Push on for private funding for public water systems

By Jordan Press, Postmedia News December 18, 2011

OTTAWA — It was a simple announcement of a new biosolids treatment facility in Sudbury, Ont., built through a public-private partnership, including an $11-million investment from the federal government.

The money came out of a $1.2-billion fund overseen by a Crown corporation whose sole responsibility is to make public-private partnerships, also known as P3s, the norm when it comes to financing infrastructure projects in Canada, including water and wastewater infrastructure.

Standing in the way are “many myths and half-truths” about P3s that leave a public leery to put crucial pieces of infrastructure in private hands, according to a study released under an access to information request.

The study done for PPP Canada, and released to Ottawa-area researcher Ken Rubin, recommended that the three-year-old Crown corporation engage in a public education campaign to further its long-term goals, but also in the water and wastewater sector.

PPP Canada spokeswoman Lisa Mitchell said none of the recommendations have been adopted or rejected. The report was penned by Victoria, B.C.-based Opus International Consultants Ltd. and delivered to PPP Canada in June.

“The recommendations are under consideration,” she said.

PPP Canada has already provided about $25 million in funding to three water or wastewater projects, according to its website. That total is just less than one-fifth of the approximately $131 million doled out from the fund, according to the PPP Canada website.

Mitchell said there are four more projects that have been approved for funding and more could be approved in the near future.

A fourth rounding of funding will be open for competition early next year, Mitchell said, and PPP Canada will be holding information sessions for municipalities and groups interested in applying for funding.

Municipalities are increasingly interested in going the P3 route to finance these multi-million dollar projects. Mitchell said the corporation has seen an increase in the number of cities inquiring about how to best use the private sector to build public infrastructure.

“From our perspective, (the study) was an opportunity to assess opportunities,” she said.

Investment in water and waste water treatment systems are set to increase dramatically over the next two decades as new federal regulations come into effect. The study predicts work will be bunched around implementation deadlines of 2019, 2029 and 2039.

“It is hoped all eligible municipalities will consider applying to the fund for support of the eligible construction costs of their water, wastewater or biosolids infrastructure projects,” the report says.

Not every project is a perfect fit for a P3, Mitchell said. Successful projects are usually very purpose-specific infrastructure where the private sector has building expertise, allow for risks in parts of the project to be transferred to the private partner and that involve performance-based contracts, she said.

Andrew Sancton, a leading expert on municipal governance, said P3s have been used in other countries to finance infrastructure projects, but water and wastewater may not be the best possible projects for them.

“I think there is a role for P3s in the financing of these things . . . but I’ve always been puzzled about why the federal government has put up money for subsidizing water supply,” said Sancton, a professor at the University of Western Ontario in London, Ont.

“Most people think water and wastewater should be paid out of user fees and it should be self-financing.”

The study gives a theory about why the federal government funds these systems. The consultants wrote that facilities are usually underfunded until local governments can no longer delay spending money on upgrades. It’s at this point that public perception changes and when upper levels of government step in and provide funding.

“As the severity of the consequence of inaction increases, the likelihood of receiving funding from the higher levels of government also increases,” the study said.

However, it’s also a potential opportunity for private sector investment, according to the report, but only if the minimum cost for the project is $40 million.

The consultants recommended PPP Canada focus its efforts on developing projects on clean, open land rather than redeveloping former industrial sites usually swamped with polluted soil known as brownfields. Municipalities with an industrial history often find these sites clustered around city cores, which makes redeveloping the prime locations challenging.

The consultants recommended PPP Canada focus more on greenfield development, even though those “developments are few by comparison.”

Another barrier to water-sector P3s is the direct impact a failure in the system has on users, which requires immediate responses. That’s different than, say, a power grid where the failure of a power link can be picked up by backup systems.

The public is also leery about a P3 leading to another Walkerton, Ont., incident, when seven people died and hundreds more were sickened by an E.coli outbreak in the town’s drinking water supply.

“For this reason, there are barriers to rapid proliferation of the P3 model in these sectors based on negative perceptions in the public space,” the report said.

Sancton said the irony of this concern is that a form of P3 was put in place to protect Walkerton’s drinking water after the E.coli outbreak.

Another barrier is the ever-evolving world of regulations. The uncertainty about what new regulations will be announced by the federal or provincial governments would require municipalities to assume the risk of future upgrades, the report says.

“Accordingly, this is not a risk that can be easily transferred to a P3 supplier, and will likely remain with the municipality to minimize risk premiums,” the report says.