Ending the investment drought

Examining claims that California, as it tries to deal with what has been described as the worst drought in recorded history, is now paying the price for not having invested in its water infrastructure sooner reveals that neither the problem nor its solution is straightforward.

But while infrastructure investment is not the only answer to California’s problem – the result of factors ranging from a complex water management system and political dynamics to an agricultural sector that relies on ‘thirsty’ crops – it is certainly part of the solution.

“We have a tremendous need for investment in our water system, both for ongoing maintenance and new infrastructure to support the conservation, water recycling, stormwater capture, additional storage, ecosystem restoration, and interconnections we need,” Nancy Vogel, public affairs director at the California Department of Water Resources (DWR), recently told Infrastructure Investor.

That is the need California Governor Jerry Brown is seeking to address with a series of initiatives set out in a five-year Water Action Plan released last year. Measures include expanding water storage capacity, improving groundwater management and increasing flood protection – the latter alone requiring an estimated $50 billion.

But when it comes to increasing storage capacity, storage projects should not be considered in isolation, Jay Lund, who is director of the UC Davis Center for Watershed Sciences, writes in a recent article with Maurice Hall, water science and engineering lead for The Nature Conservancy and Anthony Saracino, a water resources consultant in Sacramento.

“Storage should be considered and analyzed as part of larger portfolios of infrastructure and management actions, including: various water sources; various types and locations of surface and groundwater storage; various conveyance alternatives; and managing all forms of water demands,” Lund and his co-authors state.

Resources and resourcefulness

Regardless of how these projects are planned and developed, a key concern is funding. That’s why part of Governor Brown’s plan also includes finding ways to finance these projects through multiple funding sources, such as federal grants and loans, taxes, private investment and public-private partnerships (PPP; P3). The Water Infrastructure Finance Innovation Act (WIFIA) is also mentioned as a means for providing low-cost capital to infrastructure projects. At the time, the Water Resources Development Act (WRDA) was still at the draft stage.

However, since then WRDA, which includes a WIFIA component, was passed into law. Asked whether the new legislation could help California, Paul Massera, the department’s manager of strategic water planning, responded: “WIFIA can provide low interest federal loans for up to 49 percent of large drinking water, wastewater and water reuse projects. However, the law prohibits tax-exempt bonds from funding the remaining project costs. So, unless this prohibition is repealed, this prohibition will likely limit its use in California.”

In an update released in collaboration with other state agencies last January, the Department of Water Resources states that general obligation bonds approved by voters over the past decade have been effective in launching and continuing essential state services and programmes. The most recent example is Proposition 1, approved by voters last November, which will provide $7.5 billion for investment in water infrastructure projects.

DWR, however, reckons that these general obligation bonds are not sustainable. While P3s could be an option in terms of bringing private investment into the state, Massera pointed out that “the critical component of a P3 is how the private entity is going to get a financial return out of their investment. In most cases, that will require some new assessment or rate increase, a challenge in the current financial climate.”

But Californians may not have a choice. As one source pointed out, California has used up cheap water. “Whatever they do from now going forward is going to be – by definition – more expensive than what they’ve done in the past.”