Water Wars and Creeping Privatization

2014 717 wat st(Image: Flowing water via Pixabay)The newly enacted Water Infrastructure Finance and Innovation Act holds promise for life in a world shaped by climate change. However, privatization proponents are working hard to privatize ownership and control our water infrastructure.

Given the era we live in, it should come as no surprise that legislation as important – and as potentially lucrative – as the Water Resources Reform and Development Act (WRRDA) includes opportunities for privatization. Those parts of the new water law will be analyzed in the next part of this overview of WRRDA.

Before diving into that big drink of water, it is worth taking a comparative sip of an important but smaller piece of legislation within WRRDA – the Water Infrastructure Finance and Innovation Act, or WIFIA. The version of WIFIA that was enacted is intended to take an experimental approach to financing water projects. For example, WIFIA creates a five-year pilot program that provides $350 million of low-cost loans and credit enhancements for ports, inland waterways and water supply and treatment infrastructure projects. It is obvious that $350 million is far too little to address our water infrastructure needs. The experiment is intended to use that $350 million as a sort of seed money that will attract new sources of funding.

An experimental approach to funding big-ticket projects is certainly unlikely to please the finance sectors that know that far more money could be on the table. More on these issues will be found in the next installment on water infrastructure.

WRRDA was enacted with WIFIA, but without lucrative financing opportunities, such as private activity bonds (PABs). PABs may still be made available under WIFIA, because the finance industry’s pressure continues, and privatization advocates have made it clear that they have no plans to retire to lick their wounds. Instead, the private water sector continues to campaign for amendments that will provide private activity bonds for water infrastructure.

What Is WIFIA?

On June 10, 2014, President Obama signed into law the Water Infrastructure Finance and Innovation Act of 2013 as a tiny part of the larger water bill, WRRDA.

Among the policies Congress identified for WIFIA is “promoting development of water infrastructure through new financing sources.” While WIFIA is, on the surface, a law governing water infrastructure, it is actually more of a financing law enacted to support water infrastructure. An important feature of WIFIA’s funding is the creation of “revolving” federal loan funds.

Congress creates revolving loan funds that can be paid out to promote, achieve, advance or further the purposes and goals of a specific law.

In fact, the American Recovery and Reinvestment Act (ARRA) used revolving funds as an important tool during the Great Recession.

One of the program areas that the ARRA legislation encourages is the creation of long term funding mechanisms such as revolving loan funds (RLF), in order to extend the impact of the ARRA funds. By creating a revolving loan fund, states are not subject to expiration of the funds after the current three-year ARRA timeframe. The only restriction is that the entire amount allocated to the loan program must be loaned in the initial three-year time period. Repayment can be stretched over additional years. Money recaptured through loan payments must be used for the same purpose unless an amendment is approved by the DOE redirecting their use.

Many states have applied for ARRA funding in order to setup a revolving loan fund for energy efficiency and/or renewable energy. Revolving loan funds are an excellent way to provide access to capital to borrowers who might not have other resources, reduce borrowing costs, and create jobs. States are encouraged to align the goals of their RLFs with overall SEP program goals. (emphasis added)

In fact, state revolving funds (SRFs) are somewhat similar to credit unions. Both lend money to members and both have limits on how the organization’s funds may be used. And just as with credit unions, loans made for state projects are repaid with interest, and those payments pay for administration costs and making more loans – plus keeping pace with inflation. These funds, which are dispersed at the state level, have been a standard way to finance water and other big infrastructure projects.

The actual operation of an SRF is more complex than a credit union. For example, credit unions do not rely on Congress to appropriate money to pay for your house, but state revolving funds do depend on Congressional appropriations. In addition, people who take out a loan from their credit union are not required to promote specific public policy goals, but government agencies are. The Drinking Water State Revolving Fund’s Program Operations Manual lists a number of goals to guide the actions of the fund. They include attracting new investment capital to fund water projects that can guarantee revenues through user fees, leveraging private investment in water resources infrastructure, and aligning investments in water resources infrastructure to achieve multiple benefits.

WIFIA’s Purposes

WIFIA was enacted to assist communities facing significant water quality, drinking water availability or flood risk challenges. Money to achieve these goals is distributed through states’ infrastructure financing authority. In addition, WIFIA’s financing goals include rewarding coalitions, including corporations, partnerships, joint ventures, trusts, federal, state or local government entities, tribal governments or a consortium of tribal authorities and state infrastructure financing authorities. Private entities can participate in WIFIA projects, but only if the project is publicly sponsored.

WIFIA identifies a broad range of projects that are eligible for financial assistance, as long as proposed projects meet WIFIA’s criteria – including flood control, hurricane or storm damage reduction, reducing flood risk, enhancing stream flow, and protecting natural resources, and supporting the construction of levees, dams, and other types of water infrastructure.

To achieve its goals, WIFIA is designed to play nicely with others. That is, WIFIA is written to support other laws that are aligned with WIFIA’s goals. These laws include activities under the Safe Drinking Water Act, making public water systems or treatment works more energy efficient, repairing or replacing community water systems, sea water desalination, aquifer recharge projects, water recycling projects, and acquiring property integral to a project or that can mitigate environmental problems.

