Wastewater Infrastructure Financing: Stakeholder Views on a National Infrastructure Bank and Public-Private Partnerships
Published: 2010-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Communities will need hundreds of billions of dollars in coming years to construct and upgrade wastewater infrastructure. Policymakers have proposed a variety of approaches to finance this infrastructure, including the creation of a national infrastructure bank (NIB) and the increased use of privately financed public-private partnerships (PPP). In this context, GAO was asked to identify (1) stakeholder views on issues to be considered in the design of an NIB and (2) the extent to which private financing has been used in wastewater PPPs and its reported advantages and challenges. In conducting this work, GAO developed a questionnaire based on existing NIB proposals and administered it to 37 stakeholders with expertise in wastewater utilities, infrastructure needs, and financing; GAO received 29 responses from stakeholders with a variety of perspectives about an NIB. To determine the extent to which wastewater PPPs have been privately financed and their advantages and disadvantages, GAO identified and interviewed municipalities involved in privately financed PPPs and wastewater services companies, conducted case studies in states with privately financed PPPs, and conducted a literature review. GAO is not making any recommendations. While this report discusses a number of funding approaches, GAO is not endorsing any option and does not have a position on whether an NIB should be established.
section_title: What GAO Found
paragraphs: Stakeholders who responded to GAO's questionnaire discussed issues in the following three key areas that should be considered in designing an NIB: 1) Mission and administrative structure. While a majority of stakeholders supported the creation of an NIB, their views varied on its mission and administrative structure. One-third supported an NIB to fund only water and wastewater infrastructure, while two-thirds responded that it should also fund transportation and energy projects. There was no consensus among stakeholders on whether an NIB should be administered by an existing federal agency, structured as a government corporation, or structured as a government-sponsored enterprise. GAO has previously reported that 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 exposure of U.S. taxpayers. 2) Financing authorities. A majority of stakeholders agreed on an NIB's financing authorities. Specifically, a majority said the federal government should provide the initial capital; an NIB should be authorized to use a variety of options to generate funds for operating expenses and lending; and an NIB should offer a variety of mechanisms for financing projects, such as providing direct loans, loan guarantees, and funding for the Environmental Protection Agency's existing wastewater funding program--the Clean Water State Revolving Fund. 3) Project eligibility and prioritization. Stakeholders' views varied on which types of projects should be eligible for NIB financing, such as whether it should exclusively finance large projects. In addition, a majority agreed an NIB should prioritize projects that address the greatest infrastructure need and generate the greatest environmental and public health benefits. GAO identified seven municipalities that have entered into privately financed PPPs--contractual agreements in which the private partner invests funds in the wastewater infrastructure--since 1992: Arvin, California; Cranston, Rhode Island; Fairbanks, Alaska; Franklin, Ohio; North Brunswick, New Jersey; Santa Paula, California; and Woonsocket, Rhode Island. Municipal and wastewater company officials GAO interviewed identified the following examples of advantages of privately financed PPPs: 1) Provide access to financing for municipalities that have difficulty using traditional financing sources, such as municipal bond markets. 2) May make operations more efficient, for example, by taking advantage of economies of scale by buying key supplies, like chemicals, in bulk. 3) May bring new infrastructure online faster than traditional public procurement because companies have more flexibility. These officials identified challenges of privately financed PPPs, including: 1) Local opposition may arise out of concerns about higher wastewater rates and the potential loss of municipal wastewater jobs. 2) Private financing is generally more costly than tax-exempt municipal bonds because of higher interest rates; a 2002 National Research Council study reported that private financing is 20 to 40 percent more expensive. 3) Contracts can be costly and difficult to develop because they are complex, and municipalities and companies are unfamiliar with this type of PPP.

section_title: Letter
paragraphs: More than 220 million people in the United States are served by municipal  wastewater systems. These systems consist primarily of a network of  sewer pipes and treatment plants that carry and treat wastewater and then  discharge it, often into surface waters such as rivers and lakes. Many  systems were constructed more than 50 years ago and are reaching the  end of their useful lives. The deteriorating condition of the nation’s  wastewater infrastructure has direct impacts on human and aquatic health.  For example, many older wastewater systems lack the capacity to treat  increasing volumes of wastewater, particularly during periods of wet  weather. In addition, cracks in sewer pipes allow rain or snowmelt to  enter the wastewater system and overwhelm its capacity to adequately  treat wastewater. As a result of these two factors, wet weather can lead to  the release of untreated wastewater, which introduces significant levels of  pollution into local water bodies and poses risks to human health and  aquatic life. The U.S. Environmental Protection Agency (EPA) estimates  that over 850 billion gallons of untreated wastewater are released annually  into U.S. surface waters.
Cities, towns, and other municipalities have the primary responsibility to  fund wastewater infrastructure, and their wastewater spending totaled $43  billion in fiscal year 2007, according to the U.S. Census Bureau. In  addition, the federal government appropriated $2.1 billion in fiscal year  2010 principally to assist municipalities through the Clean Water State  Revolving Fund (CWSRF), which also received a one-time infusion of $4  billion through the American Recovery and Reinvestment Act of 2009.  However, according to EPA estimates, current federal, state, and local  spending may not cover the cost of maintaining and replacing wastewater  infrastructure. Specifically, a 2002 EPA analysis estimated a gap between  current levels of wastewater infrastructure spending and projected future  needs of about $150 billion to $400 billion over the period between 2000  and 2019. EPA has stated that without additional investment, the  environmental and public health gains made under the Clean Water Act  during the last three decades could be at risk.
Policymakers and wastewater groups have proposed a variety of  approaches to help bridge this potential gap between current levels of  spending and future infrastructure needs. One approach would be to  increase funding to traditional wastewater funding programs, such as the  CWSRF. Alternative funding approaches could also be used to bridge the  wastewater infrastructure funding gap. For example, a bill was introduced  in Congress in 2009 that would establish a clean water trust fund to  provide a dedicated source of federal funding for wastewater  infrastructure similar to some of the trust funds that Congress has  established for other infrastructure and environmental programs, such as  for highway and transit infrastructure and coastal wetlands restoration. In  addition, several bills have been introduced in Congress since 2007 to  establish a national infrastructure bank (NIB), which 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. Similarly, a 1992 Executive Order encouraged the use of  privately financed public-private partnerships (PPP) and stakeholders  have since encouraged their use for municipal wastewater facilities. A  PPP is a contractual arrangement in which a public entity (such as a  municipal government agency) contracts with a private sector partner to  contribute to the provision of a public service by planning, financing,  designing, constructing, or operating and maintaining a facility or system.  These PPP arrangements provide a business opportunity for private sector  companies. PPP arrangements differ in the extent to which the private  partner participates in each of these activities. When a PPP is privately  financed, it can serve as an alternative to traditional wastewater  infrastructure funding sources such as the CWSRF and tax-exempt  municipal bonds.
In this context, you asked us to examine (1) stakeholders’ views on issues  to be considered in the design of an NIB to increase financing for  wastewater infrastructure and (2) the extent to which private financing  has been used in wastewater PPPs and its reported advantages and  challenges.
To determine stakeholders’ views on the design of an NIB, we reviewed  past legislative proposals and interviewed a variety of stakeholders with  knowledge of wastewater infrastructure issues, including individuals and  organizations from the water and wastewater industry; financial sector;  and federal, state, and local government. Based on the information  gathered from these sources, we developed and administered a  questionnaire to obtain the views of stakeholders on the design of an NIB.  We identified organizational and individual stakeholders familiar with  wastewater infrastructure financing issues and existing NIB proposals  based on our preliminary interviews and our prior work on wastewater  infrastructure financing. We sent this questionnaire to 23 national  organizations with expertise in the wastewater industry in one or more of  the following areas: financing and operating wastewater projects,  constructing and maintaining wastewater infrastructure, local and state  wastewater infrastructure needs, and environmental protection. We also  sent the questionnaire to 14 individuals with expertise in financing  wastewater infrastructure who are municipal financing consultants, state  financing officials, officials from private investment firms, or policy  consultants. Although we sought to include stakeholders with a variety of  perspectives about an NIB, the views of stakeholders consulted should not  be considered to represent all perspectives about an NIB. In addition,  although an NIB could potentially finance many types of infrastructure, we  limited our stakeholders to those familiar with the wastewater sector. We  received 18 organizational responses and 11 individual responses, for an  overall response rate of 78 percent. Some stakeholders did not answer all  of the questions on the questionnaire, so the number of responses for each  question varies. After analyzing the results from our questionnaire, we  interviewed staff from the Office of Management and Budget and the  Internal Revenue Service (IRS) to discuss how an NIB might affect the  federal budget and U.S. taxpayers.
