Water Infrastructure Investment in the U.S.

1. INVESTMENTS IN WATER
PPPs and Public Investment
Thursday, December 10th
Daniel Bouskela
Eugene Chao
Molly Whitehouse
Sterling Wilson

2. Agenda
• Introduction: Need for Infrastructure, Spectrum of Funding Options
• PPP model
• How does it work?
• How have they performed? How do they price?
• Pros / cons
• Public funding mechanism
• How does it work?
• A Philadelphia Example
• Pros / cons
• Conclusion

3. The Need for New Infrastructure Funding

4. Water infrastructure investments are badly needed
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5. 5
Public Funding PPPs
Private Funding (not
approached in this ppt)
# of water
systems (in
the US)¹
Source: ¹EPA
1,343 (6%)10,800 (~44%) 12,145 (~50%)
Description Contractual agreements
between public and
private sector, in general
with private capital and
private operation.
Water systems held
completely by private
companies. In general, in
smaller municipalities
What are the possible funding structures for water infrastructure?
State or local government
issues debt, which it uses
to fund the design,
construction, and
operations of the facility.
Funding Sources

6. Several models of agreements can be drawn to invest in infrastructure
6
Spectrum of Public vs. Private Involvement

7. Water investments are essential in most of the world. With lack of capital to
invest, governments have been adopting new forms of investing.
• According to the WHO/UNICEF, 32 % of the
world’s population – 2.4 billion people –
lack improved sanitation facilities.
• 663 million people still used unimproved
drinking water sources in 2015
Name of Presenter 7
…
• Public debt has reached one of the
highest levels in the history
• Governments are adopting other
mechanisms to invest in water
infrastructure
PPPs are

8. Overview of a PPP

9. 9
• Government designs the project
• Auction is set to find potential interested partners
• Partners invest / operate the contract
• Partners recover investment through service fees paid by the public or the
government.
“In an infrastructure-intensive sector, improving access and service quality to meet
the SDGs cannot be done without massive investments. Around the developing
world, the water sector appears chronically under-funded and inefficent. In this
context, Public-private partnerships (PPPs) can be viewed as one of the tools
(among others) available to governments for improving the performance and
financial sustainability of the water sector. “ World Bank
PPPs - Public Private Partnerships

10. 10
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Gov.
Offtaker
Infrastructure
Service
Revenue
Construction
Contractor (EPC)
Senior Debt
Shareholder Equity
Water Infrastructure
Asset SPV
Free Cashflow
Residual Cashflow
Proceeds from
Commitments
Management Service
Provider
Feedstock/Fuel
Supplier
O&M Services
Provider
Insurer
Payments to
Service Providers Services
Asset
Construction
1. http://www.eib.org/epec/resources/epec-capital-markets.pdf
2. “How Banks Price Loans to Public-Private Partnerships:Evidence from the European Markets,” Journal of Applied Corporate Finance, Vol. 19, No. 4, Fall 2007.
Project Finance: Typical PPP Financing Structure
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11. ▪ From 1990-2013, the ten-year cumulative default rate for PPP/PFI was 3.9%, compared to overall project finance (6.4%).2
▪ In the event of a default, 10-year cumulative recovery rates for PPP average 81.5%, slightly higher than project finance overall (80.3).2
▪ Moody’s default and recovery rates imply that for a $100 million project, an average loss over 10 years would be $3.18 million.
▪ Transactions de-risk over time, with regular amortization, cash sweeps, reserve accounts, and “lock box” formats as typical features of the asset
class.
▪
Moody’s tracks 5,308 project finance loans, 1,293 of which they designate as PPP/PFI.
Historically, PPP/PFIs have been uncorrelated with other major markets, exhibiting
low volatility while generating inflation-linked cash returns.1
1. “Default and Recovery Rates for Project Finance Bank Loans, 1983-2013,” Moody’s Investors Service, (2015).
2. Figures are based on the Basel II definition of default, which incorporates a higher number of defaults than the Moody’s definition of default. “Default and Recovery Rates for Project Finance Bank Loans, 1983-2013,” Moody’
s Investors Service, (2015). Implied losses calculated by multiplying defaults by losses (i.e. 1 minus recovery).
3. Calculated based on data provided in “Default and Recovery Rates for Project Finance Bank Loans, 1983-2013,” Moody’s Investors Service, (2015), Exhibit 11.
4. For project finance default rates: “Default and Recovery Rates for Project Finance Bank Loans, 1983-2013,” Moody’s Investors Service, (2015), Exhibit 11. According to Moody’s, the initial three year period of elevated
marginal default rates is strongly linked to construction phase risk and/or the commencement and ramp-up of operations. For corporate default rates: Moody’s Special Comment, "Corporate Default and Recovery Rates,
1920-2011,” (2012), Exhibit 34, “Average Cumulative Issuer-Weighted Global Default Rates by Letter Rating, 1983-2014”.
Marginal Annual Defaults According to
Moody’s
Marginal annual default rates are
broadly stable for the initial 4 years
post financial close, overlapping with
an approximate 3-4 year development
and construction period, and decline
thereafter to marginal annual default
rates consistent with those of corporate
issuers in the Baa ratings category or
better.
Defaults & Recovery

