Last week at the Water Advisory Committee (WAC) hearings, the committee heard presentations on the Design-Build-Operate (DBO) process which Herb Niederberger, Davis’ General Manager of Utilities, Development and Operations, argued could save the city as much as five to ten million dollars over the course of the contract.
Much of the research backing that appears to be industry-oriented.
The rise of DBOs appears to coincide with the loss of federal funding that water municipalities relied upon 20 to 30 years ago.
In one article, Dan McCarthy, President of Black & Veatch Water Americas which operates the largest DBO project in North America argued, “The public-private partnership is something that is going to be needed for the (municipal water) industry to deal with the backlog of work that is currently out there; the traditional approach is not going to cut it in all cases.”
Proponents argue that the DBO method streamlines the more traditional design-build or design-bid-build approach. The advantage of this approach is that it grants a single contract to a single entity (or team of entities).
Writes Tim Adams, editor of WaterWorld, “In a DB, the private entity may only focus on up-front cost-savings and not consider the treatment plant’s long-term efficiencies and cost-savings. In a DBO, however, the private entity must focus on the treatment plant’s long-term goals because the company will ultimately be responsible for the cost-savings and efficiencies over the next 10 to 20 years.”
He adds, “The DB procurement method may allow the private entity to purchase a piece of equipment at a lower price for up-front cost-savings, but if the equipment is a tremendous user of electricity, the municipality’s operational costs will significantly increase, thus negating any savings made by the purchase.”
In a 2011 peer-reviewed paper published by the American Society of Civil Engineers, Smith Culp Consulting finds, “The Design-Build (DB) project delivery method was found to provide cost savings of up to 43% and reduced project schedules by as much as 33% when compared to the conventional Design-Bid-Build (DBB) approach for water and wastewater treatment projects.”
In their article, they describe that alternate project delivery methods like DB and DBO are being considered as alternatives to DBB.
They write, “In DBB, one party designs the facility, it goes out to bid and the low-bid contractor builds it. In DB, one company both designs and builds the facility. In DBO, the same company also operates the facility and in DBFO, also finances it.”
They add, “DB provides the owner with one source of responsibility for both design and construction (and operation when using DBO). This eliminates disputes about whether the responsibility to solve a project problem rests with the designer, constructor or operator.”
But, of course, while the paper is peer-reviewed, it’s also industry-published. Smith Culp Consulting has advised several communities on negotiating DBO contracts for major water and wastewater projects and has helped cities determine the best delivery method.
On Thursday, Professor Ed Schroeder argued that the most important part is making sure that the contract is done correctly because he said “that’s where all the cost savings and the control are going to be coming from.”
He added that, once the contract is signed, the city or JPA will lose control.
“You lose control of the process and you have less input into it as it goes along,” Professor Schroeder added. “You may have some surprises at what comes out of the other end in terms of the product. That’s something I think is of concern.”
At the same time, this model significantly lengthens the commitment to private operation of a public facility and thus significantly redraws the boundaries between the public and private sectors.
As Nancy Price argued last week, “Our policy makers seem to think privatization will achieve efficiency and economies. Nothing could be further from the truth.”
She adds, “We take for granted that clean water will flow when we turn on the tap.”
Ms. Price writes: “Recent statements by various City Council members and other interested parties would have us believe that if a private, for-profit company operates and manages the new water project, as long as there is public oversight this is not ‘privatization.’ “
However, as she argues: “This is exactly what a public-private partnership is: It is government outsourcing a service to a private – in this case, for-profit – corporation. You can bet the company the WDCWA selects will not agree to only a design-build contract, but will insist on an operate contract to lock in reliable income and profits from rate-payers for a fixed number of years.”
She adds, “When and if operation returns to the WDCWA and the cities, can we be assured that rate income actually was spent on sufficient maintenance, so that after the contract expired, the public wouldn’t be liable for unanticipated new costs?”
Proponents of the DBO would argue that the contract itself would ensure such adherence.
But another question would focus on the failed projects of two of the operators that have placed bids – Veolia and United Water. The question would be twofold: first, were any of the failed projects DBOs and, second, what led to the failure.
Indianapolis is a particularly concerning potential example of a private ownership going sour.
In 2002, Veolia would sign a massive 20-year, $1.1 billion contract to provide water service to more than one million people.
However, three years later, a federal grand jury would subpoena four Veolia employees as part of an investigation into allegations that the utility falsified water quality reports.
What the investigation would find is that the company had cut back on staffing, water testing, treatment chemicals and maintenance.
“We did lose money, more than we anticipated,” then-Veolia President Tim Hewitt told the Indianapolis Star in 2005. In reference to the ardent public opposition to the deal, he added, “We’ll get through this but have a black eye.”
