City privatizes wastewater treatment

Privatization of wastewater treatment operations is nothing new, but Cranston, R.I., has adopted a plan that goes one step further.

In a 25-year lease/service agreement signed in March, Triton Ocean State, LLC assumes financial responsibility along with commensurate financial guarantees for system repairs and equipment replacements.

An up-front payment of $48 million to the city will dramatically improve Cranston’s financial position, says Mayor Michael Traficante.

Triton, a special purpose subsidiary of Stamford, Conn.-based Poseidon Resources Corp., will subcontract with Metcalf & Eddy, Wakefield, Mass., to design, build and acceptance-test the capital improvements, including advance wastewater treatment.

Triton will also subcontract with Houston-based Professional Services Group to operate and maintain the wastewater facility.

This approach to privatization of wastewater treatment offers a community the opportunity to secure private capital to finance improvements or to receive an up-front cash infusion to its general fund to provide taxpayer relief, says Alan Cohen, an economist with Omaha, Neb.-based HDR Engineering’s Municipal Advocacy and Economics Group.

HDR assisted in creating the economic model and crafting the technical terms of the agreement between the city and Triton. Other advisors included the law firm of Hawkins, Delafield and Wood and financial advisor Bear Stearns.

Cohen says the most important distinction between the more common private contractor operations and managed competition models and Cranston’s arrangement is the contractor’s guarantees for repairs/equipment replacement and assumption of financial responsibility over the term of the agreement.

The three- to five-year private contract operations and managed competition variants do not typically impose responsibility for major financing or refinancing on the contractor.

In Cranston’s approach, the primary goals are: to refinance system debt and fund future capital requirements without incurring a direct municipal obligation on the debt; to provide the city with a cash infusion to its general fund; and to shift economic risk for the implementation and financing costs of all future major repairs and replacements to a private party.

Cranston’s arrangement does not transfer ownership of system assets, but does transfer operating responsibility within the framework of a 25-year service agreement.

Shifting the city’s debt repayment obligation for the wastewater system to a service fee payment obligation, in conjunction with financial enhancements to the general fund created by a reduction of short-term borrowing, is expected to improve the city’s bond rating.