WATER 

INFRASTRUCTURE

Approaches and Issues 

for Financing Drinking 

Water and Wastewater 

Infrastructure

Statement of J. Alfredo Gómez, Director 

Natural Resources and Environment 

Testimony

Before the Subcommittee on Interior, 

Environment, and Related Agencies 

Committee on Appropriations 

House of Representatives 

For Release on Delivery 

Expected at 9:30 a.m. EDT

Wednesday, March 13, 2013

GAO-13-451T 

United States Government Accountability Office

GAO 
United States Government Accountability Office

Highlights of GAO-13-451T, a testimony 

before the Subcommittee on Interior, 

Environment, and Related Agencies, 

Committee on Appropriations, House of 

Representatives

March 2013

WATER INFRASTRUCTURE

Approaches and Issues for Financing Drinking Water 

and Wastewater Infrastructure

Why GAO Did This Study

The nation faces costly upgrades to 

aging and deteriorating drinking water 

and wastewater infrastructure. 

Frequent and highly publicized 

incidents of combined sewer overflows 

into rivers and streams, as well as 

water main breaks in the nation’s 

largest cities, are the most visible 

manifestations of this problem. 

A variety of approaches have been 

proposed to help bridge the potential 

gap between projected infrastructure 

needs—estimated by EPA as almost 

$335 billion for drinking water 

infrastructure and $298 billion for 

wastewater infrastructure—and current 

funding. GAO has conducted recent 

work on three of these approaches. In 

addition, GAO’s recent work has 

addressed rural water infrastructure 

funding and economic recovery, as 

well as utilities' use of asset 

management, an approach to planning 

for and managing infrastructure costs. 

This testimony is based on a body of 

work from August 2002 through

October 2012 and focuses on (1) 

EPA’s Clean Water and Drinking Water 

State Revolving Fund programs; (2) 

stakeholders’ views on creating a clean 

water trust fund, a national wastewater 

infrastructure bank, and public-private 

partnerships for wastewater 

infrastructure; and (3) issues in 

financing drinking water and 

wastewater infrastructure. GAO’s 

testimony summarizes the results of 

issued reports.

GAO made recommendations in past 

reports to strengthen utilities’ use of 

asset management and coordination of 

rural water infrastructure funding. EPA 

generally concurred with the 

recommendations, taking action on 

some and beginning action on others.

What GAO Found

The Environmental Protection Agency’s (EPA) Clean Water and Drinking Water 

State Revolving Fund (SRF) programs are the largest sources of federal 

assistance to states and local communities for funding drinking water and 

wastewater infrastructure. In fiscal year 2012, EPA funded the Clean Water SRF 

program $1.5 billion and the Drinking Water SRF program $918 million from 

congressional appropriations. EPA grants capitalization funds to states, which in 

turn provide low- or no-interest loans to local communities or utilities to pay for 

water distribution pipelines, treatment plants, sewer lines, and other similar 

infrastructure.

GAO reviewed three of the approaches proposed to pay for the nation’s drinking 

water and wastewater needs, each of which offers a different means to fund and 

finance projects. To understand these approaches as they apply to wastewater 

infrastructure, GAO surveyed stakeholders, including industry representatives 

and associations and federal, state, and local government officials. GAO’s 

reports identified the following issues with each approach: 

• A clean water trust fund would provide a dedicated source of funding, such 

as an excise or other tax, for wastewater infrastructure. Stakeholders 

identified three main issues that would need to be addressed in setting one 

up: how a trust fund should be administered and used, what type of financial 

assistance should be provided, and what activities should be eligible to 

receive funding. A majority of stakeholders said that a trust fund should be 

administered through EPA in partnership with the states, but they differed in 

their views on how a trust fund should be used. 

• A national infrastructure bank would use public and/or private funds to

finance infrastructure projects through a variety of loans, loan guarantees, 

and other mechanisms. A majority of stakeholders supported the creation of 

such a bank but also identified three issues that should be considered in 

designing a bank: mission and administrative structure, financing authorities, 

and project eligibility and prioritization. 

• Public-private partnerships encourage private investment in infrastructure 

projects. GAO identified seven municipalities that have entered into privately 

financed partnerships for wastewater infrastructure. Municipal and company 

officials identified advantages to these partnerships, such as having access 

to sources of financing other than traditional sources, but also identified 

challenges to using partnerships. Local opposition is one challenge, as is the 

complexity and difficulty of contracting involved.

GAO’s work on asset management, among other things, highlights the 

importance of targeting federal funding to communities with the greatest need 

and spending funds efficiently. For example, in 2004, GAO identified 

opportunities for EPA to improve its promotion of asset management to utilities—

an approach that could give utilities the information and analytical tools they need 

to manage existing assets more effectively and to plan for the future. Since then, 

EPA has implemented GAO’s recommendations on asset management by, 

among other things, holding workshops and coordinating initiatives to provide 

asset management information. 

