Water PPPs Offer Financial, Environmental Compliance Solutions

Another from the “PPPs aren’t just for roads” file (see this one earlier this week on schools). From Virginia, an interesting new muti-jurisdictional water PPP:

A group of investors seeking a partnership with the towns of Cape Charles and Cheriton is moving forward with plans to build a state-of-the-art wastewater treatment plant and a new water distribution system to serve area residents, businesses and two industrial parks they are developing. [. . .] Cape Charles dumps its treated wastewater, or effluent, directly into the bay. The state environmental agency has required the town upgrade their plant by Jan. 1, 2011. The same deadline applies to plans for a central system for the town of Cheriton, which could not afford to build its own system because the population of the town hovers around 400. So the three parties are getting together and forming a public-private partnership to design, build, finance, maintain and operate water and wastewater systems that will serve residents and businesses in the two towns, and possibly beyond, and also the industrial needs at the Webster site, which sits partially in the county. Such ventures are formed under the authority of the state’s Public-Private Educational Facilities and Infrastructure Act of 2002, or PPEA. The intent of the act is to provide a structure so public projects can benefit from the involvement of the private sector, saving time and money. The law creates resources to fund a broad range of projects, from schools to water treatment and telecommunications. It helps localities reach goals and encourages innovative approaches to financing.

This is a great example of how PPPs offer solutions as public entities face growing infrastructure needs and worsening fiscal conditions. In fact, it’s apparent from this article that one of the drivers behind this deal is environmental compliance. Regs are getting tighter soon, and the cities don’t have the money to get in compliance on their own, so they’re pursuing a PPP to accelerate the project; pool their resources to make a more attractive, larger scale project; and get ‘er done before the regs kick in. Expect to see more interest in water PPPs in coming decades. The feds have been reducing their contributions to local water systems over the several decades, at the same time that they’re imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. Unfunded mandates of this nature are forcing fiscally-strapped municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds, but as we all know, government revenues are drying up and budget shortfalls are reaching epidemic status. So that leaves PPPs as one of the few nontraditional, creative options left on the table to help municipalities meet these obligations. And Virginia’s PPEA is one of the great pieces of state legislation to facilitate these solutions. After the success of its big brother, the Public-Private Transportation Act of 1995, or PPTA (facilitating transportation PPPs, like the Capital Beltway HOT lanes project currently underway), the legislature wisely opted to put legislation in place to facilitate PPPs in other realms of infrastructure. [they even still refer to PPEA in the Commonwealth as the “Public-Private Everything Else Act”]. We’re fortunate to have welcomed the PPTA’s author, former Virginia DOT secretary Shirley Ybarra, into Reason’s policy shop last year, and I’m sure she takes a certain amount of pride knowing that her work carving new ground on transportation finance and procurement has ultimately played a big role in providing options for munis in delivering water and other types of needed infrastructure. Another observation here is that we may be at the very beginning of a shift in water privatization. The standard way of doing business up to this point has been to partner with the private sector largely on operations & maintenance. The private team may design and build the plant too, or they may just take over operations of an existing facility, but to date the focus has not been on private financing in water infrastructure. But this Virginia project, a similar project under discussion in the Prescott, AZ area, and several others in recent years may be an early indicator that the more powerful PPP contracting models we see in roads, for example—where the private sector competes for the right to design, build, operate, maintain, as well as finance, infrastructure projects through longer-term contractual arrangements—may be coming to the water industry. Not that we’ll see a major shift away from traditional operational contracting in water; the point is that even looking within the relatively narrow space of water privatization, models are evolving, and new opportunities are emerging that may look way different than they did even a decade ago. As more elected officials discover that there’s a robust competition in the market for privately-financed road projects, they are naturally looking to similar opportunities in other sectors. And the $150B+ in private equity capital raised on Wall Street and within pension funds, etc. to invest in infrastructure are likely more interested than ever in diversification among assets. So it makes sense that we’ll see them interested in spreading their resources around to invest in several infrastructure subclasses, including roads, airports, water, wastewater, energy, ports, schools, etc. This may take some time in water since current privatization models are so well-established and successful, but I do think we’ll see growing interest in that evolution towards incorporating the financing component into the PPP models. And with public ledgers running redder and redder, and the maintenance and new capacity needs in water growing greater and greater, the sooner we start to engage that discussion and get some projects up and running, the better. Reason FAQ on Water/Wastewater Privatization Reason’s Water Privatization Research and Commentary

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.