Interest in public-private partnerships (P3s) has gained more traction with the proposed 2016 Federal budget. In addition to the already announced EPA Water Finance Center, click here learn more about the EPA’s Water Finance Center, the proposed budget includes Qualified Private Infrastructure Bonds (QPIBs). These bonds would offer a low-cost financing tool intended to spur private participation in building water and wastewater infrastructure. If approved, the intended goal would be to allow P3s, including transactions involving long-term leases and management contracts, to take advantage of the benefits of municipal bonds.[1]
QPIBs closely resemble an already existing bond program, Private Activity Bonds (PABs). Unlike PABs, QPIBs will have no expiration date, no limits on the total amount issued, and interest on the bonds will not be subject to the Alternative Minimum Tax. Additionally, QPIBs will include sewer as well as water infrastructure, which is not currently covered under the PAB program.
“QPIBs will extend the benefits of municipal bonds to public private partnerships, like partnerships that involve long-term, leasing and management contracts, lowering the cost of borrowing and attracting new capital,” said the White House Administration in a public statement. “The bonds will serve as a permanent lower cost financing tool to increase private participation in building our nation’s public infrastructure.”[2]
Water management in the U.S. has historically been dominated by the private sector. In a 2011 paper for the Journal of Law, Economics, and Organization, University of Michigan Professor Scott Masten wrote, “Private firms dominated the U.S. water supply throughout most of the 19th century. There were 16 waterworks operating in the U.S. in 1800, and only one was public. By 1970, 80% were publicly operated. Frictions between cities and private companies over system extensions and improvements played a significant role in the shift to municipal ownership.”[3]
According to a 2012 American Water Works Association (AWWA) report, the cost of restoring the existing water and wastewater infrastructure and expanding them to serve a growing population will cost at least $1 trillion over the next 25 years.[4] As these costs continue to rise, municipalities will potentially struggle with a limited budget and the need to increase water and sewer rates to cover infrastructure needs.
As the need for water and wastewater infrastructure increases, P3s are gaining favor as an effective strategy for providing reliable service. These partnerships are customized to fit local needs, which is one reason why P3s have enjoyed a greater than 85 percent contract renewal rate.[5] Well-structured P3s are beneficial to both parties and allow the public sector to defer up to 100% of risk and capital that is required to develop water and wastewater infrastructure. In return, the private sector receives a structured fee through the life of the contract. By distributing the risk and the necessary capital, the public sector is able to redistribute funds to other high priority infrastructure projects.
Although not a universal solution, P3s can potentially aid a community to better meet its needs and protect investments in water and wastewater infrastructure. By engaging the private sector in critical infrastructure, municipalities around the country will be armed with the private sector’s expertise and the necessary capital to make improvements and cover operational costs, whether for an existing facility or for new infrastructure construction. As our country continues to recognize the importance of critical water and wastewater infrastructure, P3s will play a growing role in ensuring safe, reliable and resilient water and wastewater service for future generations.
Sources
- US Infrastructure Public-Private Parternships: Ready for Takeoff?
- Obama Proposes New Muni Bonds for Public-Private Investments
- America’s Neglected Water Systems Face a Reckoning
- The Role of Public-Private Partnerships in Meeting a Community’s Water and Wastewater Needs
[1] Deye, Kennedy School Review, “US Infrastructure Public-Private Partnerships: Ready for Takeoff?” http://harvardkennedyschoolreview.com/us-infrastructure-public-private-partnerships-ready-for-takeoff/.
[2] Chappatta, BloombergBusiness, “Obama Proposes new Muni Bonds for Public-Private Investments.” http://www.bloomberg.com/news/articles/2015-01-16/obama-proposes-new-muni-bonds-for-public-private-infrastructure.
[3] Wharton University of Pennsylvania, Knowledge @ Wharton, “America’s Neglected Water Systems Face a Reckoning.” http://knowledge.wharton.upenn.edu/article/americas-neglected-water-systems-face-a-reckoning/.
[4] Wharton University of Pennsylvania, Knowledge @ Wharton, “America’s Neglected Water Systems Face a Reckoning.” http://knowledge.wharton.upenn.edu/article/americas-neglected-water-systems-face-a-reckoning/.
[5] Horinko Group, “The Role of Public-Private Partnerships in Meeting a Community’s Water and Wastewater Needs”. http://www.thehorinkogroup.org/wp-content/uploads/2015/02/The_Role_of_P3s_Jan-2015_web.pdf.