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

Private 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 munici- pality.

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.


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 customer service.

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.


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 services.

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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