Competitive contracting for wastewater treatment.

• Author: Kinney, Anne Spray

The Milwaukee Metropolitan Sewerage District successfully outsourced its plant and field services and expects to save $140 million dollars over 10 years.

In January 1998 the Milwaukee Metropolitan Sewerage District (MMSD) approved a 10-year agreement with a private firm for the operation of two 300-million-gallon-per-day wastewater treatment plants, biosolids management, and field operations. The agreement is expected to save district ratepayers more than $140 million over the 10-year term of the contract, or about 30 percent, compared to projected costs for in-house operation over the same period. MMSD is now the largest publicly owned wastewater treatment operation under private contract in the United States.

In addition to the large savings, the contract included an agreement that no MMSD workers in the areas to be contracted would be laid off during the 10-year term of the contract. The contractor also agreed to hire all MMSD employees in the affected work units at current wage and benefit levels. A total of 283 employees (approximately three-fifths of MMSD's workforce) was transferred to the contractor under the agreement.

The contract locks in savings by establishing a fixed-fee payment from MMSD to the contractor that can only change according to limits established in the contract. The first-year payment totals $29.8 million. In addition to the $140 million savings from the fixed fee, the contractor is required to install an advanced weather-prediction system, to provide $2 million in capital improvements up front, to conduct an MMSD-specific research and development program worth at least $500,000 and to provide ongoing regulatory analysis and advice. The contractor also agreed to contribute 5 percent of its Milwaukee pretax profits to area community groups.

MMSD before the Contract

MMSD is a regional government that provides wastewater treatment, flood control, and water-quality testing services to metropolitan Milwaukee. It serves 28 municipalities and a population of approximately 1.4 million in a 420-square-mile area. Operations and maintenance expenses are supported largely from charges to residential, commercial, and industrial users. The manufacture and sale of 50,000 tons annually of Milorganite, a nationally marketed biosolids-derived fertilizer, is also a major source of revenue. MMSD levies a property tax for capital projects and has approximately $3.5 billion in assets. Prior to the agreement with the contractor MMSD had 508 employees.

The district, reflecting Wisconsin and the Milwaukee region, has a tradition of strong unions and relatively high wages and excellent benefits. MMSD also has a reputation for efficient and high-quality operation.

Why Consider Privatization?

Nationally, privatization is typically considered when an agency is:

* experiencing problems,

* encountering resistance to rate increases necessary to properly operate a plant,

* has capital needs that would require huge rate increases, or

* in violation of its operating permit and unable to get back into compliance.

MMSD's fee increases have consistently been at or below the inflation rate in recent years. The district's capital assets are in excellent condition. The agency recently completed a 13-year, $2.3 billion capital addition and replacement program. Finally, the community has a history of strong support for protecting the water environment. MMSD is regulated by the Wisconsin Department of Natural Resources and consistently produces effluent that is of far better quality than required by the district's discharge permit. The district has not violated its permit in decades.

MMSD did not examine private-sector options because of a crisis. It was a well-run agency with capital assets in excellent condition and a prized record of permit compliance. In addition, MMSD leadership did not have a bias toward privatization or outsourcing. The district initiated its investigation into private-sector alternatives to answer the question: Is MMSD being run as cost-effectively as possible?

Privatization Feasibility Study

In early 1996, the district hired a consultant to assist it in assessing the feasibility of privatization options. The study first focused on other public agencies' privatization efforts. Specifically, the consultant was asked to investigate whether and how other agencies decided to outsource, lease, or sell their operations, and for those that chose to go to the private sector, what happened to quality, cost, employees, and the organization.

From this survey the district learned that short-term contracting (five years or fewer) was far more common than sale, lease, or long-term contracting. Furthermore, in cases where governments had chosen any form of privatization, current employees were typically well-treated. Layoffs were unusual, there was no "union busting," and pay and benefits were usually about the same as they had been.

Permit compliance was typically as good or better and contractor financial or performance failures were rare. Where private operators had taken over, savings for the government averaged from 20 to 40 percent. Savings usually resulted from staffing efficiencies, changes in work processes, energy-management initiatives, and the introduction of new technology.

The consultant's next task was to recommend privatization options that would best fit MMSD. Due to the size and complexity of MMSD's operations and the fact that MMSD has sizeable outstanding debt and more than $1 billion of unamortized government grants, sale and lease were not feasible. Contracting was the option that made the most...