View GAO-13-451T. For more information, 

contact J. Alfredo Gómez at (202) 512-3841 or 

gomezj@gao.gov
 

Page 1 GAO-13-451T 

Chairman Simpson, Ranking Member Moran, and Members of the 

Subcommittee:

I am pleased to be here today as you consider the infrastructure needs 

facing the nation’s drinking water and wastewater systems. As you know, 

the nation’s water utilities face the task and costs of upgrading aging and 

deteriorating infrastructure in both drinking water plants and wastewater 

treatment systems, including collection systems, treatment plants, and 

distribution systems. Frequent and highly publicized incidents of 

combined sewer overflows into rivers and streams, as well as water main 

breaks in the nation’s largest cities, have been perhaps the most visible 

manifestations of this infrastructure problem. In its most recent needs 

surveys, the Environmental Protection Agency (EPA) estimated that the 

funding need for drinking water infrastructure totaled $335 billion (in 2007 

dollars) and wastewater infrastructure needs totaled $298 billion (in 2008 

dollars).1

A variety of approaches have been proposed to help bridge the potential 

gap between projected future infrastructure needs and current levels of 

funding. My testimony today will draw from our reports reviewing three of 

these approaches, including a clean water trust fund,

These needs are made more daunting by the limited resources 

and budgets facing all levels of government.

2 national 

infrastructure bank,3 and public-private partnerships.4 My testimony also 

draws on reports that we have issued on rural water infrastructure,5

 

1

The most recent drinking water needs assessment is EPA, Drinking Water Infrastructure 

Needs Survey and Assessment: Fourth Report to Congress, EPA 816-R-09-001 

(Washington, D.C.: February 2009) and the most recent clean water needs assessment is 

EPA, Clean Watersheds Needs Survey 2008: Report to Congress, EPA-832-R-10-002

(Washington, D.C.). EPA conducts a separate survey and assessment for each type of 

infrastructure, drinking water and wastewater, on separate 4-year schedules. The costs 

shown reflect the year that each survey was conducted. 

utility 

2

GAO, Clean Water Infrastructure: A Variety of Issues Need To Be Considered When 

Designing a Clean Water Trust Fund, GAO-09-657 (Washington, D.C.: May 29, 2009).

3

GAO, Wastewater Infrastructure Financing: Stakeholder Views on a National 

Infrastructure Bank and Public-Private Partnerships, GAO-10-728 (Washington, D.C.: 

June 30, 2010). 

4

GAO-10-728. 

5

GAO, Rural Water Infrastructure: Additional Coordination Can Help Avoid Potentially 

Duplicative Application Requirements, GAO-13-111 (Washington, D.C.: Oct. 16, 2012).

 
 

Page 2 GAO-13-451T 

asset management,6 and EPA’s existing programs to finance drinking 

water and wastewater infrastructure (water and wastewater 

infrastructure).7 These reports have generally been informational, and we 

have not made recommendations to EPA, but in cases where we did and 

EPA provided an opinion, it generally concurred with our 

recommendations. My statement today is based on our prior work issued 

from August 2002 through October 2012 and focuses on (1) EPA’s Clean 

Water and Drinking Water State Revolving Fund (SRF) programs; (2) 

views of stakeholders on creating a clean water trust fund, a national 

infrastructure bank for wastewater, and public-private partnerships for 

wastewater infrastructure;8 and (3) issues facing federal agencies, states, 

local communities, and utilities in financing drinking water and wastewater 

infrastructure. Detailed information about scope and methodology can be 

found in our issued reports. We conducted this work in accordance with 

generally accepted government auditing standards. 

Drinking water and wastewater infrastructure improvements are largely 

paid for by communities or utilities and their ratepayers, through the water 

and sewer rates they pay. Drinking water infrastructure involves treatment 

plants, distribution pipelines, and other equipment needed to take water 

from natural sources, such as rivers, lakes, and groundwater aquifers, 

treat it, and then provide it to households, businesses, and others for 

drinking and other uses. Wastewater infrastructure includes collection 

systems, tanks, treatment equipment, and other related equipment that all 

transport wastewater from homes, businesses, and other sources for 

treatment and discharge, generally, into a nearby body of water.

A number of federal agencies provide funding to assist communities and 

utilities in financing water and wastewater infrastructure construction and 

 

6

GAO, Water Infrastructure: Comprehensive Asset Management Has Potential to Help 

Utilities Better Identify Needs and Plan Future Investments, GAO-04-461 (Washington, 

D.C.: Mar. 19, 2004) and GAO, Water Infrastructure: Information on Financing, Capital 

Planning, and Privatization, GAO-02-764 (Washington, D.C. Aug. 16, 2002).

7

See GAO, Recovery Act: Funds Supported Many Water Projects, and Federal and State 

Monitoring Shows Few Compliance Problems, GAO-11-608 (Washington, D.C.: June 29, 

2011).

8

Stakeholders include individuals and groups from the water and wastewater industry and 

federal, state, and local government with knowledge of water and wastewater 

infrastructure issues.

Background 
 

Page 3 GAO-13-451T 

rebuilding projects. In addition, the federal government subsidizes 

infrastructure projects through the tax exemption for municipal bonds, 

which reduces localities’ borrowing costs. Table 1 describes the 

assistance provided by the different federal agencies.

Table 1: Federal Agencies Providing Financial Assistance for Local Water and Wastewater Infrastructure

Agency, Program Financial assistance provided

EPA, Clean Water State 

Revolving Fund

Grants funds to states that provide loans to communities of all sizes for wastewater treatment 

infrastructure, nonpoint pollution management, and estuary programs.

EPA, Drinking Water State 

Revolving Fund

Grants funds to states that provide loans to communities of all sizes for drinking water 

infrastructure. 

Department of Agriculture, Rural 

Utilities Service, Water and Waste 

Disposal Program 

Provides funding for water and wastewater infrastructure projects in communities with populations 

less than 10,000.

