Water: A few study tips for a grade boost

Near-failing grades and where test prep went wrong

Last week, the American Society of Civil Engineers (ASCE) released its quadrennial report card on America’s infrastructure. The report examines the status of 16 of America’s infrastructure systems across several factors such as the systems’ ability to meet current and future capacity demands, existing and near-future condition, innovation, and funding. In somewhat predictable fashion, all water-related infrastructure systems (drinking water, wastewater, inland waterways, and levees) scored a ‘D’ or below. It’s not that the rest of America is doing much better–the average score was a ‘D+’ with the highest score at a ‘B-‘ grabbed by the solid waste industry–but when the whole class is failing, who really wants to be the dunce that’s below the curve?

The good thing (or part that proves we have the “aptitude” to do better) is that the innovation required to tackle critical infrastructure issues in this space already exists, including water losses from piping, inefficiencies in asset management and distribution networks, and wastewater overflow. And as we’ve noted, investor interest in innovation in this space is there and growing: 2012 was the biggest year for VC investment in water in four years and just one of three cleantech sectors that experienced VC investment growth last year (source: Cleantech Group’s i3 platform).

So why is our infrastructure grade so low, and how can we raise it? In addition to a few (logical) functional approaches, such as separating potable and non-potable water lines to increase cost-effective distribution for municipalities, the bulk of recommendations from the ASCE revolve around finding new, innovative financing approaches for water-related projects.

Unfortunately, there is little incentive for water utilities and operators to invest in innovation. The obstacles are well-noted: water utilities are struggling to generate sufficient revenues given a broken pricing model which discourages investment in costly technologies, whereas wastewater infrastructure upgrades are stagnant given customers’ unwillingness to pay for benefits that are further downstream.

The key to a major grade boost: new, innovative approaches to financing 

The ASCE notes that an $84 billion investment in infrastructure by 2020 can bridge the gap. But to get there, we need new, attractive, and innovative financing models, and we need them now. Last week, at Cleantech Forum San Francisco 2013, we featured one innovative approach, which we think is quite promising for spurring investment in innovation in this sector. The award-winning approach, fondly described last week by the CEO of United Water, Bertrand Camus, is a unique partnership between United Water and private equity firm KKR with the New Jersey Bayonne Municipal Utilities Authority (BMUA). The model is a joint-venture where United Water and KKR will acquire a 40-year concession from BMUA with an initial payment of $150 million to eliminate the existing debt of BMUA and to improve its finances. With commitments to an ever larger sum of investment over the life of the contract, the partnership will also allow for improved service reliability and water quality while BMUA maintains controls of rates charged to users. Most excitingly, given the long term nature of the agreement, the initial investment capital will be used by BMUA to invest in water metering and monitoring systems (e.g., GIS, SCADA, CMMS) which will help to reduce water losses and improve operation efficiency, providing gains for the municipalities and all parties involved.

The unique partnership represents a win-win-win; Bayonne’s municipal debt burden is cut in half, allowing them to invest in innovative technologies; KKR can expect big returns over the long-term given improved efficiencies; and, lastly, United Water is granted a long-term operators’ contract, as well as a stake in any returns.

If such partnerships are so easy, then why aren’t there more of them? The simple answer is that they are not easy. They require a shift in financing approaches and mindset: comfort in taking on greater risks and having a longer horizon for returns are just a few examples. Perhaps, however, given a new set of challenges, this might be just the shift that we need. And with the emergence and success of these types of partnerships, the water and wastewater industry could soon find itself an honors student.