Wastewater Infrastructure Financing
Stakeholder Views on a National Infrastructure Bank and Public-Private Partnerships Gao ID: GAO-10-728 June 30, 2010Communities will need hundreds of billions of dollars in coming years to construct and upgrade wastewater infrastructure. Policymakers have proposed a variety of approaches to finance this infrastructure, including the creation of a national infrastructure bank (NIB) and the increased use of privately financed public-private partnerships (PPP). In this context, GAO was asked to identify (1) stakeholder views on issues to be considered in the design of an NIB and (2) the extent to which private financing has been used in wastewater PPPs and its reported advantages and challenges. In conducting this work, GAO developed a questionnaire based on existing NIB proposals and administered it to 37 stakeholders with expertise in wastewater utilities, infrastructure needs, and financing; GAO received 29 responses from stakeholders with a variety of perspectives about an NIB. To determine the extent to which wastewater PPPs have been privately financed and their advantages and disadvantages, GAO identified and interviewed municipalities involved in privately financed PPPs and wastewater services companies, conducted case studies in states with privately financed PPPs, and conducted a literature review. GAO is not making any recommendations. While this report discusses a number of funding approaches, GAO is not endorsing any option and does not have a position on whether an NIB should be established.
Stakeholders who responded to GAO's questionnaire discussed issues in the following three key areas that should be considered in designing an NIB: 1) Mission and administrative structure. While a majority of stakeholders supported the creation of an NIB, their views varied on its mission and administrative structure. One-third supported an NIB to fund only water and wastewater infrastructure, while two-thirds responded that it should also fund transportation and energy projects. There was no consensus among stakeholders on whether an NIB should be administered by an existing federal agency, structured as a government corporation, or structured as a government-sponsored enterprise. GAO has previously reported that an entity's administrative structure affects the extent to which it is under federal control, how its activities are reflected in the federal budget, and the risk exposure of U.S. taxpayers. 2) Financing authorities. A majority of stakeholders agreed on an NIB's financing authorities. Specifically, a majority said the federal government should provide the initial capital; an NIB should be authorized to use a variety of options to generate funds for operating expenses and lending; and an NIB should offer a variety of mechanisms for financing projects, such as providing direct loans, loan guarantees, and funding for the Environmental Protection Agency's existing wastewater funding program--the Clean Water State Revolving Fund. 3) Project eligibility and prioritization. Stakeholders' views varied on which types of projects should be eligible for NIB financing, such as whether it should exclusively finance large projects. In addition, a majority agreed an NIB should prioritize projects that address the greatest infrastructure need and generate the greatest environmental and public health benefits. GAO identified seven municipalities that have entered into privately financed PPPs--contractual agreements in which the private partner invests funds in the wastewater infrastructure--since 1992: Arvin, California; Cranston, Rhode Island; Fairbanks, Alaska; Franklin, Ohio; North Brunswick, New Jersey; Santa Paula, California; and Woonsocket, Rhode Island. Municipal and wastewater company officials GAO interviewed identified the following examples of advantages of privately financed PPPs: 1) Provide access to financing for municipalities that have difficulty using traditional financing sources, such as municipal bond markets. 2) May make operations more efficient, for example, by taking advantage of economies of scale by buying key supplies, like chemicals, in bulk. 3) May bring new infrastructure online faster than traditional public procurement because companies have more flexibility. These officials identified challenges of privately financed PPPs, including: 1) Local opposition may arise out of concerns about higher wastewater rates and the potential loss of municipal wastewater jobs. 2) Private financing is generally more costly than tax-exempt municipal bonds because of higher interest rates; a 2002 National Research Council study reported that private financing is 20 to 40 percent more expensive. 3) Contracts can be costly and difficult to develop because they are complex, and municipalities and companies are unfamiliar with this type of PPP.
GAO-10-728, Wastewater Infrastructure Financing: Stakeholder Views on a National Infrastructure Bank and Public-Private Partnerships
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Report to the Ranking Member, Committee on Transportation and
Infrastructure, House of Representatives:
United States Government Accountability Office:
GAO:
June 2010:
Wastewater Infrastructure Financing:
Stakeholder Views on a National Infrastructure Bank and Public-Private
Partnerships:
GAO-10-728:
GAO Highlights:
Highlights of GAO-10-728, a report to the Ranking Member, Committee on
Transportation and Infrastructure, House of Representatives.
Why GAO Did This Study:
Communities will need hundreds of billions of dollars in coming years
to construct and upgrade wastewater infrastructure. Policymakers have
proposed a variety of approaches to finance this infrastructure,
including the creation of a national infrastructure bank (NIB) and the
increased use of privately financed public-private partnerships (PPP).
In this context, GAO was asked to identify (1) stakeholder views on
issues to be considered in the design of an NIB and (2) the extent to
which private financing has been used in wastewater PPPs and its
reported advantages and challenges. In conducting this work, GAO
developed a questionnaire based on existing NIB proposals and
administered it to 37 stakeholders with expertise in wastewater
utilities, infrastructure needs, and financing; GAO received 29
responses from stakeholders with a variety of perspectives about an
NIB. To determine the extent to which wastewater PPPs have been
privately financed and their advantages and disadvantages, GAO
identified and interviewed municipalities involved in privately
financed PPPs and wastewater services companies, conducted case
studies in states with privately financed PPPs, and conducted a
literature review.
GAO is not making any recommendations. While this report discusses a
number of funding approaches, GAO is not endorsing any option and does
not have a position on whether an NIB should be established.
What GAO Found:
Stakeholders who responded to GAO‘s questionnaire discussed issues in
the following three key areas that should be considered in designing
an NIB:
* Mission and administrative structure. While a majority of
stakeholders supported the creation of an NIB, their views varied on
its mission and administrative structure. One-third supported an NIB
to fund only water and wastewater infrastructure, while two-thirds
responded that it should also fund transportation and energy projects.
There was no consensus among stakeholders on whether an NIB should be
administered by an existing federal agency, structured as a government
corporation, or structured as a government-sponsored enterprise. GAO
has previously reported that an entity‘s administrative structure
affects the extent to which it is under federal control, how its
activities are reflected in the federal budget, and the risk exposure
of U.S. taxpayers.
* Financing authorities. A majority of stakeholders agreed on an NIB‘s
financing authorities. Specifically, a majority said the federal
government should provide the initial capital; an NIB should be
authorized to use a variety of options to generate funds for operating
expenses and lending; and an NIB should offer a variety of mechanisms
for financing projects, such as providing direct loans, loan
guarantees, and funding for the Environmental Protection Agency‘s
existing wastewater funding program”the Clean Water State Revolving
Fund.
* Project eligibility and prioritization. Stakeholders‘ views varied
on which types of projects should be eligible for NIB financing, such
as whether it should exclusively finance large projects. In addition,
a majority agreed an NIB should prioritize projects that address the
greatest infrastructure need and generate the greatest environmental
and public health benefits.
GAO identified seven municipalities that have entered into privately
financed PPPs-”contractual agreements in which the private partner
invests funds in the wastewater infrastructure”-since 1992: Arvin,
California; Cranston, Rhode Island; Fairbanks, Alaska; Franklin, Ohio;
North Brunswick, New Jersey; Santa Paula, California; and Woonsocket,
Rhode Island. Municipal and wastewater company officials GAO
interviewed identified the following examples of advantages of
privately financed PPPs:
* Provide access to financing for municipalities that have difficulty
using traditional financing sources, such as municipal bond markets.
* May make operations more efficient, for example, by taking advantage
of economies of scale by buying key supplies, like chemicals, in bulk.
* May bring new infrastructure online faster than traditional public
procurement because companies have more flexibility.
These officials identified challenges of privately financed PPPs,
including:
* Local opposition may arise out of concerns about higher wastewater
rates and the potential loss of municipal wastewater jobs.
* Private financing is generally more costly than tax-exempt municipal
bonds because of higher interest rates; a 2002 National Research
Council study reported that private financing is 20 to 40 percent more
expensive.
* Contracts can be costly and difficult to develop because they are
complex, and municipalities and companies are unfamiliar with this
type of PPP.
View [hyperlink, http://www.gao.gov/products/GAO-10-728] or key
components. For more information, contact David Trimble at (202) 512-
3841 or trimbled@gao.gov.
[End of section]
Contents:
Letter:
Background:
Stakeholders Addressed Issues in Three Key Areas That Would Need To Be
Considered in Designing an NIB:
Privately Financed Wastewater PPPs Are Uncommon and Have Several
Reported Advantages and Challenges:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Stakeholders Responding to the NIB Questionnaire:
Appendix III: Summary of Stakeholder Responses to the NIB
Questionnaire:
Appendix IV: Published Works Addressing Privately Financed Wastewater
PPPs:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Stakeholder Support for Financing Mechanisms That an NIB
Could Use to Generate Funds for Operating Expenses and Lending:
Table 2: Stakeholder Views on Mechanisms an NIB Could Offer to Finance
Projects:
Table 3: Stakeholder Views on Criteria an NIB Should Use When
Evaluating and Selecting Projects:
Table 4: Privately Financed Wastewater PPPs Developed Since 1992
Identified by GAO:
Table 5: Municipalities and State Agencies Selected for Case Study
Interviews, by State:
Table 6: Stakeholder Views on Type of Infrastructure Funded by an NIB:
Table 7: Stakeholder Views on Administrative Structure of an NIB:
Table 8: Stakeholder Views on an NIB's Authority to Generate Its Own
Funds for Operating Expenses and Lending:
Table 9: Stakeholder Views on Mechanisms an NIB Could Use to Generate
Its Own Funds for Operating Expenses and Lending:
Table 10: Stakeholder Views on Self-Sustainability of an NIB:
Table 11: Stakeholder Views on Financing Mechanisms an NIB Could Offer
to Finance Projects:
Table 12: Stakeholder Views on How an NIB Should Distribute Financing
to Qualified Projects:
Table 13: Stakeholder Views on Types of Wastewater Utilities an NIB
Should Have the Authority to Assist:
Table 14: Stakeholder Views on How an NIB Should Prioritize Eligible
Projects for Financing:
Table 15: Stakeholder Views on Criteria an NIB Could Use when
Evaluating and Selecting Projects:
Table 16: Stakeholder Views on Minimum Size of Projects Eligible for
NIB Financing:
Table 17: Stakeholder Views on Limits on Amount of Financing One
Project Could Receive From an NIB:
Table 18: Stakeholder Views on What Activities Should be Eligible for
NIB Financing:
Figures:
Figure 1: Selected Types of PPPs:
Figure 2: Types of Privately Financed Wastewater PPPs:
Abbreviations:
CWSRF: Clean Water State Revolving Fund:
DBFO: design-build-finance-operate:
EPA: Environmental Protection Agency:
GSE: government-sponsored enterprise:
IRS: Internal Revenue Service:
NIB: national infrastructure bank:
NPDES: National Pollutant Discharge Elimination System:
NRC: National Research Council:
PPP: public-private partnership:
RCRA: Resource Conservation and Recovery Act:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 30, 2010:
The Honorable John L. Mica:
Ranking Member:
Committee on Transportation and Infrastructure:
House of Representatives:
Dear Mr. Mica:
More than 220 million people in the United States are served by
municipal wastewater systems. These systems consist primarily of a
network of sewer pipes and treatment plants that carry and treat
wastewater and then discharge it, often into surface waters such as
rivers and lakes. Many systems were constructed more than 50 years ago
and are reaching the end of their useful lives. The deteriorating
condition of the nation's wastewater infrastructure has direct impacts
on human and aquatic health. For example, many older wastewater
systems lack the capacity to treat increasing volumes of wastewater,
particularly during periods of wet weather. In addition, cracks in
sewer pipes allow rain or snowmelt to enter the wastewater system and
overwhelm its capacity to adequately treat wastewater. As a result of
these two factors, wet weather can lead to the release of untreated
wastewater, which introduces significant levels of pollution into
local water bodies and poses risks to human health and aquatic life.
The U.S. Environmental Protection Agency (EPA) estimates that over 850
billion gallons of untreated wastewater are released annually into
U.S. surface waters.
Cities, towns, and other municipalities have the primary
responsibility to fund wastewater infrastructure, and their wastewater
spending totaled $43 billion in fiscal year 2007, according to the
U.S. Census Bureau.[Footnote 1] In addition, the federal government
appropriated $2.1 billion in fiscal year 2010 principally to assist
municipalities through the Clean Water State Revolving Fund (CWSRF),
[Footnote 2] which also received a one-time infusion of $4 billion
through the American Recovery and Reinvestment Act of 2009.[Footnote
3] However, according to EPA estimates, current federal, state, and
local spending may not cover the cost of maintaining and replacing
wastewater infrastructure. Specifically, a 2002 EPA analysis estimated
a gap between current levels of wastewater infrastructure spending and
projected future needs of about $150 billion to $400 billion over the
period between 2000 and 2019.[Footnote 4] EPA has stated that without
additional investment, the environmental and public health gains made
under the Clean Water Act during the last three decades could be at
risk.[Footnote 5]
Policymakers and wastewater groups have proposed a variety of
approaches to help bridge this potential gap between current levels of
spending and future infrastructure needs. One approach would be to
increase funding to traditional wastewater funding programs, such as
the CWSRF. Alternative funding approaches could also be used to bridge
the wastewater infrastructure funding gap. For example, a bill was
introduced in Congress in 2009 that would establish a clean water
trust fund to provide a dedicated source of federal funding for
wastewater infrastructure similar to some of the trust funds that
Congress has established for other infrastructure and environmental
programs, such as for highway and transit infrastructure and coastal
wetlands restoration.[Footnote 6] In addition, several bills have been
introduced in Congress since 2007 to establish a national
infrastructure bank (NIB), which could finance wastewater
infrastructure through a variety of mechanisms, such as directly
loaning money to eligible projects, guaranteeing municipal bonds to
lower costs, and pooling loans from numerous smaller municipalities to
lower costs.[Footnote 7] Similarly, a 1992 Executive Order encouraged
the use of privately financed public-private partnerships (PPP) and
stakeholders have since encouraged their use for municipal wastewater
facilities.[Footnote 8] A PPP is a contractual arrangement in which a
public entity (such as a municipal government agency) contracts with a
private sector partner to contribute to the provision of a public
service by planning, financing, designing, constructing, or operating
and maintaining a facility or system. These PPP arrangements provide a
business opportunity for private sector companies. PPP arrangements
differ in the extent to which the private partner participates in each
of these activities. When a PPP is privately financed, it can serve as
an alternative to traditional wastewater infrastructure funding
sources such as the CWSRF and tax-exempt municipal bonds.
