Nassau County Executive Edward Mangano may be on to something with his proposal for a public-private partnership to operate its sewage treatment facilities.
Indeed, in contrast to his other radical plans – privatizing Long Island Bus and consolidating police precincts, putting up $400 million from the county to redevelop Nassau Coliseum – Mangano is actually reaching out to communities to get input before the deal is done.
That might surprise people who have heard that Mangano has already selected United Water as the private company to run its sewage treatment plants.
But that is only the first step – the easier step – in what is a very complex financial deal.
As Mangano described the deal on Thursday, May 17, in the third and last of the public meetings (not actually hearings), held at the Nassau County offices in Mineola, it would be a fabulous deal for the county.
In fact, too fabulous, which is why we are skeptical.
To hear Mangano describe the plan, United Water would step in and using its efficiencies, immediately be able to operate the system for 30 to 40 percent less than it costs now.
That sounds great since right now, the $117 million that is collected to operate the system is still $40 million short of what it actually costs to run. Since the Sewer Authority was first established in 2004, through consolidating 25 separate sewer districts, the county has been subsidizing the cost to ratepayers through the reserve fund (accumulated from the balances of all those sewer districts, which is why Suozzi wanted Great Neck’s sewer plants so badly). That fund will be wiped out in 2014, at which point rate payers would see a 22 percent increase in their rates in 2014, and another 11 percent in 2015.
What is more, the plants are in need of $300 to $400 million in improvements. That would be crushing to the county, already sinking under $3 billion in debt.
But what if you could finance the improvements, pay off all your outstanding debt and even have some left over to pay down the $3 billion debt? And what if you could do all of this at absolutely no risk and not even giving up ownership of your assets (the sewer system)? Woweee, that would be a financial genius.
So the idea is to bring in a “concessionaire” who would pay the county something on the order of $750 million outright for the right to a long-term lease. That $750 million would be enough for the county to pay off its $465 million in outstanding debt on the sewage treatment facilities, and pay down another $250 million its total debt. That would bring down the county’s outstanding debt by 25 percent, from $3 billion to $2.25 billion.
On top of that, the concessionaire would invest the $300 million to $400 million for the upgrades.
But wait. There’s more. The concessionaire would promise not to increase rates to payers for the first two years, and thereafter, increases would be capped at the CPI (or rate of inflation). And if the revenues that it took in were not sufficient to cover its costs? Tough, the concessionaire would eat the loss.
What is more, the concessionaire, after spending a $1 billion on Nassau County’s facilities, would not actually own anything. If they withdraw or go bankrupt, they forfeit all the money invested.
This would be an amazing deal if the county could pull it off.
The problem is, why would anyone invest $1 billion, and be limited in the rate of return, not own any of the assets, and if they miss the mark, would have to walk away from their investment?
Indeed, how would the investor even recoup the investment, let alone make profit, when the investor has to pay United Water to actually operate the system (that would mean there would also be two layers of profit).
When a skeptical audience posed the question to Mangano, he responded, “We’re not taking a loan from them, we’re not paying them back, we pay no interest, no terms… How do they make money? They believe [or rather, United Water believes] they will run the system 40 percent more efficiently than the county…They also get the ability to take advantage of private sector benefits such as depreciation [though it was unclear how a private company could depreciate property it does not own since the county would continue to own its facilities]. And then, of course, there are such benefits as not being subject to the ridiculously wasteful Wicks Law, and not having to follow Civil Service rules. They also receive the upside on future development, such as when Nassau County grows, there would be more sewage treatment, and it would get more business.”
He offered the Nassau Coliseum, if and when it does its expansion, as an example of where the new business would come from. There are also proposals floating about handling some of Suffolk County’s sewage treatment at Cedar Creek.
What is more, the entity would be allowed to raise rates each year up to the level of the CPI, regardless of whether its O and M costs rose that much. If the CPI rises by 7 percent in one year, the entity could raise rates by that amount, as well.
“That’s how they make money, but that’s at their risk,” Mangano told the few dozen people, mostly reporters and representatives of local civic associations, “because the county would have the up-front payment of $750 million.” Morgan Stanley has assured the county this is the amount they can expect to raise, and that the plan is worthy of putting out as an RFP.
But if you do the math, and if the sewer system is costing $160 million to operate (regardless of the $117 million in revenue they are collecting, that means that United Water says it could do it for $96 million, leaving $21 million over for profits for the two private entities and reimbursement on the $1 billion investment. How does this make sense?
