Article | November 29, 2012

Future Trends In Financing Water Projects

Jim Lauria

By Jim Lauria

The American water treatment industry is facing dramatic operational challenges, maintenance challenges, and funding challenges.  Our task is to seek out learning opportunities — from the world of water as well as from other industries — to find new models that will help us meet those challenges.  It’s time for “just-in-time learning,” a phrase coined by management consultant John Kauke.  That’s learning that is fast, flexible and delivered in the right dose, at the right time, to the right people. 

When I started in the water industry, contaminants were measured in parts per million (ppm).  Since then, we’ve graduated to parts per billion and parts per trillion, and it won’t be long until people start tracking at least some contaminants at the parts per quadrillion level.  That’s 15 zeroes after the decimal point.

Look at it this way: a part per trillion is equivalent to one drop of material in 20 Olympic-sized swimming pools, each two meters deep.  A part per quadrillion is that same drop in a volume of water that could fill a cube as tall as the Empire State Building.

The challenge to the water industry is that the ability to detect contaminants at those minute concentrations will lead someone, somewhere to want to remove them to that level.

Just the concept of increasing water treatment to those almost inconceivable levels leads to marveling at the potential costs.  And that’s not even considering the sad state the water industry is already in due to the combination of increased demand, escalating standards, and deferred maintenance.  We used to think in terms of water projects that cost millions of dollars.  Now we’re not surprised to hear of price tags in the billions. 

Compound those figures by the amount of investment it will take — investment that, on the whole, we’re not making right now — to modernize or repair our nation’s water infrastructure.  The American Water Works Association estimates that the U.S. will need to spend $1 trillion over the next 25 years to bring our drinking water system up to snuff.  Add wastewater to the mix and you get the U.S. Conference of Mayors’ estimate of $2.5 to $4 trillion needed investment over the next two decades.

In short, the water industry is facing its own version of a “perfect storm” — increasing demand, tightening regulations, and scarce support.  Where is the money going to come from to weather the storm and meet the challenge?

Various Sources

The traditional well to draw infrastructure money from is federal loans and grants, or state revolving funds (which, in turn, are largely funded by federal programs).  But tightening budgets and shifting priorities have pretty much dried up that well.  The Water Environment Federation pointed out that Congress’ 2013 allotment for the Clean Water State Revolving Fund was about half of its 2012 level, and allocations for the Drinking Water State Revolving Fund in 2013 are nearly $100 million less than last year’s.

Some new legislation in the pipeline could help.  The Water Protection and Reinvestment Act of 2012 would levy a tax on products associated with water use such as toothpaste, toilet paper, soft drinks, and the like.  The tax would be earmarked for water infrastructure projects.  This legislation is akin to practices in use in the transportation sector — for instance, the tax on diesel fuel collected from barge and tow operators to fund the Inland Waterways Trust Fund.

But there’s a catch.  Until 2009, the Inland Waterways Trust Fund — designed to cover half the costs of construction and rehab on the nation’s navigational locks and dams — actually collected more than it spent.  While Depression-era locks crumbled, funds went unallocated (or projects got tied up in red tape) and successive administrations have raided the trust to help finance day-to-day operations and maintenance on the inland waterways.  At this stage, a single lock project on the Ohio River accounts for the vast majority of the trust’s funds.

Downstream, at the nation’s saltwater ports, the Harbor Maintenance Trust Fund has suffered a similar fate.  Needed improvement projects haven’t started, and Congress has only freed about half of the funds collected annually from harbor users; the rest has been siphoned off to help chip away at the national debt, at least on paper.

Clearly, we in the water industry must look carefully at what our colleagues along the rivers and coasts are doing — both for inspiration and as a cautionary tale.

The Water Infrastructure Finance Innovations Authority, another plan modeled on the transportation sector, would allow utilities access to U.S. Treasury funds at Treasury rates, lowering the cost of capital without increasing federal debt.

