Water Survey

Reader Op-Ed: Private Investments

7 Comments 10 February 2011

Reader Op-Ed: Private Investments

The debate on private funding for water infrastructure continues in the following interview with Jason Mumm, President of StepWise Utility Advisors, a wastewater and utility consultant firm. Mumm contacted WaterWideWeb after the article Private Investments in H20 Infrastructure was published on 02 February 2011.

In the aforementioned article, Erika Berlinghof, Director of Government Relations of the National Association of Water Companies (NAWC) told WaterWideWeb, “Private investments in water infrastructure are a necessary dialogue to be having right now.”

NAWC spearheaded the Water is Your Business campaign to raise awareness about the economic value of water. “In order to attract the private sector, you have to price the asset and resource accurately to repay the debt,” noted Berlinghof.

On Private Investments in H20 Infrastructure, Mumm commented, “Political will has to align with utility business needs and the ability for political leaders and utility managers to communicate the capital requirements of our systems is essential to addressing the funding gap.”

For Berlighof, public-private partnerships can deliver a timely and effective solution to the funding gap in water infrastructure. “Business is a good thing. But end users will end up paying more money if private investments are made versus if maintenance to water systems was funded by municipal bonds,” explained Mumm.  “Private equity might be a good thing in some ways, but our utilities have access to the cheapest capital in the world, after factoring in the tax exempt nature of the debt.”

Maintaining water infrastructure is complex because of the lack of political motivation to deal with the problem. It’s an issue that can be easily ignored because it is the “out of sight, out of mind” infrastructure that can be easily pushed to the side.

Aging water systems lead to main breaks, flooding, and leaks in local communities. Still, these communities are not aware of the amount of money involved in repairing these systems, nor are they aware of the significance that updating them implicates.

“Most communities aren’t going to raise utility rates so that they can deal with infrastructure issues. It’s not causing enough problems for them yet. It’ll happen all at once, which will cost large amounts of money,” mused Mumm.

For Mumm, it’s local communities where people are connected to these systems who are responsible for water infrastructure repair. The Environmental Protection Agency (EPA) establishes guidelines for affordability of service that are set at 2.5 % of the median income of a local community.

These affordability guidelines protect end users from being overcharged for basic utility services. But Mumm proposes that increased utility rates will provide the means to straddle the financing gap.  ”Water infrastructure will be the largest investments that will be made by local communities,” argued Mumm.

But is it really fair to increase utility rates in local communities because water infrastructure was neglected for roughly 60 years?

Updating water infrastructure is everybody’s problem but the lack of awareness with respect to urgency in solutions implementation is delaying anybody from taking action. Some argue for private investments; while others insist that said investments run the risk of exploiting customers when it’s time to repay the debt.

But, increasing utility costs combined with emergency responses to water leaks, main breaks, and floods, add up to quite a cost over time as well. As the issue is complex, so is the solution. Either way, the U.S. needs to put its money where its water is.

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Your Comments

7 Comments so far

  1. Monex says:

    Water pipes were not high on the priority list..Before the war water pipes were usually over-engineered. The average useful life of water pipe from the 1920s is over 100 years. We re feeling the effects of this today..More than 56 percent of all water breaks today occur in pipes built in the 20 years immediately after World War II.

  2. EMBER says:

    Re: “Private equity might be a good thing in some ways, but our utilities have access to the cheapest capital in the world, after factoring in the tax exempt nature of the debt.”

    A simple change in law would allow all public water projects access to tax-exempt debt, regardless of who is paying. Utilities could access cheap debt while using private capital to rebuild their infrastructure.

  3. Jason says:

    “Utilities could access cheap debt while using private capital to rebuild their infrastructure.”

    It’s not the tax-exempt debt that’s the issue with respect to private equity, it’s that the private equity will demand a return that is much higher than the return required for the debt. More private equity means higher costs of capital, and that means higher rates all else being equal. Still, what I also said in my interview was that private equity isn’t necessarily a bad thing (it may be totally necessary in some cases) it’s just that end users don’t understand what the implications are for their utility bills yet. The simple and accurate answer is: rates are not going to go DOWN as a result of private equity investments. It’s not a panacea of cheap money. In fact, quite the opposite.

  4. Bill says:

    I agree that water pipes are not high on the priority list and that; “Most communities aren’t going to raise utility rates so that they can deal with infrastructure issues.” Pipes aren’t sexy!

    Waterisyourbusiness.org is taking a proactive approach to raise awareness and build political support and pressure for these investments so that communities don’t have to wait for a disruptive pipe break to spur investment.

    Check out our national map of all of the pipe breaks over the last month: its a problem. There is over $180 billion in private capital waiting on the sidelines to solve it.

  5. Jason says:

    There shouldn’t be any disagreement over the need. There is really no disagreement over the solution. But there is disagreement over how to pay for it. “$180 billion in private capital waiting”…at what cost? Communities may not have a choice soon but to go the route of private equity, but simply increasing their own rates is a cheaper solution for most.

    For those who think that private equity is a panacea for funding this infrastructure problem, they should think again. There is no free ride. Utility customers will pay more.

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