Except they did not get through it, and the city had to ultimately pay the company additional money while reducing the company’s responsibilities. Amazingly, “Indianapolis then sought to raise rates by 35 percent to pay for these additional expenses along with costlier capital improvement projects.”
Would a design-build-operate model have prevented these problems? Part of the concern is when overruns occur, where would cost-savings come from? In many of these failures, the cost-savings occurred at the expense of personnel – how would a DBO prevent those?
As Nancy Price argues, “These same officials want us to trust that with sufficient public oversight, the private sector can be held accountable.”
“Why should we?” she asks pointing out, “This is not the experience in the United States or elsewhere where privatization of public water services has occurred, and after years, many of the same cities have taken their water utilities back into public control.”
Indeed, it was not very long ago when every public official in the county supported a move from PG&E to the publicly-run SMUD, arguing that costs and quality of service have been shown to better under SMUD than under PG&E.
We need to ask more questions before we decide on a delivery method that, while currently in vogue at least among industry sources that might profit from private operations, has a limited shelf life in terms of empirical data. The wave of DBO has not even been around 20 years – hardly the track record to make bold assertions and provide the data needed to make a sound decision.
—David M. Greenwald reporting
In 2002, Veolia would sign a massive 20-year, $1.1 billion contract to provide water service to more than one million people.
However, three years later, a federal grand jury would subpoena four Veolia employees as part of an investigation into allegations that the utility falsified water quality reports.
“What the investigation would find is that the company had cut back on staffing, water testing, treatment chemicals and maintenance.
“We did lose money, more than we anticipated,” then-Veolia President Tim Hewitt told the Indianapolis Star in 2005. In reference to the ardent public opposition to the deal, he added, “We’ll get through this but have a black eye.”
Except they did not get through it, and the city had to ultimately pay the company additional money while reducing the company’s responsibilities. Amazingly, “Indianapolis then sought to raise rates by 35 percent to pay for these additional expenses along with costlier capital improvement projects.”
Would a design-build-operate model have prevented these problems? Part of the concern is when overruns occur, where would cost-savings come from? In many of these failures, the cost-savings occurred at the expense of personnel – how would a DBO prevent those?”
David, am confused, was this a DBO or DB?
The Indianapolis case appears to be neither, they signed a contract to take over the existing project and operate it. Some will say well it’s a different animal and it may be. But that’s why I ask the question as to whether the DBO would have foreseen and prevented these problems when a direct contract could not.
Good question SODA, and David has answered it correctly. The contract was simply the O, with the DB having been done by firms other than Veolia, and even the initial period of O having been done by someone other than Veolia.
Jerry Gilbert addressed the issue at some length in his presentation to the WAC on August 23rd. The link to his presentation is [url]http://archive.cityofdavis.org/media/wac-2012-08-23.ram[/url] and Jerry’s presentation starts at 6:15 of the video and lasts for an hour and a half until 1:43:30. Jerry by his own admission is an unabashed supporter of the DBO method, and specifically the DBO method recently deployed at two plants in Seattle and one in San Diego. With that said, Jerry shares a wealth of information that will put anyone who listens to and watches his presentation and Q&A in a much more informed position about DBO and the specific DBO approach being proposed here.
After the September 13th WAC meeting I had a personal conversation with Dennis Diemer that identified a possible middle ground alternative that may in fact give Davis the best of all worlds. Specifically, it would be to follow the DBO process as outlined by jerry Gilbert and set the initial term of the O portion of the contract at something on the order of 3 years. The logic behind this is that that term would coincide with the “warranty shake out period” where in addition to all the normal tasks of Operation of the plant, the DBO firm would work closely in conjunction with a public employee team to validate the fact that all the equipment installed is operating according to each respective manufacturer’s specifications. Such a shake out validation is going to be conducted by the DBO firm regardless because they do not want to get stuck with the costs of defectively manufactured components that can be replaced under warranty by the manufacturer of the component. At the end of the warranty shake out period, the DBO contract would have an option exercisable by the public entity to extend the contract under already negotiated terms for an additional multi-year period.
That kind of contractual arrangement would provide both the public entity and the DBO firm with a clear evaluation period in which the DBO firm could clearly demonstrate whether they have “earned” the right to be granted a longer term operations contract. Further it would provide a period where the close joint scrutiny/inspection of the plant as-built and as-warranteed would ensure the public entity that if they chose not to extend the contract and as a result take over the plant operations, they would be taking over a plant that would not be suffering from any of the flaws that Nancy Price has expressed concern about.
It is a middle ground option that focuses on “merit” and as such resonates for me.
Thx Matt as always
Do you think any of these firms (or hopefully others less encumbered) would be interested in a 3 yr term. You are saying 3 yr with ‘option for more or turn over to public’ would be the terms ?
SODA, I honestly don’t know, but I believe Dennis Diemer will be reaching out to them to discuss this possibility. It really would be inappropriate for me to ask them, but is well within Dennis’ realm IMHO.
