Pat Mulroy, General Manager of the Southern Nevada Water Authority kicked-off the session on public-private partnerships at the recent 6th Annual OC Water Summit with a characteristically powerful and persuasive presentation about Southern Nevada’s infrastructure program. She challenged the private sector to step up and work with public agencies to finance the large infrastructure investments facing the water sector. Southern Nevada’s challenges provided an excellent context for the panel discussion that included former LA Mayor Richard Riordan and California State Treasurer Bill Lockyer. The discussion provides a roadmap for an expanded role for public-private partnerships in water infrastructure finance.
Southern Nevada’s Infrastructure Finance Woes
The economic downturn and the Colorado River drought have overrun Southern Nevada’s infrastructure finance model. Pre-2008, Southern Nevada relied on connection fees for 57% of their revenues. With the economic crash, building hit the skids, and the annual revenue from connection fees plummeted from about $200 million to $3 million.
The declining elevation of Lake Mead increases the risk that the lake’s elevation will fall below Southern Nevada’s intake point. Therefore, the agency is spending $1 billion to lower its intake. This large investment means not a drop of more water; it avoids the risk of losing water (sound familiar Californians?). As a result, Southern Nevada has increased rates significantly and its customers are in economic pain (sound familiar Southern Californians?).
Based on her speech, Ms. Mulroy experienced a “teachable moment” two years ago at a conference sponsored by rating agencies. The rating agencies listed the top risk factors they track for western water agencies. Number 1 was “Lake Mead elevation.” Sitting next to Denver Water Department’s Jim Lochhead, Ms. Mulroy reported that they looked at each other stunned.
It was difficult to avoid the “takeaway” that the traditional municipal finance model is stretched beyond comprehension, at least for water agencies facing transformational water supply risks in the face of current economic challenges. Ms. Mulroy invited the private sector to step up and develop public-private partnerships that work with public agencies to meet their obligations to their rate payers. She has challenged Goldman Sachs (by name) and others (left unnamed) to put their intellectual horsepower and financial heft at the service of the public sector.
The Leadership Challenge: Public Buy-In for Water Investment
Mayor Riordan offered important perspectives from his private and public sector experiences. Wearing his private sector hat, he noted that the private sector can step up to offer financing and bear risk, provided that it earns a reasonable return. Sporting his public sector hat, he noted that public leadership must forge the way.
Mayor Riordan reminisced about the challenges he faced when an earthquake damaged the Santa Monica Freeway (the most intensely used freeway/expressway in the nation). They needed to divert traffic off the freeway and onto side streets to avoid freeway damage and then back on the freeway. The traffic diversion required control of three intersections in another city. Under normal circumstances, such a traffic diversion would need negotiated agreements and environmental review that would have taken months. Riordan recalled giving orders to get it done immediately. He made the case for his actions and never received objections.
The lesson is leadership. For water agencies, this means an active education and public outreach program about the real challenges (don’t hide them under a rug) and justify the investments required to provide reliable water service with acceptable water quality. The premise is that the public may not have a nickel for something they don’t understand, but may have a dollar for an investment they do understand.
The panel discussion and the only question from the floor focused on the transformation needed about attitudes towards water finance. Traditionally, rates are kept low as long as possible and wait until there is no alternative but raise rates. With rate-setting disjointed from solving long-term challenges and needed investments, the politics of rate-making focuses only on pennies.
In the case of the Santa Monica freeway, the damage was self-evident and the need for action obvious. An immediate political consensus for solutions was available. The direction for leadership is crystal clear. Make the case for your investments.
Developing Policy for Public-Private Partnerships: West Coast Infrastructure Exchange
Mr. Lochyer was also his vintage self—a politician with subtle charisma and among the politicians most worth listening to. The States of California, Oregon and Washington and the Province of British Columbia has formed the West Coast Infrastructure Exchange (www.westcoastx.com) to develop new methods to finance public infrastructure needs. Their aim is to assemble lessons from case studies to develop a “template” for best practices for public-private partnerships to build on the successes and avoid the pitfalls of failures. While early in development, the commitment of these states and Canadian province suggest that the debate “about whether” public-private partnerships has now moved onto “the how.” The Exchange could become a critical forum for finding the best practices to harness the potential of public-private partnerships.
A 3P Future?
Advocates of a private sector role in water (such as me) have received the challenge. In my opinion, a successful public-private partnership must start by devising new rate structures that meet the needs of ratepayers and investment requirements, providing the financial collateral to support private financing and transferring risk to private parties. That is, the design of a public-private partnership must be done collaboratively. This is not a good candidate for the old municipal finance model where the issuer structures the financing and puts it out to a competitive bid for underwriting. A negotiated transaction done with transparency is the future of 3P.