Partnering to Build Better Infrastructure

That the U.S. faces massive infrastructure challenges is widely acknowledged among opinion leaders, pundits, journalists and government and utility industry experts. Chief among these issues, but often less discussed, is water. Communities across the nation face huge obstacles as they struggle to provide reliable water in the face of aging infrastructure, growing demand and the increasing complexity of water management.

To meet obligations, communities are faced with investing vast amounts of money, resources and expertise in renewing their water systems. Even with access to capital and the willingness to spend the money, many communities lack the in-depth experience to design or implement such a plan on their own. One solution that is expected to gain significant traction over the next few years is the public-private partnership model, whereby private-sector water companies assist in the design, rebuilding and operation of publicly owned water systems.

 

Challenges

Before discussing the solutions partnerships can offer, it is important to first consider the challenges communities face:

Aging Infrastructure. A sobering U.S. Environmental Protection Agency (EPA) projection is that some $263 billion is required to replace aging water infrastructure, an estimate that has increased by 74% since 2001.1 But with water-related services twice as capital-intensive as electricity and three times as capital-intensive as gas,2 many communities simply cannot afford to upgrade their systems—some of which are decades to a century old.

Many municipal leaders believe that the federal and state governments will make available grants and other low-cost funding as a means of dealing with this infrastructure challenge. Despite spending billions on aging infrastructure each year in an attempt to comply with existing and future federal water regulations, municipalities have an annual shortfall of at least $11 billion.

The shortfall does not account for any growth in the demand for drinking water over the next 20 years. Federal funding for drinking water in 2005 remained level at $850 million, less than 10% of the total national requirement. The Bush administration proposed the same level of funding for the 2006 fiscal year.3 Indeed, as the hope for additional federal funding diminishes and resistance grows to raising water rates to finance upgrades, cities are hard-pressed to address infrastructure needs.4

Meeting increasing complexity. Another challenge relates to the increasing complexity of water management, which some communities are ill-equipped to address. For example, the EPA is continuously updating regulations on water quality and safety. Thus, the knowledge, experience and investment requirements needed to be compliant are continuously increasing. Likewise, efficient water management is no longer simply about supplying water to the tap—it encompasses wastewater treatment, storm water management, water reuse and desalination systems, all of which require a high level of expertise to design and implement. These challenges can be facilitated through public-private partnerships.

These alliances also have increasing value in helping plan and deliver water to meet specialized industrial needs, a vital component of any city’s economic development efforts.

Growing demand. Finally, the rise in demand across a variety of regions that lack proper infrastructure means that extensive planning and expertise are needed to develop cost-effective regional water supply solutions.

Increasing demand for water and the pressure it puts on infrastructure is also an issue that takes a variety of forms. In many large, older cities, growing populations drive demand.5 In western states like Nevada, California and Arizona, entire comunities are sprouting up in places where basics such as piping and water supply sources do not exist yet.6 Additionally, many smaller communities with an aging system have a critical need for a stable and sophisticated water management system to meet growth.

 

Solutions

Currently, 85% of water systems are operated by municipalities and other government entities, which are often strapped for cash and reluctant to issue bonds that would need to be financed through increased property taxes. The remaining 15% are owned and operated by the private sector.

Given the billions of dollars needed to upgrade infrastructure, the potential cost burden may be more than local political structures can sustain. Transcending this dilemma and offering a more holistic approach to water management through public-private partnerships offers an answer to the country’s pressing water challenges. Some of the ways in which these partnerships can positively impact communities are outlined below.

Leveraging Expertise. One way in which partnerships can help local municipalities is by leveraging the knowledge and experience of a skilled partner. Small communities may significantly upgrade their water systems only once every 50 years.7 At this rate, it makes little economic sense for smaller towns to employ highly sophisticated full-time personnel to manage complex updates.

Because a primary aspect of the private water company business is upgrading infrastructure, companies accumulate skills based on operating multiple water systems in a variety of geographic settings. In terms of resources, these water utilities maintain a specialized staff of scientific experts and engineers who can be accessible to communities as needed. Through partnerships, municipalities gain affordable access to such expertise.