Until we get a detailed project proposal for West Sacramento, we have no baseline comparison between a Public-Public Partnership with rates based on building some infrastructure and public not-for-profit operation, and the Woodland-Davis Clean Water Agency/JPA Public-Private Partnership with rates based on building a entire new infrastructure and “O” for what ever number of years with a for-profit multi-national corporation such as Veolia.
We may not get the detailed project proposal with West Sacramento that we deserve, because the two City Council members negotiating on behalf of Davis ratepayers are, for their individual reasons, advocates for the Public-Private venture.
Nancy Price: “[i]We may not get the detailed project proposal with West Sacramento that we deserve, because the two City Council members negotiating on behalf of Davis ratepayers are, for their individual reasons, advocates for the Public-Private venture.[/i]”
Nancy, do you have evidence that the Mayor and Brett are not acting in good faith during the ongoing negotiations, or is this just an example of throwing mud in the hope that some of it sticks?
I thought the two negotiating for the city were Krovoza and Lee. Lee certainly is not sold on the Woodland project. So I think that comment is inaccurate. The reason we will end up with no detailed proposal is that the entire city – at least staff and most of the council favors Woodland for whatever reason.
“or is this just an example of throwing mud in the hope that some of it sticks?”
I don’t understand why you are making accusations against Nancy – does she have a history of throwing mud in this community? Because in my dealings, she is one of the people that is generally out there making proposals rather than attacking people. I think Nancy is mistaken here in terms of the facts – but i think you are out of line in terms of making the personal attack.
And I still question whether the WAC should even be looking the DBO issue. This is a community issue and from where I sit, the core of the WAC is well to the *right* (for lack of a better term) than the community. The private-public issue is as much a left-right issue as it is a fiscal one.
Three good posts in a row Growth Issue. I agree that 1) Brett Lee is not an advocate for any particular project. What I see him as is an advocate for a wise project. 2) Nancy Price does not have a history of throwing mud. 3) I tend to agree with you that the private-public issue is rater left-right.
With that said, I disagree with you that “the reason we will end up with no detailed proposal is that the entire city – at least staff and most of the council favors Woodland.” I really do not think that Brett Lee will allow that to happen. IMHO the only reason that Davis may not get a detailed proposal is that West Sac may look at the broad parameters of the deal (no water delivered to Davis for 3-6 years, therefore no cash inflows to West Sac for 3-6 years) and see that there really isn’t sufficient economic incentive to warrant committing (tying up) 12 mgd of production at this time. In B-School they say the “Cash Is King” and unless we reconsider the way the deal is presented to West Sac, there really isn’t a whole lot of “royalty” in our proposal to them as it stands now. JMHO
The other point I disagree with you on is the WAC makeup. Of the fifteen WAC members, I see at least eight members who are left of center on this issue. Kopper, Siegler, Sadler, Bartolic, Loge, Purkey, Marchand and myself. The WAC may well be more left of center than the Council, which is as we all know the representative body duly elected by the voters.
GI “[i]but i think you are out of line in terms of making the personal attack.[/i]”
Perhaps you are correct, however I have seen no evidence presented that Joe and Brett are acting in bad faith in regards to these negotiations. From my perspective Nancy’s comment is simply another unsubstantiated claim that has unfortunately been typical of those campaigning against the water project. If Nancy has evidence to back up her statement, then I will be more than happy to apologize.
From the time the City Council knew that West Sacramento was willing to discuss a joint project, it is my recollection that weeks passed before the Mayor and Bret Lee finally met with West Sac representatives. Now the Mayor is out of the country and unless a substitute is appointed, I don’t think discussions will continue, yet the Water Advisory Committee is on a tight schedule to make their decision on DBO….or what is the alternative? Maybe DB and a few years of “O.” In my opinion, if the Mayor and Councilmember Lee, as well as the other Councilmembers, really had the public interest in mind, they would provide Davis residents with what many have asked for: consideration of a cheaper, public-public project with rates calculated on that basis to compare with the Woodland-Davis project. And, they would not be using drop-dead dates as a way to push through a project and asking the public to pay whatever it costs…though those costs are still very unclear.
If I am “mistaken” about some facts “Growth Issue” can set me straight, as he/she should. Let’s just be clear, though. The Mayor has been and is one of the strongest proponents of the Woodland-Davis Project and tried to pass-off a deeply flawed rate structure last September. And Councilmember Lee has said to me on occasion that to paraphrase: it would be too bad, or hard, to let Woodland down (with the implication that so much time and effort, not to speak of money, has gone into their work on the project.)
Every day that goes by the argument of time and money is being used to push through a project and the rate-payers are being asked to pay all the costs for the administrative layers/bureaucracy, the consultants, including West-Yost, the Director (and whatever benefits attach to his contract), the advisors, lawyers, reports, etc. We, the rate-payers have never been asked if we approved all the expenses that we are being asked to pay for….with interest.