Municipal bonds show promise, and they have been tapped with increasing success by cities and districts looking for local funding.  Municipal bonds have an added value in our eat-local/buy-local climate — by their very definition, they involve buy-in by local stakeholders.

On the flip side, they can be a hard sell in an economic climate in which voters feel over-taxed and under-served.  It’s tough to convince people at the polls to raise rates or taxes, or to authorize their local officials to add to municipal debt, especially when so much of what they hear on the news is about rampant federal debt and high taxes.

Public-Private Partnerships

A promising — and controversial — avenue for new projects or substantial upgrades is public-private partnerships. 

Part of the controversy surrounding public-private partnerships is likely a misunderstanding of what they are.  Public-private partnerships are a contractual, strictly defined joint venture involving a public entity like a municipality or water district and a private company.  It is NOT privatizing a water treatment operation — in a public-private partnership, the public entity retains a substantial amount of the control and oversight of the project.

Rick Norment, executive director of the National Council for Public-Private Partnerships, offers a detailed list of key elements in successful public-private partnerships.  The statutory environment has to be carefully prepared to allow the public entity to engage in a partnership with the private company; the structure must be organized and a detailed business plan — which clearly defines the revenue stream — put in place.  Stakeholder support is vital, which is why Norment’s list starts with the key ingredient: a local champion from the public sector.

It’s not a fast or easy road to travel, but a public-private partnership could be an extremely successful way to plan, build, and operate a new water project, especially where traditional funds have dried up.  In fact, the Sustainable Water Infrastructure Investment Act currently in congressional committee would eliminate the cap on private activity bonds (PABs), the low-tax instruments that have so successfully funneled investor capital into the housing sector.  Some analysts believe removing the PAB cap would open the gates to $5 billion in capital for the water industry.

I explored public-private partnerships, performance contracts that can help those partnerships stay focused on ratepayer benefits and PABs in a previous Water Online article available here.

Successes and Failures

There have been notable successes and cringe-worthy failures when the private sector has gotten involved in water treatment in the U.S.

On the plus side, the partnership between the City of Indianapolis, IN, and Veolia Water has been a model of cooperation and achievement, with Indy’s 143 million-gallon-per-day (MGD) water treatment system hitting or exceeding the mark on 40 metrics.  The 20-year contract between the city and Veolia looks like a marriage that’s built to last.  Veolia’s partnership with the City of New Orleans has also been a great model for others to emulate — from both the public and private side.

Along the same lines, Seattle Public Utilities Board and CH2M HILL are engaged in a 15-year contract that promises — and shows all indications of succeeding at achieving — operational savings of $50 million.  That’s a win-win deal.

There have been some notable failures, however, and even though they’re old news, they continue to arm naysayers with ammunition to fight privatization and public-private partnerships — and they provide the water industry with vital lessons.

The 1999 partnership between the City of Atlanta, GA, and United Water — written as a 20-year deal — failed in 2003 when Atlanta reclaimed control of its water utilities.  Hard feelings abounded.  Atlanta officials said United Water delivered poor service, with frequent water main breaks, delayed repairs, “boil” alerts for drinking water, and uncollected bills.  United Water says it was losing as much as $10 million per year on a contract that brought in $20 million annually, according to a 2003 article in The New York Times

Within days of the sinking of the Atlanta-United Water deal, the City of Stockton, CA, and OMI-Thames Water inked a $600 million, 20-year contract for the operation of Stockton’s water and wastewater systems.  However, the deal crashed and burned in 2006 when a state superior court judge ruled the contract invalid because the parties didn’t conduct an environmental review of the new arrangement.  The ruling brought a planned $57 million upgrade of Stockton’s wastewater treatment plant to a halt.

The Stockton/OMI-Thames project provides several learning opportunities.  The deal was signed in 2003, less than two weeks before Stockton voters went to the polls to approve a law requiring public approval, by vote, of any water contract over $5 million.  It doesn’t take a thorough read of the Concerned Citizens Coalition of Stockton (CCCoS) website — or any of the Bay Area media coverage swirling around the ruling — to realize that many citizens felt disenfranchised by the process.

