New financial instruments lower barrier to entry

Traditional financing mechanisms for water and wastewater treatment projects in the United States have failed to meet the skyrocketing need for new infrastructure and upgrades. Newer financial instruments such as leases and public-private partnerships, along with a flood of funding from the Bipartisan Infrastructure Law, have bridged the chasm between need and dollars.

A complex patchwork of federal, state, and local government entities delivers water and wastewater services in the U.S., and ownership of assets is scattered among municipalities, special water districts, and investor-owned utilities. More than 50,000 community water systems (CWS) and 100,000 other utilities operate in the U.S., the majority of them serving populations under 3,300.

Government-owned water utilities account for approximately 84% of water systems, while the number of investor-owned utilities that have access to alternative capital has grown in recent years.

Finance and Governance

Often, an infrastructure budget strategy is created by considering available revenues, projections of asset lifespans, and the personal preferences of decision-makers. Capital budget types are broadly classed under three categories:

• “Pay-as-you-go” systems, in which capital is raised from revenues from, for instance, taxes and user fees.
• “Pay-as-you-use” systems, in which capital is borrowed against the promise to repay out of future revenue.
• Privatization, which involves selling water systems to investor-owned private companies.

Bonds and Loans

State Revolving Funds (SRFs) provide federal money for states to address their own water quality needs. States place their annual federal appropriation and matching funds in reserve to back the sale of tax-exempt municipal revenue or general obligation bonds. Private activity bonds may also be issued to fund private enterprises that will benefit the public interest. The additional money is put in a special fund for loans.

Many of the water infrastructure dollars provided by the massive Bipartisan Infrastructure Law will be channeled through the Clean Water and Drinking Water SRFs, encouraging partnerships between government agencies, states, tribes, territories, and local communities.

The financial complexity of state funding systems, however, increases the use of private intermediaries with more financial expertise, so government agencies will pay higher fees and may be misdirected to adopt less favorable financial strategies. The sale of state bonds also passes on interest payments to loan recipients or the state, increasing costs or jeopardizing the long-term solvency of the revolving loan fund. Many water systems may fall through the cracks and still need alternate financing.

Modern Financial Instruments

Securing infrastructure investment capital is challenging due to several factors. The technical demands of building, operating, and maintaining updated technologies add to this difficulty. Additionally, keeping plants staffed with a thinning workforce and ensuring compliance with regulations further complicate matters. As a result, newer financial instruments have evolved to address these challenges.

The complexity of financing invites specialized companies to support the financing, delivery, and long-term stewardship of infrastructure projects. Yet agreements must be structured to avoid the excesses of privatization.

The public-private partnership (PPP) is making substantial inroads into the market, in the U.S. and worldwide. A PPP is an agreement between a private water infrastructure company and a government agency that shifts risk toward the water company. Generally, PPP agreements reduce or eliminate initial capital investment for the public partner and keep the water company responsible for long-term operations and maintenance (O&M) as well as compliance, which can be a boon for regions with stretched resources.

Many states and national governments have legal frameworks that codify PPP agreements, standardizing them and ensuring they are performance-based to protect government entities.

The most popular financing structures for PPPs are build-own-operate (BOO) and build-own-operate-transfer (BOOT) agreements. Under BOO pacts, the private partner builds, owns, and operates infrastructure, generally over a decade or longer. The BOOT is essentially the same, but ownership of the infrastructure is turned over to the public partner at the end of the contract term.

Several strengths have popularized the PPP:

• PPPs shift risk to a specialized private partner that is better prepared to manage it.
• Experts operate and maintain technically demanding processes over long contract terms.
• PPPs can bypass complex funding mechanisms that slow down projects.
• Experts keep abreast of shifting regulatory frameworks to maintain compliance.
• Staffing, parts inventory, and repairs are handled by the private partner.
• Long-term stability of O&M (operations and maintenance) is assured, regardless of changes in local government.
• Payment is tied to performance, incentivizing quality builds and excellence.

Fluence Corporation is a global water and wastewater treatment company with numerous traditional and modular, decentralized options available, along with the BOO and BOOT options to finance them. Under our Water Management Services program, customers can get the infrastructure they need with no up-front investment, and Fluence takes care of the rest under performance-based contracts. Fluence also offers leasing arrangements, which work well for those wanting to try out modular units or who are looking for temporary solutions.

Contact the Fluence team to discuss your water infrastructure needs and financing options.