Santa Paula PPP buyback leaves a sweet taste

The Californian city has negotiated the repurchase of a privately financed treatment plant developed by PERC Water back in 2008. Who got the better deal?

The developers of a privately financed wastewater treatment plant in California look set to profit after a mix-up in design specifications meant the client was forced to buy the plant back at well over construction cost. The city council of Santa Paula - led by a recently re-elected mayor who in his previous time in office was against privatising the plant - voted on 3rd February to exercise an option to cancel the offtake contract and buy back the 3.4MGD (12,869m3/d) water recycling facility built and owned by a consortium of PERC Water and Alinda Capital for $70.8 million. The original capital cost of the project, which was completed in 2010, was $62 million.

PERC Water, which has sole responsibility for operating the plant under the 30-year DBFO contract signed in 2008, will be retained as the plant's operator until such time as it is economical to rebid the contract, given that there is a $940,000 break fee payable by the city if they are removed. Larry Chertoff, a former director at Alinda Capital, told GWI that the news is likely to be welcomed by the private equity firm. The Santa Paula facility was Alinda's last remaining water asset after it announced its departure from the space in 2012, and Chertoff noted that Alinda ultimately got a better deal with the city than from numerous private offers that came in during his tenure at the firm. He added that the presence of an exit clause is an important part of making deals more politically palatable. "Having that freedom makes it easier for private companies to do long-term concessions," he observed to GWI. The city originally awarded the contract for the Santa Paula plant to the team of PERC (10%) and Alinda (90%) in part because it needed to build the plant quickly, despite the fact that the first bid price submitted was higher than that offered by rival bidder Veolia. The PERC/Alinda team also swayed the decision by offering to carry out a future expansion of the plant at no cost to the city. Santa Paula's decision to buy back the plant was made after an investigation by the Ventura County Grand Jury found that high levels of discharged chlorides - which have been a historic problem in Santa Paula - were not addressed by the plant, and in fact had not been included in the design specifications at the bidding stage. The report from the Grand Jury in mid-2013 recommended that the city take advantage of record low municipal bond rates to buy back the plant and install chloride removal facilities by itself. Chertoff said that despite the buyback, the project had been a success from an investment point of view. "I can't recall if there are any penalties on the early loan termination [for Alinda]. I assume there must be," he said. "Nevertheless, this was a profitable venture for Alinda, which has ultimately chosen to focus on other investment areas."

Global Water Intelligence magazine - February 2015 - Subscribe for a FREE trial

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