Idea #16

To Modernize US Water Infrastructure, We Need New Financial Tools

by Allison Lassiter

Even though roads and bridges dominate federal infrastructure conversations, our most vulnerable and critical public infrastructure may be municipal water systems. We tend to take clean, reliable water for granted. Not only is a lot of water infrastructure reaching the end of its lifespan, however, it is particularly susceptible to climate change. Our built infrastructure of pipes, pumps, aqueducts, and dams all link to natural water infrastructure like rivers, lakes, and groundwater. In many locations, there has been or will be climate-related changes in natural infrastructure impacting the quantity and timing of water supplies that can be brought to drinking water standards. Altering source water locations, water storage, treatment methods, pipes and materials will require more money than most water agencies can currently access. Though many of the challenges of modernizing US water infrastructure must be addressed at local and regional levels of government, the federal government can help protect drinking water by dedicating funding and driving investment with new financial tools.

There is not enough federal money flowing into infrastructure, especially water infrastructure. At 1.6% of GDP, the US has among the lowest levels of national infrastructure investment in the world. If this trend continues, the World Economic Forum warns the US will have the largest shortfall of infrastructure investment of any country by 2040, with a projected gap of $3.8 trillion. Specifically with respect to water, the American Water Works Association says $1 trillion of investment is needed through 2035, which dwarfs current discussions of federal investment in water. To boot, these estimates are likely conservative, as many costs of climate-related impacts on water are not yet determined.

Water agencies bring in almost all their money through rate payers. Revenue from rate payers is often not enough but, despite shortfalls, it can be very difficult for public water agencies to garner the political support to change pricing structures and raise rates. Under tremendous pressure, public water agencies may avoid increasing rates for years. In the meantime, lack of funding can lead to deferred system maintenance. Then, when a large project is finally unavoidable, a public water agency may take on debt financed through a bond. Some agencies are either accumulating debt or under other financial risk, however, and are seeing a decline in their credit ratings. For these water agencies, new debt may only be accessible at high interest rates.

Without enough dispensable money, some public water systems have or are considering privatizing. This means a private company has either purchased or leased the infrastructure assets from the water agency. There is a long history of private water systems in the US—about 12% of water systems are currently privately owned or managed, though there is massive variation by state. Privatization is likely appropriate in some cases, but also raises a number of issues. Some fear that privatization can lead to reduced water quality and diminished service reliability, alongside soaring water bills.

The largest problem with privatization may be that privately-owned water systems are less able to radically adapt water infrastructure, even though it is and will be necessary in some locations. Private investors in infrastructure are typically seeking low risk, stable investments. These investors (for example, pension funds) are often more interested in upgrading systems at the margin than planning for major capital outlays and system overhauls. But, the future of water will most likely require a suite of approaches beyond tweaking traditional infrastructure, including: investing in distributed green and blue infrastructure, investing in both water reuse and desalination facilities, consolidating and redistricting existing water systems, and developing new regional watershed-based flow management practices. To ensure adequate service delivery and all the necessary, major infrastructure adaptations, many municipal water systems will need to stay public and be supported with funding. Funding, not debt financing.

Part of this funding must come from federal government commitment, but to close the infrastructure investment gap we also need tools to responsibly leverage private money toward water projects. One way the US can do this by looking to Australia’s infrastructure asset recycling initiative, which has skyrocketed infrastructure investment since its inception in 2014. This is how it works (more here):

  1. At the federal level, devote money to infrastructure upgrades. Create a matching program with participating states. Australia matches 15% of proceeds from the sale of divested infrastructure that was reinvested into new infrastructure.
  2. At the state level, create an overarching infrastructure agency. At a minimum, this could be by sector, but better to include multiple sectors, like transportation and water. This means that, for example, a bridge could be divested and funds brought into water delivery, thus keeping the water system public. At a maximum, the infrastructure agency could be built out to include social infrastructure, like housing or schools.
  3. Divest from state infrastructure assets that match private sector investor preferences. Divestment can span different ownership and operation frameworks—whether leasing to private operators for a fixed term or fully selling the asset. In Australia, most assets have been leased for long, fixed terms to private operators, with the state retaining ownership rights and some management tasks, like quality enforcement.
  4. Store money from the divested asset in a trust separate from other public money, where the finances are transparent and visible to the public.
  5. Reinvest money into new infrastructure, as prioritized by the infrastructure agency.

Though there are many differences between the US and Australia, an infrastructure asset recycling program is possible. Already, we have structures in place at the state-level that could be expanded to integrate with an asset recycling approach, like the Clean Water State Revolving Fund.

Ensuring adequate funding for needed services like clean and reliable drinking water is going to require dramatically rethinking methods of infrastructure investment. The traditional public water agency tools of rate setting and bonding will not be sufficient to modernize public water systems, while privatizing may stymie adaptation. Though public infrastructure investment has been siloed by sector in the past, adaptation will likely require increased efficiency through cross-sector cooperation and multi-benefit projects. New financial tools, like infrastructure asset recycling, can help drive money into water infrastructure investments and secure clean, reliable water.

Allison Lassiter is an assistant professor at the Stuart Weitzman School of Design