|Realization of necessary capital
improve- ments with private sector responsibility for design/build and cost and
performance guarantees Private sector financing for:
> Needed capital improvements
> Up-front contract payments providing municipalities with funds to meet other
permissible public needs
sector willingness to invest its own capital for:
Increasing efficiencies and reducing costs
The creation of additional revenue streams from the system which may be shared with the
This is good news to municipalities because it enables
more creative and flexible partnerships.
The new IRS regulations went into effect May 16, 1997, so
all new contracts and existing contracts renewed for a longer term will follow the new
rules. The revisions not only govern the nuts-and-bolts of specific contract terms, but
have far-reaching implications for the industry and privatization participants.
SHIFTING TO FULL-SERVICE
With the IRS Final Rules, a market shift toward long-term OM&M agreements could be on
the horizon, opening the door to a wide variety of previously-unavailable options. There
will be many new ways to structure public/private partnerships.
Long-term partnerships will make it easier for municipalities to assign responsibility of
entire systems to the private operator. In the past, short-term contracts were more
conducive to facilities only. Now, expanded service scopes will follow longer terms
because it will be more efficient to turn over more of the system
(water distribution and wastewater collection) and, in many cases, billing, collection and
In essence, communities can get out of the day-to-day water and wastewater business and
yet still own and control the assets. Cities will continue to have oversight and
monitoring while giving primary responsibility to a firm such as PSG whose core competency
is to operate, maintain and manage systems.
In addition, as a complete service deliverer, firms such as PSG will be capable of
providing not only standard OM&M services, but also design/build of capital
improvements and financing in the form of up-front contract payments that the community
can apply toward other permissible uses.
Some contracts will specify that anytime the law changes or the community needs a capital
improvement, the private sector
|partner could provide for
design, construction and financing. This arrangement offers municipal leaders simplicity
and convenience, yet at the same time, preserves their right, through ownership of the
asset, to reject proposals from the private sector partner for future projects.
REACHING ABOVE AND BEYOND
Long-term contracts will en-courage the private firm to
expand its own activities as well. Firms such as PSG will be able to invest in projects
because, after the payback period, there is time remaining on the agreement to make a
return on these investments. This is a great advantage to the public sector not only
because more capital improvements will be made to treatment systems, but also because
potential savings can be calculated into client fees, making firms even more competitive
and able to offer even lower fees to their clients.
Longer relationships will also give the private sector time to further explore
entrepreneurial opportunities. Under short-term contracts, private firms often see
opportunities for pursuing additional sources of savings for the public sector and revenue
for the private sector, but the timeframe for contracted services is too limited to fully
develop them into profitable ventures. At the same time, municipal officials may lack
sufficient resources to attempt the additional project on their own. Now, with long-term
agreements, the private firm assumes the risk in initiating the project, managing it,
taking responsibility for it and bringing in a previously-untapped revenue stream, with
provisions to share the revenue with the municipality so that both partners benefit.
Public sector jurisdictions are currently looking at the whole concept of better
government and how they can increase and improve their services for less. Why? Because
that is what taxpayers demand. More and more, outsourcing/privatization will be called
upon by the public sector as an integral tool in managing the overall delivery of public
The benefits of long-term partnerships between the public and private sectors are numerous
and varied. The new IRS regulations have made the privatization tool more powerful for
municipalities. There are more opportunities to be flexible and creative in tailoring a
relationship to the specific needs of a community. For these reasons, when looking at
establishing public/private partnerships, a long-term contract and its associated benefits
should receive serious consideration.
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