Show Me the Money: Options for Meeting Water Infrastructure Funding Needs
The pitiful state of our water and wastewater infrastructure is much lamented and little debated. Traditional funding mechanisms, such as federal loans and grants, and state revolving funds, are under stress. A variety of alternative funding mechanisms are being examined by both the industry and Congress, including a federal trust fund for water and lifting the cap on private investment bonds.
The pitiful state of water and wastewater infrastructure is much lamented and little debated. It's clear that our hundred-year old distribution and collection system networks are reaching the end of their service life and relatively simultaneously. Over the next 25 years, the American Water Works Association predicts we'll need to spend over $1 trillion to modernize, repair, and expand our infrastructure. And that's just drinking water.
The U.S. Conference of Mayors Water Council puts the figure somewhere between $2.5 and $4.3 trillion for water and wastewater over the next 20 years (2009-2028).
In addition to that, environmental regulations continue to tighten. In just the past few months, several cities have been put under new Consent Decrees, including Boston, Chattanooga, and Memphis, to name a few. Those cities will need to spend hundreds of millions of dollars to bring their wastewater and stormwater systems into compliance with Clean Water Act regulations.
Traditional funding mechanisms, such as federal loans and grants, and state revolving funds, while still available at the moment, have suffered debilitating blows from federal budget cuts. In July, the House Appropriations Committee approved a FY2013 spending bill that saw EPA's funding cut 17% compared to FY2012. In that bill, $689 million was allocated for the Clean Water State Revolving Fund (compared to $1.4 billion in FY2012) and $829 million was allocated for the Drinking Water State Revolving Fund (compared to $917 million in FY2012).
According to WWEMA, the Water and Wastewater Equipment Manufacturers Association, the bond market still holds some hope. Although bond issuance decreased 31% in 2011 compared to 2010, already in the first half of 2012, some $220 billion in municipal bonds were issued. That represents a 56% increase over the same period in 2011.
The bottom line is that there are some expensive repairs coming due and we are going to have to get a little creative about paying for them.
Over the past few years, a few interesting water and wastewater funding strategies have been percolating. One is the idea of a federal trust fund for water infrastructure, similar to what already exists for transportation. Oregon Congressman Earl Blumenauer has been a champion of this particular strategy and in August introduced the Water Protection and Reinvestment Act of 2012 (HR 6249). At its core, it's a re-introduction of his earlier, unsuccessful trust fund attempt in 2009, only this time with a concerted focus on wastewater.
Essentially it levies a tax at the manufacturer level on products that use a significant amount of water or contribute to water pollution, things like toothpaste, toilet paper, pesticides, and bottled beverages (excluding alcohol). Supporters of the trust fund like that it could funnel anywhere from $6.5 to $10 billion into wastewater infrastructure projects — with about a third of the money earmarked for utilities serving more than 100,000 people. Groups such as the American Society of Civil Engineers, the National Association of Clean Water Agencies, Associated General Contractors of America, and the American Public Works Association have voiced fervent support for it.
But a few groups, including the American Water Works Association, say not so fast. They rather prefer a scenario where funds are raised and spent locally. A federal trust fund, they say, penalizes communities that have been able to establish an adequate rate structure by forcing them to subsidize communities that haven't.
"People don't want to feel like they're paying a tax when their local jurisdiction isn't getting any benefit — it's all going to someone else," said Greg Baird, managing director and chief financial officer of AWI Consulting LLC. "No one really likes that."
"This is a local issue and you really need to be able to take care of those things at a local level best you can," said Baird.
An alternative strategy, strongly advocated by AWWA, is the Water Infrastructure Finance Innovations Authority, or WIFIA. Modeled after a similar, successful mechanism in the transportation sector, WIFIA would basically lower the cost of capital for water utilities while having little or no effect on the federal budget deficit. It would access funds from the Treasury — at Treasury rates — and use them to support water infrastructure projects. The loans would be paid back to the Authority — and then to the Treasury — with interest.
"Only about 27 states are capitalizing their state revolving funds and this offers the ability for more states to be able to do that to leverage any dollars that they have on a wider scale," said Baird.
"It also enables cities that have some very large projects to go through the program and at a lower capital cost," he said. "So the dollars are actually going to the people who are deciding, rolling up their sleeves and saying, 'We have an issue with water quality and now we're going to figure out how to fix it and maintain some level of affordability.'
In late August, Oregon Senator Jeff Merkley announced his intention to introduce WIFIA legislation when Congress returns in September. Some sources say Merkley's bill is based on Representative Bob Gibbs's draft WIFIA legislation that was circulating last spring. There is also speculation that it could have additional provisions for promoting green infrastructure. This is pure conjecture, however, as a copy of the legislation has not yet been released (at the time of this publishing).
The other beacon of hope was the Sustainable Water Infrastructure Investment Act introduced in 2010. This legislation would have removed the cap on private activity bonds, potentially freeing up billions of dollars in private capital. It was referred to committee in May 2011 and hasn't seen light of day since.
Each of these strategies has its benefits and drawbacks — but one thing they all share is that they don't yet exist.
One alternative financing method, however, is very real and growing in popularity in the U.S.: Public-Private Partnerships.
"A PPP is the use of private investment for public infrastructure projects based on a number of terms and conditions for how they will make their money," explained Terry Bennett, a strategist for civil engineering and planning at Autodesk.
