Nassau County, N.Y.'s efforts to lease out the assets of its sewer system face skepticism despite what could be a large payoff for the county.
Nassau County Executive Ed Mangano wants to hire KPMG as a financial advisor to study the feasibility of a P3, a concept he first began exploring in 2011. County officials said leasing the Nassau County Sewer and Storm Water Authority to a private company could net between $650 million and $1 billion.
"The county is performing its due diligence," said Eric Naughton, Nassau County's deputy executive for finance. "The system is out of money and has been running a deficit for a decade eating away at rainy day funds."
Mangano's efforts were delayed Sept. 12 when county legislature's rules committee tabled the KPMG contract.
Legislator Howard Kopel, R-Lawrence, raised concerns about privatization during the meeting and argued that the county could borrow money to repair the system at a lower cost than utilizing a private investor.
"Since 2011, the administration has sought to retain an expert to answer the very questions asked by Legislator Kopel," said Mangano spokesman Brian Nevin. "It is in the best interest of taxpayers to analyze all alternatives to raising rates before making a final determination for the future capital and operational needs of the sewer fund."
The payoff from privatization would retire the authority's approximately $152 million in outstanding bond debt.
Excess revenue could be used to reduce total county debt or reduce the need to borrow for other needs, which will ensure recurring debt service savings and improve cash flow liquidity, said a county spokesman.
The county, in its comprehensive annual financial report, said it had more than $3 billion of long-term bond debt as of the end of 2015.
Cristina Brennan, a spokeswoman for the Nassau County Legislature's Republican majority, said the Rules Committee has requested more information on the KPMG contract and may take up the proposal at its next meeting, Sept. 26.
Naughton said if the KPMG contract is approved the firm would study the differences between bringing in a private investor and maintaining the status quo of the county running the system. Nassau owns and maintains three sewage treatment plants, 53 pumping stations and 3,000 miles of sewers.
"KPMG will assist the county in evaluating whether this is a good option for ending the decades-old operational deficit plaguing Nassau's sewer system and ensuring proper infrastructure investments for the future," said Naughton.
The authority issued $161 million in system revenue bonds in October 2014 to refund its outstanding debt and finance roughly $38 million in new capital projects.
Moody's Investors Service rates the bonds Aa3, and S&P Global Ratings AAA.
Any agreement with KPMG would require approval from the Nassau Interim Finance Authority, which has controlled the county's finances since 2011.
Mangano pushed for a sewer privatization in 2012, before NIFA rejected a contract with Morgan Stanley to seek an investor for the system. Mangano chose New Jersey-based United Water to run the long-term operation and maintenance of the sewers as part of his 2012 P3 proposal.
The firm, since renamed Suez under the umbrella of its French parent company, in 2014 did finalize a contract to operate and manage Nassau County's sewage treatment plants and collection system for 20 years.
NIFA officials did not respond to a request for comment on Mangano's latest proposal.
The state-run fiscal control board mandated quarterly reviews tracking revenue and spending levels last year when approving Nassau's $2.95 billion 2016 budget. The suburban county just east of New York City is rated A2 by Moody's.
Roddy Devlin, a project finance and P3 attorney at Squire Patton Boggs, said wastewater P3s have been hard to execute in the U.S. largely because of community opposition stemming from concerns about rate increases and having a private operator take over a public system.
Bayonne, N.J. and Rialto, Calif. are the only two major wastewater P3s that have been completed, Devlin said, with most municipalities opting to borrow for project improvements instead.
"One key issue faced by P3s is that funding capital improvements with tax-free bonds is almost always cheaper than using private sector financing," said Devlin. "However, when you look at the life cycle costs over the long term, compared with a more traditional financing and operations approach, a P3 can save the public money. This helps keep water charge increases in check."
The Bayonne Municipal Utilities signed a 40-year deal with KKR and United Water in 2012 to operate the city's water and sewage systems that included an upfront payment of $150 million and annual payments of $500,000.
In Rialto, a city of 100,000 52 miles east of Los Angeles, Veolia Water West Operating Services reached a 30-year agreement in December 2012 with Table Rock Capital on a $172 million deal that included issuing $146 million of private placement notes.
"These kinds of deals get discussed a lot but don't often reach the end point," said Moody's project finance analyst John Medina. "We have seen so many projects in the U.S. get all the way until the end and then get cancelled."
Joseph Kane, a senior research analyst at the Brookings Institution, said there is potential for more P3s in the water space because of their ability to spread risk and provide financial flexibility to go along with technical expertise.
"As with any infrastructure P3, the devil is in the details," said Kane. "Establishing clear benchmarks to monitor performance and maintaining transparency with the public over time are especially important in this respect."
Alan Rubin, a resiliency expert and director of business development at New York-based Tigress Financial Partners, cautions against P3s for water infrastructure projects because they can lead to transparency issues regarding who is in charge. He said for a P3 to work it is best if there is an oversight board that can assure the public gets all necessary information on the arrangement.
"Privatization of public utilities does not guarantee better results," said Rubin. "It also refutes the public input and generally enhances only the individuals who are vested in the selling of the unit and then the consultants who recommend it."
Anthony Figliola, vice president of Uniondale, N.Y.-based consulting firm Empire Government Strategies, supports exploring a P3 of Nassau's sewer system, but he hopes any possible changes addresses aging infrastructure that includes old pipe lines at the three plants. He also suggests looking at best practices of other sewage treatment systems around the country that have implemented new environmentally friendly standards.
"I believe this is a golden opportunity to look at other sewage facilities across the country and study ways to make it safer and more environmentally feasible," said Figliola, a former deputy supervisor for the Town of Brookhaven in nearby Suffolk County. "I think it is good that they are looking at all these options."
Devlin noted that once funding from the Water Infrastructure Finance and Innovation Act becomes available it could make the P3 model more attractive to public authorities by decreasing-up front financing costs. The WIFIA legislation, which was enacted in 2014, allows utilities to borrow up to 49% of costs for large drinking water, wastewater, storm water and water reuse projects.
"Given the significant water and wastewater infrastructure needs in the U.S., P3s are likely to be part of the solution," said Devlin. "Major improvements in an authority's water system will inevitably lead to higher water charges for the public, but such improvements are urgently needed."