Total water management. Water utilities can also address complicated issues through the implementation of solutions such as total water management.8 In harnessing the synergies between potable water and wastewater management, for example, water poured down drains can be treated and reused for golf courses, heating-cooling and flush systems,9 thereby conserving a city’s precious ground-water resource for drinking.

Public-private partnerships have created powerful models of such programs in Battery Park City, N.Y., Gillette Stadium in Massachusetts and the Homestead active adult community in New Jersey, to name a few. In other instances, a water utility can help communities gain access to an affordable and efficient water system. In West Virginia, for example, more than 20,000 homes were supplied with drinking water and fire protection services through a public-private partnership that would have otherwise taken years to provide.

Finally, partnerships can help communities better manage the risks associated with water management, such as the increasingly stringent regulatory requirements and penalties associated with water and wastewater facilities. A case in point: Fillmore, Calif. recently engaged in a partnership for a design-build-and-operate (DBO) contract for a new wastewater recycling facility. In doing so, Fillmore transferred the specific risks associated with a DBO facility to a private company, which was better equipped to manage such ventures.10

Funding. Another way partnerships can assist communities is by bridging the capital gap. A town that has limited financial and staffing resources, for example, can contract its system out to a water utility. In return, the water utility can offer a greater economy of scale in its services by providing better management, modern metering techniques, leak detection technologies, access to capital, emergency response and a more cost-effective water system. By entering such a partnership, the city of Buffalo, N.Y., has saved $21 million to date. In Seattle, the Tolt Water Treatment plant under American Water’s management has saved 40% of previous costs.11

The concession model is one partnership program with particular advantages, since it grants communities access to funds that a private utility anticipates it can save. To illustrate, a water company can estimate relatively accurately how much money it will save a community. Partnerships have been shown to save approximately 20% a year in operations.12 So a water system that costs a town $1 million to operate may only cost a water utility $800,000. Based on these savings, the water utility can then offer a town a lump sum of money up front, which the town can use for other purposes such as financing roads, schools or pension liabilities.

Responsibility. Finally, partnerships can offer greater accountability in water management. A partnership puts the focal point of responsibility on the water utility, which becomes the prime contractor responsible for the operation. Under a publicly managed approach, there is not always a clear line of authority. Shifting this level of responsibility to a private company means that issues can be clearly addressed and resolved, rather than redirected through an often contentious municipal process.

From a business standpoint, public- private partnerships are a promising area for stable growth in the water utility sector; more than 90% of partnership contracts are renewed annually. A source at the National Association of Water Companies is quoted in Water Policy Report as having said, “There are clear signs that municipal leaders are enormously satisfied with the results of these contracts.”13

Consider again the Fillmore case. Building upon its current successful partnership with the private sector to operate and maintain the city’s existing wastewater treatment facility, the city recently decided to partner again on a broader scale. Together, Fillmore and the private sector will design, build and operate the city’s new wastewater recycling facility. For Fillmore, this new facility will be the largest one-time investment in its history.14

In West Virginia, the Kanawha County Commission president Kent Carper noted that partnerships with private-sector companies “changed the lives” of many residents in his county. “The need for private infrastructure investments in [the county] is so important, especially those that extend water to individuals that have gone without,” Carper said.15

Finally, the ability of private companies to earn a return on investment provides a clear financial incentive for capital investment that does not exist for their public counterparts.16 Many contend that the country’s infrastructure needs are so great that all forms of investment must be considered, including public-private partnerships.17

 

Final words

Water is one of our most essential commodities, and the infrastructure supporting the delivery of this product is in serious need of repair. If the infrastructure challenges are to be resolved, creative solutions must be generated and new partnerships need to be forged. Public-private partnerships offer one of the most viable ways in which cities, towns and communities can access the industry expertise and capital of the private sector. As such, these partnerships will play an increasingly critical role in helping the U.S. overcome its water infrastructure challenges.

Mark Strauss is president of American Water Enterprises. He can be reached at 856/349-8270.

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