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Savings: Myth or Reality?

Partnership-Based Water Service Delivery Models Preliminary Findings Jeff Hughes Carol Rosenfeld Environmental Finance Center at the University of North Carolina October 28, 2015 Palo Alto, CA

http://efc.sog.unc.edu @EFCatUNC 2

How you pay for it matters

Supporting the fair, effective, and financially sustainable delivery of environmental programs through: •  Applied Research •  Teaching and Outreach •  Program Design and Evaluation

3

Acknowledgements

Environmental Protection Agency

The EPA Water Infrastructure and Resiliency Finance Center

provides financial expertise to communities that are financing drinking

water, wastewater, and stormwater infrastructure.

www2.epa.gov/waterfinancecenter

The West Coast Infrastructure Exchange (WCX) promotes the type of new thinking

necessary to solve our infrastructure crisis. WCX is a unique regional platform designed

to spur infrastructure innovation and accelerate a pipeline of innovative

infrastructure projects in California, Oregon and Washington. westcoastx.com

My community has had significant problems (cost overruns, poor project delivery etc.)

with a DBB project in the past.

A. Strongly Agree B. Agree C. Neutral D. Disagree E. Strongly Disagree

StronglyAgree

Agree

Neutral

Disagree

StronglyDisagree

42%

31%

3%3%

22%

Findings of an informal poll of session participants at Stanford Executive Education program on public-private partnerships in the water sector. October 28, 2015.

What percentage of future P3s will be based on financial considerations versus other

considerations (political, technical capacity, risk sharing, labor relations..)

A.  10% B.  20% C. 50% D. Greater than 50%

10%

20%

50%

Greaterthan50%

11%

25%

44%

19%

Findings of an informal poll of session participants at Stanford Executive Education program on public-private partnerships in the water sector. October 28, 2015.

http://efc.sog.unc.edu @EFCatUNC Findings of an informal poll of industry leaders at the 2015 American

Water Summit in Denver Colorado. 10/21/2015

Assessing Cost Impacts of Alternative Service Delivery Partnerships

•  10 to 15 Financial Impact Assessments – Base case vs. alternative paths – Mix of models – Greenfield and upgrades – Geographic diversity

•  Simplified financial impact model •  Findings, conclusions, lessons learned •  Education materials

P3s reduce costs

A. Strongly Agree B. Agree C. Neutral D. Disagree E. Strongly Disagree

StronglyAgree

Agree

Neutral

Disagree

StronglyDisagree

25%

36%

0%

8%

31%

Findings of an informal poll of session participants at Stanford Executive Education program on public-private partnerships in the water sector. October 28, 2015.

The Many Faces of Costs • Project development

costs(legal, staff etc.)

• Design costs • Finance costs • Construction costs • Out of pocket costs

(access to grants • O&M costs

• On-going capital refurbishment costs

• Utility costs • Risk transfer costs • Contract

management • Non-monetized

costs/externalities • …….

Rumsfeldian Analysis of Costs Knowns Unknowns

Kno

wn

•  Cost of capital •  Annual payments •  Debt service •  O&M Agreement

•  Likely risks •  Costs for the road not

taken

Unk

now

n •  ?????? •  Acts of God •  Technology •  Political Change •  Unknown risks…

Qualitative Presentation of Risk Allocation

Example of display of variable Risk Cost: Source Deloitte Analysis submitted in report to Regina

Representation of Costs and Savings

•  Cash flows •  Present value •  Range of risk costs •  Most likely risk costs •  Life cycle costs •  Annualized costs •  Cost per customer •  Costs per service unit •  Aggregated nominal costs (BAD!)

Cost metric(s) that you think most accurately portrays project impact

A. Cost per account/bill B. Total savings over life

of project C. NPV over life of project D. First 5 years of cash

flow (expenses and revenues

Costperaccount/bill

Totalsavingsoverlifeofpro...

NPVoverlifeofproject

First5yearsofcashflow(e...

