Water and Wastewater Privatization Update

Subsection of Annual Privatization Report 2013: Local Government Privatization

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Water and Wastewater Privatization Update

The most significant water and wastewater story in 2012 lies at the federal level, and concerns new legislation that could revolutionize how water and wastewater infrastructure is financed in the United States. In spring 2012 U.S. Representative John Mica (R-FL), then-chair of the House Transportation and Infrastructure Committee, held several hearings discussing then-draft legislation called the Water Infrastructure Finance and Innovation Act (WIFIA). WIFIA is modeled in part after the Transportation Infrastructure Finance and Innovation Act (TIFIA). It aims to introduce new ways of funding water and wastewater infrastructure from the federal government, including through public-private partnerships. Specifically, WIFIA would offer direct loans and loan guarantees to finance significant water and wastewater projects, thereby giving local governments improved access to capital, more competitive interest rates and flexible repayment terms.

Support for WIFIA came from the National League of Cities, U.S. Conference of Mayors, and a number of other nationally prominent organizations.1 These groups all emphasized anticipated water and wastewater infrastructure investment needs, which range from $300 billion to $450 billion (according to the Environmental Protection Agency and National Association of Counties respectively) over the next 20 years.2 Due to widespread support, WIFIA legislation was introduced in the Senate as S.3626 during the 112th Congress as well. While WIFIA legislation didn’t pass through Congress in 2012, it is widely expected to come up again in 2013.

Also at the federal level, on March 21, 2012 then-Secretary of State Hillary Rodham Clinton announced a new U.S. Water Partnership (USWP). USWP is a public-private partnership aiming to “… share U.S. knowledge, leverage and mobilize resources, and facilitate cross-sector partnerships to find solutions to global water accessibility challenges, especially in the developing world.”3 If nothing else, this move is emblematic of the pressing need to address water and wastewater challenges in the U.S. and around the world.

In March 2013, Public Works Financing issued its annual water partnerships report that provides an effective snapshot of the U.S. industry as a whole. Table 1 below outlines the trends over the last decade. Despite a dip in the industry contract renewal rate in the years 2010 and 2011 that reversed in 2012, overall it has been remarkably steady for the last decade. Renewal rates in most years have exceeded 85 percent, indicating a high degree of satisfaction with water partnerships among municipal clients.

Table 1: Contract Renewal and Lost Government Contracts, 2003-2012

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Industry Renewal Rate (%) 96 97 93 92 98 95 85 77 65 89
Renewed by Incumbent (%) 94 95 92 89 94 90 76 74 56 82
Lost to Private Competitor (%) 2 2 1 3 3 5 9 3 8 7
Reverted to Muni (%) 4 3 7 2 2 5 8 8 18 6

Source: Author Calculations using data published in Public Works Financing, various editions.

At the local level, many communities are moving on water and wastewater partnerships, and several highlights from 2012 are listed below.

New York City, New York: Officials at New York City’s Department of Environmental Protection (DEP) signed a contract with Veolia water to provide guidance on how to optimize its public water and wastewater services for the city’s 9 million customers. Once Veolia’s guidance-focusing on improving performance and reducing operating costs-has been formally submitted, the city will choose whether to partner with Veolia or another firm to implement the optimization. Officials are targeting annual cost savings in the region of $100-$200 million, which would add up to $1.2 billion. However, the private partners will only be compensated on the basis of savings that are both achieved and documented. Veolia estimates it will generate $36 million in revenue from the partnership.4

Rialto, California: The Rialto City Council voted 4-1 in April to privatize the city’s municipal water system with American Water Works Co., Inc. The $177 million, 30-year lease calls for American Water Works Co., Inc. to create a local company called Rialto Water Services to take over operation (including billing) and maintenance of the water district, leaving ownership of water rights in public hands. Existing city workers are guaranteed positions with the private company with matching salary and benefits for at least 18 months.5

