Will Donald Trump's Infrastructure Plan Throw a Life-Ring to Water Utilities?
One of the cornerstone promises of Donald Trump's presidential campaign was his desire to improve the state of infrastructure in the United States, which finds itself at risk of losing its reputation as the world's leading system – President Trump views infrastructure upgrades as a path to creating economic and job growth. Coupled with his statements advocating for the importance of clean water, there is speculation the new Trump Administration will be a boon for water utilities' aging infrastructure systems. However, there remain many questions and challenges to overcome for President Trump's plan to spur the kind of infrastructure investment promised during the campaign.
There is a lot in that statement for water utilities to be optimistic about, but what are the details of the proposed infrastructure plan?
The goal of President Trump's plan is to reduce the barriers of infrastructure finance to attract private investment. Per the plan, the cost of finance is reduced by 18-20% through an equity tax credit. By reducing the cost of capital, the authors anticipate attracting over 1 trillion dollars over 10 years. The team also argues this plan will be revenue-neutral because the equity tax breaks will be repaid through tax revenues generated from additional wage income and contractor profits.
Our country's water infrastructure is in critical need of an upgrade. In January of 2016 the EPA released findings from the Clean Watersheds Needs Survey demonstrating $271 billion is needed over the next five years to maintain and improve wastewater infrastructure in the US.
Where the Trump infrastructure plan can benefit water utilities is by encouraging public-private partnerships (P3s). One of the major reasons for the gradual degradation of water utility infrastructure is that many municipal water utilities have trouble gaining the capital needed to design and build new infrastructure. In recent years, utilities have turned to P3s to augment the traditional method of using municipal bonds to access capital. The P3 arrangement can be structured to also include a long term maintenance agreement.
So, where are the potential pitfalls?
Many of the infrastructure upgrades required by water utilities involve repair or maintenance of existing systems. The type of investment that would grow under the Trump plan would be incentivized toward new projects which will more clearly generate revenue. A common example of this type of project would be building a new road and allowing the private company to collect tolls. Water projects in small cities and rural towns are unlikely to generate the revenue necessary to be attractive to private investors. This could create an environment where poor, rural, or inner-city communities which are most in need of critical infrastructure upgrades find themselves excluded from the investment pool.
Additionally, a recent New York Times study found private equity firms investing in water utilities often have contracts guaranteeing a specific amount of revenue. In order to ensure return on investment, rates are often increased resulting in higher water bills for residents. The Times found that in three case study towns, rates rose more quickly than in comparable towns and in Rialto, CA rates rose 68% after the water system was taken over by an investment firm. In a worst-case scenario, unpaid bills can result in a lien being placed against a resident's home and eventually, foreclosure.
The second, and perhaps larger, obstacle for President Trump's infrastructure plan is gaining the political backing to push the plan through Congress. In the days after the election, senior Republicans began to express some skepticism towards the plan in its current form. Senate Majority Leader Mitch McConnell and House Majority Leader Paul Ryan have suggested that a major infrastructure plan would face a lower priority than other significant policy changes such as repealing the Affordable Care Act or comprehensive tax reform. Other Congressional Republicans raised questions regarding whether President Trump's infrastructure plan can be implemented without significantly adding to the federal deficit.
Will this infrastructure plan provide the help water utilities have been seeking?
Ultimately, President Trump's plan has the potential to create an influx of much-needed infrastructure investment for water utilities. The tax incentives created by the plan can be used to build private-public partnerships to repair or replace aging infrastructure. However, the plan faces both financial and political challenges before it can be implemented and it is unclear if the most vulnerable communities will benefit from this approach.
As the Trump Administration assumes power in 2017, water utilities will be watching closely to see if one of their most pressing challenges will be addressed. Our water infrastructure is the best in the world, but it is at risk and our industry needs new approaches. If the America First Infrastructure Plan is supported politically and financially, and carefully managed, it may just be the life ring needed to mitigate the risks we are currently facing.