If I am critical and suspicious, it is that Krovosa/Lee have so far failed to present an alternative as was intended. Why not? If negotiations are on-going, then the WAC should not have to make a decision on DBO by Sept. 27. They should be allowed to wait until all the facts of both projects are in.
Nancy Price:
I apologize for accusing you of ‘throwing mud’ in your earlier comment. Your thoughtful comment of 1:49 makes clear your position and concerns. I appreciate your clarifying your position.
Thank you G.I. for calling me out for my bad behavior.
Mark West
Nancy, as usual, makes important observations. Mayor Krovoza’s UCD career is in the hands of the University. The UCD plan to avoid contributing to the cost of building the surface water system and then purchasing the water it needs in the future along with UCD drilling more deep aquifer wells with the city of Davis voluntarily relinquishing their equal right to drill deep aquifer wells was a product of the Mayor Krovoza-UCD “negotiations”. A single minority Brett Lee vote cannot stop this steamroller and Brett’s
“intestinal fortitude” to strongly publicly challenge a majority Council position (if that is his position ) is as yet untested.
“In my opinion, if the Mayor and Councilmember Lee, as well as the other Councilmembers, really had the public interest in mind, they would provide Davis residents with what many have asked for: “
I think that Nancy Price has indeed made some thoughtful observations worthy of considering. I also think that she herself has strengthened the comment about “mudslinging” although I would have chosen a less incendiary term such as perhaps “casting aspersions” in her comment that if various council members “really had the public interest in mind, they would provide Davis residents with what many have asked for”. The clear implication here is that if the council members don’t handle things her way then they don’t have the best interests of “the public”
In mind. I feel confident that all of our council members have the best interest of the public in mind. Surely there is room for disagreement on what “best interest actually entails.
I am glad I happened to read the Vanguard today. I think there are some misunderstandings of my views here.
Joe and I had been trying to meet with West Sac before Joe’s trip, but West Sac did not want to meet prior to receiving written documentation from us. So, the delay in meeting with West Sac is in no way related to a lack of interest or enthusiasm on our part. When Joe returns, we will meet with West Sac.
I can tell you unequivocally, that when I speak with West Sac, my goal is to obtain the best possible deal for the people of Davis. My job in these negotiations has nothing to do with Woodland, the JPA, DBO, or anything else – I am focused on working with West Sac to obtain the best deal for our community. This is just as I expect council members Swanson and Wolk to proceed with their Woodland negotiations.
When the two teams return from the negotiations (with West Sac and Woodland respectively); we will provide our report to the WAC and await their advice.
I must comment that I believe that Nancy Price is mistaken on my views. I am not wedded to either the Woodland or West Sac project. I have not made up my mind. The Woodland option is more expensive but has fewer regulatory hurdles. West Sac is less expensive, but has some additional regulatory risk, and does not ultimately lead to ownership of the facilities.
Yes, it would be unfortunate for Woodland if we did not continue our partnership with them, but my duty is to recommend the project that I think is best for the people of Davis. Just as the Woodland council members’ duty is to recommend the best project for their own community.
It will ultimately come down to cost, and currently the costs are unknown because we have not completed the negotiations with both parties. Both potential water projects partners are still in the running.
While I am at it, I suppose that I should comment on the DBO aspect. If I were in charge of planning a project from the beginning, I would choose public operation. But, we are not at the beginning. We are looking at becoming a customer of West Sac and joining their existing water system so the DBO/ public operation question is really a non issue for that option.
Or we are looking at joining Woodland. Woodland with their timetable and the several years of preliminary work that have all been based on moving forward with the DBO approach (which could allow for DB, but not for Design/Bid /Build without significant delay). So we are left with the DB vs DBO option with them.
I must admit, DB vs DBO is interesting philosophically, but here is how I view it: If we go with the Woodland option, we will own and manage the water facility for 100 plus years. If we hire private companies to design and build the plant (no one is talking about hiring municipal workers to design and build the plant are they?) and then we either have a private company run the plant for the first 5 years or we have municipal employees run the plant for the first 5 years, in the overall scheme of things, in the 100 plus years we will be running the plant, I am not sure it really makes a big difference.
What does make a difference is how we are able to switch from private operation to public operation should we so desire. The current JPA framework seems to require 3 votes to change the method of operation. I am not sure I am comfortable with the idea that unless we can find three votes on the JPA we will be locked in to private operation for the forseeable future.
That is the interesting/important aspect that I think we need to work out before we would ever proceed in that direction.
If people would like more specifics on my views, rather than guess at them, feel free to email me or say hello and ask when you see me out and about. I am always interested in hearing your views as well; I have learned a lot from my conversations with people.
Thanks!
Brett