Struggling Pittsburgh water authority calls on Veolia

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The Pittsburgh Water and Sewer Authority has hired Veolia to provide interim executive management services. Will Veolia’s performance-based model help reduce the city’s heavy debt load?

Veolia’s stated optimism about the success of the performancebased approach to operations and management of water systems seeking efficiencies gained further validation when it was selected in June to temporarily manage the beleaguered Pittsburgh Water and Sewer Authority (PWSA).

Veolia will provide interim executive management services for a period of at least 12 months, with an option to extend for six additional months. Veolia will be paid approximately $150,000 per month for the duration of the contract and is eligible to receive additional bonuses of $150,000 for achieving performance benchmarks to be agreed upon by the two parties. In addition, the authority will pay Veolia 50 percent of any cost savings it realizes under the company’s leadership. PWSA released an RFP for the interim executive management contract in March and selected Veolia over three other firms in June.

The Pittsburgh deal is the third in a series of major performance- based contracts Veolia has secured in North America over the past 14 months. Veolia’s contracts with the city of Winnipeg and the New York City Department of Environmental Protection differ from the PWSA contract due to their operations components, but all of them include a period of evaluation during which Veolia teams up with public employees to identify performance benchmarks related to operational efficiencies. Veolia Water Americas President and CEO Laurent Auguste likened the Pittsburgh deal to similar management contracts Veolia has with water systems in the Middle East.

PWSA has been leaderless since December 2010, when thenexecutive director Michael Kenney resigned amid controversy related to his ties to a company contracted to provide water and sewer line warranties to households in Pittsburgh. The authority is saddled with debt – its total liabilities had surpassed $800 million as of FY2011 (see chart below). In addition, the city’s sewer system is in dire need of a costly overhaul to control combined sewer overflows, which have flooded homes and businesses during periods of heavy rain. The City of Pittsburgh mulled the option of selling PWSA to Pennsylvania American Water late last year, but some members of PWSA’s board strongly opposed the idea.

Veolia appointed Jim Good, its vice president for the Western United States, as interim executive director of PWSA. Veolia’s management of the authority will be overseen by a steering committee consisting of three members of the PWSA board and two representatives from Veolia. Good told AWI that Veolia will use a combination of in-house resources and outside consultants to help the authority restructure its debt and develop new financing options to address needed short- and long-term capital improvements.

“We’re in the process of seeing if some models that have been used in other parts of the country can be applied here,” Good said. “Right now, the authority does everything through the water and sewer rates, but does the authority have the ability under state law to do stuff through property taxes? That’s an angle that perhaps needs to be explored a little bit more. We don’t know the answer to that yet. As you can imagine, you get state law, local law and politics involved and it’s not a straight line.”

Pittsburgh’s decision to hire private management on an interim basis appears to have been made out of dire need to right the ship. Cities facing difficult financial hurdles will be important to the further growth of the contract operations market, but they are the exception and not the rule. If, however, Veolia is able to help the authority cut its debt and revamp its systems without adding undue pressure to the city’s ratepayers, it’s not hard to imagine other forward-looking mayors and city managers adopting this model to bridge leadership gaps while making grand investments in water and wastewater infrastructure.

“The managers that have the vision and the right leadership should consider more and more of these types of solutions that we are offering, if they feel this will enable them to go faster and achieve more thanks to this access to the private sector,” Auguste said.