Almost a decade ago, EPA estimated the needed investment in our domestic water and wastewater infrastructure at approximately $105 billion; today it is estimated at over $600 billion. There is no indication thus far that the new administration is committed to reversing the rapid decay of our water infrastructure, or addressing the massive backlog of needed improvements.
In the face of diminishing government resources, water utilities over the past decade or so have aggressively moved to develop independent revenue streams to shore up their bottom lines. Most successful among these efforts have been the investments by wastewater facilities in new technologies which use sewage sludge bio-solids as a feedstock for the generation of electricity. This development is particularly noteworthy in light of the fact that the water utility sector is among the highest consumers of electricity, accounting for approximately 4% of energy use in the U.S. and as high as 20% in some states, such as California.
Although new technologies hold substantial potential benefits for water utilities both in terms of financial returns and in achieving sustainability goals, they increasingly cannot be undertaken without an initial infusion of private investment. However, this need for private capital has run headlong into long-standing negative public perceptions regarding the “privatization” of water assets. This dynamic became abundantly apparent when the new administration recently floated the idea of selling the Washington Aqueduct as a means of funding other infrastructure projects.
With the new administration’s infrastructure initiative likely to focus on transportation, water utilities almost certainly will confront continuing funding shortfalls as they encounter increasing regulatory compliance and operational challenges. In the face of this enormous and growing demand for capital, why haven’t private investors been willing to move beyond their historical antipathy toward the public water sector and provide the funding necessary to keep it afloat? As one might imagine, the answer to that question is multi-faceted.
Investments in the water sector, no matter how much they might be in demand, historically have not offered the types of returns that are routinely generated by other types of “cleantech” investments. The cumbersome and disparate structure of the water sector, with its multitude of small, municipally-owned systems, is ill-equipped to efficiently and effectively employ large infusions of new capital and to generate returns commensurate with that investment. For those private financiers who are up to the challenge of investing in the water infrastructure sector, we have offered below some considerations that you should enter into your calculus.
Typically the initial step in formulating a water infrastructure investment strategy is to establish a list of potential target jurisdictions, presumably limited to states and cities with legal, political, and economic frameworks favorable to private investment in infrastructure. For example, before deciding to include any particular municipality on your list, take a look at the 30 or so states that have enacted legislation to authorize or facilitate public-private partnerships. You should also look at the history of privatization efforts in your target jurisdictions, including the degree of support for such efforts from local political leaders, water facility managers, labor unions, citizens groups and the general public.
The candidate list can then be winnowed down to conform to the investment strategy that you have adopted. For example, your business model might include a standardized project type such as a 10-200 million gallons per day wastewater treatment plant upgrade with biogas-driven combined heat and power at a defined equity investment range such as $20-100M. Within those constraints, priority locations can then be assessed and selected.
Following the selection of an initial target, the investment team can then begin the process of developing a specific plan to further define the elements of the project and identify the preferred technology and financing model. As part of this process, the development team should also find and reach out to potential stakeholders, such as local governmental representatives and community groups, to seek their input on the conceptual framework for the transaction.
Emerging from this process should be a conceptual plan that addresses the threshold ownership and structural issues (e.g. concession agreements v. equity interests). It may also include a pre-negotiated contractual and financing model to support the project.
Finally, upon completion of the conceptual plan, it is customary to initiate a local political and public education campaign to publicize the benefits of the project and to hopefully generate broad-based community support for the project in advance of any necessary governmental approvals. If the hoped-for support does not come to fruition, most prudent investors will reassess and perhaps re-focus their efforts on another municipality.
Jerry Muys is a partner, Leigh Ratino is a law clerk, and Paul Tetenbaum is a summer intern with Boston-based law firm Sullivan & Worcester LLP.