How Private Activity Bonds Will Work

According to a recent ITT study, there are approximately 650 potable water main breaks every day. That means there are millions of gallons of drinking water being leaked into the soil ? undermining other infrastructure and environmental stability. To make matters worse, imagine the number of sewer collection leaks that may occur ? emptying raw sewage into the environment. Over the next 20 years, the U.S. Conference of Mayors estimates that communities across the country will spend up to $4.8 trillion to upgrade, repair and replace water and wastewater systems.

Today, with municipal budgets challenged to maintain a number of local competing services, and with long-term debt becoming harder to sustain, there is a dire need to identify and initiate innovative funding mechanisms for much needed water-related capital improvements. Private Activity Bonds (PABs) and Public-Private Partnerships (P3s) fit the bill regarding the balance of financial and operational stewardship.????

Private Activity Bonds are low-cost, low-interest and low-risk private equity bonds issued by the government for public works projects. These bonds have aided municipalities in developing housing, transportation, and water and wastewater infrastructure. Public-private partnerships ranging from design-build-operate, to operate-finance agreements can be formed to deliver sustainable solutions.?
Some examples in the water arena include:

  • In Kentucky, PABs were issued to finance a regional water supply project to meet current and future drinking water needs. This central Kentucky project utilized $70 million in PABs, which will save the regional customers approximately $750,000 annually over the 30-year life of the bonds.
  • In the Appalachian Mountains of West Virginia, PABs were used by regional water systems to enhance fire protection and enable the development of a water service for first time system users who previously relied on inadequate supplies.
  • United Water?s New Jersey-based utility company was the beneficiary of $230 million of PABs to date. Of that amount, $65 million was dedicated to the upgrade of the company?s state-of-the-art Haworth Treatment Plant, which provides drinking water to nearly one million residents in northern New Jersey. At an interest rate of 4.95 percent, compared to a conventional rate of 7.62 percent, PABs provide United Water New Jersey customers with annual pre-tax savings of over $6 million. Over the 20-year life of the bonds, the savings are $122 million!

Understated in the water sector is the economic development factor. The Environmental Protection Agency (EPA) estimated that with PABs, there could be upwards of $5 billion in private investment in public water projects. Those projects could create nearly 142,500 jobs annually. For this reason, the water industry must continue to be staunch advocates for the removal of federal limits on the volume of water-related PABs that can be issued in each state, each year.? Legislation has been introduced in Congress that would effectively eliminate the caps.

Private Activity Bonds and Public-Private Partnerships are responsible and sensible tools to aid communities in meeting financial, operational and environmental challenges that currently confront our nation.

Edmund DeVeaux is the vice president of external affairs for United Water and chairman of the Sustainable Water Infrastructure Coalition.

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