In this context, you asked us to examine (1) stakeholders' views on
issues to be considered in the design of an NIB to increase financing
for wastewater infrastructure and (2) the extent to which private
financing has been used in wastewater PPPs and its reported advantages
and challenges.
To determine stakeholders' views on the design of an NIB, we reviewed
past legislative proposals and interviewed a variety of stakeholders
with knowledge of wastewater infrastructure issues, including
individuals and organizations from the water and wastewater industry;
financial sector; and federal, state, and local government. Based on
the information gathered from these sources, we developed and
administered a questionnaire to obtain the views of stakeholders on
the design of an NIB. We identified organizational and individual
stakeholders familiar with wastewater infrastructure financing issues
and existing NIB proposals based on our preliminary interviews and our
prior work on wastewater infrastructure financing. We sent this
questionnaire to 23 national organizations with expertise in the
wastewater industry in one or more of the following areas: financing
and operating wastewater projects, constructing and maintaining
wastewater infrastructure, local and state wastewater infrastructure
needs, and environmental protection. We also sent the questionnaire to
14 individuals with expertise in financing wastewater infrastructure
who are municipal financing consultants, state financing officials,
officials from private investment firms, or policy consultants.
Although we sought to include stakeholders with a variety of
perspectives about an NIB, the views of stakeholders consulted should
not be considered to represent all perspectives about an NIB. In
addition, although an NIB could potentially finance many types of
infrastructure, we limited our stakeholders to those familiar with the
wastewater sector. We received 18 organizational responses and 11
individual responses, for an overall response rate of 78 percent. Some
stakeholders did not answer all of the questions on the questionnaire,
so the number of responses for each question varies. After analyzing
the results from our questionnaire, we interviewed staff from the
Office of Management and Budget and the Internal Revenue Service (IRS)
to discuss how an NIB might affect the federal budget and U.S.
taxpayers.
To determine the extent to which wastewater PPPs have been privately
financed, we conducted a literature search to identify potential
privately financed wastewater PPPs initiated since 1992, when
President Bush signed an Executive Order encouraging these
partnerships. A privately financed PPP, for purposes of this report,
is a contractual agreement in which the private partner invests funds
in the wastewater infrastructure but does not include full
privatization, in which the municipality sells its wastewater
infrastructure assets to a private partner (unless the public partner
can reacquire the assets on preferential terms at the end of the
contract). It is possible that we did not identify all privately
financed wastewater PPPs initiated since 1992. To determine the
potential advantages and challenges of privately financed wastewater
PPPs, we interviewed officials at six of the largest private companies
involved in water and wastewater PPPs and officials in municipalities
who have used privately financed PPPs. In addition, we conducted case
studies in Alaska, California, New Jersey, and Ohio in which we spoke
with numerous municipalities in each state about their wastewater
financing choices to get additional context about why few
municipalities have entered into privately financed PPPs. These
municipalities were selected to include municipalities of varying
sizes, as well as municipalities who are not involved in privately
financed wastewater PPPs, but who have considered the option in the
past. We also interviewed officials from EPA and conducted a
literature search to provide additional context about potential
advantages and challenges of privately financed wastewater PPPs. A
more detailed description of our objectives, scope, and methodology is
presented in appendix I. We conducted our work from June 2009 to June
2010 in accordance with all sections of GAO's Quality Assurance
Framework that are relevant to our objectives. The framework requires
that we plan and perform the engagement to obtain sufficient and
appropriate evidence to meet our stated objectives and to discuss any
limitations in our work. We believe that the information and data
obtained, and the analysis conducted, provide a reasonable basis for
any findings and conclusions.
Background:
Americans rely on wastewater systems to protect public health and the
environment. These systems are composed of a network of pipes and
pumps that collect wastewater from homes, businesses, and industries
and transport it to treatment facilities where it is treated prior to
being discharged to surface waters. Historically, wastewater systems
in the United States have been owned and operated by public agencies
at the municipal level. In fact there are about 16,000 publicly owned
wastewater treatment plants in the United States, which serve about 97
percent of U.S. residents served by sewers. The remaining 3 percent
are served by privately owned wastewater treatment facilities. Laws
and regulations applying to wastewater treatment and the financing of
wastewater infrastructure often differ based on whether a treatment
facility is publicly or privately owned.
Federal Laws Applying to Wastewater Treatment:
EPA sets standards for the quality of wastewater that can be
discharged under the Clean Water Act.[Footnote 9] Under this law, the
National Pollutant Discharge Elimination System (NPDES) program limits
the types and amounts of pollutants that industrial and municipal
wastewater treatment facilities may discharge into the nation's
surface waters. Both public and private wastewater treatment
facilities discharging into U.S. waters are required to have NPDES
permits authorizing their discharges. Generally speaking, municipal
wastewater treatment facilities are designed to treat typical
household wastes and certain pollutants in commercial and industrial
wastes, primarily those identified in the Clean Water Act as
conventional pollutants.[Footnote 10] Municipal facilities, however,
may not be designed to treat toxic pollutants, such as heavy metals,
which more typically occur in industrial waste streams. The Clean
Water Act authorized EPA to develop pretreatment standards--
implemented as the National Pretreatment Program--to prevent certain
pollutants, such as toxics discharged by industries into sewers, from
passing through municipal wastewater facilities and into surface
waters, or from interfering with the facilities' treatment processes.
The National Pretreatment Program regulations require publicly owned
wastewater facilities treating more than 5 million gallons of
wastewater per day, and receiving certain pollutants from industrial
users, to develop pretreatment programs. It further requires that
municipalities possess adequate authority to require industrial users
to pretreat their wastewater before discharging it into
sewers.[Footnote 11] The pretreatment standards do not, however, apply
to industrial discharges into privately owned wastewater facilities.
Without such standards or a municipal pretreatment program, privately
owned wastewater facilities may use alternative mechanisms to ensure
that nonconventional waste is properly treated before it enters the
sewer system, which according to EPA may be more costly and difficult.
[Footnote 12]
Government Funding of Wastewater Infrastructure:
The Clean Water Act also authorized significant federal construction
grants to help municipalities build eligible wastewater treatment
facilities. In the 1980s, concerns about the federal deficit, among
other factors, led to a transition from these grants to the CWSRF
program, which was established in 1987. Under this program, the
federal government provides capitalization grants to states, which in
turn must match at least 20 percent of the federal grants. The states
then use the money to provide generally low-interest loans to fund a
variety of water quality projects at the municipal level, and loan
repayments are cycled back into the fund to be loaned out for other
projects. In 2008, states provided CWSRF loans totaling about $5.8
billion to municipalities and other recipients. States can loan CWSRF
funds to publicly owned wastewater treatment facilities, but privately
owned facilities are generally not eligible for CWSRF loans.
The federal government also helps finance wastewater infrastructure by
subsidizing municipalities' use of the bond markets through the tax
code. Municipalities sell bonds to investors to gain an up-front sum
to use for infrastructure or other purposes; the investors are then
paid back over time, with interest. The federal government subsidizes
municipalities' bond issuances by exempting the interest investors
earn on these bonds from federal income tax, thus lowering borrowing
costs for municipalities. The Congressional Budget Office estimated
that the federal subsidy of municipal bonds for all types of
infrastructure amounted to $26 billion in foregone tax revenue
annually between 2008 and 2012. The federal government restricts the
level of private involvement in projects financed by tax-exempt
municipal bonds, limiting the extent to which private companies can
benefit from the federal subsidy.
There are several types of bonds that municipalities can issue to
finance publicly owned wastewater infrastructure, including general
obligation bonds and revenue bonds.[Footnote 13] General obligation
bonds are backed by the full faith and credit of the issuing
municipality, meaning that the municipality pledges to use revenue
from taxes to pay back the bond. Municipalities' capacity to issue
general obligation bonds is often limited by state law. In contrast,
revenue bonds are backed by the revenue from the facility being
constructed with bond proceeds--in the case of wastewater, revenue
bonds are usually backed by revenue from sewer rates. In cases where a
private company's involvement in a wastewater facility exceeds
thresholds for issuing municipal bonds, the municipality may still be
able to issue another type of tax-exempt bond called a qualified
private activity bond.[Footnote 14] The Department of the Treasury
limits the volume of private activity bonds that can be issued in each
state in a given year; the national limit for calendar year 2010 was
$30.86 billion. In order to issue qualified private activity bonds for
a wastewater project, a municipality must receive an allocation of
private activity bonds from their state, which can be difficult
because wastewater projects generally must compete against projects in
other sectors, which may include affordable housing, education, and
health care.
Although the federal government contributes significant funds to
wastewater infrastructure through the CWSRF and tax code,
municipalities have primary responsibility for financing wastewater
infrastructure. According to U.S. Census Bureau estimates, in fiscal
year 2007[Footnote 15] municipalities spent about $43 billion on
wastewater operations and capital projects, while states spent about
$1.4 billion. Most municipalities pay for wastewater infrastructure
improvements with sewer rate revenues and by issuing municipal bonds.
A 2005 National Association of Clean Water Agencies survey of 141
utilities serving more than 81 million people asked respondents which
sources of revenue they used to pay for capital improvements to
wastewater systems. The 75 utilities responding to this question said
that 49 percent of revenues supporting capital improvements came from
municipal bonds (both revenue bonds and general obligation bonds) and
other types of debt, 16 percent from CWSRF loans, 16 percent from user
charges such as sewer rates, and 19 percent from other sources.
In addition to obtaining funding for new infrastructure,
municipalities are also generally responsible for overseeing the
planning, design, and construction of wastewater facilities.
Conventionally, wastewater projects follow a design-bid-build approach
in which the municipality contracts with separate entities for the
discrete functions of a project, generally keeping much of the project
responsibility and risk with the public sector. To meet the continuing
need for wastewater infrastructure, some municipalities have used
alternatives to this design-bid-build procurement approach, including
a variety of types of PPPs, which are described in figure 1. In the
last 30 years, hundreds of municipalities have entered into PPPs for
the operations and maintenance of their wastewater facilities. In
addition, some communities have entered into PPPs--often called design-
build-operate agreements--in which the private sector designs,
constructs, and then operates new wastewater infrastructure for a
period of time. PPPs can also be developed to include private
financing, which can serve as an alternative to traditional wastewater
infrastructure funding sources.
Figure 1: Selected Types of PPPs:
[Refer to PDF for image: illustrated table]
Extent of private sector role: this list is a continuum from Greater
private sector role to Lesser private sector role.
Type of PPP: Design-build-finance-operate;
Private sector role: Designs, constructs, and operates and maintains
the infrastructure; partially or fully finances.
Type of PPP: Lease;
Private sector role: Finances, operates and maintains the
infrastructure.
Type of PPP: Design-build-operate;
Private sector role: Designs, constructs, and operates and maintains
the infrastructure.
Type of PPP: Design-build;
Private sector role: Designs and constructs the infrastructure.
Type of PPP: Operate-maintain;
Private sector role: Operates and maintains the infrastructure.
Source: GAO.
Note: For a more extensive list of types of PPP arrangements, see GAO,
Public-Private Partnerships: Terms Related to Building and Facility
Partnerships, GAO/GGD-99-71 (Washington, D.C.: April 1999).
[End of figure]
Proposed Approaches for Bridging the Potential Wastewater Financing
Gap:
Policymakers and wastewater groups have proposed numerous approaches
to bridge the potential gap between current levels of federal, state,
and local spending and future infrastructure needs. Two such
approaches build on traditional ways of financing wastewater
infrastructure: increasing funding for the CWSRF and implementing
EPA's Sustainable Water Infrastructure Initiative. The CWSRF has seen
an increase in funding in recent years, from $689 million in fiscal
year 2009 to $2.1 billion in fiscal year 2010. In addition, $4 billion
was appropriated to the CWSRF as part of the American Recovery and
Reinvestment Act of 2009. EPA's Sustainable Water Infrastructure
Initiative encourages wastewater and drinking water utilities to
improve the management of their systems, to plan ahead for
infrastructure needs, and to charge the full cost of their services--
including the costs of building, maintaining, and operating a
wastewater system over the long term. In its 2002 report about the
clean water infrastructure gap, EPA noted that if wastewater utilities
implemented annual rate increases of 3 percent over inflation over a
20-year period, the infrastructure gap would disappear.
In addition, wastewater stakeholders and policymakers have also
proposed a number of alternative approaches that could be used to
bridge the wastewater infrastructure financing gap. For example, one
option would be for Congress to create a federal clean water trust
fund. We have previously examined design issues that would need to be
addressed in establishing such a fund, including how a trust fund
should be administered and used; what type of financial assistance
should be provided; and what activities should be eligible to receive
funding from a trust fund.[Footnote 16] In addition, a clean water
trust fund would require a source of revenue. We found that, while a
number of options have been proposed to generate revenue for a clean
water trust fund--including excise taxes, a corporate income tax, and
a water use tax--several obstacles would have to be overcome in
implementing these options, including defining the products or
activities to be taxed, establishing a collection and enforcement
framework, and obtaining stakeholder support.
Policymakers and wastewater stakeholders have also suggested that
Congress create an NIB to finance many types of infrastructure,
including wastewater facilities. Since 2007, three bills have been
introduced that outline different visions for an NIB or similar entity
that would finance wastewater infrastructure:[Footnote 17]
* The National Infrastructure Development Bank Act of 2009 (H.R. 2521)
proposed establishing a government corporation to finance
infrastructure projects across sectors, prioritizing those that
contribute to economic growth, lead to job creation, and are of
regional or national significance. It would have the authority to
issue loans, bonds, and debt securities, as well as to provide loan
guarantees.
* The National Infrastructure Bank Act of 2007 (S.1926 and H.R. 3401)
proposed creating an independent federal entity to finance
infrastructure projects that have "regional and national significance"
with a public sponsor and a potential federal investment of at least
$75 million. It would be authorized to issue up to $60 billion in
bonds, which would carry the full faith and credit of the United
States; the bond proceeds could be used to finance direct subsidies
and loans, among other things.
* The National Infrastructure Development Act (H.R. 3896), introduced
in 2007, proposed creating two government corporations with an
intended initial capitalization of up to $9 billion in federal
appropriations over the initial 3 years. Thereafter, the corporations
would be self-financed through business income with the possibility of
converting to government-sponsored enterprises (GSE).[Footnote 18]
Yet another approach for closing the wastewater financing gap is to
encourage private investment in wastewater projects, including through
privately financed wastewater PPPs at the municipal level. The 1992
Executive Order directed federal agencies to review and modify federal
policies related to federally-financed infrastructure to encourage
appropriate privatization--including long-term leases--of
infrastructure at the local level. Figure 2 shows that the privately
financed PPPs discussed in this report generally fall into two
categories: design-build-finance-operate (DBFO) partnerships and lease
partnerships.[Footnote 19]
Figure 2: Types of Privately Financed Wastewater PPPs:
[Refer to PDF for image: illustrated table]
Type of privately financed wastewater PPPs: Design-build-finance-
operate;
Project tasks:
Preplanning and acquisition[A];
Finance (outsourced to private company);
Design (outsourced to private company);
Construction (outsourced to private company);
Operations and maintenance (outsourced to private company).
