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Failing water infrastructure could use a P3 hand

Expanded US federal funding isn’t translating into a geyser of new public-private partnerships for water infrastructure, but new technologies, state regimes that allow for water P3s and the suitability of P3s for long-term maintenance of infrastructure could help expand the market, those in the industry say. Infralogic’s Senior Reporter Liam Ford investigates where investment opportunities can be found in the water sector.

The US water industry has seen a few high-profile water public-private partnerships (P3s) over the last two decades but has never seen any sort of wholesale adoption of the P3 model, even as smaller water authorities continue to privatize their systems throughout the country.

As Santa Clara County is looking to release a request for proposals for the Valley Water project to its 2021 shortlist and Fort Lauderdale hiring subcontractors for the USD 1.4bn Prospect Lake water treatment plant project, the economic climate that’s driven up contracting and financing costs is putting a damper on new P3 opportunities. Some in the industry consulted by Infralogic say there is a better chance to procure specialized infrastructure with public-private partnerships, despite economic headwinds. A report on water infrastructure by the President’s National Infrastructure Advisory Council (NIAC) late this summer recommended more use of alternative financing and even privatization of water infrastructure. The report cited some of these large P3 projects as examples of how the water projects can be procured. Yet even in states in which water P3s are easier to do, such as Florida, the reality is that municipal bonds often make P3s a difficult sell.

There may be interest in wrapping small water systems into larger regional authorities and in P3s “particularly for technologies that haven’t been tried” on a large scale in the US, but while there is some interest in alternative delivery methods, traditional P3s aren’t taking the water industry by storm, Jill Jamieson, president of Illuminati Infrastructure Advisors, told Infralogic recently.

“Even in the replacement of wastewater treatment plants like Lake Oswego (in Oregon) with new technologies like AquaNereda, there’s not a real wholesale concern with using alternative finance and delivery,” she said. “Everyone’s like ‘Let’s just do what’s best for the project.'”

The NIAC report noted that the American Water Works Association says the US is in a “replacement era” in the water industry, with near USD 100bn more needed each year over the next 20 years to keep up with water infrastructure replacement and repair.

As the report alluded to, “You’ve got some of these publicly owned” assets that “might be privately operated” to the benefit of public authorities, the chair of the infrastructure subcommittee that produced this report, Norma Jean Mattei, told Infralogic soon after it was released. But “there’s no one size fits all” solution, said Mattei, the former chair of the University of New Orleans’ (UNO) Department of Civil and Environmental Engineering.

Aging infrastructure and an experienced workforce that’s getting close to retirement has pushed a number of public water systems into private hands. That’s not translated into full scale P3 takeovers of water systems, although it has led to many privatizations, which are easier to do under many states’ regulations.

The head of Veolia North America’s municipal water business, Karine Rougé, doesn’t expect to see a large-scale adoption of P3s for whole water systems but what she is hearing from the firm’s municipal clients echoes Jamieson’s take on the market.

A number of pressures, such as the need for more sophisticated equipment, training and technology, point toward consolidation of smaller water systems and are an opportunity for private firms to be of service to public water agencies.

“What they’re coming to us with is saying, ‘OK, can we finance that equipment upgrade, that project expansion?’ So, it’s usually add-ons to existing plants, not to build up a huge system,” Rougé said.

The projects range from around USD 5m to around USD 30m to 40m, she said. Private financing or funding for the projects can sometimes later be converted into municipal financing.

“That can be on the balance sheet of people like us. There can also be some sort of revolving kinds of [credit] facilities. Or more like short-term debt, nothing you have to raise, but more like local debt than financing,” Rougé said.

Consolidation into larger systems is something that could benefit smaller providers, Rougé, Jamieson and others said, echoing the presidential council.

“Especially with the new challenges that we’re facing in our operations on quality and quantity, these are real global challenges which require global expertise,” Rougé said.

But some advisors with experience in water projects see more opportunity and the possibility of greater changes in the market.

Damian Georgino, a Charlotte-based partner with the law firm of Womble, Bond Dickinson, who has been working in the water sector for more than 25 years, contributed to the infrastructure council’s report. He likens the situation of water utilities to that of energy companies a few decades ago, before energy deregulation.

What needs to be encouraged is “all these new alternative models that are allowing systems to become more efficient,” such as what’s happening in Fort Lauderdale, Georgino told Infralogic.

Cost not the only consideration

Focusing on the cost of private investment without looking at a P3’s other benefits could leave public agencies with the impression that now isn’t the time to enter into a P3 agreement. Yet cost isn’t the only advantage municipal leaders can find in P3s—and putting things off because of cost won’t help.

