In his January 23 State of the Union address, President Obama emphatically pointed out that it was public research dollars that helped develop the technologies to extract natural gas from shale rock, “reminding us that government support is critical in helping businesses get new energy ideas off the ground.”
Presumably, the President also understands that it is a two-way street. While public investment has created mutually beneficial opportunities for private companies, private companies should closely partner with the public sector whenever opportunities for their participation present themselves.
In this context, a subsequent Congressional initiative that specifically affects the water infrastructure takes on additional significance as a welcome public policy bellwether. On February 7, the Senate Finance Committee approved a six-year measure to remove annual volume caps on how much municipalities can raise through private tax-exempt bonds to fund drinking water and wastewater infrastructure rehabilitation.
It is, happily, a strongly bipartisan initiative, proposed by Sen. Robert Menendez (Democrat – New Jersey) and approved unanimously in committee. Here at least there is consensus that private capital is an urgently needed solution to relieve the investment burden on badly strapped governments. A memo of support from the Water and Wastewater Equipment Manufacturers Association (WWEMA) anticipates a $25 billion water infrastructure investment over a five-year period generating 700,000 jobs and adding $225 billion to the economy.
Reliable water and energy infrastructures are obviously essential to generate and convey the water and energy needed to tap into and make use of the natural gas resources that keep America running. The task at hand is to help our cities, counties, states, and countries find creative new ways to pay for essential infrastructure rehabilitation and upgrades.
To that end, some context is useful.
Not much has changed, at least with respect to drinking water, wastewater, and stormwater needs, since the nation’s infrastructure earned nearly failing grades in the 2009 Report Card for America’s Infrastructure from the American Society of Civil Engineers. Recommendations in the report to explore “all available financing options” for significant long-term investment to fix what ails our infrastructure still represent a work in progress.
The organization released a follow-up report in December, 2011, which addressed the economic repercussions if we fail to raise our grades. Last year’s Strategic Directions in the Electric Utility Industry survey results also showed aging infrastructure as the Number One concern among electric utility providers.
We know that increased investment in water and electric infrastructure will have a positive effect on supply and demand, quality and reliability, and flood control, as well as on the environment and national security. We also know that federal investment in infrastructure can create jobs and boost the still-sagging economy. Construction programs associated with the New Deal in the 1930s and the American Recovery and Reinvestment Act of 2009 shared the intent to put people back to work and improve a poor economy through public works spending. We need a similar approach to aging infrastructure but, in 2012, with more pronounced public-private collaboration.
Multiple studies have estimated the expected return on federal investment in water infrastructure. For example, according to a recent report, an investment of $188 billion (EPA’s estimate for the nation’s stormwater management and water quality preservation needs) spread out over the next five years would create approximately 1.9 million jobs and add $265 billion to the economy.
Other studies also documented substantial economic benefits, including job creation in the water and energy construction industries, and for the broader range of businesses that would feed off such investment. Increased tax revenue will naturally accrue from these infrastructure investments as well.
Yet total reliance on federal and state infrastructure investment is not likely a realistic solution. Federal grants and low-interest loans for water and energy projects are available for projects that meet the criteria established by agency rule. While many public priorities compete for federal tax dollars, visible infrastructure – such as roads and bridges – has a clear advantage, whereas buried infrastructure – such as water mains – is out of site and therefore out of mind. Infrastructure program fund availability is itself coupled with a high degree of competition and requires more persistence from applicants than ever before.
What’s more, local governments that have traditionally issued revenue or general obligation bonds to pay for water and wastewater system improvements will find it tougher to get revenue bonds and to earn a good rating so as to qualify for the lowest rates. In November, the Wall Street Journal reported “superdowngrades” by ratings firms of tax receipt-backed municipal bonds. Strained budgets and even government bankruptcies have created more uncertainty in a market once deemed relatively safe.
Major water trade organizations recently banded together to talk to their congressional representatives about possible legislation to lower the cost of infrastructure investments and increase the availability of lower-cost capital. But such water infrastructure funding relief is not on the immediate horizon.
It is therefore crucial for local government to now more seriously consider alternative sources of water and energy infrastructure funding and delivery and to more fully tap these private funding sources. Private participation can take many forms, few of which necessitate selling public assets to private interests.
Integrated project delivery and financing – such as design-build-finance and design-build-operate-finance packages – is one way to connect public utilities with private investment opportunities and attract investors to publicly traded companies. Private pension funds can also fuel infrastructure improvement projects.
Private participation transfers risk from the public to the private stakeholders. It can help local governments address the uncertainty of funding required for infrastructure rehabilitation and improvement with more certain, albeit nontraditional, funding. Private investment money can move off the sidelines and back into projects that offer a stable return on investment for shareholders as well as a boost to local economies.
The optimal type and level of private participation will vary with local needs but budget-challenged cities counties and states would be wise to seek and carefully consider innovative new New Deal-types of funding options that include private participation and bespeak the opportunities and realities of the 21st century.
Cindy Wallis-Lage is president of Black & Veatch‘s global water business and a member of the company’s Executive Committee. She is responsible for the leadership and management of the company’s global water business that includes a workforce of more than 2,600 professionals based around the world, including in the United States, Europe and Asia Pacific regions.
A licensed professional engineer, Wallis-Lage joined Black & Veatch in 1986 as a design and process engineer. Wallis-Lage serves on several committees for the Water Environment Federation (WEF) and the International Water Association (IWA). Additionally, she has authored more than 50 papers, 20 technical articles and 10 textbook chapters.
Wallis-Lage has earned recognition for her leadership in both the industry and business communities. In October 2006, she received the Professional Engineering Award from Kansas State University and in September 2009, was honored with the Top 100 Under 50 DIVERSE EMERGING LEADERS Award from DiversityMBA Magazine. She has also been honored with the WEF George Bradley Gascoigne Medal for Research in Wastewater Treatment Plant Operational Improvements.