19%

3%

58%

19%

Findings of an informal poll of session participants at Stanford Executive Education program on public-private partnerships in the water sector. October 28, 2015.

Cost metric(s) most likely to be understood and appreciated by your governing board

A. Cost per account/bill B. Total savings over

life of project C. NPV over life of

project D. First 5 years of cash

flow (expenses and revenues

Costperaccount/bill

Totalsavingsoverlifeofpro...

NPVoverlifeofproject

First5yearsofcashflow(e...

36%

9%9%

45%

Findings of an informal poll of session participants at Stanford Executive Education program on public-private partnerships in the water sector. October 28, 2015.

Name Service Procured Type of Contract An$cipatedTypeofSavings

Rialto (CA) Full service water and wastewater

Concession ????,Projectcost,O&M,retainedrisk

Bayonne (NJ)

water/wastewater collection/distribution and customer service

Concession O&M,capitalplan

Woodland Davis (CA)

Water withdrawal, treatment, and bulk transfer

Design - Build - Operate

Projectcost

Regina (Canada)

Wastewater treatment Design - Build - Finance - Operate - Maintain

Retainedrisk,outofpocketfunds,design/construc$on

Santa Paula (CA)

Wastewater treatment Design - Build – Operate Finance Own

ProjectCost,CapitalPlan,O&M

San Diego/Carlsbad (CA)

Desalinated drinking water Water purchase agreement

TechnologyRisk

San Antonio (TX)

Water rights, withdrawal, treatment, transmission

Design - Build - Finance - Operate - Maintain

Risk,HedgingLongTermCosts

Middletown (PA)

Full service water and wastewater

Concession CapitalPlan,O&M

What’s Included in Project Cost? Example from Rialto Concession

Going Beyond Savings

•  Higher quality of asset management or service delivery (contractually required) – Woodland Davis – Santa Paula

•  Tapping into Public Entity Equity (for water or other benefits) – Rialto – Bayonne – Middletown

Woodland Davis Development & Construction Costs

•  Service Provided: Raw water withdrawal,

transport, and treatment •  Service Delivery Mechanism: Design,

build, operate

Woodland Davis Savings & Tradeoffs

Savings

• Project cost • Regulatory

risk • Permitting

costs

Tradeoffs

• Project preparation

• Contract management

Woodland Davis Model Output

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We are likely to use a service delivery mechanism other than Design Bid Build within the next 5 years?

A. Strongly Agree B. Agree C. Neutral D. Disagree E. Strongly Disagree

StronglyAgree

Agree

Neutral

Disagree

StronglyDisagree

31%35%

8%

0%

27%

Findings of an informal poll of session participants at Stanford Executive Education program on public-private partnerships in the water sector. October 28, 2015.

I am more open to alternative delivery mechanisms than I was before this course?

A. Strongly Agree B. Agree C. Neutral D. Disagree E. Strongly Disagree

StronglyAgree

Agree

Neutral

Disagree

StronglyDisagree

0% 0% 0%0%0%

Response Counter

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Savings: Myth or Reality?

Partnership-Based Water Service Delivery Models Preliminary Findings Jeff Hughes Carol Rosenfeld Environmental Finance Center at the University of North Carolina October 28, 2015 Palo Alto, CA

VFM of $79.6 million (NPV), 15.5% Example of Value for Money Options Comparison:

VFM of DBFOM

Comparing an “Estimate” to a Bid

Source: Slide Presented by Chris Baisley, Deloitte Seattle 11/19/14

Example of showing trade offs Source: TRC Slide Show CASA 2014

Example of showing impacts of different models on Construction Costs: Source: Memo to Miami-Dade Sewer Department from PRAG 11/14/14

Example comparing financing costs: Source: Memo to Miami-Dade Sewer Department from PRAG 11/14/14

Example of Summary Sheet for Two Options: Source: Memo to Miami-Dade Sewer Department

from PRAG 11/14/14

Example of Summarizing Costs: Regina City: Award of RFP pg.5