Best Option for the WWTP in Regina May Be Neither DBFOM Nor DBB

A Variant of P3 Models Other than DBFOM

By Daniel Huang

The new regulations including the federal Wastewater Systems Effluent Regulations (the "Regulations") on managing wastewater effluent under the Fisheries Act[i], add to municipal governments' existing legal obligations to bring up wastewater facilities to new standards in fairly short order. Given the cost, size and scope of the infrastructure needed, P3s pose to municipalities as an attractive and cost-effective implementation model to meet the new challenges.

According to a newly released report from the Conference Board of Canada, out of 42 P3 public infrastructure projects in the past three years, 22 were finished on time, the report shows. Thirteen came in early, while seven were completed late. The City of Saskatoon has also taken note of the approach, opting to go the P3 route for a future Civic Operations Centre for its public transit fleet. Those that see positive outcomes typically are not publicized, such as the Lac la Biche (in AB) wastewater treatment plant, completed in 2011, and a water treatment facility that came online in 2000 in Moncton, N.B[ii]. A study from the United Kingdom found that P3 projects typically finished one per cent earlier than scheduled and with virtually no cost overruns, while government-led projects finished 17 per cent late with cost overruns of 47 per cent[iii]. In May 2003, the Economist compared services in England to those in Scotland, where water remains a nationalized industry, and in Northern Ireland, where water is managed by a government department. It found that English utilities score better on drinking water quality tests, comply more often with sewage discharge regulations, and lose less water to leakage than do Scottish or Irish utilities. Furthermore, English utilities provide these superior services at lower costs. Average household bills are lower in England than in Scotland or Northern Ireland. Most striking is the difference in commercial water bills: A medium-sized Scottish office pays 16 times more for water than its English counterpart. The Economist’s conclusion was inescapable: “Private water firms beat the public sector on all counts.”[iv] Rich international evidence shows that P3s substantially outperform conventional government-led projects both in terms of cost and completion time.

While the government still owns the infrastructure and is ultimately responsible for ensuring related services are up to standard, the government can reduce or withhold payment if the private partner does not deliver. Goals in terms of cost savings (through use of economies of scale, )capacity, efficiency and effectiveness can be achieved while meeting the public need. Therefore, a P3 is not necessarily a bad thing.

Nevertheless, there are higher private financing costs and risk premiums that the city will ultimately have to pay the private company. Some would say that perhaps in principle a P3 can work, but so much depends on the specifics of the agreement negotiated between the City and private partners. In other words, a P3 might be cheaper, but it might be more expensive, even with the federal government subsidy. It just depends on the specifics of the contract. Risk might be mitigated, but how and to what degree may depend on the specifics.

If the City is SO forthcoming....then they should RELEASE the redacted portions of the Deloitte report, and then be prepared to have a REAL debate, in public, with the Yes side. Please bear in mind that the city manager has already set forward a $340,000 “education” budget to fund advertisement encouraging residents to say no, apart from the $120,000 set up for non-partisan referendum advertising[v].

While the taxpayers forego $460,000, they should at least expect something to see. The author suggests having a public debate at the Council on TV before holding the refe-rendum as simply voting DBB or DBFOM may not be a good idea. If the government does not lose money but profit from the Regina project, the taxpayers will be better off than if they are required to pay more if there are unexpected cost overruns or other unexpected costs. The difference of the interest, the extra money lost from leasing, the lack of transparency and the bundling of P3 Canada makes us to reconsider the choice of DBFOM. The BEST OPTION is to combine the outsourcing part of DBFOM and the long-term financing part of the City, the best from each model. The management model is similar to that of Lac La Biche County, AB, which is a successful example. The author suggests outsourcing the project for the designing and building stage and leasing the plant for the operating and maintenance stage. In the author's outsourcing model, the risk of additional costs is borne by the private sector partner, while the government interest rate bargain can be still taken advantage of. Also, the City can benefit from a bonding fee with a private contractor for the first two stages (please note that partial financing can be used if there is not a bonding fee so as to give the private contractor a restraint, which is reflected by the case of upgrades to the Evan-Thomas, Victoria and Sudbury facilities[vi]) and from a leasing fee for the next two stages.

