By John Mastracchio
To callinfrastructure underfunded is an understatement. There’s an estimated 20-year price tag of $650 billion needed for water and projects across the U.S. Congress recently authorized $10 billion in grants under the Water Infrastructure Improvements for the Nation (WIIN) Act in December 2016. But that’s a drop in the bucket. How will state and local governments structure the rest of the funding needed for their water improvement programs?
The 2016 Water Research Foundation (WRF) studies this question and analyzes not only pros and cons but looks at the applicability of several funding models for different situations.
According to the report, “The problem with infrastructure funding is not the lack of traditional or innovative financing alternatives, but rather the limited amount of sufficient and sustained revenue funding sources that can pay for the financing since, ultimately, utility service rates are the primary means to fund the capital investments in water utilities.”
Of the 16 funding options explored in the WRF study, New and Emerging Capital Providers for Infrastructure Funding, some may be more applicable than others and have a better chance of success. Here are some examples:
Public-public partnerships: When two or more utilities collaborate, they can share risks and funding.
- The City of Allentown & Lehigh County Authority, Pa., was facing a significant challenge. Thanks to strong leadership, the city entered into a 50-year concession/lease agreement of the water and sewer systems. The winning bid of $220 million included an upfront concession payment with $500,000 in annual royalty payments to the city.
Green bonds: Pre-defined projects with climate or environmental benefits are ideal.
- Metropolitan Water Reclamation District of Greater Chicago issued green bonds to help finance a capital program that doubled the number of interested investors. Clear metrics and accountability were key to success.
Long-duration bonds: Muni bonds of more than 30 years are attractive to pension funds.
- Washington, D.C. Water and Sewer Authority used 100-year, long-duration green bonds for a portion of a wet weather Clean Rivers project. They over-subscribed in a few hours, allowing for a larger offering at reduced interest.
Integrated financing: Multiple departments or agencies collaborate to finance a capital program, often pooling funding from multiple sources.
- City of Norfolk, Va., pooled risk and financial resources with regional public, private and non-profit partners to explore options to fund the $1 billion needed for flood resiliency. Includes a $120 million HUD grant, a $1 fee on bills, and collaboration with multiple city agencies, the Port of Virginia and the U.S. Navy, among others to develop resilience bonds to fund common goals.
So what about public-private partnerships or P3s?
While successful and more prevalent in other arenas outside of the U.S. water sector, P3s have presented too many barriers for funding most water projects in the U.S. P3s work better for larger projects in excess of $100 million, providing the scale needed to generate life-cycle savings to offset high transaction costs and the higher cost of private capital. However, utilities worry about the loss of control or authority. And today only 33 states have legislation in place to allow for P3s.
Still, P3s can be productive sources of funding in certain circumstances, such as this example:
- Bayonne Municipal Utilities Authority (BMUA), N.J. Deferred debt started to mature right when the system was experiencing maintenance and revenue problems. A P3 concession agreement among BMUA and Bayonne Water Joint Venture, comprising of investment firm KKR and a unit of Suez Environment Company, spread risk and is helping pay to repair, operate and maintain the system for 40 years in exchange for modest and pre-determined rate increases.
The WRF report provides insights and a web tool to help authorities match the many options to specific situations.
John Mastracchio is a chartered financial analyst charterholder & project manager at Arcadis and leads Arcadis’ financial services practice. He is also the principal investigator for the Water Research Foundation (WEF) report, New and Emerging Capital Providers for Infrastructure Funding.