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PUBLIC - PRIVATE PARTNERSHIPS
THE SMALL WATER SYSTEM CHALLENGE
October 26, 1988
The Mayflower Hotel
Washington, D.C.
by
Michael Cook
Director
Office of Drinking Water
U.S. Environmental Protection Agency
A presentation made at the U.S. Environmental
Protection Agency National Leadership Conference on
Building Public-Private Partnerships, October 26, 1988,
W.I. iHvtroiwjentfti Protaetioa
library, RooA 8404 '""
iStreet, S.W.
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PUBLIC-PRIVATE PARTNERSHIPS
• DRINKING WATER
The Charge
Seven of ten community water suppliers in the United States
are "very small", serve fewer than 500 people each, yet have the
same technical, financial and administrative responsibilities as
do larger water systems. Eighty percent of the very small
systems are privately owned. They span the ownership spectrum
from mobile home parks to schools, and have very little
treatment technology in place. Like all community water systems,
they face compliance with 83 new drinking water regulations over
the next several years. Over the next ten years, the majority
of.the systems will have to install some technology they do not
now have.
In addition to the "very small" systems, another 20 percent
of suppliers are designated ".small" systems and serve between
500 and 3,300 people. While slightly better organized than the
very small systems, they too have major technical and financial
challenges before them. The distribution of water suppliers by
the size of the population they serve is shown in Exhibit 1.
There are two facts which underlie the small water system
challenge: small water suppliers face higher unit costs and have
fewer resources on which to draw. They must "Do more with
less," and a vigorous public-private partnership may be
essential to resolving the problems we will be discussing here
today.
To help us discuss the opportunities for public-private
partnerships in addressing these problems, I would like to
introduce our panelists on drinking water: Mr. James Barr, of
the American Water Works Service Company; Fred Marrocco, of the
water supply department in Harrisburg, Pa.; Wade Miller, of the
Association of State Drinking Water Administrators; Tom
Stephens, of the Nevada Public Service Commission; Beth Ytell,
of the Rural Community Assistance Corporation; Ann Cole, of the
National Association of Towns and Townships; and Nicholas
Kepple, First Selectman of stonington, Connecticut. After I
give an overview of the problem and potential solutions, the
panelists will give us the benefit of their direct experience.
But first, the problem.
The Problem
Small may be beautiful, when it comes to children, but when
we are talking about water suppliers complying with the 1986
Amendments, the small size of almost 90 percent of all this
country's water systems is the biggest single problem we face.
Page 1
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Other Federal programs have had to deal with the "small"
problem, but never a problem like the small water systems
present. EPA's Construction Grants Program and Farmer's Home
Administration both consider a community to be small when the
population is under 10,000. The suppliers of greatest concern to
the Drinking Water Program, however, are the two-thirds of all
systems, the "very small" systems, serving between 25 and 500
people. That could be a system serving as few as eight families.
Why is small "bad"? Because, almost without exception,
small systems are characterized by the following: 1. Missing or
Untrained Management; 2. Small Revenues; and 3. Higher Costs
per Gallon which result from Diseconomies of Scale. How the
three|characteristics operate, in turn, to cause compliance
problems for small suppliers is shown in Exhibit 2, Taxonomy of
the Small System Problem. These characteristics may not
ordinarily be a cause for local concern but when an outside
actor, the Federal Government in this case, begins to require
effective participation in a national program whose objectives
and, therefore, requirements are virtually the same for large
and small systems alike, we begin to see "capability gaps"
between what the system can do and what is required of it.
While most of my talk will focus on the problem situation
prevalent in small water systems, please recognize the problem
is not universal. The most basic protective action most water
utilities must take is protection against biological
contaminants and corrosion products such as lead. All water
utilities will need to provide this basic protection, and our
initial analysis suggests that they can, even the smallest
systems. Once past this protective threshold, however, the
small system problems quickly begin to arise.
A. Management Problems. Management problems can arise in
four areas: project management, engineering or technical
management, administration, and financial management. Project
management problems, such as those relating to project
scheduling or obtaining qualified outside assistance, are more
pronounced in small systems because they simply have less
experience dealing with large-scale capital projects. These
problems are all the worse because the day-to-day administrative
capabilities of small systems (part of the basis for expertise
in project management) are often missing basic record keeping,
reporting and contract management skills.
