Evaluating alternative procurement options

Evaluating alternative procurement options

By RUSS STEPP
R.W Beck

New pressures on the U.S. water and wastewater industry have challenged municipalities to explore new avenues to improve their efficiency and effectiveness. The pressure has built up from many directions. Recent regulations call for new or upgraded plants ś with serious penalties for non-compliance. At the same time, the consequences of deferred maintenance are being felt, and there is political resistance to rate increases. The desire to improve the cost-effectiveness of municipal operations may be compounded by a community fiscal crises.

Alternative procurement approaches may bring some relief.

Alternative procurement may not be appropriate for every project. Where careful analysis shows that it is, utilities are finding ways to access new sources of funding, stabilize rates, mitigate risks and continue to serve the public interest.

Some alternative procurement approaches have been available to municipal governments for some time, but changes in IRS rules and other developments have given them even greater flexibility.

Municipal entities from Florida to Rhode Island to Seattle are now at work on finding the best fit for each situation, and surveying a range of options.

Traditional municipal operation and facilities ownership is at one end of a spectrum, while fully private, investor-owned and operated facilities are at the other end. A variety of possible public/private partnerships lie in between.

One of the most important first steps involves the decision to pursue alternative public works contracting, and identifying the option most suited to the specific project at hand.

Questions that a public agency may ask include: Should this project involve public financing or is private financing preferable to preserve bond capacity? How much public agency involvement or oversight is desired in design and construction? Does the public agency have staff capability and desire to operate a new facility? Should assets be publicly or privately owned? Once that is decided, the next stage is to explore the alternatives to find the most appropriate fit.

One highly successful example of this process is Seattle Public Utilities' Tolt River Water Treatment Plant project. SPU wanted to develop a new water treatment plant for water supply on the Tolt River. Utility staff initially benchmarked the cost of the project using a conventional approach. However, because SPU wanted to save money and did not have staff available for operating a complex treatment plant, the city concluded that a design/build/operate process was more promising.

This approach held the potential for substantial construction and operating cost savings. And by working together as a team from the beginning of the project, designers, constructors, and operators were able to achieve important efficiencies and quality improvements.

SPU and a team headed by R.W. Beck and Malcolm Pirnie designed a procurement process through which private contractors proposed design concepts and prices for constructing and operating the facility for 20 years. They then negotiated a contract with a consortium led by CDM-Phillips that resulted in a cost-savings of 40 percent; $70 million less than what SPU estimated for a similar facility developed and operated using the traditional approach. In addition to the dollar savings, SPU benefited from risk mitigation and rate stabilization.

This summer, the Seattle City Council approved Seattle Public Utilities' recommendation to hire a team headed by R.W. Beck and Malcolm Pirnie to help determine the best contracting process for several facilities on the Cedar River. SPU's project manager, Scott Haskins, says that the Cedar River is a larger, more complex system than the Tolt, which involved one of the largest alternative procurement efforts in the country at the time.

The Cedar River projects include a 250-(million-gallons-per-day) treatment facility with associated water transmission and storage facilities; the upgrade and rehabilitation of an existing diversion facility; and a salmon hatchery and series of fish passage structures.

The team is now in the early stages of exploring the possibilities of alternative arrangements for water treatment, headworks rehabilitation and fish passage work.

On the other side of the country last year, R.W. Beck helped Cranston, R.I., creatively respond to a very different challenge. Cranston is an industrial city that had aging wastewater treatment facilities and needed to deal with regulatory compliance and limited resources. R.W. Beck helped them to arrange a public/private partnership with Triton Ocean State, who is modifying the existing system and providing advanced wastewater treatment under a 25-year operating lease; one of the first of its kind under new federal guidelines. The process provided the cash-strapped city with immediate savings of about $30 million and freed funds for other urgent needs.

More recently, a major utility in the Southeast has asked R.W. Beck to help it explore alternative delivery approaches to the financing, construction, ownership, management and operation of several potable water facilities with estimated construction costs nearly half a billion dollars.

The facilities being considered include surface and ground water diversions and conveyance, water treatment and desalination facilities. In addition to budget pressures, the utility is specifically interested in the use of alternative procurement options to shorten the project schedules to comply with regulatory agreements.

While each of these examples involves public agencies faced with similar pressures to improve the effectiveness of project delivery, each situation also has unique challenges.

Russ Stepp is the national director for infrastructure for R.W. Beck.

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