The notion of partnership is key. As Robert Farris, the president of Interwest, describes it, that partnership has three legs: the public agency, along with legislation that enables public-private partnerships; the private side that takes on the up-front risk and brings in capital; and the acceptance of the community where the project is located. "If one leg is missing, the project remains possible but becomes more difficult," adds Farris, whose company is working with South Carolina to build an Interstate connector road.
As always, cost-cutting is a popular goal of privatization, and that's what motivated the Tampa area and Atlanta to bring the private sector into their drinking water systems. But accomplishing projects today that otherwise would remain in the far-distant future is also important. Both Washington State and South Carolina officials say their bridge and highway projects, respectively, would still be theoretic doodles on paper without private-sector participation.
Another motivating factor is the desire and need to take full advantage of expertise in the private sector that would be next to impossible to duplicate. That's what has driven many a water privatization project and is at the heart of Pennsylvania's tapping of Unisys for mainframe outsourcing and why the Port Authority of New York and New Jersey is looking to Schilpol, which manages a number of European airports, for its John F. Kennedy airport project.
All of these jurisdictions are approaching privatization critically. They have put their partners-to-be through their paces--the companies' finances, skills, experience and plans were carefully examined--to make sure that the relationship would succeed. After all, as Curtis Haines, director of Pennsylvania's Bureau of Consolidated Computer Services, puts it, "It can't fail. It would be too painful to both sides."
NEW LIFE FOR AN OLD TERMINAL: John F. Kennedy International Airport, New York
It wasn't hard to see that the International Arrivals Building at John F. Kennedy Airport in New York was showing its age and, by the early 1990s, hopelessly obsolete. It was uncomfortable and unappealing. Check-in facilities were inadequate, and the flow of traffic inside the building was not efficient. Hold rooms at the gates had such limited capacity that airlines did not announce gates until half an hour before departure.It also wasn't difficult to figure out what to do about the problem: The building needed to be replaced. The hard part was working out how to pay for a modern facility that would be an appropriate and secure welcoming ground for U.S. citizens returning from abroad or visitors from other countries arriving in the United States. The price tag for a design the authority had in mind was $1 billion, and the Port Authority of New York and New Jersey, responsible for running not only JFK but also LaGuardia and Newark airports and other area facilities, didn't have that kind of money to spend on JFK.
So, the authority went looking for a private-sector partner. And it wasted no time in selecting one. Having given all proposers its design and analyses as a base to work with, the authority was able to select a winner in April 1996, one month after submissions came in. Negotiating all the details with Schilpol USA/LCOR took a little over a year. "We went to great length to define our partnership," says Barry Abramowitz, assistant director of aviation at the port authority.
The joint venture has to oversee an extraordinarily challenging and complex project. It must deliver and operate a new building that has to be constructed while the old one remains in use on the same site. Then, when the new building is in place, the partners will share in the revenue from it. Rather than setting up a simple percentage, the authority developed an intricate formula that divides revenue into 20 "buckets." The complexity had a purpose: The authority wanted to make sure that in all possible business scenarios there were appropriate incentives for the private-sector partner to stay in the game and operate a first-class building.
The potential profits are considerable: Current revenue is $80 million annually; projected revenue is $130 million.
Schilpol runs a number of European airports, shaping them more like shopping malls than merely places to get on and off airplanes. The 1,500,000-square-foot new terminal is designed to include 100,000 square feet of retail, slightly higher than the average for other U.S. airports. The port authority has to sign off on any major concession proposal.
As the $1.3 billion replacement goes up, the partners stay in close touch both with hands-on project people and business managers. There also are formal monthly and annual meetings. "Communication is fairly successful," Abramowitz says. "We don't always get what we want, but still we communicate."
"The biggest challenge is running the old terminal while building the new one," says Dave Sigman, senior vice president of LCOR. The current building runs east-west, and the new one will run north-south. It will have 16 gates but can expand to more than twice that many eventually. Most of the existing building will be operating until the end.