To determine the extent to which wastewater PPPs have been privately  financed, we conducted a literature search to identify potential privately  financed wastewater PPPs initiated since 1992, when President Bush  signed an Executive Order encouraging these partnerships. A privately  financed PPP, for purposes of this report, is a contractual agreement in  which the private partner invests funds in the wastewater infrastructure  but does not include full privatization, in which the municipality sells its  wastewater infrastructure assets to a private partner (unless the public  partner can reacquire the assets on preferential terms at the end of the  contract). It is possible that we did not identify all privately financed  wastewater PPPs initiated since 1992. To determine the potential  advantages and challenges of privately financed wastewater PPPs, we  interviewed officials at six of the largest private companies involved in  water and wastewater PPPs and officials in municipalities who have used  privately financed PPPs. In addition, we conducted case studies in Alaska,  California, New Jersey, and Ohio in which we spoke with numerous  municipalities in each state about their wastewater financing choices to  get additional context about why few municipalities have entered into  privately financed PPPs. These municipalities were selected to include  municipalities of varying sizes, as well as municipalities who are not  involved in privately financed wastewater PPPs, but who have considered  the option in the past. We also interviewed officials from EPA and  conducted a literature search to provide additional context about potential  advantages and challenges of privately financed wastewater PPPs. A more  detailed description of our objectives, scope, and methodology is  presented in appendix I. We conducted our work from June 2009 to June  2010 in accordance with all sections of GAO’s Quality Assurance  Framework that are relevant to our objectives. The framework requires  that we plan and perform the engagement to obtain sufficient and  appropriate evidence to meet our stated objectives and to discuss any  limitations in our work. We believe that the information and data obtained,  and the analysis conducted, provide a reasonable basis for any findings  and conclusions.
subsections: section_title: Background
paragraphs: Americans rely on wastewater systems to protect public health and the  environment. These systems are composed of a network of pipes and  pumps that collect wastewater from homes, businesses, and industries and  transport it to treatment facilities where it is treated prior to being  discharged to surface waters. Historically, wastewater systems in the  United States have been owned and operated by public agencies at the  municipal level. In fact there are about 16,000 publicly owned wastewater  treatment plants in the United States, which serve about 97 percent of U.S.  residents served by sewers. The remaining 3 percent are served by  privately owned wastewater treatment facilities. Laws and regulations  applying to wastewater treatment and the financing of wastewater  infrastructure often differ based on whether a treatment facility is publicly  or privately owned.
subsections: section_title: Federal Laws Applying to Wastewater Treatment
paragraphs: EPA sets standards for the quality of wastewater that can be discharged  under the Clean Water Act. Under this law, the National Pollutant  Discharge Elimination System (NPDES) program limits the types and  amounts of pollutants that industrial and municipal wastewater treatment  facilities may discharge into the nation’s surface waters. Both public and  private wastewater treatment facilities discharging into U.S. waters are  required to have NPDES permits authorizing their discharges. Generally  speaking, municipal wastewater treatment facilities are designed to treat  typical household wastes and certain pollutants in commercial and  industrial wastes, primarily those identified in the Clean Water Act as  conventional pollutants. Municipal facilities, however, may not be  designed to treat toxic pollutants, such as heavy metals, which more  typically occur in industrial waste streams. The Clean Water Act  authorized EPA to develop pretreatment standards—implemented as the  National Pretreatment Program—to prevent certain pollutants, such as  toxics discharged by industries into sewers, from passing through  municipal wastewater facilities and into surface waters, or from  interfering with the facilities’ treatment processes. The National  Pretreatment Program regulations require publicly owned wastewater  facilities treating more than 5 million gallons of wastewater per day, and  receiving certain pollutants from industrial users, to develop pretreatment  programs. It further requires that municipalities possess adequate  authority to require industrial users to pretreat their wastewater before  discharging it into sewers. The pretreatment standards do not, however,  apply to industrial discharges into privately owned wastewater facilities.  Without such standards or a municipal pretreatment program, privately  owned wastewater facilities may use alternative mechanisms to ensure  that nonconventional waste is properly treated before it enters the sewer  system, which according to EPA may be more costly and difficult.
section_title: Government Funding of Wastewater Infrastructure
paragraphs: The Clean Water Act also authorized significant federal construction  grants to help municipalities build eligible wastewater treatment facilities.  In the 1980s, concerns about the federal deficit, among other factors, led  to a transition from these grants to the CWSRF program, which was  established in 1987. Under this program, the federal government provides  capitalization grants to states, which in turn must match at least 20  percent of the federal grants. The states then use the money to provide  generally low-interest loans to fund a variety of water quality projects at  the municipal level, and loan repayments are cycled back into the fund to  be loaned out for other projects. In 2008, states provided CWSRF loans  totaling about $5.8 billion to municipalities and other recipients. States can  loan CWSRF funds to publicly owned wastewater treatment facilities, but  privately owned facilities are generally not eligible for CWSRF loans.
The federal government also helps finance wastewater infrastructure by  subsidizing municipalities’ use of the bond markets through the tax code.  Municipalities sell bonds to investors to gain an up-front sum to use for  infrastructure or other purposes; the investors are then paid back over  time, with interest. The federal government subsidizes municipalities’  bond issuances by exempting the interest investors earn on these bonds  from federal income tax, thus lowering borrowing costs for municipalities.  The Congressional Budget Office estimated that the federal subsidy of  municipal bonds for all types of infrastructure amounted to $26 billion in  foregone tax revenue annually between 2008 and 2012. The federal  government restricts the level of private involvement in projects financed  by tax-exempt municipal bonds, limiting the extent to which private  companies can benefit from the federal subsidy.
There are several types of bonds that municipalities can issue to finance  publicly owned wastewater infrastructure, including general obligation  bonds and revenue bonds. General obligation bonds are backed by the  full faith and credit of the issuing municipality, meaning that the  municipality pledges to use revenue from taxes to pay back the bond.  Municipalities’ capacity to issue general obligation bonds is often limited  by state law. In contrast, revenue bonds are backed by the revenue from  the facility being constructed with bond proceeds—in the case of  wastewater, revenue bonds are usually backed by revenue from sewer  rates. In cases where a private company’s involvement in a wastewater  facility exceeds thresholds for issuing municipal bonds, the municipality  may still be able to issue another type of tax-exempt bond called a  qualified private activity bond. The Department of the Treasury limits the  volume of private activity bonds that can be issued in each state in a given  year; the national limit for calendar year 2010 was $30.86 billion. In order  to issue qualified private activity bonds for a wastewater project, a  municipality must receive an allocation of private activity bonds from their  state, which can be difficult because wastewater projects generally must  compete against projects in other sectors, which may include affordable  housing, education, and health care.
Although the federal government contributes significant funds to  wastewater infrastructure through the CWSRF and tax code,  municipalities have primary responsibility for financing wastewater  infrastructure. According to U.S. Census Bureau estimates, in fiscal year  2007 municipalities spent about $43 billion on wastewater operations and  capital projects, while states spent about $1.4 billion. Most municipalities  pay for wastewater infrastructure improvements with sewer rate revenues  and by issuing municipal bonds. A 2005 National Association of Clean  Water Agencies survey of 141 utilities serving more than 81 million people  asked respondents which sources of revenue they used to pay for capital  improvements to wastewater systems. The 75 utilities responding to this  question said that 49 percent of revenues supporting capital improvements  came from municipal bonds (both revenue bonds and general obligation  bonds) and other types of debt, 16 percent from CWSRF loans, 16 percent  from user charges such as sewer rates, and 19 percent from other sources.