Department of Housing and Urban 

Development, Community 

Development Block Grant

Provides block grant funds to states for distribution to communities, and to certain metropolitan 

areas; communities use funds for a broad range of activities including water and wastewater 

infrastructure. According to department officials, about 10 percent of funding is used for this 

purpose. 

Department of Commerce, 

Economic Development 

Administration, Public Works and 

Economic Development Program

Provides grants to small and disadvantaged communities to construct public facilities, including 

drinking water and wastewater facilities, to alleviate unemployment.

U.S. Army Corps of Engineers Provides assistance for water and wastewater infrastructure projects, typically for specific 

locations as authorized by Congress.

Bureau of Reclamation Provides assistance for water supply projects through individual projects and under its rural water 

supply program.

Indian Health Service Provides funding for water and wastewater infrastructure on tribal lands.

Department of the Treasury, 

Internal Revenue Service

Administers provisions for tax-exempt bonds issued by local governments to finance qualified 

projects. 

Source: GAO.

The issue of how the federal government should help to finance the 

nation’s water and wastewater infrastructure involves several 

considerations. First, the entity to administer the assistance can include a 

federal agency, a special-purpose entity, or a public-private partnership. 

Special-purpose entities include government corporations and 
 

Page 4 GAO-13-451T 

government-sponsored enterprises.9 A second consideration in financing 

the nation’s infrastructure is the source of funding for the financial 

assistance provided. Such funding can be public, such as appropriations 

from the federal, state, or other governments, or private, such as private 

investment or revenues and other income from the enterprise. Third, the 

financing provided for infrastructure projects can come in a variety of 

forms: grants, loans, loan guarantees, debt or equity purchases, 

insurance for project costs, bonds, and others. And, finally, projects 

eligible to receive financing can be public and/or private and can include 

one or more aspects of a project, including design, capital construction, 

and other support.

EPA’s Clean Water and Drinking Water SRF programs are the largest 

sources of federal assistance to states and local communities for funding 

drinking water and wastewater infrastructure. EPA receives federal 

appropriations that are then, in turn, granted to states to use in 

conjunction with state funds to provide loans for improvements at 

communities’ water and wastewater treatment systems. From fiscal years 

2003 through 2012, appropriations for the Clean Water SRF averaged 

about $1.2 billion annually and about $913 million annually for the 

Drinking Water SRF. Figure 1 shows the total appropriations to EPA for 

the two programs for fiscal years 2003 through 2012.

 

9

Government corporations are not completely alike but have generally been established 

by Congress to provide market-oriented public services, such as the Commodity Credit 

Corporation, which stabilizes and protects farm income and prices. Governmentsponsored enterprises are privately owned, for-profit financial institutions that have been 

federally chartered for a public purpose, such as facilitating the flow of investment to 

specific economic sectors. 

EPA’s Clean Water and 

Drinking Water State 

Revolving Funds 

Capitalize StateManaged Revolving 

Funds 
 

Page 5 GAO-13-451T 

Figure 1: Appropriations for EPA’s Clean Water and Drinking Water State Revolving 

Fund Programs, Fiscal Years 2003 through 2012

Notes: EPA administers the Drinking Water State Revolving Fund (SRF) program, which provides 

annual funding to states to finance projects for publicly and privately owned drinking water treatment 

systems, and the Clean Water SRF program, which provides funding to states to finance projects for 

constructing, replacing, or upgrading publicly owned municipal wastewater treatment systems. 

The funding in this table represents annual appropriations and does not include funds appropriated in

the American Recovery and Reinvestment Act. The Clean Water SRF was appropriated $4 billion 

from the Recovery Act and the Drinking Water SRF was appropriated $2 billion.

The Clean Water and Drinking Water SRF programs provide states and 

local communities with an independent and sustainable source of 

financial assistance by providing capital for state SRF funds. The states 

are required to match 20 percent of the federal grant money.10

 

10State grants for the Clean Water SRF program are to be made on the basis of a 

statutory allocation formula. The Drinking Water SRF grants are to be allocated to states 

on the basis of current needs assessments, with a minimum allocation of 1 percent per 

state. 

From 

these federal and state funds, states then typically provide assistance in 
 

Page 6 GAO-13-451T 

the form of low- or no-interest loans to communities or utilities, repayment 

of which replenishes the funds and provides the ability to fund future 

loans for additional projects.

The Clean Water SRF was established in 1987 in amendments to the 

Clean Water Act, which was enacted to protect the nation’s surface 

waters, such as rivers, lakes, and coastal waters and to maintain and 

restore the physical, chemical, and biological integrity of these waters. 

Funds can be used to pay for projects such as constructing or upgrading 

secondary or advanced wastewater treatment facilities, construction of 

new sewers or storm sewers, and similar projects, among other things.

11

The Drinking Water SRF was established in 1996 in amendments to the 

Safe Drinking Water Act, which was enacted to establish national 

enforceable standards for drinking water quality in public water systems 

and to require such systems to monitor water to ensure compliance with 

standards, among other things. Funds can be used to pay for upgrading 

or replacing infrastructure to address violations of drinking water 

regulations or to replace aging storage facilities, distribution pipelines, 

treatment facilities, and similar projects related to public health protection. 

