From Public Works Financing, February 2002:

U.S. Senate Adopts Public Private Partnerships for Water Investments
William Reinhardt, Pubisher Public Works Financing

The U.S. Senate held hearings in late February on the new Water Investment Act of 2002 (S-1961) which for the first time in federal water law specifically endorses public-private partnerships as a cost-effective option for municipal infrastructure projects.

In a clarification of existing law, the section of the proposed bill on
"requirements for receiving funds" forces municipal water and wastewater
systems to meet conditions "that are designed to improve the financial
management of the treatment works . . . including consolidation with another facility; forming a public-private partnership; or using non-structural alternatives or technologies."

Lead sponsors of S-1961 include Senate Environment and Public Works Committee Chairman Jim Jeffords (I-Vt.), ranking member Robert Smith (R-N.H.) and the senior members of the subcommittee on Fisheries Wildlife and Water, Sens. Bob Graham (D-Fla.) and Michael Crapo (R-Idaho). Jeffords says he plans to mark up the five-year reauthorization bill in early March and have it ready for floor debate before the Senate's July 4 recess.

S. 1961 would require water and wastewater utilities receiving federal
assistance to have in place a rate structure that reflects the actual cost of
service, taking into account capital replacement funds. State revolving loan
recipients also would need an approved asset management plan conforming to generally accepted industry practices and including a schedule of investments to meet and sustain performance objectives (see below).

The Senate bill would carefully target grants but authorize a 250% increase
for the Clean Water State Revolving Loan Fund (CW SRF) and the Drinking Water State Revolving Loan Fund (DW SRF). If the Senate committee's proposed budgets are adopted and fully funded each year by appropriations committees, EPA's budget for both SRF programs would double next year and then rise in annual increments from $4.7 billion in fiscal 2003 to nearly $12 billion in 2007.

That's not likely to happen. The White House's fiscal 2003 budget proposals for  CW SRF and DW SRF are $1.21 billion and $850 million, the largest amounts ever for the revolving loan programs.

A more probable outcome, observers say, is gradual scaling up of SRF
authorizations with new restrictions on recipients of loan subsidies to
promote cost-effective infrastructure investments. "This is a seminal event," says Andrew Shea, who tracks federal water legislation for BOT developer Poseidon Resources. "The philosophy of public works financing is changing," he says.

Winners and Losers

Its focus on asset management, private access to SRF loans, and efficient
project design and delivery makes S-1961 a victory for the H2O Coalition, a business lobby led by the National Association of Water Companies, the Water and Wastewater Equipment Manufacturers Association and the National Council for Public-Private Partnerships (NCPPP).

"S. 1961 wisely does not authorize a large grant program which some have been advocating," says Elizabethtown Water Co. President Andrew M. Chapman, representing the H2O Coalition. "We are encouraged," that the bill's authors "saw the error in authorizing an old fashioned and outdated grant program that would do more harm than good for the entire water industry, waste taxpayers' money, and add to the federal budget deficit."

Chapman, vice president of the National Association of Water Companies, also praised Section 203 of the Senate bill. It provides for favorable loan terms, including principal forgiveness, to directly assist disadvantaged customers, not the typically large urban utilities that serve them.

The proposed loan restrictions and tightly targeted grants appear to be a
defeat for the much larger Water Infrastructure Network (WIN). Led by the
Association of Metropolitan Sewerage Agencies, WIN's 28 members sought $57 billion in untied federal grants and loans over five years to jump start a $1-trillion local, state and federal investment in water and sewer systems.

Grant applicants would receive up to 75% of project costs in a direct grant
and also be eligible for a subsidized loan for the remaining 25%.

"Basically, the committee members rejected all of the WIN recommendations," says Richard Norment, executive director of the NCPPP.

Instead of raising environmental standards, says Richard Anderson, who
advises the U.S. Conference of Mayors on water issues, "Congress is now
talking about how to help municipalities pay for all the unfunded mandates
they've already placed on local governments. That's a sea change in how
Congress thinks about clean water."

Anderson cautions, however, that "we've still got a long way to go."