In addition to obtaining funding for new infrastructure, municipalities are  also generally responsible for overseeing the planning, design, and  construction of wastewater facilities. Conventionally, wastewater projects  follow a design-bid-build approach in which the municipality contracts  with separate entities for the discrete functions of a project, generally  keeping much of the project responsibility and risk with the public sector.  To meet the continuing need for wastewater infrastructure, some  municipalities have used alternatives to this design-bid-build procurement  approach, including a variety of types of PPPs, which are described in  figure 1. In the last 30 years, hundreds of municipalities have entered into  PPPs for the operations and maintenance of their wastewater facilities. In  addition, some communities have entered into PPPs—often called design- build-operate agreements—in which the private sector designs, constructs,  and then operates new wastewater infrastructure for a period of time.  PPPs can also be developed to include private financing, which can serve  as an alternative to traditional wastewater infrastructure funding sources.
section_title: Proposed Approaches for Bridging the Potential Wastewater Financing Gap
paragraphs: Policymakers and wastewater groups have proposed numerous  approaches to bridge the potential gap between current levels of federal,  state, and local spending and future infrastructure needs. Two such  approaches build on traditional ways of financing wastewater  infrastructure: increasing funding for the CWSRF and implementing EPA’s  Sustainable Water Infrastructure Initiative. The CWSRF has seen an  increase in funding in recent years, from $689 million in fiscal year 2009 to  $2.1 billion in fiscal year 2010. In addition, $4 billion was appropriated to  the CWSRF as part of the American Recovery and Reinvestment Act of  2009. EPA’s Sustainable Water Infrastructure Initiative encourages  wastewater and drinking water utilities to improve the management of  their systems, to plan ahead for infrastructure needs, and to charge the full  cost of their services—including the costs of building, maintaining, and  operating a wastewater system over the long term. In its 2002 report about  the clean water infrastructure gap, EPA noted that if wastewater utilities  implemented annual rate increases of 3 percent over inflation over a 20- year period, the infrastructure gap would disappear.
In addition, wastewater stakeholders and policymakers have also  proposed a number of alternative approaches that could be used to bridge  the wastewater infrastructure financing gap. For example, one option  would be for Congress to create a federal clean water trust fund. We have  previously examined design issues that would need to be addressed in  establishing such a fund, including 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 from a  trust fund. In addition, a clean water trust fund would require a source of  revenue. We found that, while a number of options have been proposed to  generate revenue for a clean water trust fund—including excise taxes, a  corporate income tax, and a water use tax—several obstacles would have  to be overcome in implementing these options, including defining the  products or activities to be taxed, establishing a collection and  enforcement framework, and obtaining stakeholder support.
Policymakers and wastewater stakeholders have also suggested that  Congress create an NIB to finance many types of infrastructure, including  wastewater facilities. Since 2007, three bills have been introduced that  outline different visions for an NIB or similar entity that would finance  wastewater infrastructure:    The National Infrastructure Development Bank Act of 2009 (H.R. 2521)  proposed establishing a government corporation to finance infrastructure  projects across sectors, prioritizing those that contribute to economic  growth, lead to job creation, and are of regional or national significance. It  would have the authority to issue loans, bonds, and debt securities, as well  as to provide loan guarantees.
The National Infrastructure Bank Act of 2007 (S.1926 and H.R. 3401)  proposed creating an independent federal entity to finance infrastructure  projects that have “regional and national significance” with a public  sponsor and a potential federal investment of at least $75 million. It would  be authorized to issue up to $60 billion in bonds, which would carry the  full faith and credit of the United States; the bond proceeds could be used  to finance direct subsidies and loans, among other things.
The National Infrastructure Development Act (H.R. 3896), introduced in  2007, proposed creating two government corporations with an intended  initial capitalization of up to $9 billion in federal appropriations over the  initial 3 years. Thereafter, the corporations would be self-financed through  business income with the possibility of converting to government- sponsored enterprises (GSE).
Yet another approach for closing the wastewater financing gap is to  encourage private investment in wastewater projects, including through  privately financed wastewater PPPs at the municipal level. The 1992  Executive Order directed federal agencies to review and modify federal  policies related to federally-financed infrastructure to encourage  appropriate privatization—including long-term leases—of infrastructure at  the local level. Figure 2 shows that the privately financed PPPs discussed  in this report generally fall into two categories: design-build-finance- operate (DBFO) partnerships and lease partnerships.
DBFO. For new infrastructure or significant upgrades, a municipality and  a company enter into a DBFO partnership in which the company is  responsible for designing, constructing, and financing the infrastructure  and then operating and maintaining it for the term of the contract. The  municipal partner typically makes payments to the company covering both  debt service and operations and maintenance.
Lease partnership. For existing infrastructure, a municipality and a  company enter into a lease partnership in which the municipality leases  wastewater infrastructure assets (such as a treatment plant) to the  company, which is then responsible for operating and maintaining those  assets for a set period of time. The company makes a lease payment to the  municipality in exchange for the opportunity to operate and maintain the  facility. This payment may be a onetime up-front payment, called a  concession fee, or lease payments could be spread out over the life of the  lease. Over the course of the lease, the municipality, or the ratepayers,  make payments to the company for operations and maintenance services  and to repay the company’s periodic lease payments or initial investment  (i.e., the concession fee).
While private financing can serve as an alternative to traditional  infrastructure funding sources, we have previously reported that private  financing is not “free money”—rather this funding is a form of private  capital that must be repaid to investors seeking a return on their  investment. Depending on how a privately financed PPP agreement is  structured, it may also result in joint public-private ownership of the  wastewater assets being financed, which could result in the facility losing  its regulatory status as a publicly owned wastewater facility as defined  pursuant to the Clean Water Act. Joint public-private ownership could also  result in the loss of the municipality’s ability to issue tax-exempt bonds.
section_title: Stakeholders Addressed Issues in Three Key Areas That Would Need To Be Considered in Designing an NIB
paragraphs: Stakeholders who responded to our questionnaire addressed a variety of  issues in three key areas that would need to be considered in designing an  NIB: mission and administrative structure, financing authorities, and  project eligibility and prioritization. Appendix II lists the organizational  and individual stakeholders who responded to our questionnaire.  Appendix III lists the questions asked in the questionnaire and provides  the full range of stakeholder responses we received.
subsections: section_title: While a Majority of Stakeholders Supported the Creation of an NIB, Their Views Varied on Its Mission and Administrative Structure
paragraphs: About three-quarters of stakeholders (20 of 27) responding to our  questionnaire supported the creation of an NIB. Seven of these  stakeholders supported an NIB because it could provide another source of  funding for critical infrastructure projects. In contrast, 1 of 27  stakeholders opposed the creation of an NIB for water and wastewater,  instead supporting increased financing for the CWSRF, which according to  the stakeholder is a proven mechanism for providing cost-effective and  sustainable financing. In addition, 6 of 27 stakeholders selected “other”— neither supporting nor opposing the creation of an NIB—and cited a  variety of reasons. For example, two of these stakeholders indicated that  their positions on an NIB would depend on its authorizing legislation and  expressed concerns about how a new entity would affect the CWSRF.  Another indicated that a clear need for an NIB had not been established.
Stakeholders had varying views on an NIB’s mission and the infrastructure  sectors it should finance. Of the 20 stakeholders who supported the  creation of an NIB, about two-thirds (13) indicated that its mission should  be to fund infrastructure in multiple sectors, such as transportation,  energy, water, and wastewater. Among the reasons these stakeholders  cited for supporting a cross-sector NIB are that it would allow for  coordination across sectors and that financial experts at a cross-sector  NIB would be able to easily apply their expertise to financing a wide range  of projects. In contrast, about one-third of stakeholders who supported the  creation of an NIB (7 of 20) thought its mission should be to fund only  water and/or wastewater infrastructure.
