Designing the Financial Bridge for Water Infrastructure: The Money Section
Updated: Aug 22, 2019
Last month’s introductory article introduced the concept of designing a “Financial Bridge” that can pay for water infrastructure. The “Financial Bridge” is simply a metaphor for the processes, frameworks, and mindsets needed to access the money to pay for the projects. While several sources of funding exist, uptake beyond the familiar has been slow. I have identified 6 categorical barriers to getting access to this financing: Money, Legislation, Perception, Knowledge, Communication, and Affordability. This article considers the Money section of that bridge.
Water Infrastructure Funding
Water infrastructure is an expensive long-term investment. AWWA estimates that the US will need more than $1 trillion over the next 25 years to rebuild our drinking water and wastewater infrastructure. The Value for Money Campaign reports that there is an $82 billion gap in water infrastructure investment every year. The US is only funding about one-third of its water infrastructure needs. According to the ASCE’s Infrastructure Report Card, only 5.5% of more than 50,000 water systems serve more than 92% of the total population. The funding gap is most severe in the remaining small, medium, and tribal communities.
Utility managers are taught to seek capital improvement funding from their ratepayers first and then from federal and state sources and bond measures. Unfortunately, these traditional sources of funding are not sufficient to meet that $1 trillion price tag. It is important to understand that 95% of water infrastructure spend is locally sourced. Applying for government support takes a great deal of time and upfront cash. If the government approach doesn’t work in a specific year, reapplications or rate increases are often considered. Government funding for water projects is guided by construction-only procurement policies rather than a lifecycle investment in an asset that includes construction and maintenance. For public utilities, there is little training or institutional flexibility to explore and adopt other sources.
Private and Public Water Infrastructure Funding
Private capital and Public-Private Partnerships (P3s), as used with Design-Build Delivery, have been touted as best practice solutions to supplement government programs and accelerate the rebuild of critical infrastructure sectors. Although capital intensive, the water sector differs from the other sectors because it is required to sustain life and it is impossible to pass the full cost onto the consumers. While not ideal for many funding situations, structured collaborations with private investors may be a good way to accelerate high-impact projects.
P3s in water utilities have had slow adoption with mixed results. Yet, several private water utilities and a few public utilities have used private capital and innovative know-how such as Design-Build Delivery to improve their operations. Most US water and wastewater utilities are public and many do not have the decision-making autonomy to conduct experiments like Design-Build Delivery or P3s with their operations.
Splashlink has a large, diverse repository of funding options in the water industry, including NGOs, development banks, corporate grants, government sources, private foundations, and a variety of private investors. The EPA also recently launched the Water Finance Clearinghouse, a discovery platform that helps municipal and non-profit systems find other resources.
Municipal bond extensions like Private Activity Bonds, Green Bonds, and Water Bonds are being discussed and considered as funding vehicles to attract more structured private capital into water infrastructure. Legislative barriers and know-how are keeping these options from wider adoption.
Embracing Private Capital
Private capital support for water infrastructure doesn’t automatically mean privatization. Private investors want to directly invest in water utilities because they rarely default. The relationship can be structured as debt, equity, or acquisition. The EPA, USDA, and USACE are encouraging deeper collaborations with the private sector for funding water infrastructure projects. In 2014, the EPA and USACE were granted congressional authority for WIFIA. The 2017 budget gave the EPA version of WIFIA the credit authority for $1 billion in projects. The EPA was overwhelmed by the interest in the program, and was only able to invite 12 projects to apply for the funding. The USDA has a loan guarantee program to encourage private investors to support rural projects.
Real and Perceived Barriers in the Water Industry
Experts and industry insiders agree that alternative funding options have had slow uptake in the water industry because many communities don’t have the regulatory authority to procure a project by design-build delivery methods, sourcing private capital, or entering into a P3 agreement. Although the overall need is large, most water projects are considered too small (less than $20 million) to get the attention of traditional private equity. The system owners also think that private equity cost of capital is too expensive for water utilities to absorb into their rate structures. Many water operators equate any kind of private capital with privatization. Few understand the cost savings generated from using an asset lifecycle approach to capital improvement planning.
Chipping Away at Water Industry Barriers
The legislative barriers to adopting new funding sources for water infrastructure are real. There is progress happening on this front and I will be expanding on this in my next article. Utility operators tend to lean into traditional sources and programs where there is a familiarity and a comfort level already established. This mindset continues even though these sources cannot meet the need. My hope is that many of these closely held beliefs could be expanded with education, training, mentorships, and low-risk experiments. The legislative, perception, and affordability disconnect between US water sector and the global infrastructure finance community points to a need for solutions (bridging components) that are both empathetic and tactical.
Let’s continue the conversation to explore those solutions.
Designing the Financial Bridge for Water Infrastructure: Legislation Section
Designing the Financial Bridge for water infrastructure: Perception Section
Designing the Financial Bridge for water infrastructure: Knowledge Section
Designing the Financial Bridge for water infrastructure: Communication Section
Designing the Financial Bridge for water infrastructure: Affordability Section