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Trends Is Private Capital A White Knight For America's Water Infrastructure? Understanding and acceptance of public-private partnerships continue to grow as the gap between infrastructure needs and funding widens. By Frank McGrew and Jay Gorman W e are in the midst of a water infrastructure crisis in the United States, with the American Society of Civil Engineers recently grading the quality of America's wastewater infrastructure a "D." A confluence of factors including outdated pipes and facilities, population shifts, and inadequate maintenance, has combined to leave our water infrastructure in a state of overstress. In order to meet the challenge of modernizing our water infrastructure, more than $1 trillion of capital investment is needed. The good news is providers of institutional private capital are extremely keen on the water sector and stand ready to provide the funding needed to restore our infrastructure to necessary standards. While political, cultural, and structural hurdles exist in deploying this capital, the private sector is now an integral piece of our water infrastructure puzzle. In this article, we will explore how localities are overcoming these hurdles and using a myriad Is it time to consider a new model? of private sector solutions, ranging from consulting arrangements to full private ownership, to meet regulatory requirements, modernize facilities, unlock hidden value, and ultimately better serve their customers. A Fundamental Problem To fully appreciate the scope of the issue, one must look at the capital gap in water infrastructure spending in this country. In 2010 the functional and qualitative deficiencies of our water infrastructure system necessitated capital spending of around $90 billion; however, only $36 billion of funding was allocated. As crucial as this capital is to the construction process and restoration of infrastructural 24 wateronline.com ■ integrity in the U.S., inadequate funding is a trend that is expected to continue into the future, with the cumulative capital spending gap projected to surpass $770 billion by 2020.1 So how did we land in such a dire place? To answer this question one must examine the fundamentals of the municipal water industry. The United States has over 54,000 community water systems, with 85 percent of the population served by municipal-owned utilities. Similarly, the wastewater sector is comprised of over 15,000 community systems, over 95 percent of which are municipally owned. Waters' tie to local municipalities is problematic for two main reasons. First, it ties funding and usage rates to the political process where capital must often compete with much more visible projects (i.e., new parks, increased education spending, etc.) and rate increases are viewed like tax increases (subjecting approving politicians to being voted out). Second, water is a high capital cost, low marginal cost product to produce, which makes budgeting for replacement cycles extremely difficult in a politicized environment. If there is one thing politicians excel at it is kicking the can down the road, delaying difficult and costly decisions and often making them more costly in the long run. To prevent water utilities from deferring investment to a point which threatens water safety, the federal government regulates utilities to ensure they meet certain water quality standards. Since the formation of the U.S. Environmental Protection Agency (EPA) in 1970 and the passage of the Clean Water Act in 1972, an abundance of regulations has been implemented in an effort to assure Water Online The Magazine