Stakeholders suggested a variety of options when asked how an NIB  should interact with the CWSRF—currently the largest source of federal  financial assistance for wastewater infrastructure. About half of  stakeholders (13 of 29) suggested that an NIB assist the CWSRF in a  variety of ways including, for example, providing additional capital for the  CWSRF and helping states leverage their CWSRF funds. About a third of  stakeholders (11 of 29) suggested that an NIB act as a complement to the  CWSRF. For example, according to four stakeholders with this view, an  NIB should fund larger projects that the CWSRF typically does not have  the funds to accommodate or multistate projects that can be  administratively difficult under the CWSRF. In addition, 3 of 29  stakeholders suggested that an NIB not have any relationship with the  CWSRF; one of these noted that state CWSRF programs do not need  assistance from an NIB because they already have access to federal and  state funds, as well as bond markets for leveraging.
In addition, there was no consensus among stakeholders on whether an  NIB should be administered as a new responsibility for an existing federal  agency, structured as a government corporation, or structured as a GSE.  More specifically, 4 stakeholders indicated that an NIB should be a new  responsibility for an existing federal agency, 7 indicated that an NIB  should be structured as a government corporation, and 4 indicated that an  NIB should be structured as a GSE. We have previously reported that 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 exposure of U.S. taxpayers. Specifically:    Federal agencies are generally subject to greater federal control than  government corporations and GSEs. For example, federal agencies receive  the preponderance of their financial support from congressionally  appropriated funds, and Congress can use appropriations, hearings, other  lawmaking, and confirmation of senior leadership, as management tools.  The President also has significant means of control, for example through  responsibility for agencies’ budget proposals, administrative requirements,  and the appointment of leadership.
Although no two government corporations are completely alike, Congress  has generally established government corporations to provide market- oriented public services, such as the Commodity Credit Corporation,  which stabilizes and protects farm income and prices. In general,  government corporations are not as dependent upon annual  appropriations as federal agencies to fund operations—instead, or in  addition, receiving funds from consumers of their products and services.  As a result of this corporate structure, government corporations have been  given greater operational flexibility by Congress and corporations with  mixed public-private ownership may be exempt from many executive  branch budgetary requirements and disclosures. Nevertheless, government  corporations are subject to some federal oversight by, for example, having  some or all board members appointed by the federal government, and/or  having their budgets displayed in the federal budget.
GSEs 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. GSEs generally do not lend  money directly to the public but instead provide liquidity to capital  markets by, for example, issuing stock and debt and purchasing and  holding loans. GSEs are neither managed directly by the federal  government, nor are their activities included in the federal budget.  Although the federal government explicitly does not guarantee GSE debt  obligations, investors have widely assumed that a GSE facing a financial  emergency would receive federal support, which has allowed GSEs to  borrow at interest rates below those of other for-profit corporations. We  have previously reported that the structure of GSEs as for-profit  corporations with government sponsorship has undermined market  discipline and provided them with incentives to engage in potentially  profitable business practices that were risky and not necessarily  supportive of their public missions. Indeed, the federal government  extended support to two GSEs—Fannie Mae and Freddie Mac—beginning  in September 2008 after they lost billions of dollars due to questionable  mortgage-related investments. In addition, we have also reported that  developing an oversight system for GSEs can be challenging. For  example, regulators must have the resources, expertise, and authorities  necessary to help monitor GSEs, which, due to the implied federal  guarantee on their financial obligations, may have financial incentives to  engage in excessive risk taking. Further, regulators must have the stature  and authorities necessary to help ensure that GSEs operate within the  missions for which they were established because of incentives for GSEs   to engage in activities that are profitable but that do not support their  missions.
section_title: A Majority of Stakeholders Agreed on an NIB’s Financing Authorities, Including How an NIB Should Be Funded and How It Should Finance Projects
paragraphs: Most stakeholders (20 of 22) agreed that the federal government should  provide all or some of the initial capital for an NIB, though 4 stakeholders  suggested that federal capitalization be augmented by private funds. In  addition, 3 of 22 stakeholders suggested that an NIB’s initial capital come  from user fees and/or taxes, similar to a trust fund; such user fees and/or  taxes, according to 2 of these stakeholders, would provide an NIB with a  stable revenue flow while spreading out the funding burden. Although  most stakeholders agreed that the federal government should capitalize an  NIB, they were split on whether an NIB should continue to rely on federal  funds (9 of 22), or instead become self-sustaining (6 of 22). Two  stakeholders who supported a self-sustaining NIB explained that it should  function as a bank—investing only in projects that are creditworthy and  able to repay their loans. When asked about federal funding for an NIB,  staff from the Office of Management and Budget noted that, for budgeting  purposes, the cost to the federal government should be determined  according to the Federal Credit Reform Act of 1990. This act requires that  covered federal entities’ budgets include estimates of the government’s  long-term cost of issuing loans or loan guarantees, among other things.
Most stakeholders (21 of 23) agreed that an NIB should be authorized to  generate its own funds for operating expenses and lending, with a  majority of stakeholders (15) supporting an NIB authorized to use multiple  mechanisms to generate funds. In their responses to our questionnaire,  organizations—which are generally more familiar with the wastewater  industry—and individuals—who are generally more familiar with  wastewater financing—had different levels of support for some of the  mechanisms. Most notably, a higher percentage of organizations supported  allowing an NIB to issue tax-exempt bonds, while a higher percentage of  individuals supported allowing an NIB to charge fees for technical  assistance or other services. Stakeholders offered a variety of reasons for  supporting financial mechanisms. For example, several stakeholders  emphasized the importance of an NIB having a broad range of financial  tools for generating its own funds. In addition, two stakeholders who  supported giving an NIB the authority to borrow from the U.S. Department  of the Treasury and to issue tax-exempt bonds explained that these two  options would provide an NIB with access to low-cost capital, which could  then be passed on to projects. When asked about an NIB issuing bonds  with tax-exempt status, IRS officials noted that there is a general  prohibition on tax-exempt bonds being federally guaranteed. In order for  an NIB to issue tax-exempt, guaranteed bonds, it would need a statutory  exemption to this prohibition similar to those granted for bonds in other  sectors, such as housing. Table 1 lists the financing mechanisms most  commonly supported by stakeholders.
A majority of stakeholders also agreed on some of the mechanisms an NIB  should offer for financing projects. Organizations and individuals had  different levels of support for some of the mechanisms—most notably, a  higher percentage of organizations than individuals rated pooling loans  and issuing tax-exempt bonds as very important mechanisms for an NIB to  offer. In explaining the importance of the mechanisms an NIB should offer  for financing projects, one stakeholder noted that direct loans, pooled  loans, and/or federal loan guarantees from an NIB would help  infrastructure projects attract additional sources of capital. When we  asked staff from the Office of Management and Budget about financing  mechanisms an NIB could offer to projects, they did not have specific  views on which mechanisms an NIB should offer but emphasized that an  NIB should be subject to the Federal Credit Reform Act. Table 2 shows  stakeholder views on the mechanisms an NIB could offer.
Finally, stakeholders suggested various measures to mitigate the potential  risk of exposing taxpayers to the financial losses that could result from  multiple municipalities defaulting on NIB loans. Measures suggested by  stakeholders included the use of strict credit and underwriting standards  in selecting projects and the maintenance of adequate reserves, which  could serve to absorb financial losses. Other suggestions included  requiring general- or revenue-obligation pledges or insurance from utilities  and municipalities. When asked about risk-mitigation measures, staff from  the Office of Management and Budget noted that current infrastructure  financing programs have developed a variety of measures to mitigate  taxpayer risk. For example, the Department of Agriculture’s Rural Utilities  Service provides grants and loans for eligible drinking water and  wastewater projects in rural communities. Office of Management and  Budget staff said that this program mitigates risk by not releasing grant  funds to the recipient communities until the project is completed.
section_title: Stakeholders’ Views Varied on What Projects Should Be Eligible for Financing, but a Majority of Stakeholders Agreed on How Projects Should Be Prioritized
paragraphs: Stakeholders had a variety of views on the types of projects that should be  eligible for financing from an NIB. Specifically, half of stakeholders (12 of  24) indicated that projects of all sizes should be eligible for NIB financing,  while a third (8 of 24) noted that only large projects should be eligible.  Three stakeholders explained that they support financing projects of all  sizes because smaller projects may address important infrastructure  needs. Support for an NIB that finances exclusively large projects was  stronger among individual stakeholders than among organizational  stakeholders, though few stakeholders defined what they meant by “large.”  For example, two stakeholders supported an NIB that finances exclusively  large projects because it could fund projects beyond the capacity of the  CWSRF. In contrast, another stakeholder opposed an NIB that finances  exclusively large projects, explaining that one NIB proposal set a  threshold of $75 million or more, which could render many wastewater  projects ineligible. Similarly, stakeholders had a variety of views on  whether NIB financing should be limited to publicly owned and operated  utilities. Specifically, 9 of 23 stakeholders thought all types of utilities  should be eligible for NIB financing, while another 9 of 23 thought that  only publicly owned utilities should be eligible. Three stakeholders  indicated that an NIB should assist private utilities and PPPs—in addition  to public utilities—because the utilities’ consumers and the general public  would still benefit.