Type of privately financed wastewater PPPs: Long-term lease for
existing wastewater assets;
Project tasks:
Preplanning and acquisition[A];
Finance (outsourced to private company);
Design[A];
Construction[A];
Operations and maintenance (outsourced to private company).
[A] Task outside the scope of the PPP (either performed in house or
under separate contract).
[End of figure]
* DBFO. For new infrastructure or significant upgrades, a municipality
and a company enter into a DBFO partnership in which the company is
responsible for designing, constructing, and financing the
infrastructure and then operating and maintaining it for the term of
the contract. The municipal partner typically makes payments to the
company covering both debt service and operations and maintenance.
* Lease partnership. For existing infrastructure, a municipality and a
company enter into a lease partnership in which the municipality
leases wastewater infrastructure assets (such as a treatment plant) to
the company, which is then responsible for operating and maintaining
those assets for a set period of time. The company makes a lease
payment to the municipality in exchange for the opportunity to operate
and maintain the facility. This payment may be a onetime up-front
payment, called a concession fee, or lease payments could be spread
out over the life of the lease. Over the course of the lease, the
municipality, or the ratepayers, make payments to the company for
operations and maintenance services and to repay the company's
periodic lease payments or initial investment (i.e., the concession
fee).
While private financing can serve as an alternative to traditional
infrastructure funding sources, we have previously reported that
private financing is not "free money"--rather this funding is a form
of private capital that must be repaid to investors seeking a return
on their investment.[Footnote 20] Depending on how a privately
financed PPP agreement is structured, it may also result in joint
public-private ownership of the wastewater assets being financed,
which could result in the facility losing its regulatory status as a
publicly owned wastewater facility as defined pursuant to the Clean
Water Act. Joint public-private ownership could also result in the
loss of the municipality's ability to issue tax-exempt bonds.
Stakeholders Addressed Issues in Three Key Areas That Would Need To Be
Considered in Designing an NIB:
Stakeholders who responded to our questionnaire addressed a variety of
issues in three key areas that would need to be considered in
designing an NIB: mission and administrative structure, financing
authorities, and project eligibility and prioritization.[Footnote 21]
Appendix II lists the organizational and individual stakeholders who
responded to our questionnaire. Appendix III lists the questions asked
in the questionnaire and provides the full range of stakeholder
responses we received.
While a Majority of Stakeholders Supported the Creation of an NIB,
Their Views Varied on Its Mission and Administrative Structure:
About three-quarters of stakeholders (20 of 27) responding to our
questionnaire supported the creation of an NIB. Seven of these
stakeholders supported an NIB because it could provide another source
of funding for critical infrastructure projects. In contrast, 1 of 27
stakeholders opposed the creation of an NIB for water and wastewater,
instead supporting increased financing for the CWSRF, which according
to the stakeholder is a proven mechanism for providing cost-effective
and sustainable financing. In addition, 6 of 27 stakeholders selected
"other"--neither supporting nor opposing the creation of an NIB--and
cited a variety of reasons. For example, two of these stakeholders
indicated that their positions on an NIB would depend on its
authorizing legislation and expressed concerns about how a new entity
would affect the CWSRF. Another indicated that a clear need for an NIB
had not been established.
Stakeholders had varying views on an NIB's mission and the
infrastructure sectors it should finance. Of the 20 stakeholders who
supported the creation of an NIB, about two-thirds (13) indicated that
its mission should be to fund infrastructure in multiple sectors, such
as transportation, energy, water, and wastewater. Among the reasons
these stakeholders cited for supporting a cross-sector NIB are that it
would allow for coordination across sectors and that financial experts
at a cross-sector NIB would be able to easily apply their expertise to
financing a wide range of projects. In contrast, about one-third of
stakeholders who supported the creation of an NIB (7 of 20) thought
its mission should be to fund only water and/or wastewater
infrastructure.
Stakeholders suggested a variety of options when asked how an NIB
should interact with the CWSRF--currently the largest source of
federal financial assistance for wastewater infrastructure.[Footnote
22] About half of stakeholders (13 of 29) suggested that an NIB assist
the CWSRF in a variety of ways including, for example, providing
additional capital for the CWSRF and helping states leverage their
CWSRF funds.[Footnote 23] About a third of stakeholders (11 of 29)
suggested that an NIB act as a complement to the CWSRF. For example,
according to four stakeholders with this view, an NIB should fund
larger projects that the CWSRF typically does not have the funds to
accommodate or multistate projects that can be administratively
difficult under the CWSRF. In addition, 3 of 29 stakeholders suggested
that an NIB not have any relationship with the CWSRF; one of these
noted that state CWSRF programs do not need assistance from an NIB
because they already have access to federal and state funds, as well
as bond markets for leveraging.[Footnote 24]
In addition, there was no consensus among stakeholders on whether an
NIB should be administered as a new responsibility for an existing
federal agency, structured as a government corporation, or structured
as a GSE. More specifically, 4 stakeholders indicated that an NIB
should be a new responsibility for an existing federal agency, 7
indicated that an NIB should be structured as a government
corporation, and 4 indicated that an NIB should be structured as a
GSE.[Footnote 25] We have previously reported that an entity's
administrative structure affects the extent to which it is under
federal control, how its activities are reflected in the federal
budget, and the risk exposure of U.S. taxpayers.[Footnote 26]
Specifically:
* Federal agencies are generally subject to greater federal control
than government corporations and GSEs. For example, federal agencies
receive the preponderance of their financial support from
congressionally appropriated funds, and Congress can use
appropriations, hearings, other lawmaking, and confirmation of senior
leadership, as management tools. The President also has significant
means of control, for example through responsibility for agencies'
budget proposals, administrative requirements, and the appointment of
leadership.
* Although no two government corporations are completely alike,
Congress has generally established government corporations to provide
market-oriented public services, such as the Commodity Credit
Corporation, which stabilizes and protects farm income and prices. In
general, government corporations are not as dependent upon annual
appropriations as federal agencies to fund operations--instead, or in
addition, receiving funds from consumers of their products and
services.[Footnote 27] As a result of this corporate structure,
government corporations have been given greater operational
flexibility by Congress and corporations with mixed public-private
ownership may be exempt from many executive branch budgetary
requirements and disclosures. Nevertheless, government corporations
are subject to some federal oversight by, for example, having some or
all board members appointed by the federal government, and/or having
their budgets displayed in the federal budget.
* GSEs are privately owned, for-profit financial institutions that
have been federally chartered for a public purpose, such as
facilitating the flow of investment to specific economic sectors. GSEs
generally do not lend money directly to the public but instead provide
liquidity to capital markets by, for example, issuing stock and debt
and purchasing and holding loans. GSEs are neither managed directly by
the federal government, nor are their activities included in the
federal budget. Although the federal government explicitly does not
guarantee GSE debt obligations, investors have widely assumed that a
GSE facing a financial emergency would receive federal support, which
has allowed GSEs to borrow at interest rates below those of other for-
profit corporations. We have previously reported that the structure of
GSEs as for-profit corporations with government sponsorship has
undermined market discipline and provided them with incentives to
engage in potentially profitable business practices that were risky
and not necessarily supportive of their public missions.[Footnote 28]
Indeed, the federal government extended support to two GSEs--Fannie
Mae and Freddie Mac--beginning in September 2008 after they lost
billions of dollars due to questionable mortgage-related investments.
[Footnote 29] In addition, we have also reported that developing an
oversight system for GSEs can be challenging.[Footnote 30] For
example, regulators must have the resources, expertise, and
authorities necessary to help monitor GSEs, which, due to the implied
federal guarantee on their financial obligations, may have financial
incentives to engage in excessive risk taking. Further, regulators
must have the stature and authorities necessary to help ensure that
GSEs operate within the missions for which they were established
because of incentives for GSEs to engage in activities that are
profitable but that do not support their missions.
A Majority of Stakeholders Agreed on an NIB's Financing Authorities,
Including How an NIB Should Be Funded and How It Should Finance
Projects:
Most stakeholders (20 of 22) agreed that the federal government should
provide all or some of the initial capital for an NIB, though 4
stakeholders suggested that federal capitalization be augmented by
private funds.[Footnote 31] In addition, 3 of 22 stakeholders
suggested that an NIB's initial capital come from user fees and/or
taxes, similar to a trust fund; such user fees and/or taxes, according
to 2 of these stakeholders, would provide an NIB with a stable revenue
flow while spreading out the funding burden. Although most
stakeholders agreed that the federal government should capitalize an
NIB, they were split on whether an NIB should continue to rely on
federal funds (9 of 22), or instead become self-sustaining (6 of 22).
[Footnote 32] Two stakeholders who supported a self-sustaining NIB
explained that it should function as a bank--investing only in
projects that are creditworthy and able to repay their loans. When
asked about federal funding for an NIB, staff from the Office of
Management and Budget noted that, for budgeting purposes, the cost to
the federal government should be determined according to the Federal
Credit Reform Act of 1990.[Footnote 33] This act requires that covered
federal entities' budgets include estimates of the government's long-
term cost of issuing loans or loan guarantees, among other things.
[Footnote 34]
Most stakeholders (21 of 23) agreed that an NIB should be authorized
to generate its own funds for operating expenses and lending,[Footnote
35] with a majority of stakeholders (15) supporting an NIB authorized
to use multiple mechanisms to generate funds. In their responses to
our questionnaire, organizations--which are generally more familiar
with the wastewater industry--and individuals--who are generally more
familiar with wastewater financing--had different levels of support
for some of the mechanisms. Most notably, a higher percentage of
organizations supported allowing an NIB to issue tax-exempt bonds,
while a higher percentage of individuals supported allowing an NIB to
charge fees for technical assistance or other services. Stakeholders
offered a variety of reasons for supporting financial mechanisms. For
example, several stakeholders emphasized the importance of an NIB
having a broad range of financial tools for generating its own funds.
In addition, two stakeholders who supported giving an NIB the
authority to borrow from the U.S. Department of the Treasury and to
issue tax-exempt bonds explained that these two options would provide
an NIB with access to low-cost capital, which could then be passed on
to projects. When asked about an NIB issuing bonds with tax-exempt
status, IRS officials noted that there is a general prohibition on tax-
exempt bonds being federally guaranteed. In order for an NIB to issue
tax-exempt, guaranteed bonds, it would need a statutory exemption to
this prohibition similar to those granted for bonds in other sectors,
such as housing.[Footnote 36] Table 1 lists the financing mechanisms
most commonly supported by stakeholders.
Table 1: Stakeholder Support for Financing Mechanisms That an NIB
Could Use to Generate Funds for Operating Expenses and Lending:
Number of stakeholders who indicated support for mechanism (percentage
of total responses):
Borrow directly from U.S. Department of the Treasury:
Organizational stakeholders: 9 of 11 (82%);
Individual stakeholders: 7 of 10 (70%).
Charge application fees:
Organizational stakeholders: 8 of 11 (73%);
Individual stakeholders: 8 of 10 (80%).
Issue tax-exempt bonds:
Organizational stakeholders: 9 of 11 (82%);
Individual stakeholders: 5 of 10 (50%).
Charge fees for technical assistance:
Organizational stakeholders: 5 of 11 (45%);
Individual stakeholders: 8 of 10 (80%).
Issue commercial paper:
Organizational stakeholders: 6 of 11 (55%);
Individual stakeholders: 6 of 10 (60%).
Borrow directly from private investors:
Organizational stakeholders: 7 of 11 (64%);
Individual stakeholders: 5 of 10 (50%).
Charge fees for other services, such as annual monitoring:
Organizational stakeholders: 4 of 11 (36%);
Individual stakeholders: 8 of 10 (80%).
Source: GAO analysis of stakeholder responses.
Note: This table includes only the 21 stakeholders who supported
giving an NIB the authority to generate its own funds for operating
expenses and lending. In addition, the table includes only the
financing mechanisms supported by a majority of stakeholders.
[End of table]
A majority of stakeholders also agreed on some of the mechanisms an
NIB should offer for financing projects. Organizations and individuals
had different levels of support for some of the mechanisms--most
notably, a higher percentage of organizations than individuals rated
pooling loans and issuing tax-exempt bonds as very important
mechanisms for an NIB to offer. In explaining the importance of the
mechanisms an NIB should offer for financing projects, one stakeholder
noted that direct loans, pooled loans, and/or federal loan guarantees
from an NIB would help infrastructure projects attract additional
sources of capital. When we asked staff from the Office of Management
and Budget about financing mechanisms an NIB could offer to projects,
they did not have specific views on which mechanisms an NIB should
offer but emphasized that an NIB should be subject to the Federal
Credit Reform Act. Table 2 shows stakeholder views on the mechanisms
an NIB could offer.
Table 2: Stakeholder Views on Mechanisms an NIB Could Offer to Finance
Projects:
Number of stakeholders who rated mechanism as very important
(percentage of total responses):
Issue direct loans to infrastructure projects:
Organizational stakeholders: 10 of 12 (83%);
Individual stakeholders: 9 of 11 (82%).
Pool loans for several infrastructure projects into a larger bond
issue to lower the cost of borrowing:
Organizational stakeholders: 8 of 9 (89%);
Individual stakeholders: 6 of 11 (55%).
Provide federal loan guarantees for infrastructure projects:
Organizational stakeholders: 8 of 11 (73%);
Individual stakeholders: 7 of 11 (64%).
Issue tax-exempt bonds on behalf of infrastructure projects:
Organizational stakeholders: 8 of 10 (80%);
Individual stakeholders: 5 of 11 (45%).
Provide funding to CWSRF programs:
Organizational stakeholders: 9 of 14 (64%);
Individual stakeholders: 5 of 10 (50%).
Source: GAO analysis of stakeholder responses.
Note: While a total of 18 organizations and 11 individuals responded
to the questionnaire, not all stakeholders rated each mechanism. In
addition, this table includes only the mechanisms rated as very
important by a majority of stakeholders.
[End of table]
Finally, stakeholders suggested various measures to mitigate the
potential risk of exposing taxpayers to the financial losses that
could result from multiple municipalities defaulting on NIB loans.