12. Project Finance Loans Weighted Average Spread (bps)1
1. Compiled from database queries in Thomson ONE Banker.
2. “How Banks Price Loans to Public-Private Partnerships:Evidence from the European Markets,” Journal of Applied Corporate Finance, Vol. 19, No. 4, Fall 2007.
As in Many Things, Coupons are Cyclical

13. LIBOR 1996-Today

15. 1. http://www.eib.org/epec/resources/publications/epec_market_update_2013_en.pdf
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The Size of the Market in Europe

16. Costs & Benefits of the PPP Structure
Benefits
Harness private sector expertise & efficiency
● Risk mitigation
Government bears risks that might be unpalatable
or too expensive in the private market.
○ E.g. guarantees of debt / debt service reserves,
exchange rates, ability to convert local currency,
offtake purchaser obligations, tariff collection, a
minimum level of demand for services…
● Efficiency
Private investors are more efficient, e.g. by
keeping down construction and operating costs
and delays, which is believed to more than offset
the cost of risk-pricing by private financiers.
● Low necessity of public funding
○ The government does not incur debt
○ Costs either born by end-user or taxpayer,
depending on the government’s goals
+ - Drawbacks / Criticisms
Higher cost, lower service
● Hides government debt
By transferring costs to private sector in favor
of an ongoing payment agreement and
sometime certain government guarantees,
some accuse that it hides government debt.
● Undermines services
The private sector has financial incentives,
which sometimes conflict with the whole public
interest, and won’t be addressed (e.g. in a
huge draught, private sector wouldn’t be happy
if had to invest in extra infrastructure).
● More expensive
Private sector will, in theory, demand a higher
ROI.
● Government still needs to control
(insure water quality and access)

17. The Perception of Public Sector in Financing
Water Infrastructure in the United States

18. A well designed infrastructure investments can raise economic growth, productivity, and
land values, while also providing significant positive spillovers to areas such as economic
development, energy efficiency, public health and manufacturing.
…..………..…The Department of the Treasury with the Council of Economic Advisers October 11, 2010
Operators
Public Sector