Deficiencies in engineering or technical management often
result from a similar lack of experience: technologies now in
place may be rudimentary at best, yet the supplier's management
may have little understanding of what it takes to operate and
maintain even this basic system. Technologies proposed to comply
with the 1986 Amendments may be wholly alien and beyond the
supplier's abilities to either evaluate or operate. Financial
management problems, including those related to financial
planning, budgeting and accounting, are apt to be more prevalent
among smaller suppliers even before a project is undertaken.
Page 2
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EXHIBIT 2
Taxonomy of the Small System Problem
Points of
Address
Fewer than 500 people
Fewer than 170 households
Missing or
Untrained
Management
- Projects
- Engineering
- Administration
- Finance -
Non-functional
Hardware
Inadequate
Operation
Small Revenues
Low or No
Bond Rating*
Scale
Diseconomies
Low-coit/
Human-Intensive
Engineering
Klgti-coit/
Automated
Engineering
Credit
Unworthtnesi
High Water
Rates
Observed
Problems
Nonoptlmal
Responsiveness
and Attitude
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This, in turn, makes it less likely that assistance can be
obtained to finance the new project and that the project, once
completed, can be effectively operated and maintained.
Not only can management problems contribute to revenue
problems, but they can lead directly to a variety of other
problems shown in Exhibit 2. Inadequate project and engineering
management can result in poorly functioning hardware and
operating problems which cause violations of Maximum Contaminant
Levels (MCLs). Inattention to administration can lead to
violations of monitoring and reporting requirements. Inadequate
financial management often results in a rate structure which
fails to collect sufficient revenues. Water systems, generally,
do not
collect adequate revenues. This can best be seen, perhaps, in
Exhibit 3, which shows that water and sewer bills as a percent
of median family income have actually declined.
B. Small Revenues. Small systems raise less revenue simply
because they have fewer customers. This is true even though
their residential rates.per thousand gallons can be over two and
one-half times that of larger systems. (See Exhibit 4.) Current
revenue problems will place many suppliers at a disadvantage
when they have to borrow the money needed to install the
technology required by the 1986 Amendments.
Annual revenues of small suppliers may prove inadequate to
meet the annualized costs of some of the technologies that could
be required. For example, Exhibit 5 shows the typical annual
revenue stream of $4,800 for systems in the 25-100 population
category and the annual removal costs for Radon ($6,000), Radium
($25,000), and Uranium ($85,000) for these systems. Clearly, the
costs are greater than the typical revenues, in some cases by a
very wide margin.
Because small systems raise less revenue, they often
receive a lower bond rating or experience an inability to obtain
a rating. (Most very small systems find the requirements of
entering the bond market prohibitive.) Even where other sources
of financial assistance are available, lenders often find that
the smaller revenues of smaller systems lead to a real
difficulty in repaying loans and, hence, to questions of credit
worthiness. In what is perhaps the best of scenarios, small
systems are simply charged higher rates to borrow money than
large systems are charged. In any event, the management problems
discussed earlier tend to compound the revenue problems to
produce a picture of a typical small supplier as one with
substantially less wherewithal who thus may be severely
disadvantaged when trying to participate in the Drinking Water
Program.
C. Diseconomies of Scale. Diseconomies of scale are purely
a consequence of small size. It simply costs less per gallon to
produce 10 million gallons of safe drinking water per day than
it does to produce 3,000 gallons per day. Other structural
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EXHIBIT 5
Example of Small System
Treatment Costs
Annual Revenue Stream for a System
Serving Less Than 100 People
Number of System's Affected Annual Treatment Costs
15,000
500
1.000
Radon
Radium
Uranium
$ 6.000
$ 25,000
$ 85,000
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problems are closely associated with diseconomies of scale.
These include economically non-viable systems (systems that are
too small to operate independently) and low-density service
areas which face still higher costs per unit of centralized
water.
Current treatment technologies are another component of the
diseconomies of scale problem. An unfortunate consequence of the
design of most technologies is that they cannot be
satisfactorily scaled down to the point where they offer
commensurate cost savings to small systems. Current
technologies, with few exceptions, are characterized either by
high capital cost and automated design or by lower capital cost
designs that require a human-intensive approach to O&M. Neither
is well suited to small system needs and capabilities.