Construction is running somewhat behind schedule and over budget but within the expected range, Abramowitz says. The developer has to absorb any extra cost; there is no recourse to port authority funds.
Completion is expected in the summer of 2001. So far, the partners are in agreement that the project is moving forward successfully and meeting the challenges of the construction phase. The major test of the partnership, however, will come after the new building is complete.
MAINFRAME MOVES: Pennsylvania Data Centers
"A big chunk of the state's lifeblood was being outsourced." That's how Curtis Haines, director of Pennsylvania's Bureau of Consolidated Computer Services, talks about the state's decision to consolidate and contract out a slew of its independent data centers. The centers do the bulk of data processing for the state, including handling welfare eligibility determination, authorization of unemployment benefits payment and processing of state tax returns.The mindset of partnership for the endeavor started very early on. Haines and colleagues spoke with other jurisdictions that had outsourced mainframe operations to learn from their experiences. They were told time and again not to view the outsourcing in the traditional us-versus-them way of thinking. They were advised to look for a partner, not a vendor.
Once they chose Unisys to be their partner in the project, the next step was to translate that partnering mindset into the nitty-gritty of contract language. For instance, formal service levels were defined so that as each of the 16 centers rolls into the public-private partnership domain, Unisys knows what the expectations are. Measurements are taken 90 days before the changeover so that, for example, if an agency has 0.9-second response time, that is the standard.
To make sure pricing did not become an issue, third-party benchmarking was set up. A third party will come in and compare the project with other large outsourcings to guarantee best pricing throughout the seven years of the contract. The contract also calls for economic benefits to be split 50-50.
While governments don't go into partnerships expecting to terminate them, Pennsylvania made sure that there was an amiable, civil way to break up the relationship if it wanted out of the deal. For instance, if Pennsylvania should decide to opt out, Unisys will sell back the hardware and keep its people on site for six months.
Despite the work and thought that went into the contract, not all eventualities could possibly be anticipated. For example, some software that should have been available wasn't. Informal negotiations led to splitting the cost of one product, and Unisys got an agreement for another that netted the commonwealth a better licensing deal than it would have gotten otherwise.
So far, five data centers have been outsourced, and Haines notes that, for the agencies involved, the process has gone relatively smoothly. Although there have been irritations and flare-ups, some users, Haines says, "didn't even know the mainframe moved."
MORE DROPS TO DRINK: Tampa Bay Water Desalination
Desalination is an expensive way to provide drinking water. Pumping groundwater isn't. But the Tampa Bay Water authority recently had to consider going beyond its natural supplies for water. The number of people living in the Tampa-St. Petersburg area is climbing rapidly, while the groundwater supply in the region is slowly draining down.To explore the desalination prospect, water authority officials looked to other localities for models to follow. But desalination of ocean water isn't done much in the United States. The two plants that exist in the country are on standby. So to make sure the potential facility would be as efficient as possible, the authority tapped the knowledge, experience and business savvy of the private sector. Five prequalified bidders were given flexibility to locate the plant wherever they thought would work best, then suggest a plan to design, build, operate and own it.
In the first round of proposals, the authority asked for delivery of 20 million gallons a day of water that met Safe Drinking Water Act standards--with the potential to expand to both 35 million and 50 million gallons a day.
To help narrow down its options for the plant and examine the possibility of building two plants, the authority had the second round of bidders--now narrowed to four--price capacities ranging from 10 million to 50 million gallons a day at three different water standards. It discovered noticeable economies of size at 20 million gallons, and found that water above the minimum standard would cost only 2 percent to 3 percent more. Expecting continued growth in the area, the water authority also requested the price for expansion to 35 million gallons a day, so that it could serve as a benchmark. And it demanded the right to buy out the facility at any time during the 30- year contract at a pre-established cost.