There is no doubt that Nassau County’s sewage treatment system is a mess (and why Great Neck Peninsula breathes a sigh of relief that we withstood pressure from former County Executive Tom Suozzi to divert to Cedar Creek). There are problems with discharges into the ocean and bay, horrific odors, the county has had to pay $1 million in fines, Bay Park has to get its power from external generators because of recent power failures.
Mangano’s Chief Deputy Rob Walker, in his presentation, said that there is a “proven model” for such public-private partnerships – in Los Angeles, Indianapolis, and Milwaukee (however, in those instances, it does not seem that the licensee had to come up with $400 million in improvements, but rather a private operator came in to manage an existing public system).
Walker said that United Water was selected as designated operator through a competitive process which began last fall, whereby there was a public request for qualifications. Four firms responded; three were pre-qualified (Veolia, which is now operating Long Island Bus; Severn Trent; and United Water). United Water and Veolia presented detailed presentations, and United Water was ultimately selected “for its expertise” just a couple of weeks ago.
United Water has been in business for 140 years, since 1869, is headquartered in New Jersey where there are 1100 employees, is part of a huge global water group, Suez Environment, which has $3.3 billion in assets and $1.2 billion in network, and spends $100 million on research. Gary Albertson, United Water’s representative at the meeting, claims the company has a 95 percent contract renewal rate.
United Water has local expertise. It has served the New York metro area since 1893, and serves 110 communities in New York State, with a total population of 600,000, and 2 million in the region. It lists Rye Brook and the city of Indianapolis among its clients.
“In the past two weeks,” Albertson said, “we met with civic and environmental leaders to listen. We have flexibility going forward to include items –we know significant improvements are needed. We are working with the county staff. We will come in and improve the process, deliver the projects more efficiently, re-prioritize and improve planning, so projects get done more effectively. We intend to be open and transparent. We intend to quickly get the plants back on track and put in health and safety improvements, environmental upgrades, control systems that can give us early warning on performance of plant. We will be available to community groups, so the community can see exactly how we perform in real time.”
He pointed to the city of Indianapolis wastewater system as a close fit to what Nassau County’s operation would be. The company has had the partnership with the city, with a population of 1 million, since 1994, operating two 125 mgd advanced wastewater treatment plants, and a sewer system with 3000 miles of pipe (comparable to Nassau).
The facility won a platinum award by from the Association of Metropolitan Sewerage Agencies and the contract has been renewed twice so far; notably the company has served the city through three different mayoral administrations.
Another example is the West Basin Wastewater recycling facility in Los Angeles, a partnership since 1994, as well. This is the largest water recycling facility in US, treating over 137 billion gallons of waste water which is brought up to drinking water standard, but the water is used for non-potable, nondrinking purposes such as irrigation, industrial, and to recharge the groundwater aquifer to keep seawater from coming in. United Water did not build or pay for the plant; it was already built in 1994 and was brought in under a five-year contract to hire staff, train, but since then, the contract was renewed four times and the company managed expansion projects.
Countering this claim, though, Legislator Judi Bosworth, who opposes privatization, stated that “billions of gallons of raw and partially treated sewage poured into Lake Michigan after United Water took control of Milwaukee’s sewers. In addition, in 2010, United Water and two employees were charged with 26 counts of violating the Clean Water Act by the Justice Department for allegedly tampering with daily wastewater sampling methods.”
What is the magic that United Water would use to reduce operating costs? Albertson commented on the economics of the deal: “There are efficiencies and savings with private operations – our priority in the plant is to go in and make immediate improvements for health and safety, but there are a lot of opportunities for efficiencies by running smarter, some by changing the operational techniques, some of the equipment that is on all the time may not be needed, some of operations are in crisis mode – constantly reactive. Once stabilized, it will reduce cost.”
He uses sludge as an example: “We have ways to reduce the amount generated at the plant, drier so reduce the number of trucks, reduce disposal, get more gas which we can use for engines and reduce natural gas purchases, reorganize staff to get more productivity, train better, use better resources, IT systems, automation – a lot of opportunities throughout the whole operations, it’s chemicals, of course, a public entity could do the same thing, in fact, the Great Neck Water Pollution Control District is doing this.
Selecting United Water as the operator was phase 1 of the process; phase 2 is doing the RFP for a “concessionaire.” Indeed, United Water may be the entity that ultimately comes forward as the concessionaire or licensee. (Originally, Morgan Stanley stood to gain $5 million by handling the financial transaction; now Morgan Stanley has been precluded from doing the deal, Mangano said.)
Privatizing the operations does not seem to be the hard part of the deal (we are told that workers would be rehired by the private company). What seems pie-in-the-sky is why a fund would put up nearly a $1 billion, have all the risk and obligation and not own any of the assets nor have control over rates.