According to Public Works Financing, the terms of the agreement stipulate financing will be used as follows:

  • $43.1 million for funding operations and rate stabilization;
  • $41 million for capital improvements over five years;
  • $30 million for catch-up lease payments by the Rialto Utility Authority to the city;
  • $27.4 million to refinance city debt;
  • $24.3 million for debt issuance costs, including fees and reserves; and
  • $11.2 million for due diligence and other transaction costs.6

In order to pay for the substantial necessary infrastructure investment, city officials agreed to raise water and wastewater rates by 114.8 percent, which is expected to go into effect by 2016. However, before rate increases can go into effect, a majority of ratepayers have to approve the increase (due to California Proposition 218). If ratepayers reject the increase then Rialto will owe Table Rock Capital, American Water’s investment partner, $2 million for its work on the agreement since 2010.7

Bayonne, New Jersey: The city of Bayonne signed a 40-year contract with United Water and private equity firm Kohlberg Kravis Roberts that was voted the best in the industry by its peers at the American Water Summit. The partnership is expected to lead to over $100 million in improvements like wireless metering, pipe replacement and reduced water loss through leakage. It will also retire $130 million in Bayonne Municipal Authority Debt.8

Nassau County, New York: Nassau County Executive Ed Mangano is pursuing a public-private partnership for the county’s sewer authority that is expected to be worth as much as $700 million, money that Mangano wants to help address the county’s $3 billion debt.9 Mangano had chosen to partner with United Water, a unit of Suez Environment Company SA, but skepticism from a state control board (installed to prevent the county from going bankrupt) caused the plan to be delayed until fall 2013. The board reportedly rejected proposed budgets relying on nonrecurring revenue, such as from a sewer agreement.10

Asheville, North Carolina: Asheville voters were asked in November 2012, “Shall the City of Asheville undertake the sale or lease of its water treatment system and water distribution system?” They responded with an overwhelming “No”. While 85.5 percent of voters opposed the measure, a paltry 14.5 percent supported it.11 The $1.3 billion system serves 125,000 people with 29 reservoirs over 69,000 acres. While some policymakers found privatization appealing, one major issue in the election was the argument that legal restrictions on revenue bonds used for $40 million in infrastructure investment would prevent the sale, mortgage and/or lease of the system-in whole or in part-or its transfer to another political agency like the Metropolitan Sewerage District.12

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1 “Water Infrastructure Financing,” (Washington, D.C. National League of Cities)

2 “Municipalities need $300B in sewer, water work,” The Associated Press, February 9, 2012.

3 “Secretary Clinton to Announce Water Partnership on World Water Day,” (Washington, D.C. U.S. Department of State), March 21, 2012.

4 “Veolia Water signs partnership contract with New York City to Optimize its public water and wastewater services,” Water Online, April 10, 2012.

5 “Rialto council approves 30-year lease of water system to N.J. company,” San Bernardino Sentinel, April 7, 2012.

6 Public Works Financing, April 2012, Volume 270, pp. 10-11.

7 Ibid.

8 United Water’s ‘Solution’ Voted Best by Industry Peers at American Water Summit,” United Water Press Release, November 16, 2012.

9 Joan Gralla, “UPDATE 1-NY Nassau Mangano to revisit sewer privatization plan,” Reuters, May 17, 2012.

10 Joan Gralla, “UPDATE 2-Nassau County budge delays sewer deal, not refunds,” Reuters, September 19, 2012.

11 General Election: City of Asheville Water System Sale or Lease Referendum,” Asheville Citizen-Times, November 6, 2012 .®ion=Mountains&county=11&contest=&contest=CITY%20OF%20ASHEVILLE%20WATER%20SYSTEM%20SALE%20OR%20LEASE%20REFERENDUM%20(Vote%20For%201)&precinct=1

12 Joel Burgess, “Asheville water debate: Rumors of privatization grow,” Asheville Citizen-Times, February 11, 2012.