Joining forces

Emerging policy, regulatory and technology trends in solid waste and renewable energy from waste recovery present an ever-increasing need for modified project ownership and delivery models. Isolated approaches to project development by industry or government agencies in the combined solid waste and renewable energy field may not yield the most efficient or economical results.

The trend toward integrated project development of new or refurbished facilities through public-private partnerships (P3s) is quickly advancing in the United States. Project economics, site selection, permitting, feedstock aggregation and long-term off-take contracts for energy and process byproducts all benefit from a strategic partnership between government and industry. P3s provide those opportunities, and practitioners who understand the mechanics of P3 project delivery and can better navigate the regulatory, procurement and contracting maze and will be more likely to deliver projects on time, on budget and at or above the required performance specifications.

P3s are not new to the solid waste industry. From turnkey project delivery of publicly or privately funded solid waste management facilities including landfills, municipal waste combustors, transfer stations and other waste handling/recovery or disposal facilities to privatization of traditional municipal curbside solid waste collection and transportation, the solid waste industry has advanced through P3 vehicles long before the term became vogue. In addition, many formerly owned government solid waste facilities and new facilities in the emerging material recovery industry have benefited from P3 arrangements.

What has changed is the landscape of emerging solid waste management and energy recovery technologies and facilities and the emerging statutory framework in states that now are beginning to allow the P3 arrangement where traditionally restrictive municipal finance or procurement regulations have been a barrier to their development. Understanding P3 opportunities begins with navigating complex statutory frameworks that govern contractual relationships, financing and project delivery between government entities and private industry.
 

Setting the framework

By now, many states by statute permit P3 arrangements. Industrial practitioners and local government officials begin the process of P3 project development by looking at the state statutory framework in three key areas, including: 1.) finance, 2.) procurement and 3.) taxation. Key questions to ask include: whether a municipality may issue ground leases or sell municipal property to a private concern for facility development; whether the municipality can engage in sole-source negotiation with a single vendor for project development or contract operations of public facilities; whether the government entity has to engage in some type of public procurement process before selecting a partner for the P3 project; to what extent can tax-exempt municipal bonds be used to finance land acquisition and facility construction under the chosen ownership and delivery model for the project; how do federal tax laws apply to private ownership of publicly funded facilities; to what extent will the facility be subject to state or local taxes or assessments; and does state law permit Payment in Lieu of Tax (PILOT) arrangements for solid waste facilities. Answers to each of these critical and dispositive questions will provide the regulatory framework for the project, leaving to the parties the transactional framework based upon allowable procurement and delivery model selection.

Once allowed by state law, the next most important component of viable project development is the transactional arrangement between the government agency and the private developer. The arrangement begins long before negotiation of the contract, with the government agency first structuring a procurement vehicle and delivery model for project development. Procurement models in the P3 arrangement should be solidly grounded in Qualification Based Selection (QBS). QBS takes an opposite approach to the traditional government procurement process known as the “low-bid laws” and permits the government entity to select an industry partner for project development based on their qualifications, including technical ability, experience, reputation, project history and the particular technical plan and approach to this project.

Available procurement models include the Request for Qualifications (RFQ), the Request for Proposals (RFP), and the Request for Qualifications and Proposals (RFQP). While the RFQ is clearly and singularly a QBS selection, the RFQP and RFP normally comprise a selection based upon a combination of qualifications, technical approach and price.

The government agency, in beginning the procurement process, needs to make an initial determination of the weight to apply to each of the three criteria. The key with these approaches is to clearly define in the procurement document the precise evaluative criteria that will be utilized in proposal review. The government agency must choose whether to engage in a single-step or two-step procurement process. A two-step procurement process would involve first issuing an RFQ, and qualifying or “short-listing” a number of firms which will then be permitted to submit proposals, which would then include their technical approach and plan as well as a pricing component, in response to a more detailed RFP.

In a single-step procurement process, the government agency issues either an RFP or an RFQP.

A single-step process that utilizes one of these two vehicles will include all three qualifications, technical approach to the project and pricing. It should be noted, however, that under either of the proposal models which traditionally include price, the parties may delay final negotiations over price until further development of the design documents and assessment of market costs and revenue generation projections. Using either a lump-sum or Guaranteed Maximum Price (GMP) in situations where the government agency will own the facility outright, each provide benefits to facility development. The selection of the procurement model in many cases will be driven by the project delivery model the government agency elects to utilize.
 

Developing a model

Selecting project delivery models in P3 projects for new facility development or existing facilities upgrade involves evaluating a combination of project design, construction, finance and operations vehicles to find the “right fit” for the owner’s policy and project development objectives. The project delivery model defines the transactional relationship between the parties as well as risk assignment.

Project delivery models for P3 renewable energy from waste facilities may take one of several forms. Among these are design-build (DB), design-build-operate (DBO), design-build-own-operate (DBOO), design-build finance, own operate (DBFOO); or design-build-finance (DBF). Unlike traditional design-bid-build contracts, design-build contracts are performance based and often shift the responsibility for facility performance to the industrial partner, who is the single point of responsibility for the project.

As noted, the project delivery model drives the transactional basis of the partnership. The selection of the delivery model defines the contractual framework and balance of risk, responsibility, cost, revenue, environmental compliance, maintenance, repair, operational responsibility and future capital costs.

Although the delivery model will create the scope and range of issues necessary to be included in the contract, the party that the division of risk and allocation of benefits are assigned to is strictly a product of negotiation. Some RFPs will contain a list of mandatory business terms for the contract. Others will contain a list of what are traditionally referred to as “non-negotiable” terms. This type of approach, while protecting an owner, can deter proposals, thereby increasing the cost of the work and defeating the opportunity to have creativity and flexibility in the proposal and contract negotiation stages. It will limit the government entity’s opportunity to evaluate varying business and economic terms among the short-listed proposers.

A best practice is to include a copy of the template contract intended for use in the project, specifically delineating mandatory from negotiable terms. This assists proposers in evaluating risk and cost on their side of the balance sheet and developing a fairly reasonable pro-forma for obtaining necessary project finance.

A number of key contract provisions must be considered in structuring your P3 arrangement. First, structured as a performance-based contract, normally the industry partner who designs and builds the facility will have the responsibility for performance and regulatory and environmental compliance upon facility testing, start-up and commissioning. Depending on the operations responsibility assigned under the contract, the design-build-operator may retain risk of facility performance and compliance for an extended period of time—normally the term of the contract operation phase. In a full-risk asset management contract, the design-build-operator would normally have responsibility for ordinary maintenance and repair, as well as required capital modifications during the term necessary to satisfy performance or regulatory requirements.

Additional key contract terms not normally subject to traditional allocation among the parties include revenue sharing for sale of electricity or byproducts, revenue sharing for environmental attributes and incentives, tip fees, waste stream aggregation and minimum throughput requirements, insurance, permit fees, contract term and renewal options, end-of-life/end-of-term obligations such as transfer of ownership or facility removal, risk of loss, performance and surety.

In summary, P3 arrangements will be a large part of the future landscape for development of renewable energy from waste facilities. Project success will be a derivative of the approach in planning, procurement and finally negotiation of a contract that ensures continued project performance and effectively balances risk and reward among the government and industry partners.

Dr. Steven Torres is partner in the municipal infrastructure group for the law firm Pannone Lopes Devereaux & West, Providence, R.I. where he practices in the areas of environmental construction, including alternative project delivery and emerging technology, energy and construction litigation. Torres is a frequent national panelist, lecturer and author and is legal counsel to the Waste Conversion Technology Association.