Unlike the Clean Water SRF,

 

12 assistance can be provided to privately 

owned community water systems, as well as publicly owned community 

water systems, and nonprofit noncommunity systems.13

In addition to annual appropriation funding provided to the programs, the 

American Reinvestment and Recovery Act of 2009 (Recovery Act) 

provided a large influx of funding for the SRF programs—in total $6 

billion: $4 billion to the Clean Water SRF program and $2 billion to the 

 

 

11Wastewater treatment involves several processes, including primary treatment to 

remove suspended solids; secondary treatment to further remove contaminants using 

biological processes; and tertiary or advanced treatment to remove additional material in 

wastewater, such as nutrients or toxic chemicals. 

12Clean Water SRF funds used for financial assistance for construction or upgrades of 

treatment plants may be provided only to municipal, intermunicipal, and interstate 

agencies. 

13A community water system is one that has more than 15 connections used by yearround residents or that regularly serves 25 year-round residents. Cities, towns, and 

communities such as retirement homes are examples. A noncommunity system is a public 

water system that is not a community water system and serves a non-year-round 

population of at least 25 individuals daily for at least 60 days of the year. Schools and 

churches are examples.
 

Page 7 GAO-13-451T 

Drinking Water SRF program. The act, which was passed in February 

2009, required that projects funded with Recovery Act program funds had 

to be under contract within 1 year of the act’s passage, or February 17, 

2010. We reported in June 2011 that states had awarded contracts and 

obligated this funding, which they used to pay for major infrastructure 

projects.14

A variety of approaches have been discussed to pay for the nation’s 

water and wastewater infrastructure needs. In May 2009 and June 2010, 

we reported on the views of stakeholders, including individuals and 

groups from the wastewater industry and federal, state, and local 

governments with knowledge of water and wastewater infrastructure 

issues,15 of what is needed to create three of these financing approaches.

A clean water trust fund would provide a dedicated source of federal 

funding for wastewater infrastructure, similar to federal trust funds such 

as the Highway and Airport and Airways Trust Funds, which are used to 

account for funds that are dedicated for spending on a specific purpose. 

As authorized by law, the federal government may control a trust fund, as 

well as its earnings, and raise or lower future trust fund collections and 

payments or change the purposes for which the collections are used. 

Stakeholders concluded that a number of issues need to be addressed in 

 

14GAO-11-608. 

15See GAO-09-657 and GAO-10-728. 

Stakeholders 

Identified Issues to 

Consider in Designing 

a Clean Water Trust 

Fund, a National Bank 

for Wastewater 

Infrastructure, and 

Public-Private 

Partnerships 

Clean Water Trust Fund
 

Page 8 GAO-13-451T 

creating a clean water trust fund.16

Administration and use of a trust fund. Stakeholders told us that designing 

a clean water trust fund would involve deciding what agency or entity 

would administer the fund and whether the trust fund would be used to 

fund the Clean Water SRF or a separate program. A majority of 

stakeholders (15 of 20) expressed the view that a trust fund should be 

administered through an EPA-state partnership like the current Clean 

Water SRF program. Four of the remaining stakeholders thought that 

another entity should administer the fund, and one had no opinion on the 

matter.

The issues identified were (1) the 

administration and use of the trust fund, (2) the type of financial 

assistance that should be provided for projects, and (3) the activities 

eligible for funding.

Stakeholders had mixed views on how a trust fund should be used. About 

one-third (7 of 20) thought that a trust fund should be used to only fund 

the existing Clean Water SRF. These stakeholders said that they had an 

interest in building on the success of the existing program, avoiding 

redundant administrative costs associated with establishing a new 

program, and providing a dedicated source of funding for the existing 

program. Three of 20 stakeholders said that a trust fund should fund a 

separate and distinct infrastructure program from the Clean Water SRF. 

Some said that a separate program was needed because Clean Water 

SRF loan amounts can sometimes be inadequate to fund needs in large 

urban areas and that smaller communities may lack the administrative 

capacity to go through the process. However, five of 20 stakeholders said 

they favored using a trust fund to both fund the Clean Water SRF and to 

fund a separate program. In contrast, other stakeholders (3 of 20) 

opposed the creation of a trust fund because they said that utilities should 

be self-sustaining through the rates they charge their customers and by 

 

16The stakeholders we interviewed on the creation of a clean water trust fund included 50 

individuals and groups with knowledge of water and wastewater issues, including industry 

associations; federal, state, and local government officials; and industry representatives. 

Based on the information gathered from these interviews, we developed a questionnaire 

and sent it to 28 national organizations with expertise in financing wastewater projects, 

constructing and maintaining wastewater projects, local and state wastewater 

infrastructure needs, and environmental protection. Twenty-two stakeholders responded 

to our questionnaire; however, because not all stakeholders answered every question, the 

total number of respondents can vary for each question. See GAO-09-657 for detailed 

information on our scope and methodology.
 

Page 9 GAO-13-451T 

more efficiently managing their systems. The remaining stakeholders said 

the fund should be used for other purposes.

Type of financial assistance. Another design issue that stakeholders 

identified was specifying the type of assistance—grants or loans—that a 

clean water trust fund would provide. More than half of the stakeholders 

(13 of 21) favored distributing funding through a combination of grants 

and loans. The type of assistance provided by a trust fund, according to 

many stakeholders, should be tailored to the applicant’s needs and 

capacity. Other stakeholders said that while loans impose discipline on 

borrowers, grants may be needed for certain communities that cannot 

make loan repayments, such as those with declining or low-income 

populations. In contrast, a few stakeholders thought that either loans or 

grants should be provided from a clean water trust fund.

Eligible activities. Stakeholders said that designing and implementing a 

clean water trust fund would involve determining the type of wastewater 

infrastructure activities that the fund would support. The majority of 

stakeholders supported using funds to pay for planning and designing 

wastewater projects (18 of 21) and for capital costs of projects (19 of 21), 

similar to the Clean Water SRF.