Stakeholders generally agreed on what costs should be eligible for NIB  financing. More than three-quarters of stakeholders agreed that capital  projects (24 of 26) and planning and design costs (19 of 25) should be  eligible but that routine operations and maintenance costs (24 of 26) and  ratepayer assistance (16 of 20) should not be eligible. Four stakeholders  noted that capital and planning and design costs should both be eligible  because they are closely linked—planning and designing are essential  components of carrying out capital projects. Nine stakeholders explained  that operations and maintenance activities and/or ratepayer assistance  should be funded by utilities through the rates that they charge their  customers. One stakeholder also explained that many utilities have not  raised rates enough to invest in the needed operations and maintenance  for their systems. Our past work has highlighted similar concerns, noting  that many utilities were not routinely charging the full cost for wastewater  services.
A majority of stakeholders said an NIB should use a combination of  methods to allocate funding to eligible projects; such methods include  directly funding projects ranked using specific criteria, allocating funding  to sectors, or allocating funding to states. Stakeholders had differing  views on which combination of methods should be used. The most  commonly supported methods were directly funding projects ranked using  specific criteria and allocating funding to infrastructure sectors.  Stakeholders provided a variety of reasons for supporting these methods.  For example, one stakeholder supported directly funding projects ranked  using specific criteria to ensure that the projects most in need—including  smaller projects—would receive assistance. In addition, 2 stakeholders  explained that allocating amounts by sector would be necessary to ensure  that each sector receives funding, while 3 others noted that the differences  between sectors would make it difficult for an NIB to evaluate projects  across sectors.
Stakeholders also agreed that an NIB should prioritize projects that  address the greatest infrastructure need and that generate the greatest  public health and environmental benefits. One stakeholder explained that  these three criteria are the main reasons for wastewater regulations.  However, another stakeholder questioned how “greatest infrastructure  need” would be defined. Our past work has highlighted similar concerns,  noting that infrastructure “need” is difficult to define and to distinguish  from a wish list of capital projects. It can also be difficult to measure  environmental and public health benefits. For example, while the CWSRF  uses a uniform set of measures to help determine efficient and effective  use of CWSRF resources, our past work has found that a lack of baseline  environmental data and technical difficulties made it difficult to attribute  benefits specifically to the CWSRF. A complete list of criteria supported  by a majority of stakeholders is shown in table 3.
section_title: Privately Financed Wastewater PPPs Are Uncommon and Have Several Reported Advantages and Challenges
paragraphs: We identified seven privately financed wastewater PPPs developed since  1992. Municipal and wastewater services company officials we  interviewed identified numerous potential advantages to these  partnerships, including faster construction of new facilities, access to  alternative sources of financing, increased efficiency, and access to  outside experts and technology solutions. Officials also identified  numerous potential challenges to these partnerships, including public and  political opposition, the higher cost of private financing, and concerns  over a loss of municipal control over wastewater equipment, operations,  or rates.
subsections: section_title: Seven Municipalities Have Developed Privately Financed Wastewater PPPs Since 1992
paragraphs: As shown in table 4, we identified seven municipalities that have  developed privately financed wastewater PPPs since 1992.
Although all seven of these municipalities entered into privately financed  wastewater PPPs, their reasons for doing so differed, as did the contract  terms. Two examples illustrate these differences:    Santa Paula, California, entered into a DBFO in 2008. The city of Santa  Paula had an existing wastewater treatment plant that was not compliant  with the waste discharge requirements of the Los Angeles Regional Water  Quality Control Board. The city entered into a consent agreement with  the board in which it agreed to achieve full compliance with water quality  requirements by December 15, 2010, or else face $8.5 million in penalties.  According to city officials, the Santa Paula City Council decided to enter  into a DBFO partnership because it believed a DBFO would be less  expensive than a traditional procurement and could better ensure the city  would meet its deadline. The city awarded a contract to Santa Paula  Water—a company formed by PERC Water and Alinda Capital—to design,  build, and finance a new water recycling facility as well as to operate the  facility for 30 years. Through monthly service fees, the city is to repay  Santa Paula Water for its investment in the plant and pay for operations,  maintenance, repair, replacement, and a profit margin. PERC Water owns  the treatment facility over the 30-year contract term, after which  ownership reverts to the city.
Fairbanks, Alaska, entered into a lease partnership in 1997. Fairbanks’  wastewater treatment system faced a multimillion dollar deficit and  needed substantial capital improvements. However, according to a city  official, Fairbanks city residents were reluctant to approve bond  issuances, and local government officials were reluctant to raise rates. In  addition, Fairbanks was in a unique situation in that the city owned several  other utilities, including a telephone utility and an electric utility. The city  was approached by a consortium of companies that proposed to buy or  lease all the city’s utilities, and voters approved the action. As part of this  deal, Golden Heart Utilities leased the wastewater treatment plant in 1997  for a 30-year term. In exchange, the company pays Fairbanks about  $33,000 per month in lease payments. Golden Heart Utilities also operates  and maintains the treatment plant, and its service fee is paid by ratepayers.
section_title: Reported Advantages of Privately Financed Wastewater PPPs
paragraphs: Municipal and company officials we spoke with identified several potential  advantages of privately financed wastewater PPPs for municipalities as  compared with traditional publicly financed, operated, and maintained  wastewater facilities.
subsections: section_title: Faster Delivery of New Facilities or Facility Upgrades
paragraphs: The most commonly cited advantage was the potential for faster or more  certain delivery times for new facilities or facility upgrades, as compared  with traditional public procurement. Three municipalities cited faster  delivery times as a reason they entered into privately financed PPPs; in  two cases, the municipalities were facing regulatory deadlines that  required them to upgrade their facilities or pay fines. Company and  municipal officials told us private procurement may be faster because it is  more streamlined than public procurement. This view was echoed in a  1992 publication on wastewater treatment privatization, which stated that  wastewater industry officials believe PPPs in which a company designs,  builds, and operates a facility can save time because design, construction,  and operations are not compartmentalized, so design and construction  phases can overlap. Similarly, in a 2000 publication, a chapter discussing  PPPs in the wastewater sector points out that, in a privately financed PPP,  companies are not bound by the same administrative regulations as federal  and state construction projects. In addition, officials from Franklin, Ohio,  and Woonsocket, Rhode Island, told us that they believe it took less time  to secure private financing than public financing, an advantage specific to  privately financed PPPs.
section_title: Access to Alternative Sources of Wastewater Infrastructure Financing
paragraphs: The next most commonly cited advantage of privately financed PPPs was  access to alternative sources of wastewater infrastructure financing. For  example, officials from Arvin, California, told us the city did not access the  bond market because of its low credit rating, even as the city faced  regulatory compliance concerns. Similarly, an official from Fairbanks,  Alaska, said it was difficult to convince the public to approve bonds,  preventing the city from using municipal bonds to finance wastewater  infrastructure.
section_title: Cost and Operational Efficiencies
paragraphs: Another advantage cited by company and municipal officials and  publications we identified is that privately financed PPPs may bring cost  and operational efficiencies to wastewater collection and treatment.  Several municipal officials told us companies can take advantage of  economies of scale in a privately financed PPP by, for example, buying key  supplies, such as chemicals, in bulk. The 2000 chapter that discussed PPPs  in the wastewater sector also noted that a primary way companies can  reduce costs is through managing their three chief expenses—labor,  electricity, and chemicals. By operating a number of plants, a company  can spread staff—and costs—more widely. However, other officials we  spoke with noted that efficiencies can also be achieved by public utilities  without a privately financed PPP. For example, one regional utility said  that it achieved economies of scale by constructing regional plants, each  of which served multiple municipalities. In addition, according to a 2002  study of privatization of water services by the National Research Council  (NRC), the private sector is not necessarily more efficient than the public  sector and vice versa.
