CUSTOMER:

Mercer County Improvement Authority, Trenton, New Jersey

SERVICE PROVIDER:

Various

TRANSACTION STRUCTURE:

Design, Bid, Construct (Under EPA Construction Grants Program)

YEAR:

1984                                          DURATION:

ILLUSTRATION: This case study illustrates the potential financial exposure associated with 100% public financing of unique and potentially risky projects. Under traditional municipal procurements, construction of facilities was incrementally funded through the issuance of municipal bonds and in some cases grants. In this case, an advanced technology was introduced for the treatment of the municipal wastewater sludge.  Due to the funding approach however, minimal risk was transferred to the contractor, costing the municipality and U.S. government millions of dollars.

BACKGROUND: Under EPA's construction grants program, municipalities were entitled to seventy-five percent of construction cost For this reason, municipalities often made additional investments in capital if savings in operations could be realized. In Mercer County, the original design of the facility was based on an innovative sludge drying technology which was modified to increase plant capacity and lower unit operating cost.

TERMS OF CONTRACT/RISK ALLOCATION: The allocation of risk under this procurement was decidedly with the public entities providing 100% of the financing. The contractor designed improvements to the improve throughput, yet did not fully guarantee the performance of the system. one-sided process to

ISSUES CONFRONTED:  The original facility cost $30 million to construct.  At that time, problems were being experienced at other facilities around the country which had similar designs, and the County, with EPA's financial assistance, approved an additional $50 million in expenditures which the contractor indicated would address the performance problems. As the improvements were being finalized, other municipalities using the same technology deemed their facilities as "failures." Recognizing that this facility had the same design flaws as those failed facilities, Mercer County canceled further development of the facility, choosing not to spend additional funds on start-up activities. At this point, the County had spent over $80 million in design and construction costs.

OUTCOME/CURRENT STATUS: Although the plant was completed, it has remained idle since 1992 and the County has been servicing approximately $50 million dollars in outstanding debt on the facility. In June 1997, a developer who had acquired the rights to the technology entered into a Letter of Intent with the county to retrofit and operate the facility over a forty-year term. Rather than committing additional funds, the county has simply guaranteed a portion of its waste stream at competitive prices and will lease the facility to the developer. The developer is currently arranging project financing for the facility.