CUSTOMER:

City of Seattle, Washington

SERVICE PROVIDER:

CDM Philip, a consortium consisting of Camp Dresser & McKee, Philip Utilities Management Corporation and Dillingham Construction N.A., Inc.

TRANSACTION STRUCTURE:

Design, Build, Operate a Water Treatment Plant

YEAR:

1997                                      DURATION: 25 years

ILLUSTRATION: This case study illustrates how public financing can be used in conjunction with private sector financial backstops. Reducing cost of capital through public financing and ownership can be accomplished particularly when technological and commercial risks are well understood. In this case, public sector financing was particularly attractive because of the tax-exempt status of municipal debt, and me technology, a water filtration plant, was well known and understood. However, me City recognized the commercial risks involved in the project and required additional financial guarantees or "backstops" to protect its interests.

BACKGROUND: The Seattle Water Department provides both wholesale and retail drinking water for approximately 1.25 million people in the City of Seattle, King and Snohomish Counties. In 1996, the Department issued an RFP for the development and operation of a water filtration plant. Although ownership and Financing responsibilities reside with the City, most commercial risks were placed on the contractor through a design-build-operate transaction structure.

KEY TERMS OF CONTRACT/RISK ALLOCATION: Under the procurement, the City assumed me risks of site selection, financing, change-in-law, and water (feedstock) supply and quality. The contractor assumed permitting, design, construction, operations, and treated water quality risk.   The RFP called for a 12-month development period (permitting and financing), a 30-month construction period, and a 15-to 25-year operations period. Proposals were evaluated based on the present value of the contract's life cycle costs. Construction payments and inflation adjustments were to be based on a schedule submitted by proposers, and therefore, the contractor chose the degree of inflation risk it assumed.

ISSUES CONFRONTED: Since the City intended to finance and own the plant, it required financial assurances that, should the contractor fail, it would be sufficiently protected. Therefore, the RFP required the contractor to guarantee its performance with liquidated damages in both the construction period and the operations period. These guarantees had to be backed by letters of credit of $15 million during construction and $3 million during operations.

OUTCOME/CURRENT STATUS: The contract was awarded in the summer of 1997. The total contract value was S101 million in present value terms and the City maintains that it represents a savings of $70 million over the life of the contract.