Funding a Clean Water Trust Fund: Our May 2009 report identified 

potential sources of revenues for a clean water trust fund, but each of 

these faces obstacles to implement. A variety of options could be 

enacted, including excise taxes on products that contribute to the waste 

stream, additional taxes on corporate income, a water use tax, and an 

industrial discharge tax. However, it may be difficult to raise substantial 

sums for a clean water trust fund from any one source. Table 2 

summarizes the options we identified and the implementation obstacles.

Table 2: Options for Funding a Clean Water Trust Fund and Obstacles to Implementation

Option Description Obstacles 

Excise tax on products that 

contribute to the waste stream

A tax on products that contribute to the 

wastewater stream, such as beverages, fertilizers 

and pesticides, flushable products, 

pharmaceuticals, and water appliances and 

plumbing fixtures

Excise taxes require precise definitions of the 

products to be taxed, including a decision on 

per unit or percentage basis of tax

Internal Revenue Service would have to modify 

its excise tax collection and enforcement 

framework, update forms, train staff, and 

increase audit responsibilities

Additional tax on corporate 

income

Similar to the Corporate Environmental Income 

Tax to fund the Superfund program (until 1995)

Corporate income tax requires defining the 

types of corporations and the portions of income 

to be taxed
 

Page 10 GAO-13-451T 

Option Description Obstacles 

Water use tax A tax on water use using volume-based charge or 

flat charge added to local residential, commercial, 

and industrial water utility rates paid by customers

Developing a tax collection system, structuring 

the tax, and determining the tax base would be 

necessary

Industrial discharge tax A tax on industrial discharge by levying a fee on 

National Pollutant Discharge Elimination System 

permits or a tax on toxic chemical releases 

reported by industrial facilities

No federal system exists to charge such a tax

Determining the tax base—permits or toxic 

discharges—would be necessary

Source: GAO.

A national infrastructure bank could finance wastewater infrastructure 

through a variety of mechanisms, such as directly loaning money to 

eligible projects, guaranteeing municipal bonds to lower costs, and 

pooling loans from numerous smaller municipalities to lower costs. The 

majority of stakeholders responding to our questionnaire about creating a 

national infrastructure bank to fund wastewater projects supported the 

concept overall, but they identified three key areas that would need to be 

considered in designing such a bank. 17

Mission and administration. A majority of stakeholders supported the 

creation of a bank, but their views varied on its mission and administrative 

structure. Of the 20 stakeholders who supported creation of a bank, about 

two-thirds (13) said its mission should be to fund infrastructure in multiple 

sectors, such as transportation, energy, water, and wastewater. The 

reasons for their views included that it would allow for coordination across 

sectors and that financial experts at such a bank would be able to apply 

their expertise to a wide range of projects. In contrast, one-third of 

The three areas identified by 

stakeholders are similar to those raised in creating a clean water trust 

fund: mission and administration, financing authorities, and project 

eligibility.

 

17To obtain stakeholders’ views of a national wastewater infrastructure bank, we surveyed 

23 (18 replied) national organizations with expertise in one of the following areas: 

financing and operating wastewater projects, constructing and maintaining wastewater 

infrastructure, local and state wastewater infrastructure needs, or environmental 

protection. In addition, we also sent the questionnaire to 14 (11 replied) financing experts 

to solicit additional views on this topic. See GAO-10-728 for detailed information on our 

scope and methodology. While a total of 29 organizations and individuals responded to 

the questionnaire, not all stakeholders rated each criterion. Thus, the total number of 

respondents varied for each question. See the report for the full results of our 

questionnaire.

National Wastewater 

Infrastructure Bank
 

Page 11 GAO-13-451T 

stakeholders (7 of 20) said that the bank’s mission should be focused 

only on water and/or wastewater infrastructure.

Stakeholders did not agree on whether a bank should be administered as 

a new responsibility for an existing federal agency, structured as a 

government corporation, or structured as a government-sponsored 

enterprise. As we have previously reported, an entity’s administrative 

structure affects the extent to which it is under federal control, how its 

activities are reflected in the federal budget, and the risk of exposure of 

U.S. taxpayers.18

Type of financial assistance: Most stakeholders also agreed on some of 

the mechanisms that a bank should offer for financing projects. In 

particular, a majority of stakeholders said that a bank should issue direct 

loans to projects (19 of 29) and loan guarantees (15 of 29) for projects.19

Eligible projects. Stakeholders differed in their views of what projects to 

fund through a national infrastructure bank but they agreed on how the 

projects should be prioritized, such as whether a bank should be used 

exclusively for large projects. Half of stakeholders (12 of 24) said projects 

of all sizes should be eligible for bank financing, while a third (8 of 24) 

noted that only large projects should be eligible.

Almost half of stakeholders (14 of 29) supported pooling loans for 

infrastructure projects into a larger bond to lower borrowing costs.

20

 

18See GAO, Federally Created Entities: An Overview of Key Attributes, 

One reason for 

supporting larger projects for financing was that these are beyond the 

capacity of the Clean Water SRF to fund. In addition, a majority of 

stakeholders agreed that a bank should prioritize projects for funding that 

address the greatest infrastructure need (18 of 29) and that generate the 

greatest public health (17 of 29) and environmental benefits (15 of 29).