Measures suggested by stakeholders included the use of strict credit
and underwriting standards in selecting projects and the maintenance
of adequate reserves, which could serve to absorb financial losses.
Other suggestions included requiring general-or revenue-obligation
pledges or insurance from utilities and municipalities. When asked
about risk-mitigation measures, staff from the Office of Management
and Budget noted that current infrastructure financing programs have
developed a variety of measures to mitigate taxpayer risk. For
example, the Department of Agriculture's Rural Utilities Service
provides grants and loans for eligible drinking water and wastewater
projects in rural communities. Office of Management and Budget staff
said that this program mitigates risk by not releasing grant funds to
the recipient communities until the project is completed.
Stakeholders' Views Varied on What Projects Should Be Eligible for
Financing, but a Majority of Stakeholders Agreed on How Projects
Should Be Prioritized:
Stakeholders had a variety of views on the types of projects that
should be eligible for financing from an NIB. Specifically, half of
stakeholders (12 of 24) indicated that projects of all sizes should be
eligible for NIB financing, while a third (8 of 24) noted that only
large projects should be eligible.[Footnote 37] Three stakeholders
explained that they support financing projects of all sizes because
smaller projects may address important infrastructure needs. Support
for an NIB that finances exclusively large projects was stronger among
individual stakeholders than among organizational stakeholders, though
few stakeholders defined what they meant by "large." For example, two
stakeholders supported an NIB that finances exclusively large projects
because it could fund projects beyond the capacity of the CWSRF. In
contrast, another stakeholder opposed an NIB that finances exclusively
large projects, explaining that one NIB proposal set a threshold of
$75 million or more, which could render many wastewater projects
ineligible. Similarly, stakeholders had a variety of views on whether
NIB financing should be limited to publicly owned and operated
utilities.[Footnote 38] Specifically, 9 of 23 stakeholders thought all
types of utilities should be eligible for NIB financing, while another
9 of 23 thought that only publicly owned utilities should be eligible.
[Footnote 39] Three stakeholders indicated that an NIB should assist
private utilities and PPPs--in addition to public utilities--because
the utilities' consumers and the general public would still benefit.
Stakeholders generally agreed on what costs should be eligible for NIB
financing. More than three-quarters of stakeholders agreed that
capital projects (24 of 26) and planning and design costs (19 of 25)
should be eligible but that routine operations and maintenance costs
(24 of 26) and ratepayer assistance (16 of 20) should not be eligible.
Four stakeholders noted that capital and planning and design costs
should both be eligible because they are closely linked--planning and
designing are essential components of carrying out capital projects.
Nine stakeholders explained that operations and maintenance activities
and/or ratepayer assistance should be funded by utilities through the
rates that they charge their customers. One stakeholder also explained
that many utilities have not raised rates enough to invest in the
needed operations and maintenance for their systems. Our past work has
highlighted similar concerns, noting that many utilities were not
routinely charging the full cost for wastewater services.[Footnote 40]
A majority of stakeholders said an NIB should use a combination of
methods to allocate funding to eligible projects; such methods include
directly funding projects ranked using specific criteria, allocating
funding to sectors, or allocating funding to states.[Footnote 41]
Stakeholders had differing views on which combination of methods
should be used. The most commonly supported methods were directly
funding projects ranked using specific criteria and allocating funding
to infrastructure sectors. Stakeholders provided a variety of reasons
for supporting these methods. For example, one stakeholder supported
directly funding projects ranked using specific criteria to ensure
that the projects most in need--including smaller projects--would
receive assistance. In addition, 2 stakeholders explained that
allocating amounts by sector would be necessary to ensure that each
sector receives funding, while 3 others noted that the differences
between sectors would make it difficult for an NIB to evaluate
projects across sectors.
Stakeholders also agreed that an NIB should prioritize projects that
address the greatest infrastructure need and that generate the
greatest public health and environmental benefits. One stakeholder
explained that these three criteria are the main reasons for
wastewater regulations. However, another stakeholder questioned how
"greatest infrastructure need" would be defined. Our past work has
highlighted similar concerns, noting that infrastructure "need" is
difficult to define and to distinguish from a wish list of capital
projects.[Footnote 42] It can also be difficult to measure
environmental and public health benefits. For example, while the CWSRF
uses a uniform set of measures to help determine efficient and
effective use of CWSRF resources, our past work has found that a lack
of baseline environmental data and technical difficulties made it
difficult to attribute benefits specifically to the CWSRF.[Footnote
43] A complete list of criteria supported by a majority of
stakeholders is shown in table 3.
Table 3: Stakeholder Views on Criteria an NIB Should Use When
Evaluating and Selecting Projects:
Number of stakeholders who rated criterion as a high priority
(percentage of total responses):
Projects addressing the greatest infrastructure need:
Organizational stakeholders: 11 of 11 (100%);
Individual stakeholders: 7 of 8 (88%).
Projects generating the greatest public health benefit:
Organizational stakeholders: 12 of 14 (86%);
Individual stakeholders: 5 of 8 (63%).
Projects generating the greatest environmental benefit:
Organizational stakeholders: 10 of 14 (71%);
Individual stakeholders: 5 of 8 (63%).
Projects of national or regional significance:
Organizational stakeholders: 6 of 13 (46%);
Individual stakeholders: 6 of 10 (60%).
Projects for communities that have difficulty accessing other sources
of revenue, such as bond markets:
Organizational stakeholders: 8 of 14 (57%);
Individual stakeholders: 4 of 9 (44%).
Source: GAO analysis of stakeholder responses.
Note: While a total of 18 organizations and 11 individuals responded
to the questionnaire, not all stakeholders rated each criterion. In
addition, this table includes only the criteria rated a high priority
by a majority of stakeholders.
[End of table]
Privately Financed Wastewater PPPs Are Uncommon and Have Several
Reported Advantages and Challenges:
We identified seven privately financed wastewater PPPs developed since
1992. Municipal and wastewater services company officials we
interviewed identified numerous potential advantages to these
partnerships, including faster construction of new facilities, access
to alternative sources of financing, increased efficiency, and access
to outside experts and technology solutions. Officials also identified
numerous potential challenges to these partnerships, including public
and political opposition, the higher cost of private financing, and
concerns over a loss of municipal control over wastewater equipment,
operations, or rates.[Footnote 44]
Seven Municipalities Have Developed Privately Financed Wastewater PPPs
Since 1992:
As shown in table 4, we identified seven municipalities that have
developed privately financed wastewater PPPs since 1992.
Table 4: Privately Financed Wastewater PPPs Developed Since 1992
Identified by GAO:
Municipality: Arvin, CA;
Company: U.S. Filter (now Veolia Water);
Year initiated: 1999;
Type: Lease & DBFO;
Initial term (years): 35;
Assets included: Lease: existing treatment plant; DBFO: upgraded
treatment plant components;
Up-front payment (Y/N): Yes.
Municipality: Cranston, RI[A];
Company: Triton Ocean State LLC (now Veolia Water);
Year initiated: 1997;
Type: Lease;
Initial term (years): 25;
Assets included: Treatment plant, collection system, pumping stations,
industrial pretreatment;
Up-front payment (Y/N): Yes.
Municipality: Fairbanks, AK;
Company: Golden Heart Utilities;
Year initiated: 1997;
Type: Lease & Asset Sale[B];
Initial term (years): 30;
Assets included: Lease: treatment plant; Asset sale: collection system;
Up-front payment (Y/N): Yes.
Municipality: Franklin, OH[C];
Company: Wheelabrator EOS (now Veolia Water);
Year initiated: 1995;
Type: Lease & Asset Sale[D];
Initial term (years): 20;
Assets included: Asset sale: treatment plant; Lease: one process
within the treatment plant;
Up-front payment (Y/N): Yes.
Municipality: North Brunswick, NJ[E];
Company: U.S. Water (now United Water);
Year initiated: 1995;
Type: Lease;
Initial term (years): 20;
Assets included: Collection system & pumping stations[F];
Up-front payment (Y/N): Yes.
Municipality: Santa Paula, CA;
Company: Santa Paula Water, LLC[G];
Year initiated: 2008;
Type: DBFO;
Initial term (years): 30;
Assets included: New water recycling facility;
Up-front payment (Y/N): No.
Municipality: Woonsocket, RI[H];
Company: U.S. Filter (now Veolia Water) with third-party financing
through LaSalle Bank and ABN AMRO;
Year initiated: 1999;
Type: DBFO;
Initial term (years): 20;
Assets included: Upgrade of existing treatment plant;
Up-front payment (Y/N): Yes.
Source: GAO.
[A] Since officials from Cranston declined to speak with us, this
information about Cranston's privately financed PPP is derived from
publicly available sources.
[B] The city of Fairbanks leased its wastewater treatment plant, which
falls within this report's definition of a privately financed PPP.
Fairbanks sold its collection system, which falls outside of the scope
of this report.
[C] The wastewater treatment plant involved in the 1995 lease and
asset sale was originally owned by the Miami Conservancy District, a
flood-control agency in southwestern Ohio. The treatment plant serves
the communities of Franklin, Carlisle, and Germantown, as well as
unincorporated areas of Warren and Montgomery counties.
[D] The city of Franklin leased a portion of its wastewater treatment
plant, which falls within this report's definition of a privately
financed PPP. Franklin sold other parts of the treatment plant.
[E] The North Brunswick lease was terminated in 2002.
[F] North Brunswick also leased their drinking water assets, including
a treatment plant, as well as the distribution system.
[G] Santa Paula Water, LLC, is a partnership between PERC Water and
Alinda Capital.
[H] The wastewater treatment plant involved in the 1999 DBFO serves
multiple communities: Woonsocket, Rhode Island; North Smithfield,
Rhode Island; Cumberland, Rhode Island; Bellingham, Massachusetts; and
Blackstone, Massachusetts.
[End of table]
Although all seven of these municipalities entered into privately
financed wastewater PPPs, their reasons for doing so differed, as did
the contract terms. Two examples illustrate these differences:
* Santa Paula, California, entered into a DBFO in 2008. The city of
Santa Paula had an existing wastewater treatment plant that was not
compliant with the waste discharge requirements of the Los Angeles
Regional Water Quality Control Board.[Footnote 45] The city entered
into a consent agreement with the board in which it agreed to achieve
full compliance with water quality requirements by December 15, 2010,
or else face $8.5 million in penalties. According to city officials,
the Santa Paula City Council decided to enter into a DBFO partnership
because it believed a DBFO would be less expensive than a traditional
procurement and could better ensure the city would meet its deadline.
The city awarded a contract to Santa Paula Water--a company formed by
PERC Water and Alinda Capital--to design, build, and finance a new
water recycling facility as well as to operate the facility for 30
years. Through monthly service fees, the city is to repay Santa Paula
Water for its investment in the plant and pay for operations,
maintenance, repair, replacement, and a profit margin. PERC Water owns
the treatment facility over the 30-year contract term, after which
ownership reverts to the city.
* Fairbanks, Alaska, entered into a lease partnership in 1997.
Fairbanks' wastewater treatment system faced a multimillion dollar
deficit and needed substantial capital improvements. However,
according to a city official, Fairbanks city residents were reluctant
to approve bond issuances, and local government officials were
reluctant to raise rates. In addition, Fairbanks was in a unique
situation in that the city owned several other utilities, including a
telephone utility and an electric utility. The city was approached by
a consortium of companies that proposed to buy or lease all the city's
utilities, and voters approved the action. As part of this deal,
Golden Heart Utilities leased the wastewater treatment plant in 1997
for a 30-year term. In exchange, the company pays Fairbanks about
$33,000 per month in lease payments. Golden Heart Utilities also
operates and maintains the treatment plant, and its service fee is
paid by ratepayers.
Reported Advantages of Privately Financed Wastewater PPPs:
Municipal and company officials we spoke with identified several
potential advantages of privately financed wastewater PPPs for
municipalities as compared with traditional publicly financed,
operated, and maintained wastewater facilities.
Faster Delivery of New Facilities or Facility Upgrades:
The most commonly cited advantage was the potential for faster or more
certain delivery times for new facilities or facility upgrades, as
compared with traditional public procurement.[Footnote 46] Three
municipalities cited faster delivery times as a reason they entered
into privately financed PPPs; in two cases, the municipalities were
facing regulatory deadlines that required them to upgrade their
facilities or pay fines. Company and municipal officials told us
private procurement may be faster because it is more streamlined than
public procurement. This view was echoed in a 1992 publication on
wastewater treatment privatization, which stated that wastewater
industry officials believe PPPs in which a company designs, builds,
and operates a facility can save time because design, construction,
and operations are not compartmentalized, so design and construction
phases can overlap.[Footnote 47] Similarly, in a 2000 publication, a
chapter discussing PPPs in the wastewater sector points out that, in a
privately financed PPP, companies are not bound by the same
administrative regulations as federal and state construction
projects.[Footnote 48] In addition, officials from Franklin, Ohio, and
Woonsocket, Rhode Island, told us that they believe it took less time
to secure private financing than public financing, an advantage
specific to privately financed PPPs.
Access to Alternative Sources of Wastewater Infrastructure Financing:
The next most commonly cited advantage of privately financed PPPs was
access to alternative sources of wastewater infrastructure financing.
For example, officials from Arvin, California, told us the city did
not access the bond market because of its low credit rating, even as
the city faced regulatory compliance concerns. Similarly, an official
from Fairbanks, Alaska, said it was difficult to convince the public
to approve bonds, preventing the city from using municipal bonds to
finance wastewater infrastructure.
Cost and Operational Efficiencies:
Another advantage cited by company and municipal officials and
publications we identified is that privately financed PPPs may bring
cost and operational efficiencies to wastewater collection and
treatment. Several municipal officials told us companies can take
advantage of economies of scale in a privately financed PPP by, for
example, buying key supplies, such as chemicals, in bulk. The 2000
chapter that discussed PPPs in the wastewater sector also noted that a
primary way companies can reduce costs is through managing their three
chief expenses--labor, electricity, and chemicals. By operating a
number of plants, a company can spread staff--and costs--more widely.
However, other officials we spoke with noted that efficiencies can
also be achieved by public utilities without a privately financed PPP.