Fort Lauderdale’s water project is moving along under what was cited in the report as a unique financial structure. The city’s mayor, Dean Trantalis, told Infralogic that entering into the P3 arrangement with the IDE Ridgewood team is allowing long-neglected, necessary work to move forward more quickly.

“We try to ensure the quality of the utility for the public and at the same time, we know our limitations as a municipality,” Trantalis said. “As with any municipality [we are] trying to get things done quickly. Our city staff represented to us that the private entity would get it built much more quickly than we would, by as much as two years.”

“Originally, the company was going to seek financing on their own and we knew that the market would have been more expensive than if the city were to secure financing,” Trantalis said. “So, we insisted on 75% of the financing costs being borne by the city and 25% by the company.”

Fort Lauderdale will be using a relatively new technology and private firms are often more up to speed than all but the largest public water systems. Among other technologies that are being coupled with P3s are those such as desalination and indirect and direct potable water reuse projects, Jamieson said.

One funding program among several water infrastructure funding sources in the federal Infrastructure Investment and Jobs Act that’s not gotten a lot of attention is the USD 15bn for lead-service replacement. The program could have much greater impact if P3s are used to leverage some of the capacity for lead-pipe replacement.

The US Environmental Protection Agency (EPA) has been encouraging what are billed as community based P3s (CBP3s) for several years now and the new federal funding for water projects is expected to foster more of them. Recently Wausau, Wisconsin, became the first city in the country to sign an agreement to use a CBP3 to accelerate its lead-pipe replacement program.

Community Infrastructure Partners (CIP) will be the city’s main private partner on the project, said Shawn Kerachsky, CEO and president of CIP. The CBP3 doesn’t require private financing, but the agreement with Wausau involves CIP paying its contractors before it gets paid by the city, which will mean CIP will have to use its own resources to pay its suppliers up front. Kerachsky declined to discuss the firm’s backers.

Wausau is the first city to announce a CBP3 for lead service replacement lines and intends to replace 8,000 lead service lines by the end of 2028, up from only 60 to 70 lines replaced a year before that, Kerachsky told Infralogic. With USD 3bn a year in federal loans available through FY 2026, others are expected to follow.

“A lot of people didn’t want to be first, but a lot of people want to be second,” Kerachsky said.

The real test “is going to be what happens to a lot of these projects when the bills’ funds [both the IRA and IIJA] run out,” said Kerachsky.

When projects are being done at a local level, even with federal support, the basis for any financing, public or private, is usually the expected water rate revenues from individual households and others hooked up to any particular water service.

Jamieson and others point out that private financing can lead to higher rates, but private entities that take over water systems can sometimes better make the hard decisions to hike rates to invest in infrastructure. What’s then needed is mechanisms to help lower-income households pay for water rates, in the same way that some private firms running tollways and toll bridges have put in place programs to help offset the cost of tolls for lower-income drivers.

“If we do full cost recovery, which is the dream for infrastructure… we want full cost recovery, we want efficiencies and all those sorts of things, it’s not just the private sector who can do that. Anyone can do it,” Jamieson said. “It’s just the political calculations about rates and charges are very different if you’re a private entity than a public entity.”

“We have a real issue in the United States right now with affordability,” she said. “We need to upgrade our water systems, but there’s no doubt about it, once we do that, we will go above the EPA’s threshold for affordability for many families.”

With the economic climate, a number of projects have been getting cancelled or postponed because of the cost of potential P3s, but those in the industry said getting projects done more quickly—and not paying more a few years down the line—is an argument for going with a P3 approach. Trantalis said that in Fort Lauderdale, for example, if their water project had been started several years ago, the city would not be paying nearly as much as it is and it’s better to move as quickly as possible to get things done—an argument for using the private sector to deliver projects.

“The capex delivery portion of it in the supply chain world that we’ve been going through has this level of rush on the timing of execution which was not there in the past,” Rougé said. “This notion that you start the project now and the cost might double if you wait too much, honestly, I don’t think any of us a few years before COVID-19 would have like thought that was a realistic approach. And then we all became much more sensitive at the value of time.”

Trantalis does rue the delays in that left Fort Lauderdale with a significantly more expensive project.

“Had we made this decision two years ago even or three years ago when we should have… it would have cost half the price of what we’re looking at now,” he said.

“I’ve been in government long enough to know that the price of things never goes down,” Trantalis said.