as well as any challenges or unexpected results.”
Assessing The Models
In order to do this, the researchers took a close look at nine exemplary communities across North America that had invested in new facilities or capital improvements for various water and wastewater services. The communities were located in Pennsylvania, New Jersey, California, Arizona, Maryland, Florida, and Saskatchewan.
“We worked with the West Coast Infrastructure Exchange and EPA to identify a mix of projects that were geographically diverse as well as included both new facilities and upgraded facilities,” said Hughes. “We also wanted to include a variety of different types of delivery models.”
The projects described in the report include a surface water treatment plant built through a “design, build, operate” agreement and State Revolving Fund loan, a “pay for performance” urban stormwater retrofit, and a “design, build, finance, operate, and maintain” delivery mechanism for wastewater treatment upgrades. The report then describes each project’s initial outlay and their capital sources, giving a sense of financial impacts. These details are meant to offer other utilities an idea of how each project came together and performed, not necessarily to outline a best overall method.
“Each of the models we studied experienced some degree of success based on what the specific objectives were for the communities,” said Hughes. “The challenge … is that each community measured success differently. Some projects were driven by a desire to optimize costs whereas some projects were driven by an interest in monetizing existing assets or improving service.”
Still, there are some general takeaways about the effectiveness of alternative project delivery models.
“I will say, most of the models we looked at which integrated design and construction in some way, either as a design, build, operate or more comprehensive P3 [public-private partnership], were able to meet their deadlines and demonstrate cost and construction efficiencies beyond what would have likely been possible if a more traditional design, bid, build model has been used,” Hughes said.
Other key takeaways from the research were the potential pitfalls that alternative project delivery models present — for instance, the dangers of incorporating a private partner without adequate planning.
“I advise utilities to understand their service sales and revenues and make sure that they don’t assume that working with the private sector is going to shield them from any risk of falling or variable sales in the future,” said Hughes. “Revenue demand risk and variability is very difficult to transfer to the private sector. Small communities need to be aware that using these approaches requires considerable oversight that will require resources, including labor and funds for consultants. These approaches do not generate new capital.”
It is vital that utilities approaching a new construction project through one of these methods keep in mind that they do not promise cash cows.
“I think a community should enter into these models based on an objective that involves optimizing costs or improving services,” said Hughes. “I don’t think these approaches should be seen strictly as a new source of capital. Beware of promises of significant cost savings — while we found some construction cost efficiencies in our study, the most significant impact was improved service and the ability of sharing some risks with the private sector.”
And, as a last piece of advice, Hughes recommends that utilities not rely on research like this alone. While capital improvements are already stretching budgets thin, it is worth investing in a third-party advisor to make sure they are planned properly.
“I suggest that utilities start with determining what their primary objectives are for their project and engage a trusted, unbiased advisor to evaluate the ability of different options to meet their objectives,” he said.