Water Infrastructure Financing Options

One of this country’s most important challenges in the coming decades will be replacing aging drinking water and wastewater infrastructure.

One of this country’s most important challenges in the coming decades will be replacing aging drinking water and wastewater infrastructure. This replacement is essential if we are able to continue to provide water services to all who need them.

The needed investment has been studied extensively. There have been many estimates as to the size of the investment, ranging from a low half a trillion dollars to a high of almost a trillion dollars. According to the EPA, one solution to the spending gap would be rate increases of roughly 3% per year over a 20-year period, which would provide sufficient additional revenue to address infrastructure needs. Gradually implementing full cost of service rates would provide not only the needed revenue for necessary investments, but it also would also provide a more accurate reflection of the true cost of water.

Many municipal utilities argue that they can’t raise rates enough to replace their infrastructure so the Federal Government should subsidize their investments. They have argued for some time, through a coalition called the Water Infrastructure Network (WIN), that the way to address the country’s water infrastructure needs is through a massive new grant program funded by a new federal water trust fund. WIN is currently working on draft legislation the last version of which would create a trust fund by imposing a $.05 tax on bottled beverages. The trust fund would provide $9 billion a year and be used primarily to fund grants to municipalities for drinking water and wastewater infrastructure projects.

It will be extremely difficult for a trust fund style initiative to pass Congress. With Republicans firmly in control of both house of Congress, any initiative that increases spending or develops a new tax is generally going to be viewed negatively.

The current State Revolving Loan Funds (SRFs) for clean water and drinking water are a far more efficient and appropriate vehicle for any utility assistance from the Federal Government. Revolving loans as opposed to grants assure the same money will be used over and over again, significantly reducing the drain on the Federal treasury and providing a perpetual source of funding for future water and wastewater infrastructure needs. Since the recipient must return the principle, it forces management practices that do not breed dependence on the government.

However, SRF assistance is not the only means of addressing our infrastructure needs. By utilizing creative Public-private partnerships we can eliminate much of the financial burden placed on municipal governments while addressing the replacement needs of our water systems. Public-private partnerships entailing operations and management (O&M) and design-build-operate arrangements are the most common and fastest-growing segments of the U.S. water market.

Today, about 2400 municipally-owned water utilities are operated in partnership with contract operators. These partnerships enjoy a nearly 97% renewal rate, can save a municipality up to 40% of their total costs and benefit from the strong support of many mayors from across the country.

Other steps that can be taken include encouraging the implementation of asset management plans. The General Accounting Office has estimated that as many as 25% of all utilities do not have such a plan in place. The implementation of a good, long-term asset management plan can provide significant assistance in avoiding an infrastructure-financing gap as well as addressing the infrastructure replacement challenges facing public and private water utilities.

The financial challenges facing utilities can also be addressed by improving their economies of scale through consolidation. By tying consideration of consolidation with SRF assistance, Congress could encourage localities to put aside parochial interests, expand their vision and improve service to the consumer.

Another infrastructure-related legislative initiative would remove the volume caps that restrict the availability of tax-exempt financing to the water and wastewater industries. Specifically, this legislation, H.R. 1708, would bring water and wastewater projects out from under the State volume caps on Private Activity Bonds (PABs), thus leveraging huge amounts of private capital to assist with the water infrastructure challenge.

The effort to pass PAB legislation began a few years ago with bills introduced in each of the last several Congresses. This year, Rep. Clay Shaw (R-FL) is the champion. It is important to note that this change in the tax code would cost the Federal Government very little money ($41 million over 5 years, $147 million over ten); yet leverage billions of dollars in private capital to address the infrastructure financing challenge.

Bringing water and wastewater projects out from under the state volume caps will result in lower cost financing that is passed on to ratepayers, will encourage private sector partnerships to spread risk and encourage innovation, and will relieve all levels of government from the need to fund these much needed investments.

These are examples of steps that can help the water industry begin to move along the path toward self-sufficiency and in doing so will ensure that there is sufficient investment to address any infrastructure needs in the coming decades.

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