Excerpt of Page 12 and 13 of:

Guidance on the Privatization of Federally Funded Wastewater Treatment Facilities

available from Haig Farmer:

farmer.haig@epamail.epa.gov

tel.:  202-260-7279
fax.: 202-260-0116

The lease concept applicable to privatization of EPA funded wastewater treatment facilities differs from operating and tax-exempt lease structures. This type of wastewater lease structure establishes the contract terms for the local government, the owner of the facility, to enter into a lease agreement of the wastewater facility with a private partner. The private partner, as the lessee, frequently pays the local government a type of lease payment for the right to operate the facility for a specified period of time. The lease payment may be a one time, up-front payment, or periodic payments over the life of the lease. These payments are referred to as concession fees. The local government then pays the private partner an annual service fee to operate and maintain the facility. This annual service fee is comparable to the service fee paid under contract operations. However; the service fee under a lease includes an annual payment on the debt incurred by the private partner for concession fees. The lease arrangement allows the local government to retain ownership’s responsibility over wastewater rate setting, collection of user fees, and the municipal industrial pretreatment program.

The Clean Water Act (Title II) established EPA's construction grants program and specifies that grants should be awarded to “publicly owned” treatment works. The term “publicly owned” has been established to mean 100 percent ownership by a public entity. When a private entity invests in a “publicly owned” federally grant assisted treatment works. the action triggers the compensation requirements of EPA’s construction grants regulations.

OMB promulgated Circular A-102 to ensure consistency and uniformity among federal agencies in the administration of grants to state and local governments. One area of standardization is the uniform treatment of property acquired in whole or in part with federal funds, or whose cost was charged to a project supported by a federal grant. The uniform standards Include a prescription for the use and disposition of property acquired under a grant. EPA administers these uniform administrative requirements through its general grant regulations at 40 CFR Parts 30 and 31.

OMB Circular A-102, Attachment M, requires that any federal grantee assure EPA that “it will not dispose of, or encumber its title or other interests in the site and facilities during the period of federal interest or while the government holds bonds, whichever is longer.” When local governments applied for EPA grant assistance to fund local wastewater treatment works, they agreed not to dispose or encumber the proposed facilities during the period of federal interest. This means that property acquired under a grant can not be sold or pledged as collateral in the event the grantee needs to refinance the grant funded facility. This condition limits the grantee’s ability to draw on the federal equity invested in the facility to raise additional capital during the period of federal interest. By giving this assurance the recipient agrees to retain the financial structure in place at the time of the grant award and relinquishes its option to financially restructure. This ensures the federal agency that the financial structure it approved at the time of grant award will not be changed.

OMB Circular A-l02, Attachment N, requires that the “title to real property shall vest in the recipient subject to the condition that the grantee shall use the real property for the authorized purpose of the original grant as long as needed.” This rule effectively limits the grantees use of its federally funded Property, or discrete portions of that property, to its originally authorized purpose.

These rules regarding the deposition of federally funded property pose barriers to lease and sale types of privatization agreements for local governments which received EPA construction grant funds. These types of transactions are viewed as dispositions of federally funded proper under OMB rules, because they temporarily or permanently transfer the facilities title or use the title as a form of collateral.

Executive Order (E.O.) 12803 was issued in 1992 to simplify the disposition of the federal interest in grant funded projects. The E.O. serves as a means for EPA to subordinate the federal financial interest in the facility to those of the local and state govern ments and allow the federal government to dispose of its interest in the wastewater facilities funded with federal construction grants. Therefore, when EPA approves a lease or sale privatization agreement, the Agency relinquishes its interest in the federally funded portion of the facility. However, the Agency still retains its interest in the NPDES and RCRA permit requirements on the facilites.