“This is what I was told,” Mangano replied when the question was posed, “there is a group of big funds that are looking to invest in utilities, they believe it offers a stable rate of return, and are not looking for a home-run rate of return. They get the revenue that we have pledged, limited by the CPI, they will get the benefit of the efficiencies – 40 percent efficiency, they will actually reduce the $40 million deficit to a surplus – … they also get the benefit of certain benefits that government doesn’t – like depreciation and other benefits – and also get the upside, the additional sewerage that is created when there is expansion in the county – the c liseum, if we can get together and redevelop – will be additional sewage treated there, get upside in capacity.”
Another interesting wrinkle is the legislation the Republicans adopted, to obligate schools and nonprofits to pay sewer taxes, beginning 2013. That has the potential to generate $8 to $10 million in revenues, however the matter is in court.
As Mangano described the deal, it is great, perhaps even too good to be true. It hinges on Morgan Stanley’s assessment that there is a fund willing to pay the county $750 million in exchange for long-term lease, plus the investment of $300-$400 million in capital improvements plus adhere to a laundry list of improvements sought by environmental and civic groups to address the odors, pollution, security.
“If Morgan Stanley is wrong and the RFP comes back at $400 million, we would not proceed with this transaction. The important thing is that this is an appealing transaction that the county should pursue. I don’t have a crystal ball, but we are not doing it in haste.”
What happens if there is an accident and the plant needs $40 million more a year? “They are obligated to comply with all the environmental regulations,” Mangano said, suggesting that the county would not have to “bail out” the private company if something goes horribly awry. “It is a very heavily regulated industry.”
Meanwhile, just before Mangano opened the informational meeting to prove to the public what a great plan this was, it had come to light that NIFA had nixed the county’s contract with JP Morgan Stanley, which was consulting on the deal with an aim of putting the financial deal together.
“Ed Mangano’s sewer deal is dead,” Kevan Abrahams, the minority leader said in a statement. “It was an unnecessary and unwanted proposal that would have saddled a generation of Nassau residents with more debt.”
But Mangano said that NIFA had clearly not understood what the deal with Morgan Stanley was about – that it was not to obligate Nassau County for more bonding; au contraire, it would relieve the county of debt obligations. He vowed to press on. He said that once NIFA was put right, it would approve the contract with Morgan Stanley.
It seems it is not just NIFA, but the Democratic Legislators who do not get the genius of Mangano’s plan. But who can blame them? This is Mangano’s modus operandi – he operates unilaterally, without involving other interested parties. The Democrats on the legislature have to depend on newspaper reports and public meetings to learn the details of what they should have been intimately involved with from the start.
And frankly, Democrats, who represent half the Nassau County residents, should be directly involved in such an ambitious and radical plan, instead of Mangano consistently doing end-runs that wind up with expensive lawsuits that the county loses.
As a result, Mangano has not inspired trust in these grand schemes, especially since he has repeatedly overstated the benefits, most notoriously, on the proposed $400 million bonding to redevelop the Nassau Coliseum.
Countering this image, Mangano insisted that feedback from three hearings and public comments (you can even use an I-phone app, nassaunow, to communicate directly to the county) would be incorporated into the RFP, and that his administration has sought out environmentalists and civic associations.
It is clear that Mangano intends to use this as a political weapon. Not missing a beat, he blames the failures of the Sewer Authority on the Suozzi Administration, misrepresenting the investments that Suozzi made during his tenure, when Mangano’s own chart showed that investments went down continually under Gulotta, bottomed out, then rose continually under Suozzi.
Mangano noted a couple of times during his presentation that one of his options is to do the politically “safe” thing and do nothing until after the 2013 election, since the dramatic hike in sewer rates won’t happen until 2014, when the reserve goes broke.
“If I wanted to do the political thing, I would just not do anything, like my predecessors did, because the problem doesn’t happen until 2014 and the election is 2013, and you can just go along. But I didn’t take the office to do that. I took office to identify every problem this county has had and ignored and this is one of them. So we have to come together and choose an option, and present the option so we can select the one in the best interest of the county. The county is trying to be as objective as possible, listening to civics.
“Look at it –sounds like very desirable transaction. We have to come up with something, stop the political nonsense. We have to come together and fix this,” Mangano said.
This suggests that Mangano’s bold plan for a public-private partnership could be the centerpiece for his reelection, positioning him as a bold leader and out-of-the-box thinker. Indeed, the jury is still out on his other schemes – privatizing Long Island Bus and consolidating police precincts (overtime is already $27 million over budget), and frankly, the county’s finances are in a shambles under his administration, as the Nassau County Democrats made clear in defying his demand for a blank check on new borrowing.
