The Hidden Cost of Public Funding

July 1, 2016
A Case for Privately Funded Water Infrastructure Projects

By Michael Dimitriou

Federal and state funding agencies have provided funding for more than 40 years, supporting our efforts to collect, deliver, and treat water - often at lower interest rates than other sources. They also provide oversight, seeing that public funds are allocated and distributed fairly. But this has come with costs - costs we can no longer afford in a time of decreasing infrastructure funding.

There’s another way that will allow us to deliver projects more efficiently and reduce costs: privately funding water infrastructure projects. Our future should include private activity bonds, public-private partnerships, even an infrastructure bank, along with other methods that could help finance infrastructure while reducing costs for utilities, rate payers, and all of us as tax payers.

These more efficient - and in many ways less costly - project delivery options give utilities more freedom in how they procure and manage projects. They also eliminate the need to allocate scarce funds by making funds available to all.

There are hidden costs to traditional funding methods that make them inherently inefficient. They impose limitations and cost burdens that don’t allow the best and most efficient use of our tax and rate payer dollars. Why? Because publicly funded projects are inherently more expensive and time consuming to manage than privately funded projects. These costs include:

  • Prioritizing and allocating funds. Funding is scarce; there’s never enough to go around. Projects may have to wait years to see funding, even when needs are great. There’s significant cost involved in simply applying for funding, managing the funding process, and dealing with the costs of delay. The costs and management barriers are even more prohibitive for small systems. And it continues to get worse.
  • Funding agency review and approval requirements. Most funding agencies have review requirements during project bid and construction that add additional delays. They add to cost by adding to the project management burden and force schedule delays because of the procedural requirements needed to meet the agency’s reporting needs.
  • Limitations on delivering the project. Funding agencies have rules and procedures that limit our ability to source, design and construct, and purchase in the most efficient manner. The procedures, while meant to help and protect the project and funding agency, add costs (the value of which is limited).
  • Getting the best solution. Procurement is limited by funding agency rules. Maintaining equipment selection and a purchaser’s ability to get what they want is very limited by the need to select the lowest bid price. In some cases it proves impossible to preselect by evaluation, or pre-purchase equipment using life cycle cost or other selection processes to ensure long-term maintenance or operating benefits. The purchaser may pay less at bid time but pay a lot more during the operating life of the equipment. Bid shopping, bid protest, disruption during construction, and change orders also are more common.
  • Innovation and changes. Dealing with a change during construction and trying to minimize its impact on schedule and cost is very difficult. The need to seek approval from the funding source can result in extensive time and engineering costs that make the cost impact of any change that much worse.
  • Cost of funds. There are benefits to the lower cost of funds provided by many agencies in the form of lower interest rates. However, the savings may not really be there once the additional costs of funding are included. In a Net Present Worth analysis, the costs of the delay can add up, especially in today’s low interest commercial markets.

Cities, towns, and utilities face serious challenges meeting their water infrastructure needs due to lack of financial resources. Traditional capital sources are increasingly limited in their ability to fund projects and are imposing additional burdens when funding is provided.

So let’s use our money more efficiently and deliver projects with less cost and in a more timely manner. Let’s provide more funding options and make funding more efficient, less costly, and available to all who need it.

About the Author: Michael Dimitriou is president of WRT, which specializes in treatment systems for removal of radium and uranium from water. He is a member of the Water and Wastewater Equipment Manufacturers Association Board of Directors.