Examples of the problems we have been discussing are
presented in Exhibit 6, copies of which were distributed to you
before the session began. Also shown are some of the possible
solutions that I will come to in a moment. It is important to
remember that the three main categories of problems each flow
directly from the small size of the systems.
POSSIBLE SOLUTIONS
So much for problems; what can be done about them? General
categories of solutions are presented in Exhibits 6 and 7 to
describe possible approaches to the problems identified. Let me
expand on these general categories.
A. Capacity Building. The category of assistance referred
to here as capacity building offers some of the greatest
opportunities for solving problems. The underlying philosophy is
that assistance should not be made available indefinitely and
that properly designed assistance will enable small systems to
function largely on their own while preserving autonomous
control over their projects. The "how" column in Exhibit 7
shows that information can be provided through at least seven
different delivery mechanisms, ranging from informational
packets to hands-on technical assistance.
Perhaps one of the most promising options under capacity
building is the Self-Help Diagnostic Series, which would help
local system managers identify problems related to technical,
financial and administrative management and then suggest
possible solutions. While not one of the more intensive
approaches by itself, it may uncover serious problems that could
require a more active approach, such as some form of on-site
assistance.
B. Financial Assistance. Some type of financial assistance
is almost certainly going to be needed by the smallest water
suppliers. Yet it does not need to be, and perhaps should not
Page 4
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be, the first line of attack. Remember that management problems
can be responsible, at least to a certain extent, for revenue
problems. Financial assistance is only effective against two of
the types of problems identified and, in fact, could be
entirely wasted if funds were put in the hands of those
incapable of managing them. Where the financial need lies in
the state program office, the Performance Based Assistance
Policy could be used to target extra assistance to States who
are attempting innovative measures on their own.
C. Regionalization. The category of option referred to as
Regionalization is a way of increasing local capabilities by
sharing or regionalizing some functions now carried out by
individual suppliers. Possible candidates for regionalization
include the physical plants of separate small systems, the O&M
functions, and certain management functions. In places where
affordable financing is unavailable, small systems might
consider pooling their resources and approaching lenders as a
single regional entity.
D. Down-Scaled Treatment Technologies. While the other
options are aimed primarily at improving capabilities, the only
option that really aims at reducing high capital costs and the
option that offers the greatest potential for a public-private
partnership is the option of developing treatment technologies
scaled to the needs and financial capabilities of small systems.
Furthermore, there is a role under this option for every
major actor in the Drinking Water Program. Perhaps the first
charge of the Federal Government is to demonstrate the need for
such technology to the industry, to show them that the Drinking
Water Program is going to create a tremendous demand for small
system technology across the country, to convince them that a
market is out there.
Unfortunately, new technology does not sprout up over night.
Even with an earnest beginning, it could be many years before
significant results are achieved. While it remains a potential
solution in the long-term, emphasis in the near future probably
ought to be on other categories of assistance options.
E. External Services. External services are those provided
by a source outside the community or the water supplier's
organization. In subject matter, external services bear a close
relationship to options discussed under the capacity building
category. The important difference is that, where capacity
building is aimed at making the supplier self-sufficient, the
external services option assumes that some suppliers either
cannot or should not manage their own treatment system (either
because of severe incapacities or because it is economically
inefficient).
Examples of these services include financial and
administrative management assistance. Regionalizing external
Page 5
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services, such as through the use of a circuit riding city or
water system manager, is yet another variation. Where financing
substantial capital costs is a concern, lease back arrangements
with a private sector owner are considered by some to be
advantageous.
This is a brief sketch of the small water system problem and
some of the potential solutions. Our panelists will now discuss
some of those solutions with which they have direct experience,
telling us about successes, failures and opportunities for
Public-Private Partnerships which they foresee. Because the
list of problems is quite long, and we have but a brief period
here today, I want to direct our panel to the three basic issues
that may provide the greatest opportunity for Public-Private
Partnership. These are: obtaining financial resources, dealing
with economically non-viable systems, and enhancing basic
technical management of these systems.
Page 6
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