GAO-10-97 

(Washington, D.C.: Oct. 29, 2009) and GAO, Fannie Mae and Freddie Mac: Analysis of 

Options for Revising the Housing Enterprises’ Long-term Structures, GAO-09-782 

(Washington, D.C.: Sept. 10, 2009). 

19Stakeholders could select more than one mechanism that a bank could offer, and thus, 

the total number of respondents selecting mechanisms may be greater than 29. 

20The remaining four stakeholders replied “other” on the size of project that would be 

eligible. 
 

Page 12 GAO-13-451T 

Funding. A majority of the stakeholders we surveyed agreed on the 

financing authorities for a national infrastructure bank, including how it 

should be funded and how it should finance projects. Specifically, most 

stakeholders (20 of 22) agreed that the federal government should 

provide all or some of the initial capital for a national infrastructure bank, 

though four suggested that federal funds should be augmented by private 

funds. Further, most stakeholders (21 of 23) agreed that a bank should be 

authorized to generate its own funds for operating expenses and lending, 

using multiple financing mechanisms (15 of 23). Some of these 

stakeholders stressed the need for a bank to have access to low-cost 

capital through borrowing from the Department of the Treasury and 

issuing tax-exempt bonds. However, we noted that the Internal Revenue 

Service said that these guaranteed bonds are not exempt, so a statutory 

exemption to allow tax-exempt, guaranteed bonds would be needed to 

accomplish this.

A third approach for financing wastewater infrastructure is to encourage 

private investment in projects, including through public-private 

partnerships at the municipal level. A privately financed public-private 

partnership, as defined in our June 2010 report, is a contractual 

agreement in which the private partner invests funds in the wastewater 

project, but the agreement does not include full privatization, in which the 

municipality sells its wastewater infrastructure assets to a private 

partner.21 In that report, we identified and reviewed only a few privately 

funded public-private partnerships developed for wastewater since 1992, 

concluding that the use of such approaches is still uncommon for 

wastewater.22 Stakeholders from municipalities and private companies 

engaged in such partnerships cited several advantages and challenges in 

their use.23

 

21

The seven partnerships we identified and reviewed, the 

GAO-10-728. 

22This result echoes the results of a study by the Congressional Budget Office. See CBO, 

Issues and Options in Infrastructure Investment (Washington, D.C.: May 2008). 

23To obtain views on public-private partnerships, we interviewed officials from 

municipalities involved in six of seven partnerships we reviewed. We also interviewed 

officials from other municipalities in the states where four partnerships are located: Alaska, 

California, New Jersey, and Ohio. In addition, we interviewed officials at six of the largest 

private companies involved in water and wastewater public-private partnerships. See 

GAO-10-728 for detailed information on our scope and methodology.

Public-Private 

Partnerships for 

Wastewater Infrastructure
 

Page 13 GAO-13-451T 

parties administering the partnership, the eligible activities and assets, 

and the form of financial assistance are described in table 3.

Table 3: Wastewater Public-Private Partnerships Developed since 1992 Identified by GAO

Municipality Company

Year 

initiated Type

Initial term 

(years) Assets included

Up-front 

payment

Arvin, CA U.S. Filter (now Veolia 

Water)

1999 Lease 

and 

DBFO

35

a

Lease: existing plant

DBFO: upgraded 

treatment plant 

components

Yes

Cranston, RI Triton Ocean State LLC 

(now Veolia Water)

b 1997 Lease 25 Treatment plant, collection 

system, pumping stations, 

industrial pretreatment

Yes

Fairbanks, AK Golden Heart Utilities 1997 Lease 

and asset 

sale

30

c

Lease: treatment plant

Asset sale: collection 

system

Yes

Franklin, OH Wheelabrator EOS 

(now Veolia Water)

d 1995 Lease 

and asset 

sale

20

e

Lease: one process within 

treatment plant

Asset sale: treatment plant

Yes

North Brunswick, NJ U.S. Water (now United 

Water)

f 1995 Lease 20 Collection system and 

pumping stations

Yes g 

Santa Paula, CA Santa Paula Water, 

LLC

2008 h DBFO 30 New water recycling 

facility

No

Woonsocket, RI U.S. Filter (now Veolia 

Water) with third-party 

financing through 

LaSalle Bank and ABN 

AMRO

i 1999 DBFO 20 Upgrade of existing 

treatment plant

Yes

Source: GAO.

a

DBFO refers to an agreement to design-build-finance-operate.

b

Since officials from Cranston declined to speak with us, this information about Cranston’s privately 

financed public-private partnership is derived from publicly available sources.

c

The city of Fairbanks leased its wastewater treatment plant, which falls within the report’s definition 

of a privately financed public-private partnership. Fairbanks sold its collection system, which falls 

outside of the scope of the report.

d

The wastewater treatment plant involved in the 1995 lease and asset sale was originally owned by 

the Miami Conservancy District, a flood-control agency in southwestern Ohio. The treatment plant 

serves the communities of Franklin, Carlisle, and Germantown, as well as unincorporated areas of 

Warren and Montgomery counties.

e

The city of Franklin leased a portion of its wastewater treatment plant, which falls within the report’s 

definition of a privately financed public-private partnership. Franklin sold other parts of the treatment 

plant.

f

The North Brunswick lease was terminated in 2002.
 

