Exploring Alternative Funding For Infrastructure Upgrades
It’s clear that the nation’s infrastructure problem won’t simply go away. At some point, drinking water and wastewater utilities will have to contend with the fact that their pipelines and sewer lines are in desperate need of replacement and that will mean, somehow, uncovering the funds to do so. Of course, nobody would be happier to address infrastructure problems than the utilities themselves. The problem isn’t a lack of motivation, but a lack of funding to get it done.
Over $655 billion dollars will be needed over the next 20 years to keep pace with projected water infrastructure investment needs, according to an oft-cited U.S. EPA finding. And consumers aren’t exactly chomping at the bit to pay higher rates in order to meet this need.
That’s why the Water Research Foundation (WRF) launched a research project investigating “New and Emerging Capital Providers for Infrastructure Funding.” It produced a knowledge base assessing funding alternatives that utilities might access to supplement rate payments.
“In many areas of the country, water rates were kept too low for many years,” said Jonathan Cuppett, a research manager with WRF, on what inspired the project. “During this time, the infrastructure was wearing out and now much of the water infrastructure across the country needs to be replaced or rehabilitated. Managing a utility requires finding the right balance between many objectives. Affordable water rates, capital expenditures, financial stability of the enterprise, regulatory compliance, etc. Finding the right balance for all objectives that tend to compete with each other can be a challenge.”
Over approximately 15 months, researchers weighed the latest and potentially forthcoming alternatives to determine which ones might act as utility saviors. They reviewed relevant literature, then conducted interviews with utility managers and investors. They looked at over a dozen alternatives, like public-private partnerships, direct lending through private placements, crowdfunding platforms, and tax increment financing.
“All financing options have positive and negative attributes,” said Cuppett. “A utility should understand their borrowing objectives, like risk transfer, borrowing cost, transaction costs, etc., and then evaluate the financing options that meet their objectives.”
Cuppett listed tax increment financing and internal funding as potential alternatives for utility self-financing, which can reduce the costs of capital projects or enhance revenues. Long-duration bonds, which have a duration of more than 30 years, or century bonds, which are debt instruments that can spread the costs of infrastructure over the 100-year life of an asset, can keep rate increases lower than short-term bonds.
However, the researchers concluded that while these funding options may help, utilities will have to rely on the sustained revenue that traditional rates provide if any real headway will be made towards infrastructure improvement.
“There is plenty of money, especially in the private sector, to finance needed capital improvements,” said Cuppett. “The real problem is not the lack of traditional or innovative financing alternatives, but rather the limited amount of sufficient and sustained revenue funding that can pay for the financing since, ultimately, utility service rates are the primary means to fund the capital investments in water utilities.”
Aside from a final report disseminating the information gathered, the project also produced a support tool, which can be used to sort through new and emerging funding alternatives and determine how they might be used by a given utility. A user answers a series of questions about the project it intends to finance and about the utility in general and then the tool highlights alternatives it thinks the user should explore. It can then guide users to more information about the alternatives selected.
“This tool is intended to increase awareness of new and emerging capital financing alternatives and the situations in which the alternatives may be most applicable,” Cuppett said. “The tool may be used as a preliminary step in the identification of possible new and emerging capital financing alternatives that may be applicable to a utility.”
Though there may never be a replacement for rate revenue, the sheer scale of the country’s infrastructure problems makes potential alternatives worth a look.