By Rich Anderson
January 11, 2010

The Co-Chairs of the Mayors Water Council (MWC), Pleasanton (CA) Mayor Jennifer Hosterman and Schenectady (NY) Mayor Brian Stratton, led mayoral discussions December 2-3, 2009 in Washington (DC) at the annual Mayors Water Summit. Mayors discussed spending on water services and infrastructure; cost'saving partnership opportunities with the private sector; and unfunded mandates established by the federal government.

MWC staff presented preliminary findings from a year-long study on local government spending on public water and wastewater services and infrastructure. The study findings indicate that local government spent $1.6 trillion dollars on water and wastewater services and infrastructure between 1956 and 2008, (equivalent to $3.2 trillion in inflation adjusted 2008 dollars). While annual nominal dollar spending continues to increase every year, the ‘relative percentage' increase in spending is declining and is critically low for wastewater infrastructure reinvestment.

Local government spent $93 billion for this purpose in 2008. Projected spending over the next 20 years (2009 to 2028) is likely to be in the range of $2.5 to $4.8 trillion, (not including anticipated additional costs associated with new federal mandates and adaptation to climate change conditions). Annual spending in 2028 is expected to range between $189 and $421 billion. The prospect of tremendous required future public spending suggests that current practices will no longer suffice. American cities can meet the challenge through a coordinated national strategy that involves an increased federal share in capital financing; a planned strategy of prioritizing and phasing-in federal mandates; better asset management and sustainable rate setting by cities; and tax code changes to allow greater access to private capital such as pension funds.

Stratton remarked favorably on cost'savings attributed to a long-term partnership with Veolia Water which operates the city's 18.5 million gallons/day wastewater treatment and composting operations. Veolia has saved the city $1.5 million, implemented plant improvements, and solved neighborhood odor control problems. Stratton introduced Laurant Auguste, President of Veolia Water Americas, who described similar partnership success stories in Milwaukee, Tampa Bay, Indianapolis, and other major cities. Auguste stated that private sector expertise is largely untapped in America, unlike many other countries. Citing both the variety of partnership options available and the tremendous annual public costs involved with providing water and wastewater services and infrastructure, an annual ten percent cost savings from partnership arrangements could equal $140 billion or more over the next 20 years.

CH2MHILL Vice President Richard D'Amato II cited shrinking city revenues, tight capital markets, aging infrastructure and continued citizen demands for water service as good reasons for cities to consider partnering with private companies that bring particular expertise to bear. D'Amato stated that with the increasing level of control that can be transferred to the private sector, a commensurate level of financial and environmental compliance risk could be transferred as well. The long'standing demonstration of successful operations and maintenance (O&M) consulting can be enhanced to include standard five-year or long-term O&M service agreements, and even transfer of ownership and operation to the private sector.

Mark J. Kropilak, Vice President of United Water referred to a spectrum of partnership arrangements currently in place in cities around the nation. Using private sector profit motivation to illustrate his point, Kropilak focused on the cost'savings effects of both private operation as well as integrated capital management. A typical 120,000 population city with 50,000 water system user accounts has a revenue stream of $40 million/year and operating expenses of $30 million/year. Private operators, according to Kropilak, can reduce operating expenses to $25 million/year by applying engineering and management expertise. Thus, both the city and the operator can share in the cost'savings that would not otherwise be possible.

William Patterson, Vice President of American Water described concession and leasing partnership models. Quoting a 1998 Association of Metropolitan Sewerage Authorities and Association of Metropolitan Water Authorities statement, Patterson said that a few large, private sector water companies have developed and refined business practices based on competition and unconstrained by public sector rules and procedures that "…usually result in the lowest cost of service delivery." He defined a concession arrangement as follows: A transaction in which a private entity makes an up-front payment, or series of payments, for the right to operate municipal infrastructure assets on a long-term basis. Typically, the private entity occupies the premises under a lease matching the duration of the concession. Ownership of the assets remains with the municipality. At the end of the concession, control of the assets reverts to the municipality. The city benefits financially from the concession fee, or in the case of a lease arrangement- a leasing fee. Patterson identified over a dozen types of normally public infrastructure where these concession arrangements have been demonstrated.

Richard Splete, with Montgomery Watson & Harza, asked the question: How can cities raise the billions needed for infrastructure development from debt financing alone? In light of the projected future spending on public water and wastewater infrastructure this is a timely question. Splete stated that cities should consider a new model where private capital from certain government-owned pension funds can be tapped as an equity investment rather than as a credit investment. Cities may want to consider establishing a public corporation, with the attributes of a city-owned system, and still participate in grant programs and issue tax-exempt debt, but raise capital from selling a minority interest to a pension fund. The public corporation can enter into a service agreement with a private water operator to realize efficiencies and cost savings, and share the financial benefits with the equity shareholder. This model can allow the city to access capital for future infrastructure investments, thus ensuring long-term viability.