Policy Study

Municipal Wastewater Treatment

Privatization and Compliance

Executive Summary

The U.S. Environmental Protection Agency (EPA) estimated in 1992 that $137.1 billion is needed for wastewater treatment over the next 20 years. Partly in response to these funding needs, the EPA established the Public-Private Partnerships Initiative (now Partners Rebuilding America program). This move toward privatization offers the prospect for improved compliance of wastewater treatment standards, more cost-effective wastewater treatment service, and greater accountability in the design, construction, and operation of facilities.

Despite these benefits, Congress and the EPA may not discontinue federal funding programs for wastewater treatment in 1994 as originally planned. In 1991, Sen. Max Baucus (D-Mont.) proposed a partial return to the grant system that funded many facilities over the past several decades. And several bills propose to extend federal funding of state-revolving funds beyond 1994.

Extension of these federal funding programs all discourage communities from discovering innovative ways to meet their treatment needs. Federal grant programs created disincentives for local communities to comply with water treatment standards, since failure of the federal government to provide funds was an acceptable excuse for noncompliance. Moreover, grant regulations slowed the process of constructing or upgrading facilities to comply with wastewater treatment standards, adding an average delay of two to four years. Finally, the process made it difficult to identify and hold accountable those responsible for provision of inaccurate or improper advice.

State-revolving funds (SRFs) are an improvement over the Construction Grant Program. However, the SRF program still inhibits efficient investment in municipal wastewater treatment plants capable of meeting effluent standards. Like the CGP, SRF funding discourages local governments from developing self-sufficient, efficient, and effective wastewater treatment programs.

Privatization offers an alternative means of funding and operating wastewater treatment facilities. According to EPA, five benefits result from use of public-private partnerships: 1) access to more sophisticated technology; 2) cost-effective design, construction, and/or operation; 3) flexible financing; 4) clear delegation of responsibility and risk; and 5) guaranteed costs.

Accountability provided in privatization contracts ensures that a private operator will either meet the contract standards established by the local government or face penalties such as fines or contract termination. Clear assignments of responsibility are linked to accountability through the privatization contract.

Although various forms of privatization have been pursued in hundreds of communities throughout the United States, numerous factors restrict the ability of communities to fully capture the advantages provided by private-sector participation in the provision of wastewater treatment.

To support further wastewater treatment privatization and the development of cost-efficient, reliable municipal wastewater treatment plants the federal government should pursue its plans to discontinue the SRF loan program, ease federal regulations associated with existing funding, and modify tax laws that discourage use of tax-exempt bonds for privately owned facilities. At the state level, regulators should allow communities maximum flexibility in designing the best partnership to meet their needs under EPA’s Partnerships Rebuilding America privatization program, and eliminate any state restrictions on use of SRF loans to help finance privately owned facilities.

In pursuing privatization, local officials should ensure that privatization contracts establish clear responsibility and accountability by requiring insurance to cover bankruptcy and maintain service; the right of first refusal if the private firm wishes to sell; and by specifying the terms under which the local government can change the O&M provider and the conditions under which O&M fees can be increased.