There’s a Way If You’ve Got the Will

WWEMA just completed its 33rd Washington Forum held each year in the nation’s capital. “Who’s Driving the Water Market . . . and How Do We Get on Board?” was the theme of this year’s event. Attendees were privy to 21 presentations over the course of 10 hours covering such topical subjects as future trends in treatment technology; water priorities facing the Nation’s cities; finding opportunities through the World Bank; federal procurement projects in water infrastructure; and protecting our Great Lakes, among many other pertinent topics of interest to companies serving the water and wastewater industry.

In response to the question “Who’s Driving the Water Market?”, the answer appears to be multi-faceted with players including federal, state and local governments, as well as international finance institutions, non-governmental agencies and concerned citizens. Ours is truly a complex market with many diverse drivers creating multiple courses of action for achieving a variety of water quality goals. For companies serving the water industry, the challenge is to select which course offers the best fit for matching real demand (i.e., ability to pay) with their company’s product or service offerings.

The good news coming out of this year’s WWEMA Washington Forum is on the “ability to pay” side of the equation. As reported a year ago in a survey conducted by Luntz Research Companies, more than 80% of Americans say they are willing to open their wallets and pay for clean and safe water because they think it is a priority.

This is reassuring considering the fact that “pay-as-you-go” - relying on user charges, rate increases and capital reserves generated from user charges - will be the financing method most frequently used by cities in meeting their water infrastructure needs, according to the results of another survey recently conducted of the nation’s principal cities concerning their water resources priorities and trends.

Rich Anderson, senior advisor to the U.S. Conference of Mayors’ Urban Water Council, told the Washington Forum attendees that according to the National City Water Survey 2005 conducted by his organization, the majority of cities plan to use the following multi-source financing methods during the second half of the decade, in descending order of frequency: pay-as-you-go (51.7%); revenue bonds (46.1%); state revolving fund (SRF) loans (38.3%); general obligation bonds (28.8%); and, private activity bonds (.8%).

Recognizing that multiple sources of funding will be needed to meet the Nation’s water and wastewater infrastructure needs, WWEMA’s Washington Forum turned to the experts to share their perspectives on the health of these alternative funding mechanisms . . . and the news was encouraging!

Giving a capital market’s perspective was Richard Weiss, vice president at Morgan Stanley, who reported that 90% of water and wastewater projects are locally funded, primarily using the tax-exempt market. The tax-exempt market stood at $300 billion in 2005, of which water and wastewater utility tax-exempt debt issuance represented over 8% (or $28 billion) of the market.

He observed that there has been a steady growth in tax-exempt debt issuances for water and wastewater facilities since the late 1990’s due to their strong credit profile. “Water and wastewater facilities are among the strongest credit risks in the tax-exempt market,” he noted, attributing this to the fact that they provide an essential service, have a low default history, and are a strong security with regard to revenue pledge, rate covenant, and reserves. He assured the audience that despite challenges in the Gulf Zone created by Hurricane Katrina, credit trends for the water and wastewater utility in 2005 were positive. “The water and wastewater utility capital markets are alive and well,” he concluded.

Turning to the other major source of funding for water and wastewater infrastructure, the SRF programs, Washington Forum attendees received good news from the directors of these two programs.

George Ames, chief of the EPA Clean Water SRF program, reported a resounding “NO” in response to the question of whether there will be a slump in the market as a result of recent cuts in the federal contribution to the Clean Water SRF. In fact, the program is currently capitalized at $52.7 billion and issued $4.9 billion in loans in 2005. The majority of these funds have gone toward secondary treatment (43%), followed by new sewers (20%); advanced treatment (18%); sanitary sewer overflows (11%); combined sewer overflows (3%); and storm water (1%). He estimated that by 2018, the program could exceed $100 billion is funding available to communities to meet their wastewater infrastructure needs. “The Clean Water SRF is a gift keeps on giving,” Ames stated, recognizing the recycling nature of the loan program.

Peter Shanaghan, team leader for the EPA Drinking Water SRF program, acknowledged that his program was created ten years after the Clean Water SRF but still has created an impressive fund with $11 billion available to help communities meet their drinking water needs. By the year 2018, he estimated that the program will be issuing $1.2 billion annually for drinking water infrastructure projects.

As for the final financing method cited in the U.S. Conference of Mayor’s report, that being private activity bonds, the head of the nation’s water program, EPA Assistant Administrator of Water Ben Grumbles, assured the Washington Forum attendees that his agency was “aggressively exploring innovative financing approaches, including private activity bonds” to help bridge the funding gap facing the nation’s water and wastewater programs. H.R. 1708 - the Clean Water Investment and Infrastructure Security Act - is currently gaining momentum in the U.S. House of Representatives and will remove sewage and water supply facilities from the state caps on private activity bonds.

All of these findings and observations bode well for the future of the water and wastewater industry in providing the necessary financial tools to meet the needs facing our communities. The only question that remains, “Do we have the will to commit to action?”

About the author:

Dawn Kristof is president of the Water and Wastewater Equipment Manufacturers Association. WWEMA has operated for 98 years as a Washington, D.C.-based, non-profit trade organization representing the interests of companies that serve the water and wastewater industry.