There are a number of project delivery options nowadays that range from traditional design-bid-build up through more integrated project delivery approaches. "We're starting to see these in water where you have the ability to link planners, designers, contractors, and owners together under single party agreements," said Bennett. The latest evolution of that integrated delivery, he said, is where public-private partnerships come in, where the rights to operate that infrastructure for a period of time are passed to a private entity and then turned back over to the public utility at the end of the contract term.
PPP's are nothing new — they've been around for 200 years here in the U.S. But unlike in the rest of the world, they've been slow to penetrate the North American water and wastewater market, in some respects due to some very high-profile failures.
Stockton, CA, is one such failure. In 2003, the city entered into a $600 million contract with OMI-Thames Water to operate and maintain its water, wastewater and stormwater utilities for a period of 20 years. It was the largest PPP of its kind in the western U.S.
The vote to approve the contract was split 3-3 with the deciding vote being cast by then-Mayor Gary Podesto, one of the deal's biggest supporters. The curious thing was that the contract was signed just a couple of weeks before voters approved a measure that would have required a public vote on it. So, from the very beginning, the deal had left a bitter taste in voters' mouths.
A litany of litigation followed and in 2007, just four years into the 20-year contract, the city voted unanimously to terminate the deal. In its wake were left rate hikes, budget cuts, sewage overflows and a constituency that felt alienated.
For every PPP failure, however, there are dozens of partnerships that are thriving. In New Orleans, a partnership between the Sewerage and Water Board and Veolia Water North America restored the wastewater facilities in the wake of Hurricane Katrina through implementation of the private sector's emergency preparedness plan and substantial community participation.
In California, a partnership between the City of Santa Paula, Alinda Capital and PERC Water provided for the replacement of an outdated wastewater facility with a plant that exceeds discharge standards. It was developed under a design-build contract, financed and operated by the private partners.
Given the state of our water infrastructure and thinness of our wallets, a public-private partnership most certainly needs to be one of the project delivery methods under consideration by cities contemplating a major water or wastewater infrastructure project.
"Regulatory mandates that have a timeline, coupled with lack of funding, creates a dynamic where the only place municipalities can get the money is to go external," said Bennett. "That's going to accelerate the project pool, and it's going to make PPP's a lot more attractive for these large scale projects that need to get done before regulations kick in — and the ensuing fines that may come with them."
Considering some of the examples of PPP's-Gone-Wild, utility owners and local governments are understandably skittish about relinquishing control of a public asset to a private entity, even temporarily. But that doesn't mean it can't be done right, fairly, and to the benefit of all involved.
There are myriad ways to structure a public-private partnership depending on the type of project being planned. "Some of those [types of partnerships] will apply to existing facilities, some to new facilities, and then a hybrid mix," said Baird.
Regardless, the key to ensuring success, Bennett said, is education. "If you do it right, you do a thorough evaluation of what your goals and objectives are," he said. It's important to focus on the water governance and really leverage the best practices of not only the financial mechanism but also the construction mechanism to actually build it and the design mechanism to use the latest technologies so that you can validate what you're trying to do. "You do this so that it's a wise and clear investment so that people aren't surprised," he said. "At the end of the day, if you're surprised at what's coming, that's bad in infrastructure design and construction — no matter how you do it."
Another important piece of advice: Don't go it alone. "If the community or public agency executing the PPP does not have an experienced and dedicated PPP office set up, then they absolutely need to bring in that expertise to guide them."
Baird agreed. The utility needs to carefully plot its course, understand what all the risks are, understand what the various option are, he said. "And it's interesting because a lot of times internally, they may not know all the steps to take it on by themselves and, to me, that's a tell tale sign that they need to partner up with some additional expertise to be able to continue on with that process."
"In all cases, the appropriate delivery strategy and how you finance it are really going to depend on the individual circumstances," said Bennett.
Ultimately, however, responsibility is really on the local level, said Baird. "They can look at and try a lot of different options including PPP's, consolidation, and regionalization." If a utility insists on retaining all of the control and all of the ownership, they also end up with all of the risk. "And that may not necessarily be the best thing long-term for that local community."
7 Keys to Successful PPPs
1. Public Sector Champion: Well-informed champions can play a critical role in minimizing misperceptions about the value to the public of an effectively developed PPP.
2. Statutory Environment: There should be a statutory foundation for the implementation of each partnership. Transparency and a competitive proposal process should be delineated in this statute.
3. Public Sector's Organized Structure: The public sector should have a dedicated team for PPP projects or programs. This unit should be involved from conceptualization to negotiation, through final monitoring of the execution of the partnership.
4. Detailed Contract (Business Plan): A PPP is a contractual relationship between the public and private sectors for the execution of a project or service. This contract should include a detailed description of the responsibilities, risks and benefits of both the public and private partners.
5. Clearly Defined Revenue Stream: While the private partner may provide a portion or all of the funding for capital improvements, there must be an identifiable revenue stream sufficient to retire this investment and provide an acceptable rate of return over the term of the partnership.
6. Stakeholder Support: More people will be affected by a partnership than just the public officials and the private sector partner. Affected employees, the portions of the public receiving the service, the press, appropriate labor unions and relevant interest groups will all have opinions, and may have misconceptions about a partnership and its value to all the public. It is important to communicate openly and candidly with these stakeholders to minimize potential resistance to establishing a partnership.
7. Pick Your Partner Carefully: The "best value" (not always lowest price) in a partnership is critical in maintaining the long-term relationship that is central to a successful partnership. A candidate's experience in the specific area of partnerships being considered is an important factor in identifying the right partner. Equally, the financial capacity of the private partner should be considered in the final selection process.
*Excerpted from "How PPPs Work," The National Council for Public-Private Partnerships, www.ncppp.org.