While company officials said a privately financed PPP can operate more  efficiently by making better capital investment decisions, this may depend  on the terms of the PPP contract. According to officials at one company,  municipal governments face political pressure to keep costs down in the  short term, which can lead to higher costs in the long run. Company  officials told us that a contract that makes the private partner responsible  for both capital upgrades and maintenance can incentivize decisions that  save money in the long run. For example, according to PERC Water  officials, in its privately financed PPP with the city of Santa Paula, the  company invested its own funds above the signed contract price for  energy efficient equipment expected to reduce energy consumption and  operating costs over the 30 year term of the contract. In contrast, if a  contract passes capital repair costs through to municipalities, one  municipal official told us that companies may have an incentive to  underinvest in maintenance. In such circumstances, delaying maintenance  could result in savings for the private partner but impose higher costs on  the municipality by hastening the need for capital repairs.
section_title: Access to Expertise and Technology Solutions
paragraphs: Another commonly cited advantage of privately financed wastewater PPPs  is that the private partner may have greater access to expertise and  technology than some municipalities. For example, officials from one  company told us it spends $200 million a year on research and  development and can draw on this research to solve problems  municipalities have not been able to solve on their own. Similarly,  according to a 2000 publication on municipal wastewater treatment  outsourcing, wastewater treatment companies may have more  experienced personnel and better access to the latest technologies if  wastewater treatment is the company’s core business. For example, an  official from Fairbanks, Alaska, told us that prior to entering into a  privately financed PPP, his city had been unable to process the sludge  from its wastewater treatment plant into a useful form. Golden Heart  Utilities used a technology to convert the sludge into compost, which is  now sold to the public. This access to expertise and technology may be  particularly important for small- and medium-sized communities, which  may lack the expertise to upgrade or operate plants to meet regulatory  standards, according to the 2002 NRC study.
section_title: Up-front Payments to Municipalities
paragraphs: Several municipal and company officials also cited up-front payments to  municipalities as an advantage of privately financed PPPs. Up-front  payments to municipalities could be used to finance wastewater  infrastructure improvements, but company and municipal officials told us  these payments could also be used to finance other priorities, such as a  pension fund or municipal budget gap. Although six of the seven  municipalities that entered into privately financed PPPs received up-front  payments from their private partners, at least three used part of the  payment for nonwastewater-related activities. One municipal official told  us his municipality was motivated to enter into a privately financed PPP so  that it could use the up-front payment to supplement its general fund and  scale back a planned property tax increase. Similarly, the mayor of Akron,  Ohio, proposed that the city lease its wastewater assets and use the up- front payment to fund a scholarship program that would allow all Akron  students to attend the University of Akron. Voters ultimately rejected this  proposal. In a 1997 response to congressional questions about wastewater  PPPs, EPA pointed out that up-front payments can be viewed as loans  from the company to the municipality and will require wastewater users to  repay the company, with interest. According to EPA, an increase in user  fees can result when an up-front payment exceeds the previously  outstanding local debt on the wastewater treatment facilities. We have  highlighted similar considerations about the use of up-front payments in  the transportation sector.
section_title: Increased Focus on Other Municipal Functions
paragraphs: Finally, company and municipal officials said that privately financed PPPs  may allow local governments to increase their focus on other functions,  such as police and fire services. In contrast, however, some municipal  officials told us they would not consider entering into a privately financed  wastewater PPP because they believe wastewater treatment is a core  municipal duty. According to the 2002 NRC study, local officials are in part  drawn to private participation in their wastewater utilities because of the  need to focus civic energies and resources on more immediate social  problems. Although the role of a municipal government in a privately  financed PPP may change, it is still important. For example, according to  the NRC study, if a utility’s operations are transferred to the private sector,  the public sector’s importance does not diminish but rather changes from  that of operator to contract manager—a role that can require new talents  and skills. Similarly, an official in Woonsocket, Rhode Island, told us that  carrying out a privately financed PPP contract on a daily basis takes more  time and expertise than he expected, because even simple questions can  require a review of the city’s 1,000-page contract with its private partner.
section_title: Reported Challenges to Considering and Developing Privately Financed Wastewater PPPs
paragraphs: Municipal and company officials also identified a number of potential  challenges to considering and developing privately financed wastewater  PPPs.
subsections: section_title: Public and Political Opposition
paragraphs: The challenge cited most often by municipal and company officials was  public and political opposition. These officials told us that the public is  sometimes concerned about the possibility that a company would not be  as responsive to ratepayers as a municipality, about job losses for  municipal employees, and about sewer rate increases. For example, North  Brunswick, New Jersey, entered into a privately financed PPP in 1995, but  terminated that agreement in 2002, in part because of public reaction to  rate increases. An official from Fairbanks, Alaska, told us some residents  feel the city “gave away” its wastewater utility in its privately financed PPP  deal, and they object to a company profiting from running the utility. In at  least one case, opposition from citizens as well as interest groups derailed  the development of a privately financed PPP in Akron, Ohio.
section_title: Financing Challenges
paragraphs: Municipal and company officials said that making private financing  attractive to municipalities may be a challenge for a variety of reasons:    Private financing generally costs more than public financing. Municipal  and company officials told us that private financing typically costs more  than tax-exempt municipal bonds. In its 2002 study, the NRC reported that  the federal tax exemption on municipal bonds gave municipal borrowers a  2.5 percent to 3 percent cost advantage over private bonds. The NRC study  also reported that, for municipalities, private financing is roughly 20 to 40  percent more expensive than public financing. Municipal officials told us  the profit motive of companies may also drive up the cost of a privately  financed PPP. However, one municipal official in Woonsocket, Rhode  Island, noted that the speed at which private financing can be obtained  could still result in a lower overall cost, due to the time saved. Similarly,  company officials told us they are able to compensate for the higher cost  of financing over the course of a contract term. For example, officials  cited tax rules generally allowing companies to depreciate capital, and  their ability to find cost savings through efficiencies as ways to offset their  costs over the contract term.
Combining private financing with public financing is difficult. In  writing the contract for a privately financed PPP, the parties must  carefully follow IRS tax rules to avoid changing the status of existing tax- exempt municipal bonds to taxable bonds. IRS officials told us that, under  the tax code, a municipality in such a partnership could continue to issue  tax-exempt general obligation bonds to finance wastewater infrastructure  only under certain circumstances. For example, a sewage facility could be  financed with 50 percent private financing and 50 percent tax-exempt  general obligation bonds, if no payments from the private partner or  ratepayers secure the public debt or are used to pay the public debt  service. Under these rules, it is especially difficult for a municipality in a  privately financed PPP to issue tax-exempt revenue bonds—often the  preferred type of bond for wastewater facilities—because the revenue  bonds are secured by payments from ratepayers. According to an official  from the Office of Chief Counsel, which advises the IRS, a privately  financed PPP can be financed with tax-exempt qualified private activity  bonds if it meets criteria in applicable statutes and regulations. However,  one company official said that the volume caps imposed on the issuance of  private activity bonds in each state limit their availability for wastewater  projects; he advocated lifting the state volume caps.
