April 16, 2014

Sewers may need public-private financing

As published in The Erin Advocate

If the Town of Erin decides to build a sewer system for its urban residents, it may need to form a partnership with a private company that could not only provide expertise and financing, but also take responsibility for the risks of operating the system.

In the long run, it is a more expensive way to build sewers, but the provincial and federal governments are promoting private sector participation as a way to boost efficiency and reduce the huge tax burden of upgrading major infrastructure.

Transition Erin recently held a workshop about various alternatives in the wastewater field. One of the speakers was Steve Rohacek, Senior Vice President for Municipal Business Development and Lending at Infrastructure Ontario.

“We have a mandate to use alternative methods to try to ensure that there is value for taxpayers in how we deliver our infrastructure, and that it is on time and on budget,” he said.
Competition should drive down the cost of a major project if the Town can “bundle” the various functions, he said.

“It transfers risk from the public sector to the private sector in the areas of design, coordination, building and long term maintenance and life cycle.”

Once the environmental assessment work is done, the Town would set specifications for a sewer system based on the requirements of the Ministry of the Environment. It would either manage the process itself, or take bids on a Public-Private Partnership (P3), also known as Alternative Financing and Procurement (AFP).

The Town would always own the asset, but it could have a 30-year agreement with a company that would design, build, finance, operate and maintain it. Costs to the end users would include not only some profit for the company, but the cost for the Town to hire sufficient expertise to supervise the process.

“The project agreement allows for deductions for poor operations,” said Rohacek. “There is also the ability to innovate and cost-share, so that if in the future you are looking at some sort of expansion or innovative technology that you may be able to implement in 20 years, you can bring that forward, which would have a cost savings to you.”

Erin’s Servicing and Settlement Master Plan (SSMP) final report, which could be wrapped up this summer, is not expected to restrict whether the Town could build sewers with an AFP contract.

Investment in such a system could come from several sources. There could be grants from senior governments, with some grant programs now requiring a partnership with private financing. The Town could borrow money on behalf of urban residents, with the cost of that amortized onto local sewer bills. Money from developers would largely cover services for new homes, but not for existing homes.

“We are a provincial government agency, so the public interest is very high on our priority list,” said Rohacek. “The agreement has to be fair. The private sector has money at risk for the 30 years.”

In the traditional model, municipalities face costs and complications at every stage of the tendering process. They assume full responsibility for delays, cost overruns and things not working properly.

“If it is not your core competency, why are you doing it,” said Rohacek. “The Ministry of Health’s core competency is not building hospitals, it is delivery of health services.”

An AFP contract would provide “a totally transparent business model and cost for 30 years, a model that is predicated on risk transfer”. But he said an AFP would only work for capital projects over $25 million, with the best value closer to $50 million.

There would be no payment to the company until they had substantially completed the project, and proved to the Town that was working properly. Ongoing key performance indicators would have to be met.

“Yes, there’s profit in here, but you try to minimize that under competitive tension, so you get a system that is according to design and has the best value.”
Infrastructure Ontario would be available to support and advise the municipality throughout the process.