Let us look at the next table. We assume that the borrowing amount will be $118.3 million, and we will use the City’s borrowing rate 3.82% as the discount rate for DBB and 5.82%for DBFOM. The contract is for 30 years, and it is supposed that the City’s deal structuring cost is at 0.5%, and 8% for the private sector (with 4% for each party, besides the interest rate of 5.82%), federal funding of $58.5 million can be obtained for DBFOM, and that the plant can be leased at $5 million per year since the wastewater can be sold for $5 million annually to potash companies in north Saskatchewan[vii], then we can have the following results:

Project Management Models Comparison (in Million Dollars)

	DBB	DBFOM	Outsourcing without Private Financing
Amount Borrowed	118.30	118.30	118.30
Annual Borrowing Rate	3.82%	5.82%	3.82%
Annual Borrowing Cost	4.52	6.89	4.52
NPV of Borrowing Cost	79.90	96.69	79.90
NPV of Blended Borrowing Cost	198.20	214.99	198.20
Deal Structuring Cost	0.59	9.46	0.59
Federal Funding		-58.5
NPV of Leasing Revenue	0	0	-88.38
Net Total Cost	198.79	165.95	109.82

          Note: Much of the data of this table was based on the reports by Hugh Mackenzie and of Deloitte LLP though the author has changed the net present value calculation significantly[viii].

 

Here it is clearly demonstrated the government should not forgo the financing part as it is more economical if the government handles it. Moncton ended up paying $31 million for a $23 million water treatment plant due to the higher borrowing cost than the City. Also, the government need to take control of the project. Due to lack of control in the Hamilton wastewater treatment project, in addition to the workforce being cut in half within 18 months, millions of litres of raw sewage spilled into the Hamilton Harbour, homes were flooded and major additional costs were incurred[ix].

For supervision, a committee consisted mostly of elected members from independent organizations (which may include government officials in charge of different related departments) may be necessary to supervise the project and make decisions on some important issues.

In a word, though most P3s can actually enhance the ability of government to deliver core public services on-time and on-budget, while maintaining appropriate controls with the procuring government, an efficient, ecologically sound, environmentally friendly (eg using the system of Bear River Solar Aquatics Waste Water Treatment Plant in Nova Scotia[x]) and socially beneficial, accountable and sustainable project with the most increase in social welfare would be a priority.

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[i] Wastewater Systems Effluent Regulations, SOR/2012-139; Fisheries Act, RSC 1985, c. F-14.

[ii] Vanessa Brown: P3s: Risks & Rewards, Leader Post, August 29, 2013.

[iii] Hugh MacIntyre and Charles Lammam: P3 Best Bet for Wastewater Project, Leader Post, August 6, 2013.

[iv] John Peet, Priceless: A Survey of Water, Economist, July 19, 2003, Page 6; Water Industry: Frozen Taps, Economist, May 31, 2003, p. 56.

[v] Marco Vigliotti: Plant Referendum on Sept. 25, Page 3, Regina Metro, August 15, 2013.

[vi] Catherine Doyle and Timothy J. Murphy: P3s in Wastewater Treatment Facilities: Opportunities for Municipalities, Nov, 2012. See more at: http://www.mcmillan.ca/P3s-in-wastewater-treatment-facilities-opportunities-for-municipalities#sthash.O8vpxymC.dpuf

[vii] Brent Patterson. 3 December 2012. “Regina Sells its Water for Potash Mining”, http://canadians.org/blog/?p=18251. 

[viii] Deloitte. 22 January 2013. “City of Regina Wastewater Treatment Plant Expansion & Upgrade Project, Summary of Delivery Model Assessment”, Page 25. Hugh Mackenzie. 6 May 2013. “Flushing Money away”, Page 17.

[ix]The Council of Canadians. 29 August 2013. “Conference Board of Canada Report Sweeps P3 Problems under the Rug”, http://www.canadians.org/blog/conference-board-canada-report-sweeps-p3-problems-under-rug.

[x] Government of Canada: Bear River Solar Aquatics, Aug. 13, 2013. Please also see the website: www.collectionscanada.gc.ca/eppp-archive/...nova/bearriver.html.