3 minute read 22 Mar 2019
Water treatment plant

Three questions on public-private partnerships for US municipal water projects

By

Stephen Auton-Smith

Ernst & Young Infrastructure Advisors, LLC Managing Director

Transaction leader in energy and environmental infrastructure. Passionate about climate change and making a positive difference. Father, husband, mountaineer and traveler.

3 minute read 22 Mar 2019

The use of public-private partnerships in municipal water projects is still limited.  An EY/American Water Works Association study reveals some of the reasons.

Private developers and investors have been cautiously optimistic about the US municipal water sector as a source of meaningful public-private partnership (P3) projects for years. Progress is being made and an increasing number of projects are in development, but to date the market remains largely one of potential. To better understand why the use of P3s has been relatively limited in water projects, EY, in partnership with the American Water Works Association (AWWA), conducted a survey to gain insight into the perceptions of those directly involved in water service provision across the US.

The survey of AWWA’s members – which include utilities supplying roughly 80% of US drinking water, as well environmental advocates, scientists and academics – yielded answers to three key questions.

1. What are the main drivers of interest in P3 delivery models?

Technical innovation is the most significant perceived benefit, with respondents seeming to value private-sector participation as a means of bringing forward more technically or operationally sophisticated projects.

Risk transfer is also seen as a key driver, specifically the use of performance-based contracts to transfer design, construction and operating risk by connecting public-sector payment and private-sector performance.

Reduced deferred maintenance risk is also noted. Respondents feel that P3 delivery can play an important role in helping to avoid the siphoning of resources for other needs and the buildup of deferred maintenance now plaguing many aging water infrastructure assets.

2. What are the key barriers to successfully pursuing P3s in water and how can these be overcome?

The top responses to this question include stakeholder skepticism or concerns over the costs and benefits of P3s; resistance to ceding technical control over an asset to a third party and absence of internal executive and/or political support.

A lack of managerial resources and experience to evaluate, structure, procure or negotiate P3 projects; and limited financial/legal understanding of P3 structures, were also notable challenges.

3. Where are P3s likely to be most appropriately deployed in the US water sector going forward?

Despite the barriers, 60% of respondents express an active interest in pursuing P3 for a discrete subset of infrastructure projects in their capital plans.

Those deemed most suitable for P3 delivery include new-build water, wastewater, energy recovery and reuse infrastructure.
The survey left us with these overall takeaways:

  • P3s are considered more favorably the more they are understood.
  • Stakeholders are skeptical over the general applicability of a P3 delivery model and are of the view that only a subset of projects will have the scale, technical or operational complexity and risk profile to make the risk-transfer value case for P3.
  • Respondents need an objective and well-considered justification for trying something new, but some lack practical guidance and visibility as to what other municipal entities are considering.
  • P3s that complement rather than replace existing municipal service provision, by bringing resources, skills and project delivery experience and discipline to those infrastructure projects where the public sector does not have capacity and experience to deliver, are most likely to be favored.
  • As the US water sector increasingly invests in advanced wastewater treatment, energy recovery, potable water reuse, desalination and other complex infrastructure, P3 will have a key role to play in advancing a number of these critical projects.
  • Moving P3 forward in the water sector means three things:
  • Empowering municipal stakeholders to use P3 as a delivery model where it is genuinely beneficial to do so.
  • Focusing on project success through appropriate deal structuring, effective procurement and contract development, so that the anticipated benefits of P3 are realized through contracts that are recognized as successful. Many respondents recognize the many preconditions for success, but they are not fully able to put these building blocks in place, which (rightly) discourages the use of P3.
  • Creating a positive feedback loop whereby success by municipal authorities creates positive examples and role models for others to follow.

Summary

A new EY/American Water Works Association study looks at the attitudes and barriers around using public-private partnerships to develop infrastructure projects, leading to answers to three key questions.

About this article

By

Stephen Auton-Smith

Ernst & Young Infrastructure Advisors, LLC Managing Director

Transaction leader in energy and environmental infrastructure. Passionate about climate change and making a positive difference. Father, husband, mountaineer and traveler.