Leasing Is The Key To Smart Financial Management For Your Water System
By Julia McCusker
With each passing year, America’s 2.2 million miles of water pipes and related equipment get older, more fragile, and less reliable. According to a recent Infrastructure Report Card issued by the American Society of Civil Engineers, water main breaks occur so frequently in the U.S. that about 6 billion gallons of water are lost each day — enough to fill more than 9,000 swimming pools. It’s no surprise that America’s infrastructure scored a C- on the report card.
Nevertheless, the growing population continues to rely on the thousands of treatment plants around the country to the point where some plants are stretched far beyond their original engineering limits.
The answer might seem obvious: Improve the water infrastructure systems across the nation. Yet it’s hard for water system providers to know how to replace in the most cost-effective, systematic way possible. Most providers don’t want to resort to shifting costs to consumers. Between 2012 and 2019, residential water and wastewater rates skyrocketed by 30%, outstripping inflation. That means the cost of clean water has risen more than the cost of most foods or fuel types.
Still, water projects have to be tackled sooner rather than later no matter the cumulative expense, which could reach an estimated $1 trillion over the next quarter-century. The question, then, becomes how to afford necessary upgrades and replacements.
Financing An Aging American Water System
Although it’s possible for water system providers to find financing to help pay for anything from extensive repairs to complete overhauls, many financing vehicles are far from ideal.
Take federal and private bank financing, for instance. Both options present unique challenges. Federal financing tends to include a lengthy, cumbersome application process. With inflation as a factor in 2022 and beyond, waiting for approval will add expense as the value of the American dollar declines. Plus, inflation is causing vendors to increase their prices, which presents a double-whammy effect on water system providers’ budgets. That’s where the process of leasing comes into the picture.
Opting To Lease Water System Assets As A Procurement Strategy
In many industries, equipment leases are standard operating procedures. The water system sector hasn’t quite embraced the benefits of leasing everything from water softeners and reverse osmosis systems to water meters, filtration devices, and other water treatment solutions. Little by little, though, water system providers are coming around to the idea as they learn about some of the upshots to leasing equipment rather than financing equipment purchases.
One of the most immediate rewards of leasing is that it can be done quickly. In most cases, companies don’t have to seek consent from third-party lenders. Instead, they can work directly with lessors. Frequently, lessors don’t ask for anything down, or they ask for a negligible amount. Water system providers can get started immediately on all projects, especially smaller ones, without dipping into any liquid cash reserves.
Another perk to leasing is that plenty of vendors that offer leases offer special add-ons as well. They could fold the cost of installation into the lease, allowing lessees to pay for the installation over time. They might be willing to factor in shipping and transportation costs, additional parts, and even training, too. These extras might not seem like much at first but can remove quite a few financial, logistical, and planning stressors. Additionally, some lessors will be open to negotiating surprisingly flexible terms if a water system company leases a large amount of equipment and peripheral services.
Another upside to leasing equipment is that the company knows it will always have access to leading-edge solutions for temporary fixes. Some breakdowns can be patched temporarily without affecting the safety of a water system’s performance. Having the chance to lease world-class equipment instead of buying it outright at once ensures that the equipment can work right away and companies can return it later. The equipment might even be swapped with later-model replacements down the road. Consequently, the water system company will always have state-of-the-art machinery and materials.
Of course, water system providers might find that leasing presents other privileges and opportunities, too. But they can’t tap into those advantages until they start exploring their financial management options.
Tapping Into Financial Leasing Advice
The best way to go about leasing water and wastewater treatment equipment begins with a few preliminary steps:
1. Talk to a trusted financial services partner.
As mentioned before, the cost to revitalize all or part of a lagging water system can be extremely high. Although leasing can be an excellent decision, providers should seek the help of financial experts in consideration.
Water system providers should talk with a customer relationship manager at a lender. Ideally, the manager will have some experience with helping other utility companies investigate leasing as opposed to buying items outright. The lender should also provide helpful tech tools that can assist in making final choices regarding how and where to spend money.
2. Map out a replacement or upgrade plan.
The best way to make the most informed decisions on purchases versus leases when dealing with infrastructure projects is to map out the whole project. From that point, planning can begin.
Keep in mind that most water, stormwater, and wastewater infrastructure restoration projects happen in stages, and leasing equipment temporarily could fill gaps between project phases. Still, it’s essential to know the scope and parameters of each of these stages before signing any type of equipment lease.
3. Consider leasing terms attentively and pragmatically.
Leasing financing terms are, by nature, fairly flexible. Some are prepayable, too. Others have one-dollar buyout clauses that kick in at the end of the lease. Still, not all financing setups are right for all lessees.
Take the length of the lease as a prime example. Leases are designed to match the useful life of the asset (most are five to10 years). By leasing the item, you are not paying for it well beyond when it is replaced (as in the case of a 30- to 40-year loan). Lessees must be cognizant of all the moving parts of leasing before diving into a leasing situation.
The problem of America’s aging water infrastructure system isn’t going to resolve itself overnight or even within a few years. It took time to get to this point, and it will take time to turn everything around. However, the time is ripe for water system providers to explore creative ways to improve the assets that people around the country depend on for clean, safe water. Leasing can keep the water flowing and avoid putting unwanted fiscal burdens on families.
Julia McCusker is the regional vice president of water at CoBank, a national cooperative bank serving vital industries across rural America by providing loans, leases, export financing, and other financial services in all 50 states