A few months ago, one of our crews at United Water, working within view of Manhattan's skyline, unearthed a section of water main stamped with the date when it was originally laid. It reads 1897 — the year in which William McKinley succeeded Grover Cleveland as president of the United States, the Klondike Gold Rush began with the arrival of the first successful prospectors in Seattle, and Boston ran its first marathon with 15 competitors.
For 116 years, that pipe carried clean, fresh water to people's homes. Like most of us today (about seven in 10 people, according to a study of U.S. households last year), successive generations would have scarcely given a second thought to how that water got there when they turned the tap on. And why would they when that water seems to cost next to nothing?
Maybe people's sense that water should cost nothing is why there is often protest whenever water rates rise. As playwright Oscar Wilde said: "Nowadays people know the price of everything and the value of nothing." Water is essential for life. No one can live without it. Yet with ever more stringent standards and regulations, significant cost is attached to treating and delivering it to our taps — and that cost is rising all the time. A new Value of Water Campaign, created by a diverse coalition of nonprofit and for-profit organizations, aims to help people understand why this is so.
Explaining the value of water
The problem lies in the assumption that water will be "there" without recognizing the need to invest in the water infrastructure to treat and deliver it. Buried beneath our streets, water infrastructure is mostly out of sight and out of mind. This has created an unavoidable hurdle for present and future generations. For decades, cities across the U.S. have deferred investment to update water systems to the point where, every two minutes, a water main now breaks in a city somewhere. By building awareness of the critical role water plays in driving business and economic growth, as well as in our daily lives, the Value of Water coalition aims to elevate investment in water infrastructure as a municipal priority.
The other problem is cost. The price tag to put things right over the next 25 years is estimated at more than $1.3 trillion. Who, in today's world, has that kind of money? The government doesn't. Federal support for water infrastructure renewal is at a trickle. And cities — many of which face budget and credit crises of their own — all have schools, roads, fire and police departments competing for the same scarce funds. That leaves private investors with the remaining lifeline.
The majority of water systems in the U.S. — about 85 percent — are municipal owned, funded and operated. Private sector utilities have varying degrees of involvement in the rest. Tax breaks have made issuing bonds an attractive way for cities to raise money (although little of that is usually invested in water). Over the years, bonds have become more costly to service as municipal credit ratings have fallen. The appetite for muni-bonds among potential buyers also has waned.
Private equity partnerships offer a new solution to our century-old problem. While private equity investment in U.S. roads, bridges and airports is not new, it is new when it comes to investment in water infrastructure.
The private equity solution
The first private equity investment in a U.S. municipal water system became final in December 2012. KKR, in partnership with United Water, won a 40-year water and wastewater contract from the city of Bayonne, N.J., that included an upfront $150 million payment used by the municipality to eliminate debt, plus a commitment to invest a further $157 million to repair, maintain and upgrade the city's water system. All the while, system ownership and control and rate rises will remain in city hands. Immediate system improvements have been made in Bayonne, such as the installation of wireless meters that pinpoint at-risk pipes before they break.
In future decades, the need for clean and safe water will grow. So will our present-day problems with aging pipes if the money to fix and replace them is not found. While no one organization can write a $1.3 trillion check to fix all of our water infrastructure problems, private equity, in partnership with water companies equipped with innovative technology and system management skills, offer the fresh source of capital that cities need.
Photo of broken water main by Jovan Nikolic via Shutterstock