Private Sector Funding Options for Water Infrastructure

In a move that was more theatre than substance, Rep. Earl Blumenauer (D-Ore.) introduced legislation to establish a federal trust fund for investments in clean water infrastructure – on the same day Congress began its annual summer break.

Sep 2nd, 2012

In a move that was more theatre than substance, Rep. Earl Blumenauer (D-Ore.) introduced legislation to establish a federal trust fund for investments in clean water infrastructure – on the same day Congress began its annual summer break. Given the lack of action by Congress in an election year, it is unlikely to move forward and will die a quiet death when this session of Congress adjourns.

Still, it was a nice gesture and highlights the growing need for alternative funding sources for water infrastructure. It has been estimated that such as trust fund could provide $9 billion annually, most of that going to support the Clean Water State Revolving Fund program.

Several methods for financing water infrastructure investment have been considered over the past few years, including an infrastructure bank and an expanded SRF program. Most, if not all, called for a significant amount of federal funding, which is a tough sell given the soaring federal deficit.

I recently read an interesting white paper developed by American Water that focused on boosting private sector funding for the municipal water industry. As the largest investor-owned U.S. water and wastewater utility company, the company clearly has a vested interest in water infrastructure finance.

According to the paper, one key solution is attracting additional private capital from investor-owned companies like American Water, as well as private capital that is already in infrastructure funds, pension funds, and other funds seeking the long-term, reliable investments that water utility systems can offer.

Top on its list was for Congress to extend the current dividend tax and capital gains tax rates. Without action by Congress, the tax rates on dividends and capital gains are set to increase significantly on January 1, 2013. Those increases could limit investment and hurt companies like American Water that pay dividends and rely on continued investor growth to provide access to low cost capital.

The company would also like to see an end to what it called "punitive" IRS regulations for private water transactions. Current IRS regulations impose a significant financial penalty on municipalities who sell or lease their water system to a private company.

One legislative measure that many thought would make its way through Congress this year was the Sustainable Water Infrastructure Investment Act, H.R. 1802, which would have removed water projects from the state volume caps for Private Activity Bonds. American Water believes that removing the bond cap would spur increased private investment in water and wastewater systems throughout the country.

Some believe that lifting the cap for water projects could generate at least $2 billion in new investment each of the first few years and grow to several times that as the market opens up. Other major infrastructure components already exempt from existing caps include airports, high-speed rail and solid waste disposal.

Ultimately charging full cost pricing and focusing on efficiency may be the only real answer for public water agencies, but encouraging private investment may be one alternative to consider for cash-strapped utilities.

To read the American Water white paper on Financing Solutions for Water Infrastructure Investment, look under the white paper tab in the press resources section of www.amwater.com.

James Laughlin, Editor

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