Money – or the lack of it – dominates discussions in Washington these days, and the water sector is no exception. Thanks to the stern taskmaster of deficit reduction, it is a given that cuts in government spending will be made; the only remaining question is which programs will be cut and by how much. On March 13, a House Appropriations Subcommittee held an oversight hearing to look at implications of these funding limitations on water infrastructure. ?
Rep. Mike Simpson, chairman of the Interior, Environment and Related Agencies Subcommittee, convened the hearing to look at financing options beyond the State Revolving Funds (SRFs) appropriated by Congress each year. Rep. Simpson noted that the SRFs have received a total of $52 billion since the program’s inception in 1987, including last year’s appropriation of $2.38 billion for drinking water and clean water combined. This funding level is unlikely to increase any time soon – indeed, talk of phasing out the program altogether continues to percolate in Washington.
However, it’s important to note that SRF funding comprises only a small portion of the estimated $40 to $45 billion in annual capital spending for local water and wastewater systems. The other, more substantive government subsidy is, of course, tax-exempt municipal bonds. However, with many formerly sacrosanct tax breaks now being called into question, the American Water Works Association (AWWA) betrayed some worry, urging the Appropriations Committee at the March hearing to protect this tax exemption.? Losing the muni bond benefit appears unlikely for now, but any expansion of federal support for water infrastructure finance also appears unlikely. ?
Thinking Outside the Box ?
Acknowledging this, Simpson said at the hearing, “We need some outside-of-the-box thinking, and all options need to be on the table.” The water industry isn’t exactly famous for embracing innovative thinking, but there does appear to be increasing acceptance that it’s time to think about doing business in new and different ways. It’s also time to look at all sources of capital to address water infrastructure needs.
Clearly, private sector capital is the most underutilized source, by far. While we still have a long way to go, the discussion of how to effectively bring private capital to the water sector is finally gaining traction, and support for public-private partnerships of various kinds is growing in many quarters, despite stubborn opposition in others.
One thing is clear: big money is available. According to Preqin Ltd., investors have committed $128 billion to global infrastructure funds since 2008. In the United States, pension funds are increasingly interested in allocating a share of assets to infrastructure investment – particularly water, given the long-term nature of the assets, essential service provided and recession-resistant cash flows generated by ratepayers.
Yet, few municipal water projects utilizing private capital have been done to date. Notable recent transactions in Bayonne, N.J., and Rialto, Calif., (see Kathy Shandling’s article in the Feb. 2013 issue of UIM) are drawing renewed attention to the long-term concession model, however, and should help pave the way for additional agreements that can help municipalities address their financial and operational needs.
Importantly, while fiscal challenges may be the initial driver, these transactions are not just about getting access to new money. As Simpson said at the water finance hearing, “We also need to be thinking about how to use existing funds and infrastructure more efficiently.” A critical component of any concession agreement involving private capital will be a program for optimizing utility operations over the life of the contract, typically 20 to 40 years. Indeed, in order to be financeable, any project must include a clear plan for managing operational costs and generating revenues.
Value for Money
What some municipalities are starting to understand is that while unsubsidized private capital at market rates is more “expensive” than subsidized grants and muni bonds, the value for money proposition can still be compelling. More efficient capital delivery, reduced operating costs and transfer of financial and performance risk to private sector partners can result in a lower overall cost to the municipal utility owner, and ultimately, to ratepayers.
What’s needed is a way to bring these options to a municipal market unfamiliar with alternative project finance models. Some states are beginning to step up to fill this void. For example, the West Coast Infrastructure Exchange (www.westcoastx.com), a partnership between California, Oregon, Washington and British Columbia, was recently formed in order to expand innovative finance in the region. The program will evaluate and help develop strong projects and then connect them to interested capital providers.?? ?
Taken together, new financial resources and a heightened focus on efficiency and appropriate risk management should lead to a wave of water infrastructure investment that will be more affordable than we think.
Debra G. Coy is a principal with Svanda & Coy Consulting. She has covered the water sector for many years as an investment research analyst for Wall Street firms.
EPA Provides More than $500,000 to New Jersey, Barnegat Bay Watershed
The U.S. Environmental Protection Agency has awarded $523,000 to the New Jersey Department of Environmental Protection (DEP) for the creation of shorelines in Camden, N.J. and the Barnegat Bay watershed that are made of plants, sand and some rock rather than hard structures such as bulkheads. These types of shorelines create habitats for fish and wildlife, improve water quality and protect shorelines from storm surges and rising seas.
“By supporting the creation of shorelines with plants, sand and other organic material, the EPA is helping communities protect valuable natural resources, residential and commercial properties and essential infrastructure from the types of storm surges and flooding experienced during Hurricane Sandy,” said EPA Regional Administrator Judith A. Enck. “The benefits of these natural barriers will be even more important in the future as New Jersey is likely to see more frequent and severe storms occur due to climate change.”
The New Jersey Department of Environmental Protection will use a $323,000 grant to work with the Partnership for the Delaware Estuary to design the restoration of shorelines in Camden’s future Cramer Hill Waterfront Park and Phoenix Park in south Camden. The Cramer Hill Waterfront Park, which will be located on the site of the former Harrison Avenue Landfill, will include a mile-long riverfront greenway and restoration of the shoreline along the Cooper and Delaware Rivers. This project will include local residents and will provide the opportunity for community monitoring.
The New Jersey Department of Environmental Protection will also use a $200,000 grant from the EPA to develop one or more living shoreline projects in the Barnegat Bay watershed. These projects will assist in the recovery from Hurricane Sandy and will protect water quality and natural resources from the impacts of future storms. The New Jersey DEP will work with the Barnegat Bay Partnership and other local entities on the project.
Infrastructure a Major Focus of U.S., Canadian Budget Plans
The first U.S. Senate budget plan in four years would dedicate $100 billion for a “jobs and infrastructure package,” according to the AWWA.
Passed last month by a 50-49 vote, the 2014 budget plan would pay for the package “by eliminating loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.”
“The first priority of the Senate Budget is creating jobs and economic growth from the middle out, not the top down,” said Budget Committee Chair Patty Murray (D-Wash.). “I realize there are serious differences between the parties, and the last few years have been especially polarized here in Congress. We have presented very different visions for how our country should work and who it should work for ? but I am hopeful that we can bridge this divide.”
Meanwhile, the Canadian government also announced a new budget last month that targets $53 billion over 10 years to build transportation, water, communications and other public infrastructure in cooperation with provinces, territories and municipalities.
In addition, the government said it “will make significant investments in First Nations infrastructure and in federal infrastructure assets.” The Building Canada plan includes a $14 billion fund that dedicates $4 billion for national infrastructure and $10 billion for Provincial-Territorial infrastructure, including drinking water and wastewater.