Page 14 GAO-13-451T 

g

North Brunswick also leased their drinking water assets, including a treatment plant, as well as the 

distribution system.

h

Santa Paula Water, LLC, is a partnership between PERC Water and Alinda Capital.

i

Officials from the municipalities and companies we interviewed reported 

advantages of privately funded public-private partnerships, including 

faster delivery of facilities or upgrades, access to alternative sources of 

financing, cost and operational efficiencies, access to expertise and 

technology solutions, up-front payments to municipalities, and increased 

focus by local governments on their other functions. For example, two of 

the municipalities we interviewed were facing regulatory deadlines that 

required them to upgrade their facilities or pay fines. Company and 

municipal officials said that private procurement may be faster because it 

is more streamlined than public procurement. Other municipal officials 

said that they could not access the bond market to pay for their project, 

and another community official said that it was difficult to get the public to 

approve their bonds, and the public-private partnership offered an 

alternative source of financing.

The wastewater treatment plant involved in the 1999 DBFO serves multiple communities: 

Woonsocket, Rhode Island; North Smithfield, Rhode Island; Cumberland, Rhode Island; Bellingham, 

Massachusetts; and Blackstone, Massachusetts.

Challenges that municipal and company officials reported included public 

and political opposition, higher costs to borrow with private financing, 

difficulties with combining public and private financing, loss of municipal 

control over a project, lack of experience with public-private partnerships, 

costly and difficult contracting, and legal issues.

• The challenge most often cited by municipal and company officials 

was public and political opposition. The public is often concerned 

about the possibility that a company would not be as responsive to 

ratepayers as a municipal government; other public concerns are 

about job losses and sewer rate increases. For example, one 

community we reviewed terminated its agreement in 2002 because, in 

part, of a public reaction to rate increases. In another case, public 

opposition derailed the development of a partnership.

• Financing challenges include the fact that private financing generally 

costs more than public financing and that combining public and 

private financing is difficult. In our June 2010 report, we cited a 

National Research Council study that said private financing may be 20 

to 40 percent more expensive than public financing, although officials 

said that tax rules allowed companies to depreciate capital and find 

cost savings over the long term. In addition, the public entity must 
 

Page 15 GAO-13-451T 

follow Internal Revenue Service tax rules to avoid changing the status 

of existing tax-exempt municipal bonds to taxable bonds, and may 

have difficulty meeting the requirements to issue tax-exempt bonds in 

the future.

• Several municipal and company officials told us that they had 

concerns with losing control over their facilities and rates. For 

example, officials in Santa Paula, California, told us they experienced 

a loss of control over plant design, choice of equipment, and 

construction costs after entering into their design-build-financeoperate agreement. The terms of this kind of agreement determine 

the extent to which a municipality may retain control in a public-private 

partnership.

• Municipal and company officials also said that they lack experience 

with developing partnerships and that this might limit development of 

any such partnerships. Related to this is costly and difficult 

contracting, another challenge cited by municipal and company 

officials. Finally, state and federal laws may raise difficulties in 

entering into public-private partnerships. For example, EPA officials 

stated that prior to accepting private financing, municipalities must 

repay any remaining federal investment for facilities built under the 

construction grants program of the 1970s and 1980s, as well as any 

other federal grants.24

As the nation faces limited budgets and funding for federal programs, the 

importance of targeting federal funds to communities with the greatest 

need and spending funds efficiently increases. Part of this effort, as our 

work and that of EPA’s Inspector General shows, is determining which 

communities and utilities have the greatest need for funding and targeting 

federal funds to help these communities. One way to target funds is to 

provide them to communities that are economically disadvantaged. The 

Drinking Water SRF program requires states to consider household 

affordability, among other factors, in prioritizing drinking water projects, 

and it also allows states to provide extra subsidies to disadvantaged 

communities, under some conditions (the Clean Water SRF allows states 

to consider community financial need in prioritizing funds for projects, but 

does not require it). As we reported in June 2011, however, EPA has 

 

24Prior to the creation of the SRF programs, EPA provided grants to states for 

infrastructure construction. 

Issues with Efficiently 

Financing Water 

Infrastructure
 

Page 16 GAO-13-451T 

limited information about how states target disadvantaged communities 

for SRF funding.25 Furthermore, while the Recovery Act did not require 

states to provide funding to disadvantaged communities, it did require

them to provide a portion of Recovery Act Clean Water and Drinking 

Water SRF funds to communities without the requirement to repay the 

funds—a concept called principal forgiveness—and states targeted this 

principal forgiveness to entities that they determined were economically 

disadvantaged. While some states had data, according to an April 2011 

EPA Inspector General report, EPA did not have the overall data to 

ensure that Recovery Act SRF funds were targeted to the disadvantaged 

communities.26

Our October 2012 report on rural water infrastructure funding shows the 

potential for greater efficiency in federal funding.27

In October 2012, we reported on the three largest sources of federal 

funding for rural water infrastructure and identified opportunities for these 

programs to coordinate and lower the costs to communities applying for 

funding from more than one program and agency. Our analysis showed 

that program overlap among EPA’s Clean Water and Drinking Water SRF 

programs and the Department of Agriculture’s Rural Utilities Service 

Water and Waste Disposal program, which provides funding for both 

drinking water and wastewater projects in low-income rural communities 

of 10,000 or less, can result in potential duplication of communities’ 

efforts to prepare funding applications and related documents, including 

preliminary engineering reports and environmental analyses. Engineers 

One group of 

communities that has a difficult time paying for infrastructure 

improvements is small, often rural, communities that have 10,000 or 

fewer residents. Unlike large communities, which can spread costs across 

a broader public, small, rural communities often cannot pay for 

infrastructure improvements through rate increases because they have a 

low number of ratepayers to bear the costs. Rural communities also often 

lack access to bond markets and cannot, therefore, raise their own capital 

to pay for projects. As a result, they are more dependent on federal 

financial assistance to help pay for their projects.