Last July, S&W Water LLC signed a contract to provide 25 million gallons a day to the authority, starting on January 1, 2003. That will provide about 10 percent of its needs. Over the 30 years of the contract, the projected average price of the desalinated water is $2.08 per thousand gallons--the lowest in the world. One reason the price is low is the company's siting of the plant. The facility can save a chunk of money by co-locating with an electrical plant. That way it doesn't have to construct a water intake or discharge structure.
Environmental permits for the 30,000-square-foot reverse-osmosis membrane plant must be in place by August, or the partner forfeits a letter of credit worth up to $9.5 million. If the water isn't delivered on time, the company covers the penalties and fines Tampa Bay Water would have to pay for not reducing its groundwater use. And once the water is being delivered, project manager Don Lindeman points out, the company only gets paid for the water it delivers. "It's a built-in hammer. They have incentive to do what they say in order to pay all their bills."
THE SMART SOLUTION: Atlanta Drinking Water
Not every city has companies approach it with offers to operate the drinking water system--and to hand over millions of dollars for the privilege of doing so. And maybe not every city would respond in the cautious, painstaking way that Atlanta did. Rather than simply letting the companies bid against each other, in 1997 the city set up a team of engineering and accounting management firms to help study its options for both drinking water and wastewater.The team came up with eight alternatives, which started with minimal in-house changes and went all the way to contracting out the entire operation. Savings for each alternative were estimated, as were future annual rate increases.
With that kind of information to inform his decision, Mayor Bill Campbell opted to bring in a private-sector partner to manage the drinking water system; the wastewater operations would follow suit later. Based on the consultants' estimates, the city was expecting to save $15 million a year on what would be the largest privatization of drinking water operations to date.
The procurement effort began two years ago with specifics spelled out from the start: The contract was attached to the Request for Qualifications and Request for Proposals. "We weren't blind men feeling an elephant," says Chief Operating Officer Larry Wallace. "We knew what we wanted in the contract. We said, `If you want to do business with us, this is what you have to do.'"
The five potential partners who submitted their qualifications then were asked for separate technical and cost proposals detailing such things as plans for operations, maintenance, staffing, use of technology and tracking customer information. The city evaluated the plans on cost effectiveness, technical approach, management team quality, equal business opportunity, employee relations and performance capabilities. Then each bidder came up with a best and final proposal to supply water to the 1.3 million households served, including wholesale accounts and people in other jurisdictions.
Three main priorities of the city were maintaining the quality of water, saving money and keeping water department workers in their jobs. The winner, United Water Services, committed to all three. It projected savings of $20 million a year over the life of the 20-year contract, signed in November 1998, and promised no layoffs, except for performance-based problems.
After the first year of operation, one nagging problem was solved under the new operator. The city had been behind for some time on leak detection and hydrant repair and replacement, carrying a backlog of as many as 3,000 work orders. There was no backlog by the end of '99, Wallace reports.
To help ensure the contract's success, the city hired an independent monitor and meets regularly with its partner at operational and supervisory levels. "We crossed our T's and dotted our I's," Wallace says. "We hope to have trust, but this is too important to rely solely on that."
ROAD WARRIORS: Greenville, South Carolina, Connector
Thirty years is a long time to wait to get a road built. Plans for an Interstate connector have been on the drawing board since 1968, and local demand for an alternative east-west arterial route on the southern side of Greenville, South Carolina, has intensified over the years. Moreover, the rural southern portion of the county has been growing, but the road system wasn't keeping pace.By all accounts, the Greenville area would still be waiting for a road if the state transportation department hadn't recruited the private sector.
"We decided to not approach projects the traditional way anymore," says Transportation Department Director Elizabeth Mabry. When the department sent out its Request for Proposals, it detailed what work had to be done and asked for assistance in financing, building and getting it up and running. Of the three responses the state received, only one came back suggesting private financing.
