WATER/WASTE TREATMENT

As mills continue to focus on their core competency, some are seeking onsite management or even ownership of their waste treatment system

Outsourcing Treatment Operations Means Balancing Costs, Liability

By Kirk J. Finchem, Technical Editor


As they have with power islands and maintenance services, pulp and paper mill owners are examining the advantages and liabilities of "outsourcing" their water and waste treatment services. And they are coming to some of the same conclusions. The chief advantage is reduced costs, which come from improved operating focus and technical expertise. The chief liability is the problem of communication between the mill owner and the third-party contractor, since the manufacturing process and the treatment process are so intertwined.

Sam White, vice president and senior consultant for RMT Inc., in Greenville, S.C., says "Most of our clients are operating in very competitive environments and are trying to focus on their relative competitive advantages. They are seeking to develop relationships with other firms that are experts in the support operations, such as waste treatment."

Robert Carroll, environmental manager at Simons Engineering in Decatur, Ga., agrees. "The trend is clearly to focus on the core business-papermaking-and outsource everything else (power, wastewater treatment, etc.)."

THE ADVANTAGES OF OUTSOURCING.

According to Jim Thibodeaux, marketing manager for Nalco's Treated Water Outsourcing (an equity joint venture with U.S. Filter), the operating savings of these types of outsourcing arrangements are typically in the range of 10%/year-40%/year, compared with the costs of owner-operated systems. And while the savings can be significant, pursuing an outsourced waste treatment arrangement simply as a cost savings opportunity misses other, and potentially more important, advantages.

One of the forces driving the consideration of contracted wastewater treatment is the general industry trend toward concentrating on core competencies. "That is a key advantage that many of the companies we work with are interested in trying to exploit," says Thibodeaux.

He explains that there are several ways to structure a water and waste treatment relationship. "In some cases, our joint venture actually buys the treatment facilities from its owner-operator. The venture then owns, operates, and maintains those systems, selling the treated water and charging for waste treatment services. In other cases, the venture simply operates and maintains the facility for the millÕs owner-operator."

Regardless of the ownership arrangement, the treatment specification portion of most agreements are very similar. To wit, the characteristics and quantities of process effluents that will flow to the treatment plant are stipulated in the contract, as are the characteristics of the treatment plant's outfall.

According to Thibodeaux, "Clients typically guarantee an influent quality and quantity. The contractor guarantees the process efficiency and reliability of the system. As long as the client operates within the limits of the contract, the contractor is responsible for the quality of the discharge."

Thibodeaux maintains that contracting firms specializing in treatment plant operation "bring a huge body of technical expertise 'to the table'-more than most pulp and paper producer companies could afford to build and maintain. This level of expertise and attention allows contractors to get similar or better results from a facility while at the same time being more cost-effective."

He explains that there are several other advantages, as well, including the following:

• Capital redeployment. In the case of an off-balance sheet contract (where the contractor owns, operates and maintains the facility), the mill can reinvest its liberated capital in core business activities.

• Environmental improvements. Also in the case of an off-balance sheet contract, changes and improvements to the waste treatment system that require investment in new, "state-of-the-art" treatment equipment can be done at the contractor's generally lower cost of capital. This has the effect of reducing the cost of the improvements.

• Risk reduction. Irrespective of the ownership of the assets, contracted services allow the mill owner-operator to transfer the operating risk of the waste treatment system to a "properly incentivized" contractor.

NO SLAM-DUNK. Despite these advantages, mills that pursue an outsourcing strategy face some significant challenges. According to RMT's White, "This is not a 'slam-dunk' decision for the mill or the service providers. All of the parties-mill management, the mill workforce, and the contractor-need to be aware of the degree and nature of the risks. And the mill owner needs to be comfortable with the 'level of knowledge' on the part of the treatment contractor. The contractor must have a specific knowledge of pulping and papermaking technologies and operations, and also have a 'forward-looking understanding' of regulatory trends."

He adds, "Frankly, I'm surprised that the industry is pursuing this (waste treatment outsourcing) given the lack of discrete operations. It is much easier to outsource discrete operations. Today, waste treatment operations are increasingly an integrated part of the mill's operation. It is no longer the 'no man's land' that it might have once been-on the boundaries of the mill property and far from management's daily concern. The manufacturing process and waste treatment operations are bound together like never before."

Simons' Carroll agrees on the direction and challenges. "With the general trend toward pollution prevention (as opposed to waste treatment), effluent waste reduction and recycling, manufacturing processes and waste treatment are becoming more intertwined as a practical matter. As far as contracting out waste treatment, sometimes it is hard to tell where the manufacturing process ends and waste treatment begins."

Communication is the critical link, according to Carroll. "Communications between the mill owner and the waste treatment contractor require some extra effort. Things like changes in production rates, shutdowns, and cleanouts must be clearly communicated."

REGULATORY COMPLIANCE. One thorny set of issues that concerns most mill owner-operators as they contemplate outsourcing their waste treatment is regulatory compliance and enforcement. Typically, these issues provide plenty of motivation for communicating effectively. "Having your fate in someone else's hands can give a manager reason for pause," says Carroll. "No matter what the contract says, when a permit is violated, the mill owner is ultimately responsible."

Thibodeaux explains how his group approaches the situation. "When we prepare to enter into a long-term contract to manage a facility, we take a look at the system. We take into account its condition and process capabilities, as well as the mill's discharge permit requirements. We want to assure ourselves that the system-operated correctly-is capable of consistently meeting the permit requirements."

Simons' Carroll points out, "A mill owner has to be careful about the incentives it puts into a waste treatment contract. 'Cost-plus' is a terrible way to structure one of these relationships."

If a mill's purpose in outsourcing its waste treatment operations is to reduce cost, the mill is likely to get a "cheaper operation," Carroll says. If, on the other hand, the purpose is to improve the effectiveness of the operations-and an incentive goes along with it-effectiveness is likely to improve, and reductions in operating costs are a likely side benefit.