Water Industry News

Design, Build, Own, Operate, and Transfer P3 model – also called:

 Long-Term Concession Agreement

By Lawrence Chertoff

 A long-term concession arrangement, also called Design, Build, Own, Operate and Transfer (DBOOT) is a form of public private partnership in which a private entity – the concessionaire -- is contracted by a government agency, usually a city or county (or parish) to design, build and operate a private facility for the exclusive benefit of the government agency in return for a fixed monthly fee from that government agency. The fee would compensate the private entity (concessionaire) for all capital investment, operating costs, interest on debt and return of capital and earnings on capital and operations. The government entity is responsible for setting the customer rates or tax subsidy needed to pay the monthly fee to the concessionaire. The concessionaire, under contract, must provide services and meet standards as required in its contract with the government agency.

 Each concession contract has clauses specific to that project but generally follow a similar pattern. An investor – the concession owner --  pays for the design, engineering and construction of the required treatment facilities and/or collection system and associated effluent conveyance systems. The concessionaire (owner/investor) provides the equity and debt for the capital investment.  The concessionaire would also contract with an operator for the facility. This investment would include, in addition to tangible physical assets, permits, rights of way, intellectual property and customers in the project area by buying private wastewater systems, or take over municipal customers if available.

 The concession/owner would get his investment returned through the service contract with the municipality. Typically the service contact amortizes the initial capital investment over the full term of the concession agreement of 20 to 50 years. The service agreement would also compensate for the operating cost.

 The base-case operating costs are based on initial operating costs and are adjusted regularly, usually annually, to account for inflation and change of volume processed. Often Bureau of Labor Statistics indices are used for costs specific to the geographical region, cost of labor, chemicals and other consumables, and energy. Energy costs are sometimes passed-through to the government agency because of its price volatility, but it may be indexed. The service fee is also adjusted to accommodate an increase (or decrease) in volume of water and wastewater treated. Because actual costs may not increase in direct proportion to volume – economies of scale – the agreement may allow for some annual negotiating flexibility to account for true costs changes with goal of keeping the profit percentage to the concessionaire within a fairly narrow band. Any costs reflecting changes of law are typically passed through to the government.  An increased standard imposed by environmental regulators would be documented and may result in an increased monthly service fee if added capital investment and increased operating costs are required. It is a true partnership that does require some good will among the parties. Sometimes open-book accounting is used, at worst outside independent consultants are used to verify needed improvements and associated costs. At worst, binding arbitration is used.

 The concession owner guarantees performance. The facility must meet contracted standards. That typically means existing EPA standards or greater. The concession owner is responsible for fines from environmental infractions.

 The monthly fee from the government agency is set by a mathematical formula.

 The municipal government (public partner) is responsible for setting and collecting customer fees. The actual billing and collection practice can be contracted to a private company. As I understand the contemplated project, the Parish would deliver to the private facility wastewater. The wastewater becomes the responsibility of the project owner from that point forward the concession owner may, or may not, actually own the wastewater. That would depend on contractual negotiations (ownership of the effluent allows the owner to sell the treated wastewater for secondary use).

 The current private wastewater treatment company could contract with the concessionaire for operations and/or construction work. The private treatment company would also receive compensation for assigning its customers to this project; that compensation could be taken in one lump sum at financial closing or over a period of time – whatever the two private parties agree to.

 Finally, at the end of the concession period, typically, the facility would become the property of the government agency (public partner). The transfer of ownership could be for consideration or transferred at no charge.

 Also, the concession agreement may include a provision for the government partner to acquire the project at a date earlier than the prescribed contract termination date.  A buyout schedule is agreed upon in the concession negotiation. That form of exit ramp gives comfort to officials, but typically is very costly – by design -- and is rarely used.

 There are many ways to tailor a concession agreement. For example, it may to everyone’s benefit to have the asset owned by the Parish and leased to the “owner” to reduce taxes and be able to accept grants. But, a Parish-owned asset would prohibit our ability to award DBO contracts.

Question? Contact Lawrence Chertoff: larry@chertoff.com