Investors - FEBRUARY 5, 2016

Flint, Mich., water crisis highlights countrywide need for infrastructure investment

by Drew Campbell

Bad decisions in Flint, Mich., have exposed the dangers of aging U.S. water infrastructure, and not only in the Midwestern city. Across the United States many older cities have 40-, 50- and, in some cases, 100-year-old water systems that are in need of billions of dollars of investment for upgrades, maintenance and new development.

“It’s not a financing problem,” says Ed Crooks, managing director, Infrastructure Advisory with KPMG. “There is plenty of financing available through public and private sources. The problem is what pays for that financing — user fees. Water is so underpriced in the U.S., those user fees often cannot fund the loans and investments needed to finance these projects.”

Cable TV, phone and Internet services, on the other hand, are typically several multiples of a normal water bill but much less capital intensive than water services, Crooks points out. The lack of fee revenue and high capital needs hold back investment in water systems.

One solution to this problem is availability payments — although in the water sector, where users typically pay what they are charged, albeit a low rate, and providers have a monopoly — they are currently not used often. When they are, these payments allow water providers to supplement user-generated fees with transfers from a government general fund. Private developers view this arrangement as less risky than projects without them, and therefore they leverage more aggressively to drive down their total cost of capital, making the project more inviting to private investment and development.

On the government side of the ledger, availability payments create a predictable cost profile with the opportunity to transfer significant performance risks to the private sector while retaining control of rate-setting.

Although availability payments are not common in the water sector at the moment, Crooks believes they will be used much more in the future.

Beyond models that attract investment, getting water consumers comfortable with a fee schedule that looks more like that of telecommunications, where services are priced more inline with true market demand, is another way to generate revenue for water providers. That increased revenue could also be put toward water infrastructure investment.

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