For example, one regional utility said that it achieved economies of
scale by constructing regional plants, each of which served multiple
municipalities. In addition, according to a 2002 study of
privatization of water services by the National Research Council
(NRC), the private sector is not necessarily more efficient than the
public sector and vice versa.[Footnote 49]
While company officials said a privately financed PPP can operate more
efficiently by making better capital investment decisions, this may
depend on the terms of the PPP contract. According to officials at one
company, municipal governments face political pressure to keep costs
down in the short term, which can lead to higher costs in the long
run. Company officials told us that a contract that makes the private
partner responsible for both capital upgrades and maintenance can
incentivize decisions that save money in the long run. For example,
according to PERC Water officials, in its privately financed PPP with
the city of Santa Paula, the company invested its own funds above the
signed contract price for energy efficient equipment expected to
reduce energy consumption and operating costs over the 30 year term of
the contract. In contrast, if a contract passes capital repair costs
through to municipalities, one municipal official told us that
companies may have an incentive to under invest in maintenance. In
such circumstances, delaying maintenance could result in savings for
the private partner but impose higher costs on the municipality by
hastening the need for capital repairs.
Access to Expertise and Technology Solutions:
Another commonly cited advantage of privately financed wastewater PPPs
is that the private partner may have greater access to expertise and
technology than some municipalities.[Footnote 50] For example,
officials from one company told us it spends $200 million a year on
research and development and can draw on this research to solve
problems municipalities have not been able to solve on their own.
Similarly, according to a 2000 publication on municipal wastewater
treatment outsourcing, wastewater treatment companies may have more
experienced personnel and better access to the latest technologies if
wastewater treatment is the company's core business.[Footnote 51] For
example, an official from Fairbanks, Alaska, told us that prior to
entering into a privately financed PPP, his city had been unable to
process the sludge from its wastewater treatment plant into a useful
form. Golden Heart Utilities used a technology to convert the sludge
into compost, which is now sold to the public. This access to
expertise and technology may be particularly important for small-and
medium-sized communities, which may lack the expertise to upgrade or
operate plants to meet regulatory standards, according to the 2002 NRC
study.
Up-front Payments to Municipalities:
Several municipal and company officials also cited up-front payments
to municipalities as an advantage of privately financed PPPs. Up-front
payments to municipalities could be used to finance wastewater
infrastructure improvements, but company and municipal officials told
us these payments could also be used to finance other priorities, such
as a pension fund or municipal budget gap. Although six of the seven
municipalities that entered into privately financed PPPs received up-
front payments from their private partners, at least three used part
of the payment for nonwastewater-related activities. One municipal
official told us his municipality was motivated to enter into a
privately financed PPP so that it could use the up-front payment to
supplement its general fund and scale back a planned property tax
increase. Similarly, the mayor of Akron, Ohio, proposed that the city
lease its wastewater assets and use the up-front payment to fund a
scholarship program that would allow all Akron students to attend the
University of Akron. Voters ultimately rejected this proposal. In a
1997 response to congressional questions about wastewater PPPs, EPA
pointed out that up-front payments can be viewed as loans from the
company to the municipality and will require wastewater users to repay
the company, with interest.[Footnote 52] According to EPA, an increase
in user fees can result when an up-front payment exceeds the
previously outstanding local debt on the wastewater treatment
facilities. We have highlighted similar considerations about the use
of up-front payments in the transportation sector.[Footnote 53]
Increased Focus on Other Municipal Functions:
Finally, company and municipal officials said that privately financed
PPPs may allow local governments to increase their focus on other
functions, such as police and fire services.[Footnote 54] In contrast,
however, some municipal officials told us they would not consider
entering into a privately financed wastewater PPP because they believe
wastewater treatment is a core municipal duty. According to the 2002
NRC study, local officials are in part drawn to private participation
in their wastewater utilities because of the need to focus civic
energies and resources on more immediate social problems. Although the
role of a municipal government in a privately financed PPP may change,
it is still important. For example, according to the NRC study, if a
utility's operations are transferred to the private sector, the public
sector's importance does not diminish but rather changes from that of
operator to contract manager--a role that can require new talents and
skills. Similarly, an official in Woonsocket, Rhode Island, told us
that carrying out a privately financed PPP contract on a daily basis
takes more time and expertise than he expected, because even simple
questions can require a review of the city's 1,000-page contract with
its private partner.
Reported Challenges to Considering and Developing Privately Financed
Wastewater PPPs:
Municipal and company officials also identified a number of potential
challenges to considering and developing privately financed wastewater
PPPs.
Public and Political Opposition:
The challenge cited most often by municipal and company officials was
public and political opposition. These officials told us that the
public is sometimes concerned about the possibility that a company
would not be as responsive to ratepayers as a municipality, about job
losses for municipal employees, and about sewer rate increases. For
example, North Brunswick, New Jersey, entered into a privately
financed PPP in 1995, but terminated that agreement in 2002, in part
because of public reaction to rate increases. An official from
Fairbanks, Alaska, told us some residents feel the city "gave away"
its wastewater utility in its privately financed PPP deal, and they
object to a company profiting from running the utility. In at least
one case, opposition from citizens as well as interest groups derailed
the development of a privately financed PPP in Akron, Ohio.
Financing Challenges:
Municipal and company officials said that making private financing
attractive to municipalities may be a challenge for a variety of
reasons:
* Private financing generally costs more than public financing.
Municipal and company officials told us that private financing
typically costs more than tax-exempt municipal bonds. In its 2002
study, the NRC reported that the federal tax exemption on municipal
bonds gave municipal borrowers a 2.5 percent to 3 percent cost
advantage over private bonds. The NRC study also reported that, for
municipalities, private financing is roughly 20 to 40 percent more
expensive than public financing. Municipal officials told us the
profit motive of companies may also drive up the cost of a privately
financed PPP. However, one municipal official in Woonsocket, Rhode
Island, noted that the speed at which private financing can be
obtained could still result in a lower overall cost, due to the time
saved. Similarly, company officials told us they are able to
compensate for the higher cost of financing over the course of a
contract term. For example, officials cited tax rules generally
allowing companies to depreciate capital, and their ability to find
cost savings through efficiencies as ways to offset their costs over
the contract term.
* Combining private financing with public financing is difficult. In
writing the contract for a privately financed PPP, the parties must
carefully follow IRS tax rules to avoid changing the status of
existing tax-exempt municipal bonds to taxable bonds. IRS officials
told us that, under the tax code, a municipality in such a partnership
could continue to issue tax-exempt general obligation bonds to finance
wastewater infrastructure only under certain circumstances. For
example, a sewage facility could be financed with 50 percent private
financing and 50 percent tax-exempt general obligation bonds, if no
payments from the private partner or ratepayers secure the public debt
or are used to pay the public debt service. Under these rules, it is
especially difficult for a municipality in a privately financed PPP to
issue tax-exempt revenue bonds--often the preferred type of bond for
wastewater facilities--because the revenue bonds are secured by
payments from ratepayers. According to an official from the Office of
Chief Counsel, which advises the IRS, a privately financed PPP can be
financed with tax-exempt qualified private activity bonds if it meets
criteria in applicable statutes and regulations.[Footnote 55] However,
one company official said that the volume caps imposed on the issuance
of private activity bonds in each state limit their availability for
wastewater projects; he advocated lifting the state volume caps.
[Footnote 56]
Concern about Loss of Municipal Control:
Several municipal officials told us another challenge is their concern
about the loss of control over municipal wastewater facilities and
rates. Officials at one municipality told us they chose not to pursue
a privately financed wastewater PPP in part because they believed they
would lose some control over rate setting and system growth. According
to a 2000 chapter that discussed PPPs in the wastewater sector,
[Footnote 57] in a privately financed PPP, a local government's
control over a facility's operations depends on the contract's terms.
For example, officials in Santa Paula, California, told us they
experienced a loss of control over plant design, choice of equipment,
and construction oversight after entering into their DBFO. The
officials explained that, while the city's contract with its private
partner includes performance specifications, the city has no control
over the methods the company uses to achieve those specifications.
Further, because the city does not have detailed knowledge of the
facility or its operations, it may not be able to pass on such details
to other operators when its current contract ends.
Lack of Experience with Privately Financed PPPs:
Municipal and company officials also cited their lack of experience
with privately financed wastewater PPPs as a challenge to the
development of such partnerships. For example, one municipal official
commented that few municipalities will want to be the first to try
something new and potentially risky. Another municipal official echoed
that concern, commenting that there are few examples showing this
model can work effectively in the United States. A company official
told us that municipal officials are concerned about being locked into
a relationship with a private partner for a long-term contract and the
difficulties of maintaining a good relationship during that time.
Company officials also cited the need for more education about
privately financed PPPs to explain their advantages.
Costly and Difficult Contracting:
Municipal and company officials also told us that developing a
contract for a privately financed wastewater PPP can be costly and
difficult, in part, because of the lack of experience of companies and
municipalities with these contracts and, in part, because of their
complexity. For example, an official from Santa Paula, California,
told us the city's attorneys did not have experience with DBFO
contracts, so the city hired specialized counsel to develop the DBFO,
resulting in legal fees three times greater than for a traditional
procurement. A company official told us the complexity of privately
financed PPPs and the differences between this type of procurement and
traditional procurement can result in slower transactions. One
municipal official noted that part of the complexity associated with
developing a privately financed PPP contract is transitioning
employees from the public to the private sector. In addition, the 2002
NRC study noted that the preparation of adequate contracts is
expensive and time-consuming, and outside legal and engineering
expertise is usually needed. We have cited similar concerns for
highway PPPs.[Footnote 58] One municipal official noted that
communities often look to privately financed PPPs when they are
financially stressed, but this might make it difficult to hire
experienced contractors and consultants to protect the interests of
the community.
State and Federal Laws:
Finally, municipalities may encounter difficulties entering into
privately financed PPPs due to state and federal laws as follows:
* State laws. Municipal officials cited state laws that, in some
cases, outlaw the use of the same contractor to design and build a
wastewater treatment facility as a challenge, which would prohibit the
use of DBFOs, as well as other design-build PPPs. Specifically, a
municipal official in Ohio told us he would like to pursue a DBFO, but
state law requires design and construction to be bid separately from
one another, and also requires different trades be bid separately,
such as electrical and plumbing. Ultimately, he told us, this prevents
design-build contracts, with or without private financing. Echoing
this point, a company official told us that developing privately
financed PPP contracts is complicated by the fact that every state has
its own procurement rules.
* Federal financial interest. According to EPA officials, prior to
accepting private financing, municipalities must repay any remaining
federal investment for facilities built under the construction grants
program of the 1970s and 1980s, as well as any other federal grants.
Officials from Franklin, Ohio, told us some of the up-front payment
from the private partner was used to repay the existing federal
interest in the wastewater plant, since it was built with federal
grants in 1972. EPA officials told us that, although most facilities
that received funds through the construction grants program are now
fully depreciated with no remaining federal financial interest, some
other more recent grants, including construction grants that are still
awarded to the District of Columbia and U.S. Territories,
congressionally directed grants for particular wastewater facilities,
and direct grants through states under the American Recovery and
Reinvestment Act, would also be subject to early payback.
Agency Comments and Our Evaluation:
We provided a draft of this report to EPA, IRS, the Office of
Management and Budget, and the U.S. Department of the Treasury for
review and comment. These agencies did not provide written comments to
us. EPA and IRS provided technical comments, which we have
incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to appropriate
congressional committees, Secretary of the Treasury, Administrator of
EPA, Director of the Office of Management and Budget, Commissioner of
IRS, and other interested parties. The report will also be available
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff members have any questions regarding this report,
please contact me at (202) 512-3841 or trimbled@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. Key contributors to this
report are listed in appendix V.
Sincerely yours,
Signed by:
David C. Trimble:
Acting Director:
Natural Resources and Environment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To determine stakeholders' views on the issues to be considered in
designing and establishing a national infrastructure bank (NIB), we
reviewed past legislative proposals and wastewater industry position
papers on establishing an NIB. In addition, we interviewed
stakeholders with knowledge of a variety of wastewater infrastructure
issues, including individuals and organizations from the water and
wastewater industry; financial sector; and federal, state, and local
government; and obtained their views on establishing and designing an
NIB.
Based on the information obtained through these interviews, and our
review of reports and legislative proposals, we developed a
questionnaire to gather information about stakeholder views on an
NIB's mission and administrative structure, financing authorities, and
project eligibility and prioritization. We pretested the questionnaire
with four stakeholders from a variety of backgrounds and made changes
based on their input.
In addition to developing the questionnaire, we identified
organizational and individual stakeholders familiar with wastewater
infrastructure financing issues and existing NIB proposals. We
developed this list based on our preliminary interviews and prior GAO
work on wastewater infrastructure financing. We sent the questionnaire
to 23 national organizations with expertise in the wastewater industry
in one of the following areas: financing and operating wastewater
projects, constructing and maintaining wastewater infrastructure,
local and state wastewater infrastructure needs, and environmental
protection. In addition, we identified individuals involved in
wastewater infrastructure financing to provide additional perspective
on the creation and design of an NIB. We sent the questionnaire to 14
individuals with expertise in financing wastewater infrastructure,
including: consultants who provide advice to municipalities; state
financing officials; officials from private investment firms; and
policy consultants who have studied an NIB or wastewater
infrastructure financing. Although we sought to include stakeholders
with a variety of perspectives about an NIB, the views of stakeholders
consulted should not be considered to represent all perspectives about
an NIB. In addition, although an NIB could potentially finance many
types of infrastructure, we limited our stakeholders to those familiar
with the wastewater sector.
We received responses from 18 organizational stakeholders. Of the 5
organizational stakeholders that did not respond, 2 told us they could
not come to a consensus on behalf of their organization.[Footnote 59]
We also received responses from 11 individuals. Our overall response
rate was 78 percent. Some stakeholders did not answer all of the
questions on the questionnaire, so the number of responses for each
question varies. For a list of the organizational and individual
stakeholders that responded to the questionnaire, see appendix II.
Appendix III provides the responses that stakeholders gave regarding
design issues to be considered in creating an NIB.
To provide additional context about the potential implications of an
NIB's design on the federal budget, and its risk to U.S. taxpayers, we
reviewed prior GAO reports, as well as reports by the Congressional
Budget Office. We also spoke with officials at the U.S. Department of
the Treasury, the Internal Revenue Service, and the Environmental
Protection Agency (EPA). In addition, after analyzing the results from
our questionnaire, we interviewed staff from the Office of Management
and Budget to discuss how an NIB might affect the federal budget and
U.S. taxpayers. We conducted a similar interview with officials at the
Department of the Treasury; however because the current administration
is still deliberating issues related to an NIB, Treasury officials
could not comment on specific issues discussed by stakeholders
responding to our NIB questionnaire.
To determine the extent to which wastewater public-private
partnerships (PPPs) have been privately financed, we conducted a
literature search of online databases to identify academic and news
articles discussing privately financed wastewater PPPs initiated since
1992, when President Bush signed an Executive Order encouraging such
partnerships. Despite these efforts, it is possible that we did not
identify all privately financed wastewater PPPs initiated since 1992.