section_title: Concern about Loss of Municipal Control
paragraphs: Several municipal officials told us another challenge is their concern about  the loss of control over municipal wastewater facilities and rates. Officials  at one municipality told us they chose not to pursue a privately financed  wastewater PPP in part because they believed they would lose some  control over rate setting and system growth. According to a 2000 chapter  that discussed PPPs in the wastewater sector, in a privately financed  PPP, a local government’s control over a facility’s operations depends on  the contract’s terms. For example, officials in Santa Paula, California, told  us they experienced a loss of control over plant design, choice of  equipment, and construction oversight after entering into their DBFO. The  officials explained that, while the city’s contract with its private partner  includes performance specifications, the city has no control over the  methods the company uses to achieve those specifications. Further,  because the city does not have detailed knowledge of the facility or its  operations, it may not be able to pass on such details to other operators  when its current contract ends.
section_title: Lack of Experience with Privately Financed PPPs
paragraphs: Municipal and company officials also cited their lack of experience with  privately financed wastewater PPPs as a challenge to the development of  such partnerships. For example, one municipal official commented that  few municipalities will want to be the first to try something new and  potentially risky. Another municipal official echoed that concern,  commenting that there are few examples showing this model can work  effectively in the United States. A company official told us that municipal  officials are concerned about being locked into a relationship with a  private partner for a long-term contract and the difficulties of maintaining  a good relationship during that time. Company officials also cited the need  for more education about privately financed PPPs to explain their  advantages.
section_title: Costly and Difficult Contracting
paragraphs: Municipal and company officials also told us that developing a contract for  a privately financed wastewater PPP can be costly and difficult, in part,  because of the lack of experience of companies and municipalities with  these contracts and, in part, because of their complexity. For example, an  official from Santa Paula, California, told us the city’s attorneys did not  have experience with DBFO contracts, so the city hired specialized  counsel to develop the DBFO, resulting in legal fees three times greater  than for a traditional procurement. A company official told us the  complexity of privately financed PPPs and the differences between this  type of procurement and traditional procurement can result in slower  transactions. One municipal official noted that part of the complexity  associated with developing a privately financed PPP contract is  transitioning employees from the public to the private sector. In addition,  the 2002 NRC study noted that the preparation of adequate contracts is  expensive and time-consuming, and outside legal and engineering  expertise is usually needed. We have cited similar concerns for highway  PPPs. One municipal official noted that communities often look to  privately financed PPPs when they are financially stressed, but this might  make it difficult to hire experienced contractors and consultants to  protect the interests of the community.
section_title: State and Federal Laws
paragraphs: Finally, municipalities may encounter difficulties entering into privately  financed PPPs due to state and federal laws as follows:    State laws. Municipal officials cited state laws that, in some cases, outlaw  the use of the same contractor to design and build a wastewater treatment  facility as a challenge, which would prohibit the use of DBFOs, as well as  other design-build PPPs. Specifically, a municipal official in Ohio told us  he would like to pursue a DBFO, but state law requires design and  construction to be bid separately from one another, and also requires  different trades be bid separately, such as electrical and plumbing.  Ultimately, he told us, this prevents design-build contracts, with or without  private financing. Echoing this point, a company official told us that  developing privately financed PPP contracts is complicated by the fact  that every state has its own procurement rules.
Federal financial interest. According to EPA officials, 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. Officials from  Franklin, Ohio, told us some of the up-front payment from the private  partner was used to repay the existing federal interest in the wastewater  plant, since it was built with federal grants in 1972. EPA officials told us  that, although most facilities that received funds through the construction  grants program are now fully depreciated with no remaining federal  financial interest, some other more recent grants, including construction  grants that are still awarded to the District of Columbia and U.S.  Territories, congressionally directed grants for particular wastewater  facilities, and direct grants through states under the American Recovery  and Reinvestment Act, would also be subject to early payback.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to EPA, IRS, the Office of Management  and Budget, and the U.S. Department of the Treasury for review and  comment. These agencies did not provide written comments to us. EPA  and IRS provided technical comments, which we have incorporated as  appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to appropriate congressional  committees, Secretary of the Treasury, Administrator of EPA, Director of  the Office of Management and Budget, Commissioner of IRS, and other  interested parties. The report will also be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff members have any questions regarding this report,  please contact me at (202) 512-3841 or trimbled@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To determine stakeholders’ views on the issues to be considered in  designing and establishing a national infrastructure bank (NIB), we  reviewed past legislative proposals and wastewater industry position  papers on establishing an NIB. In addition, we interviewed stakeholders  with knowledge of a variety of wastewater infrastructure issues, including  individuals and organizations from the water and wastewater industry;  financial sector; and federal, state, and local government; and obtained  their views on establishing and designing an NIB.
Based on the information obtained through these interviews, and our  review of reports and legislative proposals, we developed a questionnaire  to gather information about stakeholder views on an NIB’s mission and  administrative structure, financing authorities, and project eligibility and  prioritization. We pretested the questionnaire with four stakeholders from  a variety of backgrounds and made changes based on their input.
In addition to developing the questionnaire, we identified organizational  and individual stakeholders familiar with wastewater infrastructure  financing issues and existing NIB proposals. We developed this list based  on our preliminary interviews and prior GAO work on wastewater  infrastructure financing. We sent the questionnaire to 23 national  organizations with expertise in the wastewater industry in one of the  following areas: financing and operating wastewater projects, constructing  and maintaining wastewater infrastructure, local and state wastewater  infrastructure needs, and environmental protection. In addition, we  identified individuals involved in wastewater infrastructure financing to  provide additional perspective on the creation and design of an NIB. We  sent the questionnaire to 14 individuals with expertise in financing  wastewater infrastructure, including: consultants who provide advice to  municipalities; state financing officials; officials from private investment  firms; and policy consultants who have studied an NIB or wastewater  infrastructure financing. Although we sought to include stakeholders with  a variety of perspectives about an NIB, the views of stakeholders  consulted should not be considered to represent all perspectives about an  NIB. In addition, although an NIB could potentially finance many types of  infrastructure, we limited our stakeholders to those familiar with the  wastewater sector.
We received responses from 18 organizational stakeholders. Of the 5  organizational stakeholders that did not respond, 2 told us they could not  come to a consensus on behalf of their organization. We also received  responses from 11 individuals. Our overall response rate was 78 percent.  Some stakeholders did not answer all of the questions on the  questionnaire, so the number of responses for each question varies. For a  list of the organizational and individual stakeholders that responded to the  questionnaire, see appendix II. Appendix III provides the responses that  stakeholders gave regarding design issues to be considered in creating an  NIB.
To provide additional context about the potential implications of an NIB’s  design on the federal budget, and its risk to U.S. taxpayers, we reviewed  prior GAO reports, as well as reports by the Congressional Budget Office.  We also spoke with officials at the U.S. Department of the Treasury, the  Internal Revenue Service, and the Environmental Protection Agency  (EPA). In addition, after analyzing the results from our questionnaire, we  interviewed staff from the Office of Management and Budget to discuss  how an NIB might affect the federal budget and U.S. taxpayers. We  conducted a similar interview with officials at the Department of the  Treasury; however because the current administration is still deliberating  issues related to an NIB, Treasury officials could not comment on specific  issues discussed by stakeholders responding to our NIB questionnaire.
To determine the extent to which wastewater public-private partnerships  (PPPs) have been privately financed, we conducted a literature search of  online databases to identify academic and news articles discussing  privately financed wastewater PPPs initiated since 1992, when President  Bush signed an Executive Order encouraging such partnerships. Despite  these efforts, it is possible that we did not identify all privately financed  wastewater PPPs initiated since 1992. For purposes of this report, a  privately financed wastewater PPP is a partnership involving the core  business of collecting and treating municipal wastewater between a  municipality (or other public entity) and one or more private partners in  which the private partner(s) contribute private funds to the partnership.  For our report, the public partner must retain a long-term interest in the  facility. This means that, if the private partner acquires an ownership stake  in any of the wastewater assets, the public partner must be able to  reacquire the assets on preferential terms at the end of the contract.
