May 07, 2014

Private firm could design and operate sewers

As published in The Erin Advocate

If the Town of Erin proceeds with a sewer system, councillors will have to make a crucial choice. Do they figure out exactly what they want and hire someone to do it? Or do they simply state what has to be achieved, then take bids from companies willing to take the risk of designing and operating the system?

The current Servicing and Settlement Master Plan (SSMP) will only set out a general vision, including decisions on whether to proceed with some type of sewers, and what areas should be serviced (Erin village, Hillsburgh or both). After that, the next phase of the environmental assessment process would deal with details of how it could be done.

“What do we know about small bore or traditional gravity sewers?” said Roy Val of Transition Erin, who brought guest speakers to a Transition Erin workshop in March, for Town councillors, staff and the public. “Give it to the people who know, and will be responsible for it for 30 years.”

Two companies that could potentially bid on designing, financing and running the whole thing as part of a Public-Private Partnership made presentations at the workshop.

“We are taking the risk, so we want to get the design right,” said Richard Nie, president of Koester Canada of Brantford, with projects in 85 locations in Ontario. He said this model opens up the possibility of choosing from any technology that is on the market.

“You are not experts, so you shouldn’t be doing it. It’s a procurement issue. People worry about us scrimping, but we usually go further. We are trying to find synergies, to reduce costs. Essentially, we pass risk downwards. The same performance guarantee we’re giving you, we’re passing down to our suppliers. We vet them for their assets and capability to back those performance guarantees.”

Efficiency could be gained by sharing staff for relatively small locations such as Erin. For example, one operator could be doing the water sampling at half a dozen small plants. The company could also provide centralized alarm and reporting functions, do bulk purchasing of parts and chemicals to get lower costs, and be able to deliver the advantage of broad experience with equipment at many plants, he said.

Typically, a firm that wins a contract like this will set up a subsidiary utility company to deal with all financial and management issues for a specific system. Nie said having a private enterprise with its own money at risk reduces the risks and costs for the Town, eliminates frequent Requests for Quotation (RFQs) and reduces the chances of costly delays.

“It’s actually cheaper over the long term,” he said.

The revenue from on-going sewer charges paid by homeowners, which can be set up to include individual connection costs, covers a firm’s operating costs, including insurance. It also creates a surplus that goes towards paying down the capital loan taken out for construction, and a profit for the company.

“A lender or the municipality can take an equity stake in the company, and earn part of the profit,” said Nie, noting that the 30-year cost of operating the system is far greater than the cost of building it. “No one makes money unless it works.”

He also said it is a “myth” that everyone has to hook up to make a project feasible. “It depends on the condition of the septic systems,” he said.

Also making a presentation was Peter Rupcic of Clearford Industries, which specializes in Small Bore Sewer collection systems, but can also do treatment plants, financing and operation. Last week the company announced it had won a $3 million, 30-year contract to build, own and operate both the water and wastewater systems for Fetherstone Mobile Park near Kemptville.

Residents of 41 homes there had been facing possible eviction due to malfunctioning septic systems. The new system will be built to accommodate up to 100 new homes. Clearford has also announced ClearDigest, a new type of septic tank that would only have to be pumped out after “decades” of normal use.

Val said the traditional “prescriptive” approach would require council (with the help of staff and consultants) to decide on issues in which they have no expertise. Residents would pay for each stage of the process, plus the retrofitting of any part of the system that turned out to be inadequate.

A “performance” approach, on the other hand, would encourage innovation, shift much of the funding and liability to the private sector and delay payment until the system is working.

“It’s a question of cash flow and risk,” said Val. The Town would own the sewer system in either scenario, but a Public-Private Partnership could promote entrepreneurial efficiency. There would be costs for the Town to hire experts to monitor the project.

“It’s like leasing,” he said. “It costs a bit more, but you have paid for something of value.”

Rupcic said, “The reality is that the government can’t fund everything.” He quoted from a C.D. Howe Institute study on water and wastewater that says billions of dollars in promised federal funding is dwarfed by the overwhelming needs of municipalities. Grants are unpredictable, with large ones often creating new problems.

“On the one hand, the possibility of getting ‘free’ money tempts municipalities to delay making necessary investments, and in fact, those that neglect their infrastructure are often rewarded. On the other hand, once grants do materialize, they allow a municipality to invest in unnecessary capacity,” the study said.

“Consumers, relieved of bearing the full costs of the water they use, over-consume. Municipalities, likewise relieved of incentives for efficiency, over-invest. Using other people’s money, municipalities build more infrastructure than they need and more than they can afford to operate and maintain.”