For purposes of this report, a privately financed wastewater PPP is a
partnership involving the core business of collecting and treating
municipal wastewater between a municipality (or other public entity)
and one or more private partners in which the private partner(s)
contribute private funds to the partnership. For our report, the
public partner must retain a long-term interest in the facility. This
means that, if the private partner acquires an ownership stake in any
of the wastewater assets, the public partner must be able to reacquire
the assets on preferential terms at the end of the contract.
To determine the potential advantages and challenges of privately
financed wastewater PPPs, we conducted interviews with officials from
six of the seven municipalities we identified that entered into a
privately financed wastewater PPP since 1992; officials from Cranston,
Rhode Island, declined to speak with us. In addition, we conducted
case studies in four of the states in which privately financed
wastewater PPPs have occurred: Alaska, California, New Jersey, and
Ohio. As part of our case studies, we spoke with numerous
municipalities in each state about their wastewater financing choices
to get additional context about why few municipalities have entered
into privately financed PPPs. These municipalities were selected to
include municipalities of varying sizes, as well as municipalities who
are not involved in privately financed wastewater PPPs, but who have
considered the option in the past. We also spoke with state officials
as needed to understand more about the legal context within each
state. Table 5 includes a list of the municipalities and state
agencies we spoke with as part of our case studies.
Table 5: Municipalities and State Agencies Selected for Case Study
Interviews, by State:
Alaska:
State agencies:
* Department of Environmental Conservation;
* Regulatory Commission of Alaska;
Municipalities and local utilities:
* Anchorage;
* Fairbanks;
* Juneau;
* Palmer.
California:
State agencies:
* State Water Resources Control Board;
Municipalities and local utilities:
* Arvin;
* Central Contra Costa Sanitary District;
* Fillmore;
* San Francisco Public Utilities Commission;
* Santa Paula.
New Jersey:
State agencies:
* New Jersey Board of Public Utilities;
Municipalities and local utilities:
* Atlantic County Utilities Authority;
* Cape May County Municipal Utilities Authority;
* North Brunswick;
* North Hudson Sewerage Authority.
Ohio:
State agencies:
* Not applicable;
Municipalities and local utilities:
* Akron;
* Franklin;
* Metropolitan Sewer District of Greater Cincinnati;
* Tricities Authority.
Source: GAO.
[End of table]
To obtain additional information about private sector views on the
advantages and challenges of privately financed wastewater PPPs, we
interviewed officials at the six largest water and wastewater services
companies in the United States: American Water, CH2M Hill, Severn
Trent Environmental Services, South West Water Company, United Water,
and Veolia Water. We also interviewed officials from PERC Water, a
water recycling company involved in the privately financed wastewater
PPP in Santa Paula, California. In addition, we interviewed officials
from EPA and numerous stakeholders in the water and wastewater
industry, including national associations representing wastewater
utilities, consultants that advise municipalities on wastewater
financing decisions, and representatives from the financial sector
involved in water and wastewater infrastructure financing.
Finally, we also conducted a literature search to identify
publications that discuss the advantages and challenges of privately
financed wastewater PPPs in the United States. After reviewing various
publications, we included the 10 publications that: (1) focused on the
wastewater industry in the United States; (2) discussed the advantages
and challenges of wastewater PPPs; and (3) specifically addressed the
use of private financing in the context of a PPP. Throughout the
report, we cite the advantages and challenges identified in these 10
publications to provide additional context to the information gathered
in our interviews. See appendix IV for a complete list of the
publications we identified.
We conducted our work from June 2009 to June 2010 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions.
[End of section]
Appendix II: Stakeholders Responding to the NIB Questionnaire:
The following stakeholders responded to our questionnaire regarding
design issues to be considered in creating a national infrastructure
bank. The individuals who responded to our questionnaire presented
their personal views and not the views of the organizations for which
they work.
Organizations:
American Council of Engineering Companies:
American Public Works Association:
American Rivers:
American Society of Civil Engineers:
American Water Works Association:
Association of Metropolitan Water Agencies:
Clean Water Action:
Clean Water Construction Coalition:
Council of Infrastructure Financing Authorities:
Food & Water Watch:
Government Finance Officers Association:
National Association of Clean Water Agencies:
National Association of Water Companies:
National Utility Contractors Association:
The Associated General Contractors of America:
The United States Conference of Mayors:
Water and Wastewater Equipment Manufacturers Association:
Water Environment Federation:
Individuals[Footnote 60]:
Everett M. Ehrlich, ESC Company:
Paul Eisenhardt, Eisenhardt Group, Inc.
John A. Flaherty, Carlyle Infrastructure Partners:
James T. Gebhardt, New York State Environmental Facilities Corporation:
Stan Hazelroth, California Infrastructure and Economic Development
Bank:
Mark Kellett, Northbridge Environmental Management Consultants:
Eric P. Rothstein, Galardi Rothstein Group:
Kenneth I. Rubin, PA Consulting Group:
Bernard L. Schwartz, BLS Investments, LLC:
Stephen M. Sorett, McKenna Long & Aldridge:
[End of section]
Appendix III: Summary of Stakeholder Responses to the NIB
Questionnaire:
This appendix provides information on stakeholders' responses to our
questionnaire addressing design issues to be considered in creating an
NIB. The questions asked in the questionnaire are reproduced below,
[Footnote 61] along with a tally of stakeholder responses for each
closed-ended question.[Footnote 62]
1. What types of infrastructure should an NIB provide financing for?
Table 6: Stakeholder Views on Type of Infrastructure Funded by an NIB:
An NIB should provide financing for a variety of types of
infrastructure, which could include, among others, transportation,
energy, water, and wastewater infrastructure;
Number of organizational stakeholders: 8;
Number of individual stakeholders: 5.
An NIB should finance only water and wastewater infrastructure;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 3.
An NIB should finance only wastewater infrastructure;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 1.
An NIB should not be created;
Number of organizational stakeholders: 1;
Number of individual stakeholders: 0.
Other;
Number of organizational stakeholders: 4;
Number of individual stakeholders: 2.
Total responses;
Number of organizational stakeholders: 16;
Number of individual stakeholders: 11.
No answer;
Number of organizational stakeholders: 2;
Number of individual stakeholders: 0.
Source: GAO analysis of stakeholder responses.
[End of table]
2. What should be the mission of an NIB?
Stakeholders provided a variety of open-ended responses to this
question, which are discussed in the report as appropriate.
3. If an NIB is created, how should it be structured?
Table 7: Stakeholder Views on Administrative Structure of an NIB:
As a new responsibility for an existing federal agency;
Number of organizational stakeholders: 2;
Number of individual stakeholders: 2.
As a government corporation, either wholly-owned by the government or
mixed-ownership (government and private ownership);
Number of organizational stakeholders: 2;
Number of individual stakeholders: 5.
As a government-sponsored enterprise (a private enterprise with
implicit public backing, similar to Fannie Mae and Freddie Mac);
Number of organizational stakeholders: 2;
Number of individual stakeholders: 2.
Other;
Number of organizational stakeholders: 4;
Number of individual stakeholders: 2.
Total responses;
Number of organizational stakeholders: 10;
Number of individual stakeholders: 11.
No answer;
Number of organizational stakeholders: 8;
Number of individual stakeholders: 0.
Source: GAO analysis of stakeholder responses.
[End of table]
4. What relationship, if any, should an NIB have with the existing
state-level Clean Water State Revolving Fund programs?
Stakeholders provided a variety of open-ended responses to this
question, which are discussed in the report as appropriate.
5. How should an NIB initially be capitalized?
Stakeholders provided a variety of open-ended responses to this
question, which are discussed in the report as appropriate.
6. Should an NIB have the authority to generate its own funds for
operating expenses and lending using different financing mechanisms?
Table 8: Stakeholder Views on an NIB's Authority to Generate Its Own
Funds for Operating Expenses and Lending:
Yes, an NIB should be able to use the following financing mechanisms
to generate its own funds (see table 9 for the list of mechanisms);
Number of organizational stakeholders: 11;
Number of individual stakeholders: 10.
No, an NIB should not have the authority to generate its own funds;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 1.
Other;
Number of organizational stakeholders: 1;
Number of individual stakeholders: 0.
Total responses;
Number of organizational stakeholders: 12;
Number of individual stakeholders: 11.
No answer;
Number of organizational stakeholders: 6;
Number of individual stakeholders: 0.
Source: GAO analysis of stakeholder responses.
[End of table]
If you answered "yes" to question 6, which mechanisms should an NIB
have the authority to use to generate is own funds?
Table 9: Stakeholder Views on Mechanisms an NIB Could Use to Generate
Its Own Funds for Operating Expenses and Lending:
Issue tax-exempt bonds;
Number of organizational stakeholders: 9;
Number of individual stakeholders: 5.
Issue commercial paper;
Number of organizational stakeholders: 6;
Number of individual stakeholders: 6.
Borrow directly from the U.S. Department of the Treasury;
Number of organizational stakeholders: 9;
Number of individual stakeholders: 7.
Borrow directly from commercial banks;
Number of organizational stakeholders: 4;
Number of individual stakeholders: 5.
Borrow directly from private investors;
Number of organizational stakeholders: 7;
Number of individual stakeholders: 5.
Borrow directly from international entities on the global capital
market;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 4.
Charge application fees;
Number of organizational stakeholders: 8;
Number of individual stakeholders: 8.
Charge fees for technical assistance;
Number of organizational stakeholders: 5;
Number of individual stakeholders: 8.
Charge fees for other services, such as annual monitoring;
Number of organizational stakeholders: 4;
Number of individual stakeholders: 8.
Other;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 1.
Total responses;
Number of organizational stakeholders: 11;
Number of individual stakeholders: 10.
Source: GAO analysis of stakeholder responses.
Note: This table only includes the 21 stakeholders who supported
giving an NIB the authority to generate its own funds for operating
expenses and lending.
[End of table]
7. Should an NIB become self-sustaining after its initial
capitalization? By self-sustaining, we mean an NIB that is fully
reliant on funds that it generates, rather than on continued federal
funding.
Table 10: Stakeholder Views on Self-Sustainability of an NIB:
Yes, an NIB should be become self-sustaining and not continue to rely
on federal funds;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 3.
No, an NIB should not become self-sustaining and continue to rely on
federal funds;
Number of organizational stakeholders: 5;
Number of individual stakeholders: 4.
Other;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 4.
Total responses;
Number of organizational stakeholders: 11;
Number of individual stakeholders: 11.
No answer;
Number of organizational stakeholders: 7;
Number of individual stakeholders: 0.
Source: GAO analysis of stakeholder responses.
[End of table]
8. How important is it that an NIB has the authority to provide each
of the following financing mechanisms?
Table 11: Stakeholder Views on Financing Mechanisms an NIB Could Offer
to Finance Projects:
Issue tax-exempt bonds on behalf of infrastructure projects:
Organizations;
Not at all important: 0;
Moderately important: 1;
Very important: 8;
Should not be provided by an NIB: 1;
Total responses: 10;
No answer: 8.
Issue tax-exempt bonds on behalf of infrastructure projects:
Individuals;
Not at all important: 1;
Moderately important: 0;
Very important: 5;
Should not be provided by an NIB: 5;
Total responses: 11;
No answer: 0.
Issue tax-credit bonds on behalf of infrastructure projects:
Organizations;
Not at all important: 1;
Moderately important: 3;
Very important: 6;
Should not be provided by an NIB: 0;
Total responses: 10;
No answer: 8.
Issue tax-credit bonds on behalf of infrastructure projects:
Individuals;
Not at all important: 1;
Moderately important: 1;
Very important: 3;
Should not be provided by an NIB: 5;
Total responses: 10;
No answer: 1.
Pool loans for several infrastructure projects into a larger bond
issue to lower the cost of borrowing: Organizations;
Not at all important: 0;
Moderately important: 1;
Very important: 8;
Should not be provided by an NIB: 0;
Total responses: 9;
No answer: 9.
Pool loans for several infrastructure projects into a larger bond
issue to lower the cost of borrowing: Individuals;
Not at all important: 1;
Moderately important: 1;
Very important: 6;
Should not be provided by an NIB: 3;
Total responses: 11;
No answer: 0.
Issue direct loans to infrastructure projects: Organizations;
Not at all important: 0;
Moderately important: 1;
Very important: 10;
Should not be provided by an NIB: 1;
Total responses: 12;
No answer: 6.
Issue direct loans to infrastructure projects: Individuals;
Not at all important: 0;
Moderately important: 1;
Very important: 9;
Should not be provided by an NIB: 1;
Total responses: 11;
No answer: 0.
Provide federal loan guarantees for infrastructure projects:
Organizations;
Not at all important: 0;
Moderately important: 3;
Very important: 8;
Should not be provided by an NIB: 0;
Total responses: 11;
No answer: 7.
Provide federal loan guarantees for infrastructure projects:
Individuals;
Not at all important: 1;
Moderately important: 2;
Very important: 7;
Should not be provided by an NIB: 1;
Total responses: 11;
No answer: 0.
Issue commercial paper on behalf of infrastructure projects:
Organizations;
Not at all important: 1;
Moderately important: 3;
Very important: 1;
Should not be provided by an NIB: 2;
Total responses: 7;
No answer: 11.
Issue commercial paper on behalf of infrastructure projects:
Individuals;
Not at all important: 2;
Moderately important: 4;
Very important: 1;
Should not be provided by an NIB: 4;
Total responses: 11;
No answer: 0.
Provide grants to infrastructure projects: Organizations;
Not at all important: 3;
Moderately important: 2;
Very important: 6;
Should not be provided by an NIB: 1;
Total responses: 12;
No answer: 6.
Provide grants to infrastructure projects: Individuals;
Not at all important: 2;
Moderately important: 0;
Very important: 3;
Should not be provided by an NIB: 6;
Total responses: 11;
No answer: 0.
Provide funding to Clean Water State Revolving Fund programs:
Organizations;
Not at all important: 1;
Moderately important: 0;
Very important: 9;
Should not be provided by an NIB: 4;
Total responses: 14;
No answer: 4.
Provide funding to Clean Water State Revolving Fund programs:
Individuals;
Not at all important: 1;
Moderately important: 1;
Very important: 5;
Should not be provided by an NIB: 3;
Total responses: 10;
No answer: 1.
Other: Organizations;
Not at all important: 0;
Moderately important: 0;
Very important: 2;
Should not be provided by an NIB: 0;
Total responses: 2;
No answer: 16.
Other: Individuals;
Not at all important: 0;
Moderately important: 0;
Very important: 1;
Should not be provided by an NIB: 0;
Total responses: 1;
No answer: 10.