The last two parts of WIFIA have clearly been drafted with an eye to the hurricanes and extreme weather we now experience on a regular basis. One section provides funding for resilient construction that can resist hazards brought on by a major disaster, continue to provide primary functions even after a major disaster and withstand a potentially disruptive event. Another section requires studies to make recommendations that will reduce loss of life and property from extreme weather events. Examples of projects that meet those criteria can be found in a May 14, 2014, press release from Sen. Barbara Boxer (D-California).

Selecting Projects to Fund Through WIFIA

Anyone who is lining up to get WIFIA funding should pack a big lunch. WIFIA’s funding is limited to $50 million each year to the Army Corps of Engineers, and to the Environmental Protection Agency for each fiscal year, 2014 through 2018.

The projects can be financed by a private entity, such as Morgan Stanley, but only with the sponsorship of a public entity, such as the Army Corps of Engineers. In addition, the projects must have national or regional significance and generate economic and public benefits, such as reducing flooding, improving water quality and quantity and protecting drinking water.

Other criteria for WIFIA to provide financing include the use of innovative methods for projects that protect against extreme weather or that protect the environment, that serve regions with significant water resource challenges, such as water quality and quantity problems, and that preserve water resources that have exceptional recreational or ecological value.

WIFIA’s funding is intended to be more in the nature of seed money, and that money must come from both the public and private sector.

WIFIA project funding is capped at 49 percent of a project’s cost, and WIFIA caps the federal share from other federal sources at 80 percent. In other words, it is impossible to fund a project solely from federal sources. One way of looking at WIFIA’s financing limitations is that the federal share is similar to a Kickstarter campaign – providing seed money for worthy projects, as well as inserting a speed bump for those who would use infrastructure privatization financing in ways that do not benefit the public.

A Fine Whine

WIFIA’s structure may have some of the game changing effects we are beginning to see in the Affordable Care Act, such as rapidly falling numbers of those who lack health insurance and making it possible for people to quit, to work fewer hours or to take a job they like even though it does not provide health insurance.

WIFIA’s focus is on providing infrastructure that protects the country in the face of climate change, ensures that water is safe and adequate for our needs and prevents privatization cheerleaders from funding private water projects on the public’s dime.

The Transportation Infrastructure Finance and Innovation Act (TIFIA) program has been an important source of funding for highway, transit, railroad, intermodal freight and port access. TIFIA provides a number of forms of federal financial assistance. Financing transportation infrastructure through TIFIA has often relied on tax-exempt private activity bonds. The problem with these tax-exempt bonds is that this subsidy to private financiers costs the federal government money. In fact, infrastructure financing of “private-public partnerships” has allowed a private “partner” to provide no more than 3 percent of the costs. Is it any wonder that major players in private water infrastructure see WIFIA, in its present form, as a huge disappointment?

According to The Bond Buyer, rather than giving private contractors the sorts of subsidies available under TIFIA, WIFIA “provides only $350 million of low-cost loans and credit enhancement for ports, inland waterways, and water supply and treatment infrastructure projects during a five-year pilot program.”

In a final blow to the infrastructure privatization crowd, tax-exempt private activity bonds cannot be used, directly or indirectly, for a project receiving WIFIA support. Of course, the water privatization industry, including the American Water Works Association, is lobbying to get that ban overturned.

“Partnership” on the Cheap

According to Jim Watts, writing for the May 28, 2014, Bond Buyer, “Water groups and state and local officials are already urging members of Congress to amend a new federal loan program for infrastructure projects to allow tax-exempt bonds to be used in conjunction with the financial assistance.”

Why not give investors tax-exempt private activity bonds? Shouldn’t the government promote investment in private projects that will create jobs instead of hurting the job creators?

In fact, each of these assumptions is ill founded. Private activity bonds may sound like municipal or other government bonds, but they are not. Historically, people have been attracted to government bonds because they are backed by the government and, as a result, are very safe investments. When the government issues bonds that are tax-free in order to attract investors in public projects, that is the government making decisions about how best to fund government projects.

Private companies have long issued bonds and stocks in order to fund their own operations. Investors in those private stocks and bonds take more risk than is the case for government bonds, but they may also make greater gains than would be the case with government bonds. Indeed, aren’t risk and rewards for taking those risks supposed to be their reward as capitalists?

Isn’t demanding that government give up taxes on the gains from private bonds and stocks outrageous, at the least? If capitalists cannot make money through their own entrepreneurial efforts, then they are hardly job creators and do not deserve to be rewarded.

These capitalists tend to overlook that PABs and TIFIA mean that the government collects less tax and then has less money for public needs. In fact, doesn’t the use of those instruments, depending on the tax code, actually thwart the beneficial operation of our capitalist system, which includes weeding out the weak and making failure possible?

The key to getting private investment so low is large public subsidies to capitalists, including through TIFIA and PABs. Each of these financing schemes involves the private partner either not paying taxes or getting government subsidies. In the end, what this means is that the private contractor gets an almost-free pass to receive toll or other money that should be used to fund public infrastructure.

Playing With Water

It has not escaped the notice of the private water industry that WIFIA has, so far, not been allowed to provide the sorts of financial benefits available to those who invest in transportation privatization. In the next installment of Truthout’s series on water infrastructure, we will look at key players in the water industry – public and private – and how they operate.