Military privatization

Big picture: The military budget has doubled since 9/11. It's now about $500 billion and that doesn't include Iraq and Afghanistan, which Brown University says, will total about $3.4 trillion by the time it's over.

Under the deficit-reduction legislation in effect now, the Pentagon must cut $400 billion over 10 years. If the supercommittee can't reach a consensus on budget cuts or if it does and Congress doesn't pass it by Nov. 23, the Pentagon would be hit with mandatory additional cuts of $600 billion more over 10 years.

The Pentagon says that would cause a 1% increase in private sector unemployment, including a flood of soldiers seeking work.

I don't believe in Armageddon. But something big is happening.

The military housing market is over. Congress is tightening the screws on military housing developers who are seeking relief from overly optimistic forecasts.

Congress is asking a lot of questions about renewable energy contracts, mainly whether it has the money to spend now on future savings that may not be real.

I'm not sure what all this means. But it seems likely that P3 contracts with the military will be less profitable.

Water

Each year starting in 1999, I've sent a long questionnaire to the largest water outsourcing companies in the U.S. asking about their business. They have generously responded.

Results of the most recent survey, last March, showed water PPPs are a stable but slow-growth market:

The total water utility outsourcing market shared by the six largest contract services firms in 2010 was $1.574 billion. That number represents fees paid by 1,359 municipal clients and 178 industrial owners.

Revenues have been generally flat since 2006 but are trending up now. Municipal O&M revenues are showing the greatest growth-8% last year. Industrial revenues are retreating.

New business: Between 1999 and 2010, the largest companies shared 350 new business contracts between them, including capex and O&M. Those contracts were worth $5 billion over the full life of the service agreements, including capex and O&M.

Of those contracts, 24 were for DBO projects worth $1.7 billion in capital and operating fees. That market has been shrinking steadily but could turn around if affordable financing, through private activity bonds, for example, can be added to the value chain.

Industrial O&M revenues are running about $200 million a year, a very small piece of the pie. There is no industrial DBO or DBFO market to speak of.

Each of the major P3 water companies has built considerable O&M, asset management and consulting capabilities. They've identified market niches where they can make money. And they all believe in a bright future. Contract renewals typically run above 95%; safety records show P3s to be best-in-class; and I don't know of any successful prosecutions for clean water violations in the 1,400 municipalities where they operate. On the contrary, P3 companies have cured many hundreds of violations for municipal clients.

Levels of service are dropping among public water purveyors. Because of the diligence and proven performance of P3 operators, I believe the water market is coming their way, and strongly.