19. Tools for Public Financing Water
Infrastructure in the United States

20. Grants
Loans
EPA Environmental
Finance Program
Information
Access
Fees &
Special Charges
Bonds
Subsidies
Grants from federal, state, and/or local sources, often disbursed on the basis of a
competitive, merit-based process, are one source of funding.
Ex: USDA rural business enterprise grants, EPA Drinking Water State Revolving Fund
Short or long-term commercial loans, typically with fixed interest payments.
Ex: Water Infrastructure Finance and Innovation Act (WIFIA),Clean Water State Revolving Fund (CWSRF)
Subsidies to an operator to cover operating losses (which may include interest on debt
financed projects) are another funding source.
Ex: Interest Rate Subsidies
Electronic services
Ex: Catalogue of Federal Domestic Assistance (CFDA) and Grants.gov
The program provides leveraged financial outreach services through advisory
board (EFAB), finance center (EFC), and information network (EFIN).
Ex: EFC is a system of 9 university-based centers to provide the public and private sector with
training and educational, technical, and analytic assistance on environmental finance.
The price pays as remuneration for services or financial charges for activities undertaken.
Ex: Connection fees, Septic system inspection fees, water and wastewater utility user fees
A bond is a written promise to repay borrowed money on a definite schedule, and usually
at a fixed rate of interest for the life of the bond.
Ex: Advance Refunding Bonds, Anticipation Notes, Special Tax Bonds
Source: U.S. EPA Guidebook of Financing Tools: Paying for Environmental System, August 2008

21. Water Infrastructure Finance and Innovation Act (WIFIA)
WIFIA could provide credit assistance to large water infrastructure projects that otherwise have
difficulty obtaining financing.
WIFIA would access funds from the U.S. Treasury at Treasury rates, the mechanism is able to
lower the cost of capital for borrowers.
WIFIA assistance would have much less of a federal budgetary effect than conventional project
grants that are not repaid, because only the subsidy cost of a loan (representing the presumed
default rate on loans) would be scored. Thus, if only an average 10% subsidy cost is charged
against budget authority, a $20 million budgetary allocation theoretically supports $200 million in
loans.
To be eligible for assistance, projects must be determined to be creditworthy with a revenue
stream for repayment, thus limiting the federal government’s exposure to default and also
encouraging private capital investment.
The WIFIA concept is modeled the Transportation Infrastructure Finance and Innovation Act (TIFIA) program.
WIFIA may include the following benefits:
1
2
13
4
Source: Water Infrastructure Financing: WIFIA Program, Congressional Research Service, August, 2015

22. U.S. Treasury
WIFIA
Water Projects
State Revolving
Loan Funds
Principal Interest
The Structure of WIFIA

23. Clean Water State Revolving Fund (CWSRF)
CWSRF authorized by the Clean Water Act, provides low-cost financial assistance for planning, design,
and construction of wastewater infrastructure. Eligible applicants include cities, counties, districts, river
authorities, public bodies, and private entities proposing nonpoint source or estuary management projects.
Enhance Infrastructure System
✓ Treatment
• Projects to install or upgrade facilities to improve drinking water quality to comply with SDWA regulations
✓ Transmission and distribution
• Rehabilitation, replacement, or installation of pipes to improve water pressure to safe levels or to prevent
contamination caused by leaky or broken pipes
✓ Source
• Rehabilitation of wells or development of eligible sources to replace contaminated sources
✓ Storage
• Installation or upgrade of finished water storage tanks to prevent microbiological contamination from entering
the distribution system
✓ Consolidation
• Interconnecting two or more water systems
✓ Creation of new systems
• Construct a new system to serve homes with contaminated individual wells
• Consolidate existing systems into a new regional water system
Source: U.S. EPA Drinking Water State Revolving Fund (DWSRF)
- provide the largest capital assistance today

24. The Structure of Public Finance
- Bonds

25. ➢ A Bond is an agreement in which an issuer is required to repay to the investor the
amount borrowed plus interest over a specific period of time.
➢ A Bond is a debt instrument issued by governments, corporations and other entities
in order to finance projects or activities.
Principal borrowed by government from the investor.
Principal and Interest returned to the investor
Principal
Interest
Government/ Bond Issuer Investor/ Bond Buyer