Source: GAO analysis of stakeholder responses.
[End of table]
9. If an NIB suffers from financial losses due to municipalities
defaulting on loans or commercial paper, taxpayers may be at risk to
cover those financial losses. How should an NIB mitigate this
potential risk to taxpayers?
Stakeholders provided a variety of open-ended responses to this
question, which are discussed in the report as appropriate.
10. How should an NIB distribute financing to qualified projects?
Table 12: Stakeholder Views on How an NIB Should Distribute Financing
to Qualified Projects:
Directly from an NIB to the qualified project;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 3.
From an NIB to existing federal programs (such as the Clean Water
State Revolving Fund), which select qualified projects;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 1.
From an NIB to individual states, which select qualified projects;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 1.
Some combination of the above;
Number of organizational stakeholders: 8;
Number of individual stakeholders: 6.
Other;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 0.
Total responses;
Number of organizational stakeholders: 11;
Number of individual stakeholders: 11.
No answer;
Number of organizational stakeholders: 7;
Number of individual stakeholders: 0.
Source: GAO analysis of stakeholder responses.
[End of table]
11. What types of wastewater utilities, if any, should an NIB have the
authority to assist? Please check all that apply.
Table 13: Stakeholder Views on Types of Wastewater Utilities an NIB
Should Have the Authority to Assist:
State, local, and nonprofit (such as a rural sewer district) utilities
that own and operate wastewater infrastructure;
Number of organizational stakeholders: 9;
Number of individual stakeholders: 9.
Utilities engaged in public-private partnerships with publicly owned
but privately operated wastewater infrastructure;
Number of organizational stakeholders: 7;
Number of individual stakeholders: 9.
Private utility companies that own and operate wastewater
infrastructure;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 6.
An NIB should not have the authority to directly assist wastewater
utilities;
Number of organizational stakeholders: 2;
Number of individual stakeholders: 0.
Other;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 2.
Total responses;
Number of organizational stakeholders: 12;
Number of individual stakeholders: 11.
No answer;
Number of organizational stakeholders: 6;
Number of individual stakeholders: 0.
Source: GAO analysis of stakeholder responses.
[End of table]
12. Assuming constrained resources, by what method should an NIB
prioritize eligible projects for financing?
Table 14: Stakeholder Views on How an NIB Should Prioritize Eligible
Projects for Financing:
First-come, first-served;
Number of organizational stakeholders: 0;
Number of individual stakeholders: 0.
Use a formula to allocate a specific amount for each infrastructure
sector, such as transportation, energy, or wastewater;
Number of organizational stakeholders: 1;
Number of individual stakeholders: 1.
Use a formula to allocate a specific amount for each state;
Number of organizational stakeholders: 1;
Number of individual stakeholders: 0.
Rank projects according to specific criteria;
Number of organizational stakeholders: 2;
Number of individual stakeholders: 2.
Some combination of the above options;
Number of organizational stakeholders: 8;
Number of individual stakeholders: 5.
Other;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 2.
Total responses;
Number of organizational stakeholders: 15;
Number of individual stakeholders: 10.
No answer;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 1.
Source: GAO analysis of stakeholder responses.
[End of table]
13. What should be the level of priority for the following criteria
that an NIB could use to evaluate projects and select those that
should be financed?
Table 15: Stakeholder Views on Criteria an NIB Could Use when
Evaluating and Selecting Projects:
Projects addressing greatest infrastructure need;
Number of Stakeholders: Organizations;
Low priority: 0;
Medium priority: 0;
High priority: 11;
Total responses: 11;
No answer: 7.
Projects addressing greatest infrastructure need;
Number of Stakeholders: Individuals;
Low priority: 1;
Medium priority: 0;
High priority: 7;
Total responses: 8;
No answer: 3.
Projects generating greatest environmental benefit;
Number of Stakeholders: Organizations;
Low priority: 0;
Medium priority: 4;
High priority: 10;
Total responses: 14;
No answer: 4.
Projects generating greatest environmental benefit;
Number of Stakeholders: Individuals;
Low priority: 2;
Medium priority: 1;
High priority: 5;
Total responses: 8;
No answer: 3.
Projects generating greatest public health benefit;
Number of Stakeholders: Organizations;
Low priority: 0;
Medium priority: 2;
High priority: 12;
Total responses: 14;
No answer: 4.
Projects generating greatest public health benefit;
Number of Stakeholders: Individuals;
Low priority: 2;
Medium priority: 1;
High priority: 5;
Total responses: 8;
No answer: 3.
Projects serving the largest number of people;
Number of Stakeholders: Organizations;
Low priority: 1;
Medium priority: 8;
High priority: 4;
Total responses: 13;
No answer: 5.
Projects serving the largest number of people;
Number of Stakeholders: Individuals;
Low priority: 2;
Medium priority: 4;
High priority: 3;
Total responses: 9;
No answer: 2.
Projects generating the most economic growth and jobs;
Number of Stakeholders: Organizations;
Low priority: 1;
Medium priority: 7;
High priority: 6;
Total responses: 14;
No answer: 4.
Projects generating the most economic growth and jobs;
Number of Stakeholders: Individuals;
Low priority: 3;
Medium priority: 1;
High priority: 5;
Total responses: 9;
No answer: 2.
Projects of national or regional significance;
Number of Stakeholders: Organizations;
Low priority: 1;
Medium priority: 6;
High priority: 6;
Total responses: 13;
No answer: 5.
Projects of national or regional significance;
Number of Stakeholders: Individuals;
Low priority: 1;
Medium priority: 3;
High priority: 6;
Total responses: 10;
No answer: 1.
Projects with the greatest current and projected use;
Number of Stakeholders: Organizations;
Low priority: 2;
Medium priority: 8;
High priority: 2;
Total responses: 12;
No answer: 6.
Projects with the greatest current and projected use;
Number of Stakeholders: Individuals;
Low priority: 2;
Medium priority: 2;
High priority: 4;
Total responses: 8;
No answer: 3.
Projects serving a population with the lowest median household income;
Number of Stakeholders: Organizations;
Low priority: 3;
Medium priority: 5;
High priority: 5;
Total responses: 13;
No answer: 5.
Projects serving a population with the lowest median household income;
Number of Stakeholders: Individuals;
Low priority: 4;
Medium priority: 2;
High priority: 3;
Total responses: 9;
No answer: 2.
Projects for communities that have difficulty accessing other sources
of revenue, such as bond markets;
Number of Stakeholders: Organizations;
Low priority: 1;
Medium priority: 5;
High priority: 8;
Total responses: 14;
No answer: 4.
Projects for communities that have difficulty accessing other sources
of revenue, such as bond markets;
Number of Stakeholders: Individuals;
Low priority: 2;
Medium priority: 3;
High priority: 4;
Total responses: 9;
No answer: 2.
Projects that include private financing;
Number of Stakeholders: Organizations;
Low priority: 2;
Medium priority: 6;
High priority: 3;
Total responses: 11;
No answer: 7.
Projects that include private financing;
Number of Stakeholders: Individuals;
Low priority: 4;
Medium priority: 1;
High priority: 4;
Total responses: 9;
No answer: 2.
Projects that are ready to begin construction;
Number of Stakeholders: Organizations;
Low priority: 8;
Medium priority: 2;
High priority: 3;
Total responses: 13;
No answer: 5.
Projects that are ready to begin construction;
Number of Stakeholders: Individuals;
Low priority: 1;
Medium priority: 4;
High priority: 4;
Total responses: 9;
No answer: 2.
Source: GAO analysis of stakeholder responses.
[End of table]
14. Should an NIB exclusively finance large infrastructure projects?
Table 16: Stakeholder Views on Minimum Size of Projects Eligible for
NIB Financing:
Yes, an NIB should exclusively finance large infrastructure projects;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 5.
No, an NIB should finance infrastructure projects of all sizes;
Number of organizational stakeholders: 8;
Number of individual stakeholders: 4.
Other;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 1.
Total responses;
Number of organizational stakeholders: 14;
Number of individual stakeholders: 10.
No answer;
Number of organizational stakeholders: 4;
Number of individual stakeholders: 1.
Source: GAO analysis of stakeholder responses.
[End of table]
15. Should there be a limit on the amount of financing that one
project can receive from an NIB?
Table 17: Stakeholder Views on Limits on Amount of Financing One
Project Could Receive From an NIB:
Yes, there should be a maximum limit related to the overall financial
resources of an NIB;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 7.
No, there should not a maximum limit;
Number of organizational stakeholders: 3;
Number of individual stakeholders: 3.
Other;
Number of organizational stakeholders: 1;
Number of individual stakeholders: 0.
Total responses;
Number of organizational stakeholders: 7;
Number of individual stakeholders: 10.
No answer;
Number of organizational stakeholders: 11;
Number of individual stakeholders: 1.
Source: GAO analysis of stakeholder responses.
[End of table]
16. In your opinion, which of the following wastewater infrastructure
activities should an NIB finance?
Table 18: Stakeholder Views on What Activities Should be Eligible for
NIB Financing:
Routine operations and maintenance;
Number of stakeholders: Organizations;
Yes: 1;
No: 15;
Total responses: 16;
No answer: 2.
Routine operations and maintenance;
Number of stakeholders: Individuals;
Yes: 1;
No: 9;
Total responses: 10;
No answer: 1.
Planning and design of wastewater infrastructure projects, such as
feasibility review, permitting, environment reviews, or
preconstruction planning;
Number of stakeholders: Organizations;
Yes: 13;
No: 3;
Total responses: 16;
No answer: 2.
Planning and design of wastewater infrastructure projects, such as
feasibility review, permitting, environment reviews, or
preconstruction planning;
Number of stakeholders: Individuals;
Yes: 6;
No: 3;
Total responses: 9;
No answer: 2.
Ratepayer assistance to low-income households;
Number of stakeholders: Organizations;
Yes: 3;
No: 9;
Total responses: 12;
No answer: 6.
Ratepayer assistance to low-income households;
Number of stakeholders: Individuals;
Yes: 1;
No: 7;
Total responses: 8;
No answer: 3.
Capital costs, such as reconstruction, rehabilitation, replacement, or
expansion;
Number of stakeholders: Organizations;
Yes: 14;
No: 2;
Total responses: 16;
No answer: 2.
Capital costs, such as reconstruction, rehabilitation, replacement, or
expansion;
Number of stakeholders: Individuals;
Yes: 10;
No: 0;
Total responses: 10;
No answer: 1.
Source: GAO analysis of stakeholder responses.
[End of table]
17. In addition to design issues discussed above related to
administration, authorities, financing prioritization, and financing
eligibility (questions 1 through 16), what other design issues should
be considered in designing and establishing an NIB, if any?
Stakeholders provided a variety of open-ended responses to this
question.
18. Please provide any additional information that would be helpful to
GAO in better understanding potential issues related to establishing
an NIB.
Stakeholders provided a variety of open-ended responses to this
question.
[End of section]
Appendix IV: Published Works Addressing Privately Financed Wastewater
PPPs:
We identified the following published works which address privately
financed wastewater PPPs and were published since 1992:
Haarmeyer, David. "Environmental Infrastructure: An Evolving Public-
Private Partnership." in Seidenstat, P., Nadol, M., & Hakim, S.
America's Water and Wastewater Industries: Competition and
Privatization. Vienna, VA: Public Utilities Reports, 2000.
Heilman, John and Gerald Johnson. The Politics and Economics of
Privatization: The Case of Wastewater Treatment. Tuscaloosa, AL:
University of Alabama Press, 1992.
Landow-Esser, Janine and Melissa Manuel. "Environmental and
Contracting Issues in Municipal Wastewater Treatment Outsourcing." in
Seidenstat, P., Nadol, M., & Hakim, S. America's Water and Wastewater
Industries: Competition and Privatization. Vienna, VA: Public
Utilities Reports, 2000.
Matacera, Paul J. and Frank J. Mangravite in Seidenstat, P.,
Haarmeyer, D., & Hakim, S. Reinventing Water and Wastewater Systems:
Global Lessons for Improving Water Management. New York: J. Wiley,
2002.
National Research Council. Privatization of Water Services in the
United States: An Assessment of Issues and Experience. Washington,
D.C.: National Academy Press, 2002.
Seidenstat, Paul, Michael Nadol, and Simon Hakim. "Competition and
Privatization in the Water and Wastewater Industries." in Seidenstat,
P., Nadol, M., & Hakim, S. America's Water and Wastewater Industries:
Competition and Privatization. Vienna, VA: Public Utilities Reports,
2000.
Seidenstat, Paul. "Organizing water and wastewater industries to meet
the challenges of the 21st century." Public Administration and
Management (8:2), 69-99 (2003).
Seidenstat, Paul. "Global Lessons: Options for Improving Water and
Wastewater Systems." in Seidenstat, P., Haarmeyer, D., & Hakim, S.
Reinventing Water and Wastewater Systems: Global Lessons for Improving
Water Management. New York: J. Wiley, 2002.
Sills Jr., James H. "The Challenges and Benefits of Privatizing
Wilmington's Wastewater Treatment Plant." in Seidenstat, P.,
Haarmeyer, D., & Hakim, S. Reinventing Water and Wastewater Systems:
Global Lessons for Improving Water Management. New York: J. Wiley,
2002.
Traficante, Michael A., and Peter Alviti, Jr. "A New Standard for a
Long-Term Lease and Service Agreement." in Seidenstat, P., Haarmeyer,
D., & Hakim, S. Reinventing Water and Wastewater Systems: Global
Lessons for Improving Water Management. New York: J. Wiley, 2002.
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
David Trimble, Acting Director, (202) 512-3841, or trimbled@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Sherry L. McDonald,
Assistant Director; Hiwotte Amare; Elizabeth Beardsley; Janice
Ceperich; Philip Farah; Cindy Gilbert; Maylin Jue; Corissa Kiyan;
Carol Kolarik; Anu Mittal; Marietta Mayfield Revesz; Janice M. Poling;
and Ben Shouse made significant contributions to this report. Also
contributing to this report were Carol Henn, William B. Shear, and
James Wozny.
[End of section]
Footnotes:
[1] Fiscal year 2007 includes data for each individual government's
fiscal year that ended between July 1, 2006, and June 30, 2007. The
Census Bureau also reports that state governments spent about $1.4
billion on wastewater in fiscal year 2007.
[2] Pub. L. No. 111-5, Div. A, Tit. VII, 123 Stat. 115, 169. Under the
CWSRF program, the federal government provides grants to states, which
use the money to provide generally low-interest loans to fund a
variety of water quality projects at the municipal level.