DOT liked the idea and the concept behind it. The developer proposed a toll road, with the tolls being used to pay back the developer. To finance up-front costs, the developer would issue private bonds. For its part, the state would retain responsibility for construction oversight and maintenance and would own the road. A board of local businesspeople would be the contractor; Phoenix-based Interwest would be the developer; local businesses would do the work.
As they set out on this new venture in February of 1996, transportation officials decided to build a relationship of trust with their partners and keep the state out of the business of micromanaging project details. "Everybody is focused on the end result," Mabry says. "We gave them the specs for quality guidelines and the location. They have to figure out how to accomplish it."
The private sector has a strong incentive to do the job right. If the road is little used, the developer team won't make its money back.
The 16-mile road connecting Interstates 85 and 385 is well under way and on schedule to be done on November 17, 2001, at a cost of some $209 million--none of it state money. The toll is expected to be about 10 cents a mile.
The construction staff overseeing the project reports satisfaction with the quality of work and the flow of information. Innovations have included modifications to the pavement design and the engineering of some structures.
"People don't yet understand what we've done," says John Walsh, program development engineer for the state's DOT. "We accelerated this Interstate link that would have been 20 years down the pike with current funding."
CROSSING OVER: Tacoma Narrows Bridge, Washington
Growth in population carries both good and bad baggage with it. More people means an expanding tax base, but it also means a demand for more services, some of which can be very expensive. Washington State is wrestling with that problem in the Puget Sound area, where burgeoning traffic demands more capacity on the bridge that crosses the Tacoma Narrows portion of the Sound.Currently there's one bridge there. It opened 50 years ago with a capacity of 60,000 vehicles a day; now, it carries some 90,000 cars and trucks every 24 hours.
Another bridge clearly is needed, and the state realized that some time back. Six years ago, the transportation department sent out a Request for Proposals and got three. It selected United Infrastructure Washington, a joint venture that offered to finance, design and build a bridge that would pay the costs back through tolls. But before things could move along, opposition surfaced. Citizen groups had environmental concerns, and some opposed the concept of a toll bridge- -even though the existing bridge had been a toll facility for its first 15 years. In light of the reaction, the legislature required holding an advisory vote of area citizens.
When the vote was held in November 1998, 53 percent of those who went to the polls supported a toll bridge. In addition, the Federal Highway Administration signed off on the project's environmental impact statement this March. With those two green lights, negotiations between the joint venture and the builder began again and are expected to be completed in September. Financing is scheduled to be in place by the end of the year, with construction to start by next January and completion four to five years after that.
The new suspension bridge will run parallel and south of the existing one, providing three eastbound-travel lanes with shoulders and space for bicyclist and pedestrian use. With future growth in mind, it will be designed to support a possible second deck. The old bridge will provide three westbound lanes and a shoulder. A $3 toll will be collected, both electronically and manually, from eastbound travelers. Up to 6,750 vehicles an hour can be accommodated--that's not quite double the capacity of the old bridge, on which 3,900 vehicles an hour can cross.
"Without this public-private program, the bridge would not be on the radar screen for funding," says Rhonda Brooks, program manager of the public-private initiatives program. "We can't even keep up with maintenance and preservation needs today." Washington's goal was to make sure it not only got the project under way but kept the cost as low as possible. The state is kicking in $50 million, and the developer has committed to a $300 million cost. The risk that there are cost overruns is borne by the developer, United Infrastructure Washington, and their design/builder, not the state.
The state has had to do things differently than with other construction projects, Brooks adds. It has had to let go of the control it normally has over such projects, although it also has shifted the risk of cost overruns and delays. The agreement spelling out all the details took 500 pages. Officials plan to keep a close eye on this first fixed-price, design-build transit project in Washington, monitoring the budget and timing.
Citizen opposition is still a factor. A group called the Peninsula Neighborhood Association has sued to stop the bridge, saying it would unfairly turn the state highway that it is part of into a toll road. Although the group lost in state Superior Court, the state Supreme Court will hear its appeal on June 22.