26. Philadelphia: Funding & Pricing Regimes

27. Philadelphia Facts
Source: Wikipedia

28. PWD Facts
Source: PWD

29. PWD History
Source: PWD

30. PWD Operations
Source: PWD

31. PWD Progressive Solutions: CSO
Source: PWD, Phila.gov

32. PWD: Combined Sewer Overflow (CSO)
Source: EPA

33. PWD: Green Stormwater Infrastructure
Green City, Clean Waters
Source: PWD Website, Interview with PWD staffer, Erin Williams

34. PWD: Green Stormwater Infrastructure
Source: Commons Images

35. PWD Regressive Pricing
Source: PWD

36. PWD Regressive Pricing
Source: PWD

37. PWD Financing
Source: Treasury.gov, Alpha Publications

38. PWD Financing
Source: Treasury.gov, Alpha Publications

39. Agenda
• Introduction: Need for Infrastructure, Spectrum of Funding Options
• PPP model
• How does it work?
• How have they performed? How do they price?
• Pros / cons
• Public funding mechanism
• How does it work?
• A Philadelphia Example
• Pros / cons
• Conclusion

40. Conclusion and Takeaways
40
Government should dedicate to prioritizing infrastructure needs, creating a streamlined
investment process and a competitive arena to galvanize investors’ creativity and innovation.
Government should devote to maximizing efficiency gains and mobilizing private capital.
Environmental planning, funding and financing decision has to be made before EIS reviews.
Unnecessary restrictions given by BAB, etc should be unlocked. Otherwise, receiving public
funding will be a less desirable option and may cause unnecessary delay on projects.
Water pricing calculation should internalize administrative cost, link with inflation, and provide
saving incentives.
It is hard to directly compare whether PPP is better than Public Finance or the other because
it varies. But, Leadership and Governance are equally important and indispensable for all
infrastructure project.

41. Questions?
We (may have) answers!

42. Thank you for your time and attention.
-Daniel, Eugene, Molly, Sterling

43. Appendix

44. 44
Where can I get the money? Should we try PPP or wait for federal financial support?
It’s grab a coffee first.
Time is money. It’s all about efficiency gains.
Return of Skill. Return of Speed. Return of Fund Size. Return of Impact Investing
Public Sector
Private Sector
The Efficiency and Project Delivery Process

45. 45
Source: The World Bank Public-Private Partnerships Reference Guide: Version 2.0
How PPPs can help infrastructure delivery process
The power of private sector

46. U.S. EPA Guidebook of Financing Tools:
Paying for Environmental System, August
2008

47. Appendix

52. Key Decision-Makers Goal-setting Funding/Financing
Decision Criteria
Public Sector
Government
Federal
State
Municipal/Regional
❑ Maximizing public benefits
❑ Minimizing negative
externalities
❑ Risk of project default
Political level
• Funding availability
• Pricing
• Public benefits (economic
impacts) justify investment
• Project size/ risk profile
• Public support
• Financing capacity and ability
to attract grants
Administrative level
• Budget/funding availability
• Necessary approval (EIS,
Procurement process)
• Political power
• Pricing and regulatory policy
Public Water Operations ❑ Achieving mandated public
policy objectives
Access to funding
Private Sector
Private Water Operations ❑ Profitability
❑ Other investment
opportunity (network
expansion)
• ROI
• Risk profile
• Optimal capital structure
• Shareholder support
Shareholders/ Capital
Markets
❑ ROI (Share prices,
dividends)
• Consistence with portfolio
landscape
• Resistance to
macroeconomic risk
Lenders/Banks/Bond Market ❑ Return on loans • Creditworthiness to borrower
• Securing risks
• Resources to assets in
default risk
Suppliers ❑ Business growth
❑ Profitability
• New business where margins
can be generated
• Risks associate with revenue

53. Contract durations vary considerably – from 3 years (management) to
20 years (delegation contract)
Name of Presenter 53

54. Works Cited

55. Bibliography

56. Bibliography
http://www.eib.org/epec/g2g/annex/1-project-finance/

57. PWD: Sources