[3] The federal government also funds wastewater infrastructure
through other programs. For example, the Department of Agriculture's
Rural Utilities Service provides grants and loans for wastewater
infrastructure improvements to rural communities, including those with
populations of 10,000 or less. In fiscal year 2010, this program
received an appropriation of nearly $569 million, primarily for grants
and loans to support wastewater and other environmental
infrastructure. Pub. L. No. 111-80 (2009), § 123 Stat. 2111.
[4] EPA, The Clean Water and Drinking Water Infrastructure Gap
Analysis (Washington, D.C.: September 2002). In the report, EPA notes
that this gap is not inevitable and could be addressed in part if
wastewater utilities raised the rates they charge consumers. EPA
estimates a potential gap for drinking water infrastructure as well.
[5] The Federal Water Pollution Control Act Amendments of 1972, Pub.
L. No. 92-500, § 2, 86 Stat. 816 codified as amended at 33 U.S.C. §§
1251-1387 (2010) (commonly referred to as the Clean Water Act).
[6] Water Protection and Reinvestment Act of 2009, H.R. 3202; the bill
would establish a trust fund to assist clean water and drinking water
infrastructure projects. Our previous work has found that numerous
issues would need to be addressed in the design of a clean water trust
fund. See GAO, Clean Water Infrastructure: A Variety of Issues Need to
Be Considered When Designing a Clean Water Trust Fund, [hyperlink,
http://www.gao.gov/products/GAO-09-657] (Washington, D.C.: May 29,
2009).
[7] The bills included the National Infrastructure Development Bank
Act of 2009 (H.R. 2521), National Infrastructure Bank Act of 2007 (S.
1926 and H.R. 3401), and National Infrastructure Development Act (H.R.
3896).
[8] Executive Order 12803 was signed by President Bush on April 30,
1992.
[9] Wastewater treatment generally involves two steps, called primary
and secondary treatment. During primary treatment, solid materials
such as sand and grit are removed from wastewater. Secondary treatment
usually involves using bacteria to remove organic material from
wastewater. Under the Clean Water Act, municipal wastewater treatment
plants are required to provide secondary treatment for wastewater. In
addition, over 30 percent of wastewater treatment plants also provide
advanced treatment for wastewater, which can clean wastewater to even
greater levels by, for example, removing nutrients.
[10] Conventional pollutants treated in municipal wastewater
facilities include: biochemical oxygen demand, total suspended solids,
fecal coliform, pH, and oil and grease.
[11] In addition, National Pretreatment Standards apply to certain
categories of industrial dischargers into sewers connected to
municipal wastewater facilities, regardless of whether the municipal
facility has a pretreatment program.
[12] The Resource Conservation and Recovery Act (RCRA) regulates
treatment, storage, and disposal of hazardous waste, among other
things. RCRA regulations generally exclude sewage conveyed for
treatment at publicly owned treatment facilities from the standards
and permit requirements for managing hazardous waste. However, the
RCRA exemption for privately owned facilities only excludes the
discharge authorized under an NPDES permit; handling of wastes before
and during treatment, as well as generated sludges may be subject to
hazardous waste rules.
[13] Municipalities can also issue Build America Bonds, which the
federal government subsidizes through tax credits (rather than tax-
exempt interest). Build America Bonds were authorized in the American
Recovery and Reinvestment Act of 2009 and can be issued in 2009 and
2010. According to the U.S. Department of the Treasury, as of April
30, 2010, states, municipalities, and other local entities had issued
194 Build America Bonds worth $19.8 billion for projects that include
sewer or water utility improvements.
[14] Under the Internal Revenue Code and applicable regulations,
generally a bond is a private activity bond when more than 10 percent
of the bond issue proceeds is to be used for private business use--
such as where a private contractor is leasing a facility receiving
such proceeds--and if the payment of the principal or interest on more
than 10 percent of the proceeds is derived from or secured by an
interest in property used for a private business use. Whether a bond
involving a PPP facility meets these criteria is determined by the
facts and circumstances surrounding the PPP arrangement. See 26 U.S.C.
§ 141, 26 C.F.R. § 1.141-3 (2010). While interest on a private
activity bond is generally taxable, interest on qualified private
activity bonds for exempt facilities such as sewage facilities can be
tax-exempt if the bonds meet applicable criteria. See 26 U.S.C §§
103(a)-(b)(1), 141(e)(1), 26 C.F.R § 1.142(a)(5)-1 (2010).
[15] Fiscal year 2007 includes data for each individual government's
fiscal year that ended between July 1, 2006, and June 30, 2007.
[16] See [hyperlink, http://www.gao.gov/products/GAO-09-657].
[17] The Build America Bonds Act (S. 2021), introduced in 2007,
proposed an entity similar to an NIB but did not include wastewater
infrastructure among the eligible projects. This act proposed granting
recognition to a multistate transportation finance corporation, which
would be authorized to issue up to $50 billion in bonds--providing
federal tax credits in lieu of interest--to finance qualified
infrastructure projects. The Build America Bonds Act is different from
the Build America Bonds authorized by the American Recovery and
Reinvestment Act of 2009.
[18] GSEs are privately owned, for-profit financial institutions that
have been federally chartered for a public purpose, such as
facilitating the flow of investment to specific economic sectors.
[19] State law may limit or condition contract arrangements available
to municipalities.
[20] See GAO, Highway Public-Private Partnerships: More Rigorous Up-
front Analysis Could Better Secure Potential Benefits and Protect the
Public Interest, [hyperlink, http://www.gao.gov/products/GAO-08-44]
(Washington, D.C.: Feb. 8, 2008).
[21] A total of 29 stakeholders--18 organizations and 11 individuals--
responded to our questionnaire. However, because not all stakeholders
responded to each question, the total number of responses varies for
each question. While we aggregated the counts of organizational and
individual stakeholders' views for reporting purposes, the tables in
this section include information on separate organizational and
individual stakeholder views.
[22] This paragraph is based on stakeholder responses to an open-ended
question. As such, some stakeholders suggested multiple ways in which
an NIB could interact with the CWSRF.
[23] Twenty-seven states currently leverage their CWSRF funds by using
some of their SRF assets, such as federal capitalization grants, as
collateral in the public bond market.
[24] Eight stakeholders suggested a variety of other possible
relationships between an NIB and the existing CWSRF. For example, one
stakeholder explained that the EPA and the CWSRF could help identify
eligible projects for NIB assistance whereas another suggested that an
NIB could push the CWSRF programs to fund more innovative and
sustainable infrastructure.
[25] It is difficult to gauge the overall level of support for each
potential administrative structure because 6 stakeholders selected
"other" rather than indicate a specific administrative structure for
an NIB and another eight stakeholders did not respond to the question.
[26] See GAO, Federally Created Entities: An Overview of Key
Attributes, [hyperlink, http://www.gao.gov/products/GAO-10-97]
(Washington, D.C.: Oct. 29, 2009); and GAO, Fannie Mae and Freddie
Mac: Analysis of Options for Revising the Housing Enterprises' Long-
term Structures, [hyperlink, http://www.gao.gov/products/GAO-09-782]
(Washington, D.C.: Sept. 10, 2009).
[27] For example, the Federal Deposit Insurance Corporation is a
government corporation that insures deposits in and is financed by
premiums paid by banks and thrift institutions.
[28] See [hyperlink, http://www.gao.gov/products/GAO-09-782].
[29] On September 6, 2008, the Federal Housing Finance Agency, the
regulator for two large housing GSEs, Fannie Mae and Freddie Mac,
established itself as their conservator given that they had lost
billions of dollars due to questionable mortgage-related investments
and that their deteriorating financial condition threatened the
stability of financial markets. The Congressional Budget Office
estimates that Fannie Mae and Freddie Mac conservatorships could cost
taxpayers nearly $400 billion over the next 10 years.
[30] See GAO, Housing Government-Sponsored Enterprises: A Single
Regulator Will Better Ensure Safety and Soundness and Mission
Achievement, [hyperlink, http://www.gao.gov/products/GAO-08-563T]
(Washington, D.C.: Mar. 6, 2008); and GAO, Housing Government-
Sponsored Enterprises: A New Oversight Structure Is Needed,
[hyperlink, http://www.gao.gov/products/GAO-05-576T] (Washington,
D.C.: Apr. 21, 2005).
[31] This paragraph is partly based on stakeholder responses to an
open-ended question. As such, some stakeholders suggested multiple
ways in which an NIB should be capitalized.
[32] Seven of 22 stakeholders selected "other," neither supporting nor
opposing a self-sustaining NIB. Three of these stakeholders explained
they would support a self-sustaining NIB but were unsure whether it
would be feasible.
[33] Pub. L. No. 101-508, Title XIII, § 13201(a) (1990) (amending the
Congressional Budget Act of 1974), 104 Stat. 1388-610, codified at 2
U.S.C. §§ 661-661f (2010).
[34] Federal entities calculate these costs by multiplying the
expected dollar amount of loans by a program's credit subsidy rate,
which is calculated to include the possibility of a borrower default
and other factors that could affect the risk to taxpayers.
[35] Of the remaining 2 stakeholders who responded to this question,
one opposed giving an NIB the authority to generate its own funds for
operating expenses and lending to ensure that an NIB focuses on
funding infrastructure projects rather than raising capital, and
another selected "other," neither supporting nor opposing giving an
NIB the authority to generate its own funds for operating expenses and
lending.
[36] 26 U.S.C. §§ 149(b)(1), 149(b)(3)(C) (2010).
[37] Four of 24 stakeholders responded "other," neither supporting nor
opposing an NIB that finances only large infrastructure projects. Two
of these stakeholders suggested that an NIB should directly fund
larger projects but should also use the state CWSRF programs to fund
smaller projects.
[38] Since 2 stakeholders provided multiple answers in response to the
question on this topic, the number of responses is greater than 23.
[39] Of the 9 stakeholders that supported only publicly owned
utilities, 2 supported only publicly owned and operated utilities,
while 7 supported publicly owned and operated utilities, as well as
publicly owned utilities with PPPs. In addition, 2 of 23 stakeholders
did not think an NIB should directly assist wastewater utilities, and
5 of 23 stakeholders expressed other views.
[40] See GAO, Water Infrastructure: Information on Financing, Capital
Planning, and Privatization, [hyperlink,
http://www.gao.gov/products/GAO-02-764] (Washington, D.C.: Aug. 16,
2002) and GAO, Water Infrastructure: Comprehensive Asset Management
Has Potential to Help Utilities Better Identify Needs and Plan Future
Investments, [hyperlink, http://www.gao.gov/products/GAO-04-461]
(Washington, D.C.: Mar. 19, 2004).
[41] This question allowed respondents to check an individual option
for an NIB to use in allocating funding to eligible projects or to
check that an NIB should use a combination of options and specify
which options.
[42] See GAO, Opportunities for Congressional Oversight and Improved
Use of Taxpayer Funds: Budgetary Implications of Selected GAO Work,
[hyperlink, http://www.gao.gov/products/GAO-04-649] (Washington, D.C.:
May 7, 2004) and GAO, U.S. Infrastructure: Agencies' Approaches to
Developing Investment Estimates Vary, [hyperlink,
http://www.gao.gov/products/GAO-01-835] (Washington, D.C.: July 20,
2001).
[43] See GAO, Clean Water: How States Allocate Revolving Loan Funds
and Measure Their Benefits, [hyperlink,
http://www.gao.gov/products/GAO-06-579] (Washington, D.C.: June 5,
2006).
[44] Our examination of privately financed PPPs did not include an
evaluation of the effect of these agreements on communities' sewer
rates and cost or level of service. Since most of the privately
financed PPPs we identified are more than 10 years old, reliable
information about these issues was not readily available.
[45] The Los Angeles Regional Water Quality Control Board, a part of
the California Environmental Protection Agency, conducts a broad range
of activities to protect ground and surface waters under its
jurisdiction, including enforcing water quality laws and regulations;
preparing, monitoring compliance with, and enforcing waste discharge
requirements, including NPDES permits; and implementing and enforcing
local storm water control efforts.
[46] This advantage would also apply to design-build partnerships that
are not privately financed.
[47] Heilman, John and Gerald Johnson, The Politics and Economics of
Privatization: The Case of Wastewater Treatment (Tuscaloosa, AL:
University of Alabama Press, 1992).
[48] Haarmeyer, David in Seidenstat, P., Nadol, M., & Hakim, S.,
America's Water and Wastewater Industries: Competition and
Privatization (Vienna, VA: Public Utilities Reports, 2000).
[49] National Research Council, Privatization of Water Services in the
United States: An Assessment of Issues and Experience (Washington,
D.C.: National Academy Press, 2002).
[50] Other types of PPPs could also offer access to expertise and
technology. For example, an official from one municipality involved in
an operations and maintenance PPP told us that the contract resulted
in efficiencies after the private partner installed technology to
monitor its facility remotely via the Internet.
[51] Landow-Esser, Janine and Melissa Manuel in Seidenstat, P., Nadol,
M., & Hakim, S., America's Water and Wastewater Industries:
Competition and Privatization (Vienna, VA: Public Utilities Reports,
2000).
[52] EPA, Response to Congress on Privatization of Wastewater
Facilities, EPA-832-R-97-001a (Washington, D.C.: July 1997).
[53] See [hyperlink, http://www.gao.gov/products/GAO-08-44].
[54] PPPs without private financing may also bring this advantage.
[55] For more information, see discussion on page 8 and footnote 14 of
this report.
[56] Several bills (H.R. 537, S.3262, H.R. 4213, and H.R. 4849),
introduced in the House of Representatives and the Senate, would
exempt water and wastewater projects from the volume caps imposed on
the issuance of private activity bonds in each state.
[57] Haarmeyer, David in Seidenstat, P., Nadol, M., & Hakim, S.,
America's Water and Wastewater Industries: Competition and
Privatization (Vienna, VA: Public Utilities Reports, 2000).
[58] See [hyperlink, http://www.gao.gov/products/GAO-08-44].
[59] In addition, we received a questionnaire from a respondent not in
our original selection. The respondent's views are not included in the
results presented in this report. However, the respondent was opposed
to an NIB, explaining that infrastructure projects have access to
traditional sources of financing such as the tax-exempt municipal bond
market and the Clean Water State Revolving Fund (CWSRF). According to
the respondent, any new funds should be directed to the CWSRF.
[60] One additional individual responded to our questionnaire but
requested that his name and organization not be listed.
[61] Stakeholders were also asked to provide the reasons for their
responses to each question.
[62] In each table in this appendix, the category "No answer" includes
respondents who checked "No answer/no opinion," as well as respondents
who left the question blank.
[End of section]
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