Many cities are struggling to find new ways to meet the challenges posed by an enormous infrastructure funding gap. Indianapolis is using the flexibility of a public-private partnership to implement new practices to reduce capital improvement costs and to keep up with the demands of population growth and an aging water infrastructure.
As competing needs for federal funds become more acute, municipalities face the dual challenge of meeting strict water and wastewater standards while shouldering an increasing portion of the cost for upgrading water infrastructure, system expansions, and other necessary capital improvements. Rate shock is in store for many communities as increasing water and waste-water infrastructure needs exceed the ability of local governments to raise capital.
In 2002, Indianapolis initiated the nation's largest public-private partnership for water services. Since its inception, its partnership with Veolia Water Indianapolis has met the city's goals for rate stability, customer service, and water-quality improvements, while expediting project delivery for critical capital improvements. Through the partnership's innovative structure, the city maintains local control of its water system.
Establishing the partnership was an integral part of the city's plan to acquire the assets of Indianapolis Water Co. After decades of being served by a regulated utility, the city acquired the waterworks system in April 2002 for $515 million. Simultaneously, the city launched a fast-track, multi-faceted plan to select the private operator and establish the long-term partnership to manage the system.
A Model Program
The partnership offers a new model in the U.S. water outsourcing industry with an incentive-based compensation plan to achieve high performance. Under the 20-year agreement, Veolia Water manages all operations, maintenance, and customer service facets of the city's waterworks system, which includes 12 water treatment plants, 18 pumping stations, 15 water storage tanks, more than 4000 miles of water main, and 32,000 fire hydrants. The company also is responsible for executing a potentially $400 million capital improvement program.
“A capital program was contemplated in the request for proposals, and subsequently included in the management agreement, which suggested that the operator could plan on approximately $20 million per year of capital projects,” said Carlton Curry, contract manager of the Indianapolis Board of Waterworks. “It also stated that there could be as much as another $20 million in capital projects each year that would be performed by either the operator or the city of Indianapolis or some combination.”
At the time the city acquired the waterworks, the projected cash flows allocated for capital projects for the utility were about $15 million a year. Also, with the acquisition, the city promised no rate increase until 2007.
“Knowing we needed more than $20 million a year for capital projects, we provided for bonding that was approximately $50 million more than was necessary for the acquisition of the waterworks,” said Curry. “With this additional money, our funds for the first three years of the partnership exceeded $33 million per year of capital.”
The capital projects component allowed for a much lower management fee and also set the stage for efficiencies in capital improvement planning and project delivery. Today, the program demonstrates how projects can be completed more quickly and cost-effectively than traditional methods of procurement of planning, design, and construction of major water infrastructure.