Solutions to nation's water infrastructure financing needs

By Jeff Sterba

The facts are as clear as the water we drink. The U.S. water and wastewater infrastructure is in desperate need of repair. In its 2013 Report Card on Infrastructure, the American Society of Civil Engineers gave the nation’s drinking water systems a "D" grade. It is estimated that a major water main breaks every two minutes, significantly affecting residences and businesses, as well as the roads that sit above them.

The U.S. EPA estimates that $633 billion is needed for capital improvements to drinking water and sewage infrastructure just to maintain current levels of service over the next two decades. Since approximately 85 percent of water systems in this country are municipal-owned, the majority of this high-priced burden to upgrade our nation’s water and wastewater infrastructure falls on the public sector.

Consider two recent events that highlight this challenge further. First, the Detroit bankruptcy – this is a city, like many cities, faced with enormous budget challenges. While not the first community to declare bankruptcy, it is the largest and may have implications for the City’s Department of Water and Sewer, its credit rating, its ability to bond and its ability to invest in its water systems. Our nation’s capital is also impacted by aging infrastructure and limited dollars. In July, water officials avoided a near-catastrophe by making emergency repairs to a 48-year-old water main that was ready to explode. If it had, tens of thousands of residents would have had to go without water for days during the hottest week of the year.

We know that no sector, whether public or private, can solve the nation’s water challenges alone.  But we can solve this together. There are various actions we can take together as a nation through innovation and by embracing the powerful combination of public service and private enterprise to build the water infrastructure our communities need to continue to thrive and be healthy.

Incentivizing capital formation through public-private partnerships (PPPs) can be a critical tool in addressing the challenge. Yet, due to the complicated nature of the analysis, structure and oversight, PPPs can be burdensome to municipalities. There are ways, however, to find efficiencies and reduce this burden. Other nations have done it. Canada offers dedicated advisory assistance and professional services to municipalities at both federal and provincial levels. As a result, Canada's PPP landscape has evolved considerably and is one of the more significant PPP geographies. The dedicated support of federal and provincial agencies has developed a national source of expertise, producing greater competition and lower costs for public sector entities entering into PPPs. It may be advantageous to consider a similar tool, whether public, private or non-profit, in the U.S.

Some areas of our country are also taking steps. For example, Miami-Dade County, Fla., proposed an ordinance to create a PPP program. While in an introductory stage, the goal is to encourage additional private investment to assist with alternative financing to help meet the county’s infrastructure needs.  To quote Commissioner Juan C. Zapata, “The idea is for us to have a game plan…bring in some of the best ideas out there to address infrastructure needs.” It is this type of shared thinking that will move us toward resolution. We can’t solve our challenges without collaboration and innovation. Partnerships can bring technology, expertise and access to capital.

In addition, public policy initiatives can also help. The IRS should modify regulations that unnecessarily impose a significant higher cost on municipalities who sell or lease their water system to a private company. The higher costs, in the range of 15 to 20 percent, discourage these transactions. Yet municipalities typically pursue lease or sale of their water system to ensure critical infrastructure investment in the water system or obtain financial flexibility to address other important city priorities. A narrowly tailored modification to IRS regulations on defeasance to eliminate this penalty for water infrastructure would allow greater economic efficiencies and infrastructure investment, while still protecting U.S. taxpayer interests and allowing the municipality to have the option to retain its debt obligation and utilize any acquisition funds for its highest public use priorities.

The upkeep and replacement of the nation’s water infrastructure is driving the need to invest substantial amounts of capital. Everyone – government, utilities and American households – must understand what is at stake and work together to create viable solutions. 

Jeff Sterba is the president and CEO of American Water, the nation’s largest publicly traded water and wastewater utility company.

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