According to the San Francisco Chronicle, Stockton residents railed against the privately operated utility, alleging cutbacks in preventive maintenance and increases in sewage leakage and spills.  Watchdog groups also complained that OMI-Thames was secretive about its business, including staffing, profits, and operations.

It’s important to note that CCCoS — an anti-privatization group that also opposes privatization of Stockton’s library — was joined in its lawsuit against the city and OMI-Thames by the League of Women Voters of San Joaquin County and the Sierra Club.  That powerful alliance clearly underscores the dangers of alienating stakeholders during the delicate process of linking public and private interests, and the importance of transparency.  That’s especially true in the realm of water, which is viewed as a basic human right rather than a commodity that people are comfortable seeing in private hands.

Utility of the Future

Given the options available — the spectrum between public control of water underwritten by government money and privatization, and the broad span between plummeting public funds and eager investor dollars — what will the utility of the future look like?

I think members of the distinguished Water Leaders panel from the last WEFTEC conference provided great vision on this topic.

Jeff Sterba, president and CEO of American Water, charted it from the perspective of a leader of a private water utility.  He sees a holistic approach to water treatment planning, creating a balance between decentralized systems and integration into larger communities.  Rather than trying to grasp a whole, massive utility project like the $400 million Atlanta contract from 1999, Sterba advocates reducing risk by breaking down projects into bite-sized pieces.

Even with good planning and sound philosophy, not every project is going to be a winner, Sterba noted, so learning from failure as you push a frontier is vital.

George Hawkins, general manager of DC Water, shared his view as leader of a public utility in the most pro-government town in America — the capital.

Like Sterba, Hawkins is all about balance.  His utility of the future is a public entity that’s learned a few lessons from the private sector.  Among those lessons he shared at WEFTEC is how to outsource overhead functions and offer services that are a special expertise.  Does every municipality really need separate billing, customer service, and public relations departments, he asks, or could that be handled in some centralized way?  On the flip side, DC Water is already demonstrating the wisdom of offering toll processing of wastewater from other communities — a service that helps keep costs down for his ratepayers, as well as those from other areas he serves.

Another pick-up from the private sector is the idea of monetizing innovation.  The long tradition of free help and cooperation within the public water sphere is noble and vital, he notes, but when a creative problem solver at a utility develops an innovation that can improve efficiencies for similar operations — like the home-grown software system that automatically notifies DC ratepayers when their water usage spikes — managers need to begin thinking about how they can partner with private industry to turn innovations into revenue.

Perhaps the most vital lesson Hawkins takes from the private sector is the importance of marketing.  Drinking water utilities should “own” the drinking water market, he notes, not play second fiddle to overpriced bottled water.  They should be getting credit for the remarkable job they do every day providing clean, safe drinking water and removing the vast amount of pollutants society hands them every day in wastewater.

I agree.  I’d add that this is the moment to be doing not only just-in-time learning but also just-in-time teaching — teaching ratepayers, voters, and policymakers the true value of the services water treatment professionals provide.  We need to illustrate the value of clean, reliable water supplies; not the pennies-on-the-dollar, highly subsidized, nearly free price most of us pay for tap water and sewer services, but a value for water that much more accurately reflects its importance, scarcity, and societal worth.

If consumers think water is nearly free to purchase and that access to it is an inalienable human right, how much would they be willing to authorize for new projects?  How can we expect them to agree to tax themselves billions of dollars to ensure access to something they think is free?  It’s time now for the industry to imagine new ways to structure and finance water treatment in the future — and time to educate consumers enough so they see the wisdom in supporting the growth and repair we need to keep up with increasing demand, tightening regulation, and plummeting resources.

Jim Lauria is a water technology executive with a Bachelor of Chemical Engineering degree from Manhattan College. He has over 20 years of global experience as a senior executive in the water treatment industry. Jim is an international businessman, marketing expert, engineer, author, blogger, and water evangelist. He is a frequent speaker at water industry conferences and has published over 50 technical articles in water trade publications.