Privatizing Wastewater Treatment in Franklin, Ohio

By Coxson, Samuel L. | Government Finance Review, February 1996 | Go to article overview
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Privatizing Wastewater Treatment in Franklin, Ohio

Coxson, Samuel L., Government Finance Review

The City of Franklin, Ohio, is a city of approximately 12,000 people located mid-way between Dayton and Cincinnati in southwestern Ohio along the Great Miami River. It has a total budget of $17 million, including the $4.1 million general fund. In the summer of 1994, the city, along with the villages of Carlisle and Germantown - both with populations of approximately 5,000 - began planning and negotiating for what was to become the first privatization of a wastewater treatment plant that had been constructed with federal grant funds. Franklin had been accepted by the United States Environmental Protection Agency (EPA) to serve in the agency's privatization pilot project. On July 12, 1995, word was received from the EPA that the final review had been completed and the transaction authorized. Then, only two weeks were needed for the closing to take place and actual ownership of the Miami Conservancy District (MCD) plant to change hands.

This privatization of the Franklin, Ohio, plant authorized by the EPA, while very significant in its own right, can have profound implications for municipal officials throughout the country. It is a path-breaking example of a full public-private partnership potential that may lead other public officials to begin to realistically meet their environmental mandates and requirements without federal and state funding.

Negotiating the Service Agreement

With federal and state inability and unwillingness to provide funding at the local government level, it has become increasingly difficult for local officials to comply with mandates, requirements, and regulations. Bringing private funds into the picture makes it more possible to meet those mandates and regulations. The added dimension of private funding is the key to the potential that the public-private partnership offers. As in any process that involves the use of private capital, however, the public official must be concerned with its regulatory, political, and financial ramifications.

Throughout the 16 months of negotiating the service agreement for the Franklin wastewater plant, the city managers, mayors, and councils of the three jurisdictions involved concerned themselves with such items as getting a fair price for the treatment plant, keeping the rate at the lowest possible level, providing for the proper maintenance of the plant, and assuring that shortcuts could not be used in order to make profits look good.

The service agreement is a 20-year contract with right of renewal. It addresses among other things:

* the rate (per thousand gallons of treated sewage);

* how and when the rate may be increased, shifting of financial risk of operations and expansion to the private entity;

* maintenance and operations standards;

* allocation of environmental risk to each respective entity; and

* provision of a quick method for resolving conflict.

It is not the intent of this article to present a detailed discussion of the total privatization process nor the service agreement but rather to highlight several important and relevant issues for public officials. As the issue of labor relations was not an important factor in the Franklin privatization, it is not addressed in any detail here.

Rate and Financial Concerns

In the Franklin transaction, the three most pertinent fiscal considerations were the 1) sale price of the plant, 2) the annual rate and the amount and timing of any [TABULAR DATA FOR EXHIBIT 1 OMITTED] increases to the rate, and 3) the purchase price of the plant either at the end of the 20 years or prior to that date.

The sale price was arrived at by using the plant's fair market value less depreciation. In order to be sure the analysis of the methods and actual numbers would be acceptable to the city councils of the three cities - Franklin, Germantown, and Carlisle - a consultant with privatization experience was engaged to advise and work with the three city managers during the evaluation and negotiation phase.

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