Today we are talking to Chris Malinowski. Chris has worked for 20 years in private sector companies providing water utility services to the public. He is currently VP of Safety and Compliance at Southwest Water Services. Southwest provides regulated public utility services as well service work under contract to municipal entities in 10 of the United States.
Chris has a civil engineering background, and has exposure to many of the issues associated with the provision of public utilities by the private sector.
Chris, can you briefly fill us in on your career and areas of expertise?
I have been in the water and wastewater operations business since 1986, when I graduated from Texas A&M University. For most of my career I have worked for United Water and its parent company, Suez as in the engineering, operations, and business development areas. United Water is a United States based company who owns and/or operates water and wastewater utilities across the United States, and is not affiliated with the United Water that is present in Australia. It is, however, a sister company to Australian Water Services, which operates the Prospect Water Treatment Plant near Sydney. I currently work as Vice President of Safety and Compliance for Southwest Water Company, who owns and/or operates over 500 water and wastewater systems across the USA.
In my two decades in the water business, I have worked in several areas, all of which are interesting. The technical side involves engineering, project management, and asset management of all types of infrastructure one would find in a typical water/wastewater utility. The business development side involved deal structures, financing, contract negotiation, and listening to customer needs. The operations side involves regulatory issues, maintenance, and the typical operations issues.
You have worked in many different countries. How have the companies you have worked for managed the issue of balancing politically driven fixed retail prices for water with the true cost of maintaining the service levels demanded by local authorities? What have your key learnings been on this topic throughout your career?
This is definitely a tricky issue. Many times, a company is asked to come in and make necessary improvements, while the local politicians try to avoid rate shock to their constituents. This is particularly difficult in developing countries, where the level of poverty is extremely high.
In developing countries, both the utility owner and the private company must be realistic in what must be done to reach the desired level of service. In some cases, I have seen companies try to bring a water utility up to “first world” standards in a five year period, despite the fact that the system had suffered from decades of deferred maintenance. This can carry a hefty price tag that must be passed on to someone. The local officials must determine their customers ability to pay, and if it is judged that it will be an issue, then either the scope must be dialed back, or the money must come from somewhere outside of the customers’ pockets. In some cases, funds from a central government agency have been used to subsidize these projects. Private companies must also remember that prices that seem reasonable back home, may be unreasonable in a developing country. For example, US$10 a month for water might seem reasonable to you and I, but it may be equivalent to a week of wages to many people to whom you are providing water.
In developed countries, planning in the early phases of the bid phase is also crucial. What is driving the desire to use a private company? Is it because massive investment is needed? Is it an effort to make the existing operations more efficient? Is it because a local government authority cannot attract top talent to operate, maintain, and manage its utility? If large capital investments are needed, then rate hikes may be inevitable, but I have found that the local authorities often want to be able to say that their utility is efficient, or getting efficient, in order to minimize rate hikes. I have seen several utilities use “key performance indicators” to measure important items in their system, and convey those to the public. Examples may be percent of billed revenue that is collected, percent of unaccounted for water, percent of main breaks repaired within 24 hours, energy usage per megalitre of water produced, and breakdown of preventative versus corrective maintenance.
Another thing that I have found that helps to reduce the “politics” of water is when the utility is governed by someone other than the politicians. Water commissions, water agencies, and other entities are one step removed from the day to day politics of city and local governments. Although they are not totally immune from political pressures, I have found that they have more flexibility to make necessary long term decisions.
Australia has traditionally relied almost completely on dams for our urban water supply. Due to the ongoing drought effecting most of Australia, many parts of the country are seeing dams approaching empty. While recycling is much discussed and occasionally implemented, Australia has largely turned to desalination as a quick and effective fix. As I understand the US also faces water supply issues in some areas. What are the trends in the states in terms of guaranteeing water supplies for the future?
The interesting thing about water utilities in the USA is that local conditions vary so much from region to region. Some areas are rich with water, others are not. For example, many people are surprised that Florida actually has problems finding new water, despite the fact that everything seems tropical.
Many utilities are finding it problematic, and expensive, to find new sources of water. In this day and age, the building of large reservoirs to serve entire regions is practically non-existant. Most water rights are also already claimed.
Despite this, many things are being done in the USA to find new water. Some river authorities in Texas are optimizing the operations of their dam systems to release water at more optimal times, in order to avoid excess water running into the ocean (while at that same time guaranteeing “environmental flows” for aquatic wildlife).
Many utilities are now turning to water sources that they previously had discarded in the past. The treatment of brackish groundwater is now becoming more and more common. This involves the use of reverse osmosis plants and is somewhat expensive, but it often ends up being the least-cost alternative.
Of course, reuse of treated wastewater effluent continues to be of importance, especially in drier areas of the country. Many new large scale housing developments now have a small wastewater treatment plant that sends its treated effluent to the golf course. In addition, several large cities, such as San Antonio and Los Angeles, have dedicated reused water systems to sell water to commercial and industrial clients.
Due to the scale of the desalination plant projects in Australia’s relatively small economy, authorities have turned to alliances for construction and operation, and financing methodologies such as PPPs. What has worked well and badly in your experience in terms of project delivery methodologies and financing techniques? What are the pitfalls? And finally what are the latest trends for infrastructure financing in the States?
Over the years, I have seen a wide variety of PPPs. Some have worked well, and others have not.
In my opinion, there are two key components that make every deal work. First, both parties (utility and company) have to be 100% committed to making the deal work. Second, the contract must have provisions to deal with unknowns. One area where this often arises is in repairing underground assets (pipes, leaks, etc.). I know of two contracts where the utility said, “We have X number of leak repairs per year, and use that to calculate your price.” When the company came in, there ended up being double or triple the amount of leaks, but the contract was fixed price. When the company then went and talked with the utility, the response was that the company should have known that there would be more leaks.
When a utility is facing the need for a major new investment, such as a new reverse osmosis water plant, a Design-Build-Operate-Finance approach may be appropriate. In this method, the company is responsible for delivering a project that it finances and owns, and produces a final product of a specified quantity and quality. This approach works especially well when the utility has no previous experience with that technology. The private company can bring experience from other similar projects, project funding, and financial guarantees to the project.
In the USA, the Design-Build-Operate method is also used to deliver new projects. It is similar in nature to the method described above, but in this case the utility finances the project. This occurs quite often because in the USA governmental entities can issue debt that is tax-exempt and therefore the debt service costs are less.
Another trend in the United States is the ever increasing presence of private equity firms, such as Macquarie. Whereas these firms are currently investing in buying water companies, I believe that it is only a matter of time before we see deals similar to what they have done in the transportation sector. These deals involved long-term concessions with huge upfront payments.