Concern over mid-term elections this year could delay legislation from the
two House committees that share jurisdiction over the Clean Water Act and
Safe Drinking Water Act. Appropriations funding levels, building trade union demands on wage rules, arbitrage limits on leveraged state revolving funds, and a host of other issues remain to be settled.

In his opening remarks during the Senate hearings on Feb. 26, for example,
Sen. Smith warned about "poison-pill" amendments to the bipartisan compromise bill. He didn't specifically mention earlier Clean Water reauthorization battles over requiring state SRF-funded projects to meet federal Davis-Bacon prevailing wage rules for building trade union workers. But Sen. Jon Corzine (D-N.J.) noted he would support such an amendment if it was offered.

Private Activity Bonds

The Senate bill does not address a request from the U.S. Conference of Mayors for Congress to remove state volume caps on tax-exempt Private Activity Bonds (PABs) for new and renovated municipal water and sewer projects.

In their comments on S-1961, however, both Sens. Corzine and Jeffords went out of their way to focus on PABs as a complementary source of financing to the SRFs. Trenton, N.J., Mayor Douglas Palmer, the new Chair of the Conference of Mayors' Urban Water Council, also made a strong case for (PABs) during his Feb. 26 testimony.

"One of the most fruitful financial incentives the Congress can provide for
increasing aggregate water infrastructure investment," he said, "is to make
certain that the largely unfunded environmental mandates and environmental goals they impose on local government should not be impeded by a rigid and inflexible tax code."

The Conference of Mayors represents more than 1,100 cities and the largest water and wastewater systems in the United States. With its support, PAB legislation, H.R. 2207, was introduced last June 14 by Rep. Karen Thurman (D-Fla.) and referred to the House Ways and Means Committee. It has recently gained GOP support as hopes for a federal stimulus bill have faded.

In late February, the Joint Tax Committee of Congress released its federal
revenue impact assessment for H.R. 2207. Its scoring estimate-$147 million over 10 years-is far below the $566-million revenue impact estimated by consultants for the Mayors' Urban Water Council. The difference is based on the tax committee's use of current PAB activity for predicting demand for future water project financings and the Mayors' estimate of induced demand from private developers for tax-exempt debt if state bond volume caps are removed.

The Joint Tax Committee's low scoring estimate will be the basis for
congressional review of the proposed municipal bond law change when House Ways and Means and Senate Finance Committee (which includes Sens. Graham, Jeffords, and Max Bacchus) consider H.R. 2207 and a companion Senate bill, probably next year.


Support for Full-Cost Accounting

In his Feb. 28 testimony on S. 1961 Andrew M. Chapman, President of
Elizabethtown Water Co., praised the Senate's adoption of the H2O Coalition's asset management approach, which for the first time would require public and private utilities to adopt full-cost accounting for their services.

Chapman, representing the National Association of Water Companies, testified as follows:

"S. 1961 seeks to avoid some past mistakes of government assistance programs by requiring utilities receiving DW-SRF and CW-SRF assistance to have in place:

A rate structure that reflects the actual cost of service, taking into
account capital replacement funds, and a sound asset management plan conforming to generally accepted industry practices and including a schedule of investments to meet and sustain performance objectives.

These provisions require managers to take an enterprise approach to utility
management and move all systems toward self-sustainability. The provisions will force utilities to solve their infrastructure problems in ways that are the least onerous to the American taxpayer, yet are responsible, efficient and effective.

Absent these important safeguards we could relive many of the problems of
past government subsidy programs wherein:

Small or inefficient utilities were artificially propped up, discouraging
consolidation and regionalization; utilities became dependent on the government funds and needed regular infusions creating greater reliance on government money;

Because of the subsidy, the American people got a false impression of the
true cost of water, discouraging conservation; and the private sector was effectively barred from participation in the industry, thus denying utilities the benefits of the free marketplace and its associated innovations and economies.

Some will argue that these provisions represent a too heavy-handed government approach to legislating, and are thus a step backward. We disagree. While both the CW-SRF and DW-SRF are administered through the States and include some state matching money, the vast majority of the SRFs' corpora are made up of federal money coming from the American taxpayer. Therefore, the federal government has a responsibility to the American taxpayer to be sure their money is distributed and used in an efficient and accountable manner, as S.1961 would do."

S-1961  .pdf file