To determine the potential advantages and challenges of privately  financed wastewater PPPs, we conducted interviews with officials from  six of the seven municipalities we identified that entered into a privately  financed wastewater PPP since 1992; officials from Cranston, Rhode  Island, declined to speak with us. In addition, we conducted case studies  in four of the states in which privately financed wastewater PPPs have  occurred: Alaska, California, New Jersey, and Ohio. As part of our case  studies, we spoke with numerous municipalities in each state about their  wastewater financing choices to get additional context about why few  municipalities have entered into privately financed PPPs. These  municipalities were selected to include municipalities of varying sizes, as  well as municipalities who are not involved in privately financed  wastewater PPPs, but who have considered the option in the past. We also  spoke with state officials as needed to understand more about the legal  context within each state. Table 5 includes a list of the municipalities and  state agencies we spoke with as part of our case studies.
To obtain additional information about private sector views on the  advantages and challenges of privately financed wastewater PPPs, we  interviewed officials at the six largest water and wastewater services  companies in the United States: American Water, CH2M Hill, Severn Trent  Environmental Services, South West Water Company, United Water, and  Veolia Water. We also interviewed officials from PERC Water, a water  recycling company involved in the privately financed wastewater PPP in  Santa Paula, California. In addition, we interviewed officials from EPA and  numerous stakeholders in the water and wastewater industry, including  national associations representing wastewater utilities, consultants that  advise municipalities on wastewater financing decisions, and  representatives from the financial sector involved in water and wastewater  infrastructure financing.
Finally, we also conducted a literature search to identify publications that  discuss the advantages and challenges of privately financed wastewater  PPPs in the United States. After reviewing various publications, we  included the 10 publications that: (1) focused on the wastewater industry  in the United States; (2) discussed the advantages and challenges of  wastewater PPPs; and (3) specifically addressed the use of private  financing in the context of a PPP. Throughout the report, we cite the  advantages and challenges identified in these 10 publications to provide  additional context to the information gathered in our interviews. See  appendix IV for a complete list of the publications we identified.
We conducted our work from June 2009 to June 2010 in accordance with  all sections of GAO’s Quality Assurance Framework that are relevant to  our objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations in our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for any findings and conclusions.
section_title: Appendix II: Stakeholders Responding to the NIB Questionnaire
paragraphs: The following stakeholders responded to our questionnaire regarding  design issues to be considered in creating a national infrastructure bank.  The individuals who responded to our questionnaire presented their  personal views and not the views of the organizations for which they  work.
subsections: section_title: Organizations
section_title: Individuals
section_title: Appendix III: Summary of Stakeholder Responses to the NIB Questionnaire
paragraphs: This appendix provides information on stakeholders’ responses to our  questionnaire addressing design issues to be considered in creating an  NIB. The questions asked in the questionnaire are reproduced below,  along with a tally of stakeholder responses for each closed-ended  question.  1.  What types of infrastructure should an NIB provide financing for? 2.  What should be the mission of an NIB?
Stakeholders provided a variety of open-ended responses to this question,  which are discussed in the report as appropriate.  3.  If an NIB is created, how should it be structured?  4.  What relationship, if any, should an NIB have with the existing state- level Clean Water State Revolving Fund programs?
Stakeholders provided a variety of open-ended responses to this question,  which are discussed in the report as appropriate.  5.  How should an NIB initially be capitalized?
Stakeholders provided a variety of open-ended responses to this question,  which are discussed in the report as appropriate.  6.  Should an NIB have the authority to generate its own funds for  operating expenses and lending using different financing mechanisms?
If you answered “yes” to question 6, which mechanisms should an NIB  have the authority to use to generate is own funds?  7.  Should an NIB become self-sustaining after its initial capitalization? By  self-sustaining, we mean an NIB that is fully reliant on funds that it  generates, rather than on continued federal funding.  8.  How important is it that an NIB has the authority to provide each of  the following financing mechanisms? 9.  If an NIB suffers from financial losses due to municipalities defaulting  on loans or commercial paper, taxpayers may be at risk to cover those  financial losses. How should an NIB mitigate this potential risk to  taxpayers?
Stakeholders provided a variety of open-ended responses to this question,  which are discussed in the report as appropriate.  10. How should an NIB distribute financing to qualified projects? 11. What types of wastewater utilities, if any, should an NIB have the  authority to assist? Please check all that apply.  12. Assuming constrained resources, by what method should an NIB  prioritize eligible projects for financing?  13. What should be the level of priority for the following criteria that an  NIB could use to evaluate projects and select those that should be  financed?  14. Should an NIB exclusively finance large infrastructure projects?  15. Should there be a limit on the amount of financing that one project can  receive from an NIB? 16. In your opinion, which of the following wastewater infrastructure  activities should an NIB finance?  17. In addition to design issues discussed above related to administration,  authorities, financing prioritization, and financing eligibility (questions  1 through 16), what other design issues should be considered in  designing and establishing an NIB, if any?
Stakeholders provided a variety of open-ended responses to this question.  18. Please provide any additional information that would be helpful to  GAO in better understanding potential issues related to establishing an  NIB.
Stakeholders provided a variety of open-ended responses to this question.
section_title: Appendix IV: Published Works Addressing Privately Financed Wastewater PPPs
paragraphs: We identified the following published works which address privately  financed wastewater PPPs and were published since 1992:  Haarmeyer, David. “Environmental Infrastructure: An Evolving Public- Private Partnership.” in Seidenstat, P., Nadol, M., & Hakim, S. America’s  Water and Wastewater Industries: Competition and Privatization.  Vienna, VA: Public Utilities Reports, 2000.
Heilman, John and Gerald Johnson. The Politics and Economics of  Privatization: The Case of Wastewater Treatment. Tuscaloosa, AL:  University of Alabama Press, 1992.
Landow-Esser, Janine and Melissa Manuel. “Environmental and  Contracting Issues in Municipal Wastewater Treatment Outsourcing.” in  Seidenstat, P., Nadol, M., & Hakim, S. America’s Water and Wastewater  Industries: Competition and Privatization. Vienna, VA: Public Utilities  Reports, 2000.
Matacera, Paul J. and Frank J. Mangravite in Seidenstat, P., Haarmeyer, D.,  & Hakim, S. Reinventing Water and Wastewater Systems: Global Lessons  for Improving Water Management. New York: J. Wiley, 2002.
National Research Council. Privatization of Water Services in the United  States: An Assessment of Issues and Experience. Washington, D.C.:  National Academy Press, 2002.
Seidenstat, Paul, Michael Nadol, and Simon Hakim. “Competition and  Privatization in the Water and Wastewater Industries.” in Seidenstat, P.,  Nadol, M., & Hakim, S. America’s Water and Wastewater Industries:  Competition and Privatization. Vienna, VA: Public Utilities Reports, 2000.
Seidenstat, Paul. “Organizing water and wastewater industries to meet the  challenges of the 21st century.” Public Administration and Management  (8:2), 69-99 (2003).
Seidenstat, Paul. “Global Lessons: Options for Improving Water and  Wastewater Systems.” in Seidenstat, P., Haarmeyer, D., & Hakim, S.  Reinventing Water and Wastewater Systems: Global Lessons for  Improving Water Management. New York: J. Wiley, 2002.
Sills Jr., James H. “The Challenges and Benefits of Privatizing Wilmington’s  Wastewater Treatment Plant.” in Seidenstat, P., Haarmeyer, D., & Hakim,  S. Reinventing Water and Wastewater Systems: Global Lessons for  Improving Water Management. New York: J. Wiley, 2002.
Traficante, Michael A., and Peter Alviti, Jr. “A New Standard for a Long- Term Lease and Service Agreement.” in Seidenstat, P., Haarmeyer, D., &  Hakim, S. Reinventing Water and Wastewater Systems: Global Lessons  for Improving Water Management. New York: J. Wiley, 2002.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Sherry L. McDonald, Assistant  Director; Hiwotte Amare; Elizabeth Beardsley; Janice Ceperich; Philip  Farah; Cindy Gilbert; Maylin Jue; Corissa Kiyan; Carol Kolarik; Anu Mittal;  Marietta Mayfield Revesz; Janice M. Poling; and Ben Shouse made  significant contributions to this report. Also contributing to this report  were Carol Henn, William B. Shear, and James Wozny.