Municipal finance specialists say two things stand out about Nassau County’s plan to partially privatize its aged sewer system: the system’s large size and the large debt required by the deal — at least $750 million.
Despite the debt and vehement political and civic opposition, some finance experts think it could succeed if investors can be convinced that the private operator chosen by Nassau, United Water of Harrington Park, N.J., will be able to cut costs without skimping on service or environmental protections.
Under the proposal, County Executive Edward Mangano’s administration would find a private investment group to lend at least $750 million — money raised from individual investors. That money is to be repaid by the county, from sewer fees and from system efficiencies instituted by United Water.
The money loaned by the investment group would go into the county treasury, under the latest proposal from Mangano’s office, to reduce the county’s debt of $3 billion, including $465 million in sewer system borrowings. The investment group is responsible for paying for about $400 million in improvements that the system needs.
United, which will get a flat fee from the investment group for operating the system, would have to reduce operating costs while being limited in its ability to increase user fees. United could raise those fees only with approval from the county, and not until after 2015.
Many aspects of the proposal are still unknown: whether it will be approved by the Nassau Interim Finance Authority, who the investment group will be, whether it can raise sufficient funds and how much United Water will be paid to operate the system.
Deputy County Executive Rob Walker said in an interview the sewer system has revenues now of about $112 million a year and is losing $25 million to $30 million.
The upfront debt presents a large hurdle for the project, according to the National Council for Public-Private Partnerships, a nonprofit group.
“That’s a heavy load to put on a wastewater plant,” said the group’s spokesman, Richard Norment.
William G. Reinhardt, editor of the trade journal Public Works Financing, which covers public-private investments in infrastructure, said that, among sewer and water projects, “None have come even close to that magnitude” of debt.
The deal would have to be approved by the Nassau Interim Finance Authority, which took control of the county’s finances last year after finding a $176-million budget deficit. One member, George Marlin, a banker and conservative columnist and author, already has panned it as unworkable because he contended it will force big increases in sewer fees. Authority chairman Ronald Stack didn’t return a call seeking comment.
Walker called criticisms premature and in some cases politically motivated. He said a private operator should be able to run the system 20 percent to 30 percent more efficiently than the county. “We have to look outside the box,” he said.
DJ Gribbin, a managing director for the Australian investment bank Macquarie Group, which specializes in infrastructure investments, said significant savings are possible: “The benefit of having the private sector operate it is they are incentivized to find efficiencies.” He added, “There’s a huge amount of global demand for investments in U.S. infrastructure.
Colin Myer, a managing director at FMI Capital Advisors, Inc., and a specialist in public-private financing at the engineering and construction firm FMI, said political obstacles can discourage investors: “If there’s one thing all of us in this business try to assess, it’s how much political will there is to carrying this across the finish line.”
Five large public-private partnerships
Nassau County’s proposal for United Water, a Harrington Park, N.J., subsidiary of French Suez Environment, to run its sewer system would create a large public-private infrastructure project. Some other sizable ones include:
Indianapolis Sewers: United Water has run the city’s sewer and stormwater system under contract since 1994, saving the city $189 million so far, according to the National Council for Public-Private Partnerships. System serves 800,000 homes and 41,000 businesses in the region. Major capital improvements remain the city’s responsibility. The contract is for $28.3 million a year.
Atlanta Water supply: City contracted in 1999 with United Water to manage water supply system in what then was the largest deal of its kind. But it collapsed in 2003 amid soaring costs to United, which underestimated the system’s state of disrepair, and disputes between United and the city over how much was saved by privatization. The city, with more than 4 million residents, had hoped savings by privatization would help pay for needed upgrades to non-privatized sewer system. Still, the National Council of Public-Private Partnerships estimates more than $16 million in savings to the Atlanta-Fulton County Water Resources Commission from the $22-million-a-year arrangement.
New Orleans Wastewater facilities: A partnership formed in 1992 by the Sewerage and Water Board of New Orleans and Veolia Water, a unit of the same French corporation that runs Nassau’s bus system, claims to have saved the city $33 million since 1992. On-time efforts to restore the two wastewater plants in 2005 after the Hurricane Katrina disaster won praise from the U.S. Conference of Mayors and National Council for Public-Private Partnerships, at a cost of $42 million, managed by Veolia and paid by Federal Emergency Management Agency.
Port of Miami Tunnel Project: A $900-million collaboration between Florida transportation department and MAT Concessionaire Llc, of Miami, to reduce the 16,000 daily truck and cruise-related vehicles on downtown streets by linking the port with interstates 95 and 395. It’s under construction, with completion scheduled for 2014. In lieu of tolls, the private operator receives regular payments from the transportation department during and after construction.
Capital Beltway I-495 Express Lanes, Virginia: Five-year, private-public $1.4-billion project to improve traffic flow on 14-miles of the Capital Beltway with four new high-occupancy toll lanes, to be completed late this year. State retains ownership of new lanes, to be built and operated by a consortium of Fluor Corp. of Irving, Texas, and the TransurbanGroup of Australia. State provides $409 million grant to support construction and, later, shares in toll revenues. Another $349 million is being provided by private equity.
Sources: National Council for Public-Private Partnerships; Veolia Water; Port of Miami Tunnel Project; Virginia Department of Transportation; United Water