 

25GAO-11-608. 

26OIG, EPA Faced Multiple Constraints to Targeting Recovery Act Funds, Report No. 11-

R-0208 (Washington D.C.: Apr. 11, 2011). 

27GAO-13-111. 
 

Page 17 GAO-13-451T 

we interviewed estimated that preparing additional engineering reports 

could cost anywhere from $5,000 to $50,000 and that the cost of an 

environmental analysis could add as little as $500 to a community’s costs 

or as much as $15,000. The additional time and resources add costs to 

projects. 

Further, we found that inefficiencies in funding projects arose when statelevel programs did not cooperate in funding projects. Specifically, the 

officials with the Rural Utilities Service in Colorado and North Carolina 

reported needing, or expecting, to deobligate more than $20 million that 

they had committed to fully fund projects because they were unaware that 

the state SRF programs had also committed to fully fund the same 

projects. The two Rural Utilities Service state offices could not meet 

internal agency deadlines to fully obligate their available funds and, as a 

result, had to return these funds to a central headquarters pool for 

reallocation. We recommended several actions to improve coordination 

among the agencies and programs, such as completing an effort to 

develop guidelines to assist states in developing their own uniform 

preliminary engineering reports to meet federal and state requirements 

and starting an effort to create uniform guidelines for environmental 

analyses that could be used, to the extent appropriate, to meet state and 

federal requirements. EPA and USDA neither agreed nor disagreed with 

these recommendations, but they have implemented one action and have 

begun to take steps on the others.

Part of the effort to efficiently finance water and wastewater infrastructure 

funds is managing existing infrastructure efficiently to manage costs of 

repair and replacement. As we reported in March 2004, comprehensive 

asset management is an approach that could give utilities the information 

and analytical tools they need to manage existing assets more effectively 

and to plan for the future.28

 

28

Using asset management concepts, utilities 

and other organizations responsible for managing capital infrastructure 

can minimize the total costs of designing, acquiring, operating, 

maintaining, replacing and disposing of capital assets over their useful 

lives. The steps involved, as we cited in our March 2004 report, include 

the following:

GAO-04-461. 
 

Page 18 GAO-13-451T 

• Collecting and organizing detailed information on assets. Collecting 

basic information about capital assets helps managers identify their 

infrastructure needs and make informed decisions about assets. An

inventory includes descriptive information about assets, an 

assessment of the assets’ condition, and information on the assets’ 

value.

• Analyzing data to set priorities and make better decisions about 

assets. Under asset management, managers apply analytical 

techniques to identify significant patterns or trends in the data they 

have collected on capital assets, help assess risks and set priorities, 

and optimize decisions on maintenance, repair, and replacement of 

assets. This can include a life-cycle cost analysis or risk assessment.

• Integrating data and decision making across the organization. 

Managers ensure that the information collected within an organization 

is consistent and organized for the people who need it.

• Linking strategy for addressing infrastructure needs to service goals, 

operating budgets, and capital improvement plans.

Our 2004 report recommended various actions that EPA could take to 

promote asset management, and EPA has taken those actions, including 

holding workshops for utilities and coordinating its ongoing initiatives. In 

addition, in its SRF sustainability policy, EPA supports asset management 

as an approach to increase the longevity of infrastructure. The last time 

we reviewed utilities’ use of asset management was in 2002.29

In conclusion, Mr. Chairman, the funding needs for upgrading the nation’s 

drinking water and wastewater infrastructure require attention. Much of 

this burden will be borne by local communities and utilities and the 

At that 

time, we found that, of large utilities (i.e., those with over 10,000 users), 

one-quarter did not have asset management plans. We have not updated 

this work and do not know the extent to which more utilities, including 

smaller utilities, now have plans. Those utilities that did have asset 

management plans reported benefits such as being able to better justify 

rate increases and bond ratings. In addition, utility officials believed that 

such plans would slow the rate of growth of their costs for capital, 

operations, and maintenance.

 

29 GAO-02-764. 
 

Page 19 GAO-13-451T 

ratepayers using the services provided. Given the magnitude of our 

projected infrastructure needs nationwide, it is important that utilities 

adopt a strategy to manage the repair and replacement of key assets as 

cost-effectively as possible, as well as a plan to sustain their 

infrastructure in the long term. The states and federal government have 

played a long-time role in assisting local communities and utilities, and 

will likely continue to do so. In considering approaches for providing 

continued federal assistance, it is helpful to consider how an entity 

providing assistance will be administered and funded, how it will finance 

projects, and what projects will be eligible. It will also be important to 

consider how to target funds to those with the greatest needs and to 

spend funds efficiently. 

This concludes my prepared statement, Chairman Simpson, Ranking 

Member Moran, and Members of the Subcommittee. I would be pleased 

to answer any questions you have at this time. 

For further information about this testimony, please contact me at (202) 

512-3841 or gomezj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony. Susan Iott (Assistant Director), Liz Beardsley, Mark 

Braza, Cindy Gilbert, Scott Heacock, Rich Johnson, Micah McMillan, 

Janice Poling, and MaryLynn Sergent made key contributions to this 

testimony.

GAO Contact and 

Staff 

Acknowledgments 

(361478)
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