As the infrastructure needs of the U.S. and the globe continue to mount, the importance of focusing on alternative project delivery methods to accelerate project schedule and reduce cash flow needs is increasing. At the same time, public water utilities have long been (perhaps unfairly) chided for being slow to adopt technology, often limited by regulatory requirements and a generally risk-averse approach to technology adoption. Public-private partnerships, or PPP/P3s, represent an excellent opportunity to solve both the financial and technology risk challenges for public water utilities.
The range of project delivery methods from design-bid-build (DBB) to a true P3 or design-build-finance-operate-maintain (DBFOM) represent increasing private sector involvement and opportunity to transfer technology risk, as shown in Figure 1.
But what is it about alternative project delivery methods that makes them well-suited for incorporating innovative technologies? In most traditional DBB projects, highly prescriptive specifications have been developed by designers and then incorporated usually on a number of different projects. In many cases, agencies update their standard specifications infrequently, and the burden is on the contractor awarded the work to make a compelling case, if allowed by the contract provisions, that an alternative product is suitable as an “or equal” alternative. In these projects since the designer and contractor end up on opposite sides of the transaction working for a public owner, there may be reluctance to approve an “or equal” that may have unknown or unexpected design consequences.
"A thoughtful procurement process will include a detailed exploration of the opportunities for technology innovation on the project"
By marrying together the design and construction aspects, such as in a design-build (DB) or other alternative project delivery method, technology integration is managed by the contractor and design team internally. In particular when operations and maintenance (O&M) components are added, such as in a DBOM or DBFOM/P3, the long-term concerns relating to ensuring efficient use and management of the innovative technology during the entire project lifecycle is managed by the project developer/ contractor.
There are advantages in incorporating the O&M aspects with design and construction. P3 developers, in many cases, will have implemented the technology being considered for implementation on other public projects. There is the opportunity for direct transfer of lessons learned and improvements in design and construction as a result of struggles encountered during the operations and maintenance of other projects before it is “too late” because contract documents have been advertised with one particular prescriptive specification incorporated.
Advantages also exist where a new technology – whether a wastewater treatment process, desalination, or another – is being incorporated by a public owner. In these cases, existing O&M staff may not have extensive understanding and expertise operating particularly new or innovative technologies incorporated. By utilizing the developer’s O&M staff synergies and elations with the design and construction team are more readily developed. In some jurisdictions, the idea of contracted operations and maintenance is not palatable for political, labor agreement, or other reasons. In these cases, an initial O&M start-up/warranty period with transferrable training can sometimes be incorporated alongside public sector O&M staff.
P3s have been more extensively used in the U.S. in transportation-related transactions but their occurrence in the water sector has thus far been relatively limited.While interest in P3s within water has continued to increase, there must be a specific, thoughtful process carried out to determine which projects are best for consideration under the P3 method. Correct contract structuring, with appropriate risk allocations and a solid procurement process is essential to delivering a successful P3 project.
It is easy for public water utilities to feel that P3s are not a useful tool in their project delivery toolbox – after all, water utilities enjoy excellent credit ratings and have access to low cost lending, so why bother incorporating private capital? It is shortsighted to look past the benefits associated with a comprehensive developer-provided solution, and the benefit of oversight from the involvement of private equity providers and private lenders, to facilitate the incorporation of new and innovative technologies. The value of these benefits can far exceed the cost of incorporating capital, and provides excellent incorporation with the new USEPA WIFIA program.
While it may seem appealing to transfer away a comprehensive list of project risks to the private sector, public owners pay dearly when approaching a procurement with this mindset. Not all risks are appropriately managed by the private sector, such as risks related to government approvals. Others may be best shared between the public and private sector, such as the risks for rising utility costs or similar. A thoughtful procurement process will include a detailed exploration of the opportunities for technology innovation on the project, along with a review of the public owner’s appetite for risk which will shape and guide the risk allocation project in the procurement documents.
