Innovative Infrastructure Finance

Supporting Municipal Water Infrastructure and Green Infrastructure Solutions

Most water utilities in the Western United States face significant accumulated infrastructure "deficits" as a result of rapid growth, aging infrastructure issues, and reduced federal and state funding for infrastructure construction.

Water utilities across the United States are facing significant infrastructure challenges, with many systems overdue for expansion, replacement, or upgrades. In 2018, the American Water Works Association's (AWWA) state of the industry report listed infrastructure replacement and financing for these capital expenditures as the top two challenges facing the sector based on a survey of its members.

The AWWA expects that restoring existing water systems and expanding them to serve the growing population will cost at least $1 trillion over the next 25 years, and in its most recent survey, the Environmental Protection Agency (EPA) has estimated that $472.6 billion are needed over the next 20 years to maintain and improve the nation’s drinking water infrastructure.

A large part of this burden will fall on municipalities, which own most of the water infrastructure in the U.S. For example, municipalities own 98% of the 16,000 wastewater systems operating in the U.S., and wastewater treatment plants are expected to need investments of about $271 billion over the next 25 years. However, due to budgetary constraints and pressure to maintain low rates, many smaller communities have deferred the maintenance of existing assets and have been unable to sustain capital expenditures at a level necessary to make their systems optimal, often leading them to failure in meeting regulatory compliance standards.

A modern water treatment facility. Rural communities often lack the capacity, technical expertise, and financial means to upgrade older infrastructure, or to consider more innovative, cost-effective, or environmentally beneficial projects (such as use of green infrastructure in place of traditional "grey" infrastructure..

This trend is especially common in rural areas, which tend to face more significant financial constraints due to their relatively smaller customer and tax bases; rural utilities also often lack the capacity, technical assistance, and borrowing capacity to construct infrastructure upgrades, let alone consider more innovative, cost-effective, or environmentally beneficial projects. Rural utilities frequently are forced to defer needed replacements and upgrades to their water, wastewater, and stormwater systems. Unfortunately, as those systems age and break down, meeting regulatory standards becomes increasingly challenging and expensive.

Given these projected capital needs and the potential impacts of failing infrastructure on human health and the environment, it is critical for the water sector to explore solutions that can address these needs, especially in communities where the cost associated with water infrastructure exceeds the current funding capacity of the communities they serve.

Working with Culp & Kelly, LLP and various partner organizations, and building on foundational work undertaken in connection with the 2015 report Liquid Assets: Investing for Impact in the Colorado River Basin, we have begun exploring innovative approaches to help smaller communities access the technical assistance they need to consider water infrastructure solutions, achieve economies of scale for their projects, and access additional sources of capital. These include exploration of two key initial strategies.

System losses in smaller water utilities can be significant, and result in substantial additional water use and higher costs to customers; pay-for-performance leak detection and repair can save water and reduce costs without requiring capital investment from the utility.

Bundling Water and Wastewater Infrastructure. A “bundling” strategy could potentially help to address small water/wastewater infrastructure needs. Under this approach, small projects would receive supportive funding and technical assistance to develop a common engineering solution that allows for the development of economies of scale in design and procurement, with assistance for local capacity development and  permitting. The resulting projects can then be “bundled” for financing purposes to achieve both financial sustainability and water quality improvement, working in partnership with a community development financial institution.  

Addressing Non-Revenue Water Through Pay-for-Performance. Non-revenue water” is the industry term for municipal water system loss, where water that is diverted and treated is lost to leaks before arriving at a metered customer connection. System losses in smaller water utilities can be significant, and result in substantial additional water use and higher costs to customers. It is also difficult for small providers to make the investments to find and fix these issues; while bigger cities frequently have loss rates of 5% or less, many smaller providers have losses of 25% or more. The approach we are working to develop brings together private investment to provide up-front capital on a pay-for-performance basis in partnership with an engineering firm and technology partner. Under agreement with a provider, the partners identify and fix non-revenue water issues, and are repaid (with interest) from cost savings – substantially increasing water conservation at no additional cost to the utility or to its customers and creating long-term savings.