US legislation: More than a drop in the bucket?

“WRRDA will be the most policy- and reform-focused legislation of its kind in the last two decades,” Bill Shuster, a Congressman and chairman of the House of Representatives' Transportation and Infrastructure Committee, said in August 2013, referring to the Water Resources Reform and Development Act, a bill he was preparing to present to his colleagues later that year.

When WRRDA was signed into law in June 2014, it was noteworthy for several reasons. It was a bipartisan bill that easily passed both House and Senate; it was the first piece of legislation to address the country's water infrastructure needs in seven years; and it was opening the door to private investment.

With nearly 18 months having passed since WRRDA became law, Infrastructure Investor spoke to several industry experts to gauge whether the legislation was living up to its sponsor's claims. The findings, as is often the case with US infrastructure, were mixed.

FIRST, THE GOOD NEWS

Taking on the entire spectrum of water infrastructure – from ports, dams and canals to drinking water and wastewater facilities – WRRDA is very comprehensive. For those projects related to water transportation and water supply, which fall under the jurisdiction of the US Army Corps of Engineers (USACE), the benefits are more clear-cut.

“Objectively, WRRDA does benefit ports, harbours and waterways more,” says Whit Remer, senior manager of federal government relations, energy, environment and water at the American Society of Civil Engineers (ASCE). “This is not because Congress believes drinking water/clean water are less important, but because they're managed at the state level and as such are not really federal issues,” he explains.

WRRDA reduces red tape by setting hard limits on the time and cost of studies, requiring USACE to adopt the 3X3X3 rule. This means feasibility studies have to be completed within three years (as opposed to a current 10- to 15-year timeframe); they cannot cost more than $3 million; and personnel from the district, division, and headquarters levels of the Corps must concurrently conduct the review required. It also de-authorises $18 billion worth of old, inactive projects.

“I think it's a very positive step forward,” Usha Rao-Monari, chief executive of Blackstone-backed Global Water Development Partners (GWDP), says. “This bill and the approach that comes with it is quite new for the country and quite new for the way the US has managed its water resources so far.”

SIMILAR BUT NOT THE SAME

Indeed one of the new approaches introduced through WRRDA is how water infrastructure projects are financed. The legislation includes a public-private partnership (PPP; P3) pilot programme and the Water Infrastructure Finance Innovation Act (WIFIA).

WIFIA, which is modelled on the US Department of Transportation's TIFIA (Transportation Infrastructure Finance Innovation Act) programme, provides low-interest loans – interest is based on US Treasury rates and loan terms can be for up to 35 years – to finance up to 49 percent of eligible water projects costing $20 million or more.  

However, unlike TIFIA, the remaining 51 percent of the project costs cannot be funded through tax-exempt financing. It is this ban on combining WIFIA loans with tax-exempt bonds that some industry insiders have described as rendering WIFIA “useless”.  

“We've been talking to Congress for the past year and a half, asking them to remove that ban,” explains Tommy Holmes, legislative director of the American Water Works Association (AWWA), which along with the American Beverage Association initially developed and advocated for the inclusion of WIFIA in WRRDA.

According to Holmes, an amendment repealing the ban has been included in the Senate's six-year surface transportation bill. AWWA is now focusing on persuading the House to do the same in its version of the bill, which was scheduled for mark-up as we were going to press.

What's more, WIFIA exists only on paper at the moment. “Congress has not appropriated any money for EPA [Environmental Protection Agency] to make loans,” Holmes says. “They've appropriated $2.2 million for the EPA to set up an administrator office but the original WRRDA bill authorised $25 million in fiscal year (FY) 2015 and FY2016.”  

The EPA is administering the WIFIA program for drinking water and wastewater projects, while the Corps of Engineers is administering the programme for water resources projects (flood control and navigation). According to one source, USACE has not received any funds to get the programme up and running.

“WIFIA has tremendous potential to address the nation's water infrastructure needs,” Holmes comments. “It just has two challenges: getting funding to get loans out the door and that ban on using tax-exempt finance has WIFIA operating with one hand tied behind its back.”

Dolly Mirchandani, a partner with law firm Allen & Overy, agrees: “In its current form WIFIA is not capable of turning the dial in supporting the amount of financing needs in the US water sector. It doesn't even scratch the surface.”

“There's plenty of private capital to fill the gap, but what we don't have an abundance of is what I would call 'investable propositions' being put out to tender by the public sector who own and operate water assets. There is plenty of private money that would love to invest in upgrading these systems and running them efficiently in return for the right to make a reasonable rate of return,” she explains.

Dylan Foo, head of Americas, infrastructure equity at AMP Capital, makes that same point. “The challenge at the moment is that the majority of water utilities in the US are owned by municipalities.”

According to the National Association of Water Companies (NAWC), only 15 percent of the country's water utilities are privately owned.

“What we believe will eventually happen is that a greater amount of the municipally-owned utilities will have some form of private capital involvement, whether that's under a P3 concession, funding of capex or an actual trade sale,” Foo says.

REAL REFORM

One of the problems is that the issue is highly politicised and part of the reason for that is because the sector has been essentially a publicly-funded sector.

A way to depoliticise it and keep rates under control, according to Mirchandani, is to establish a regulatory framework similar to that of the power industry. “That would also ensure that you're keeping rates in step with the cost of production,” she says.

Mirchandani also stresses the need for rationalisation. “There should be an opportunity to raise rates because when you look at household expenditure, water is a very small portion of the aggregate utility bill. The reason for that is we're not spending enough on it.”

According to the White House, the US will need to invest at least $600 billion over the next 20 years to ensure safe drinking water and clean rivers and lakes. When ports, dams, levees and inland waterways are factored in, that estimate jumps to $2 trillion over the same time period.

While a regulatory framework is one way to keep rates under control, another approach is what Mirchandani calls 'contractual regulation'. 
An example is the partnership private equity firm Kohlberg Kravis Roberts & Co (KKR) entered into with the Bayonne Municipal Utilities Authority (BMUA) of New Jersey at the end of 2012.

“The way those concessions work is that the contract defines how much of the capital costs can be passed on to users and what the maximum rate regulation is,” Mirchandani says.

The problem, however, is that the US market is very fragmented, making this an episodic approach.

“Surprisingly, many of these water utilities serve less than 1,000 users, which may limit efficiency given the lack of economies of scale and synergies. This can sometimes mean higher costs for rate payers,” Foo comments.

The challenges of dealing with laws and regulations in 50 different states is an issue that applies to infrastructure in the US in general. Given that, like transportation, water utilities are also regulated and managed at the state, local and/or municipal level, the solution lies with the American taxpayer becoming more knowledgeable and more demanding as to how their tax dollars are spent, Mirchandani suggests.

“I think there is a culture of deferred maintenance in parts of the US water sector. The assets were built cheap, financed with tax exempt debt and maintenance was tomorrow's problem,” she says. “You don't get away with that when times are lean and they are leaner now, so we need to become more efficient in how we procure and run these assets over their lifecycle.”