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Op-Ed: It's Time to Talk About the Future of U.S. Water Infrastructure

The following op-ed by Heiner Markhoff, President & CEO, GE Power & Water, Water & Process Technologies, and Kyung-Ah Park, Head of the Environmental Markets Group, Goldman Sachs, appeared on The Huffington Post's website on 8 February 2013:

Water is as fundamental to the health and well-being of our economy as it is essential to human life.   

The worst drought in half a century has impacted more than half the continental United States.  In Texas, dire drought conditions caused close to $8 billion in agricultural damages in 2011. Water levels in the Mississippi River, a critical transport route through the heart of the United States, are at record lows, impeding the transport of billions of dollars of grain, coal and other necessary goods in our agricultural and industrial supply chains.

The economic consequences of water stress are clear to the naked eye. Emaciated livestock, ravaged crops, and the exposed and cracked beds of lakes make for powerful images. But what can’t be seen is equally menacing.

Our nation’s water infrastructure system is failing. 

The American Society of Civil Engineers (ASCE) gives water systems in the United States a D- grade, the lowest of any of our infrastructure systems.  By 2020, ACSE estimates the cumulative GDP loss to our nation’s economy resulting from our declining water infrastructure at $416 billion and the cumulative loss in business sales at $734 billion (2011-2020). To make matters worse, nearly 700,000 jobs are at risk. 

According to the US Conference of Mayors, we need as much as $4.8 trillion in water and wastewater investment over the next 20 years.  The figures can portray a significant challenge, but viewed differently they create an enormous opportunity.

GE, Goldman Sachs and the World Resources Institute are convening a summit on “Water: Emerging Risks and Opportunities”, to facilitate a discussion on these issues.  Representatives from local, state and federal agencies, private sector companies and investors, as well as non-governmental organizations, will come together to help address key questions related to the intersection of capital, technology and policy in meeting the U.S. water challenge.          

With significant pools of capital seeking long-term, stable yield oriented investments, the time is right for water infrastructure investment.  Opportunities to invest in the space in the U.S. have been largely limited to the municipal debt market.  Given the large investment needs, growing complexities and risks, and need for innovation, we need to look at more ways to tap into private sector expertise.  Funding resources of the federal, state and local governments are also becoming scarcer and private capital can and should play a more meaningful role in helping to address these constraints. 

For example, public-private-partnerships, where municipalities partner with the private water operators to construct, operate and/or maintain water and wastewater systems, with the right construct and incentives, can yield numerous benefits and enable private capital to finance much needed investment.  Some recent partnerships have also included infrastructure investors alongside the private water operator, bringing an expanded pool of capital and assuming certain risks previously born by the municipality.  If done right, these partnerships can be part of the solution going forward and help achieve both improved reliability in service and water quality as well as long-term rate stability.

There are also a number of legislative proposals that aim to address the capital needs of our water infrastructure by stimulating private capital flow.  A proposal that expands the availability of tax-exempt financing available to private entities, called Private Activity Bonds (PABs), is one such option.  Currently, there is a state volume limit on PABs with water projects that must compete with many other public projects within the cap.  By lifting the cap, greater private capital could flow into water and wastewater investments, as is the case for airports and high speed rail projects which are exempt from state volume limits. 

Another idea on the table is the creation of a federal vehicle through which credit enhancements and loans could be provided, helping to lower the cost of capital and stimulate private capital.  Proposals include the Water Infrastructure Finance and Innovation Act, targeted for water infrastructure, and the National Infrastructure Bank, which includes but is not limited to water infrastructure.  

There is no silver bullet in addressing our water infrastructure needs and the investment requirements are daunting.  What is clear is that the cost of not addressing it is even more daunting from an economic perspective, for our long-term competitiveness, and for our well-being.  As Benjamin Franklin purportedly once said “When the well’s dry, we shall know the worth of water.”