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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

Supporting the fair, effective, and financially sustainable delivery of environmental programs through: • Applied Research • Teaching and Outreach • Program Design and Evaluation How you pay for it matters http://efc.sog.unc.edu @EFCatUNC 2

Acknowledgements Environmental Protection Agency The West Coast Infrastructure Exchange (WCX) promotes the type of new thinking The EPA Water Infrastructure and necessary to solve our infrastructure crisis. Resiliency Finance Center WCX is a unique regional platform designed provides financial expertise to to spur infrastructure innovation and communities that are financing drinking accelerate a pipeline of innovative water, wastewater, and stormwater infrastructure. infrastructure projects in California, Oregon and Washington. www2.epa.gov/waterfinancecenter westcoastx.com 3

My community has had significant problems (cost overruns, poor project delivery etc.) with a DBB project in the past. A. Strongly Agree 42% B. Agree 31% C. Neutral 22% D. Disagree E. Strongly Disagree 3% 3% Strongly Agree Agree Neutral Disagree Strongly Disagree 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..) 44% A. 10% B. 20% 25% C. 50% 19% D. Greater than 50% 11% Findings of an informal poll of session participants at Stanford Greater than 50% 10% 20% 50% Executive Education program on public-private partnerships in the water sector. October 28, 2015.

http://efc.sog.unc.edu Findings of an informal poll of industry leaders at the 2015 American @EFCatUNC 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 36% B. Agree 31% C. Neutral 25% D. Disagree E. Strongly Disagree 8% 0% Strongly Agree Agree Neutral Disagree Strongly Disagree 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 • On-going capital • Project development refurbishment costs costs(legal, staff etc.) • Utility costs • Design costs • Risk transfer costs • Finance costs • Contract management • Construction costs • Non-monetized • Out of pocket costs costs/externalities (access to grants • …… . • O&M costs

Rumsfeldian Analysis of Costs Knowns Unknowns • Cost of capital • Likely risks Known • Annual payments • Costs for the road not • Debt service taken • O&M Agreement • Acts of God • ?????? • Technology Unknown • 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 58% B. Total savings over life of project C. NPV over life of project 19% 19% D. First 5 years of cash 3% flow (expenses and revenues Cost per account/bill NPV over life of project Total savings over life of pro... First 5 years of cash flow (e... 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 45% A. Cost per account/bill 36% B. Total savings over life of project C. NPV over life of 9% 9% project D. First 5 years of cash flow (expenses and Cost per account/bill NPV over life of project Total savings over life of pro... First 5 years of cash flow (e... revenues 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$cipated Type of Savings Rialto (CA) Concession ????, Project cost, O&M, Full service water and wastewater retained risk Concession O&M, capital plan Bayonne water/wastewater collection/ (NJ) distribution and customer service Project cost Woodland Water withdrawal, treatment, Design - Build - Davis (CA) and bulk transfer Operate Wastewater treatment Retained risk, out of pocket Regina Design - Build - (Canada) funds, design/construc$on Finance - Operate - Maintain Wastewater treatment Project Cost, Capital Plan, O&M Santa Paula Design - Build – (CA) Operate Finance Own Desalinated drinking water Technology Risk San Diego/ Water purchase agreement Carlsbad (CA) Risk, Hedging Long Term Costs San Antonio Water rights, withdrawal, Design - Build - (TX) treatment, transmission Finance - Operate - Maintain Middletown Full service water and Concession Capital Plan, O&M (PA) wastewater

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 Tradeoffs • Project cost • Project preparation • Regulatory risk • Contract management • Permitting costs

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 35% 31% B. Agree 27% C. Neutral D. Disagree E. Strongly Disagree 8% 0% Strongly Agree Agree Neutral Disagree Strongly Disagree 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 0% 0% 0% 0% 0% Strongly Agree Agree Neutral Disagree Strongly Disagree Response Counter

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

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

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