Water and wastewater utilities spend three to four months assembling a bond team of financial experts, reviewing financial ratios and developing the offering statement as part of their due-diligence process prior to issuing millions in debt. However, many have failed to assess the financial risks associated with the replacement costs of underground infrastructure.
Water main breaks, sink holes, and flooding are disrupting drinking water services and causing property damage and economic losses all across the nation. For the past decade organizations like the American Water Works Association have declared the age of renewal and replacement is upon us.
To keep up with population growth and movement, the United States installed underground water infrastructure in three main time periods: in the 1800s, from 1900 to 1945, and post-1945. Pipes constructed in each of these three eras will all start to fail at nearly the same time over the next couple of decades for a number of reasons, ranging from age and soil conditions to inadequate design and poor installation.
Additionally, the life span of the materials used has become shorter with each new investment cycle. The main hot spots for these failures are in the industrialized population growth centers after World War II.
Under the 1996 amendments to the Safe Drinking Water Act, the U.S. Environmental Protection Agency is required to conduct an infrastructure needs assessment every four years.
In 2001, the Water Infrastructure Network — a consortium of industry, municipal, and nonprofit associations — estimated that up to $1 trillion over a 20-year period would be needed to sustain the country’s water and wastewater systems, when both capital-investment needs and the cost of financing were considered.
In the past decade, the required investments have not been made. In 2009, the American Society of Civil Engineers gave the U.S. drinking water infrastructure a rating of D-minus.
The issue is more a funding problem than an engineering one. However, there must be a high degree of collaboration between a number of professional disciplines, including financial institutions.
The implementation of GASB 34, on standards for government financial statements, fell short of identifying the liability of long-term assets and their replacement costs.
An above-ground asset can be inspected, but the underground network of pipes that makes up nearly 60% of the total replacement costs of our aging water infrastructure remains largely out of sight and out of the capital improvement plans of utilities, which are truly the main driver of determining how much debt funding is required in the future.
If a utility chooses to ignore the problem or continue to defer capital replacement projects to avoid basic rate increases, the investment gap will significantly rise and the costs of the projects will increase, creating a larger future liability for the ratepayers and weakening the overall financial strength of the utility.
Finance professionals spend a great deal of time looking for safe investments that offer a good rate of return. Making capital investments in infrastructure should be considered just as important.
Existing research on aging infrastructure reveals that there is a lack of data on the condition of the underground assets required to help finance professionals make the right capital investment decisions.
Typically, public works engineers and their consultants approach a finance officer and say they have tested 20% of a pipeline and it all needs to be replaced. A finance officer should be able to check the accounting for the asset and would likely discover that it has been fully depreciated and therefore at the end of its useful life.
Based on this common scenario the entire pipeline would require funding for replacement. However, if a piece of pipe that still has some useful life is replaced, money has been wasted. If an asset is replaced too late and fails, the emergency replacement cost may actually be double.
The true need is to find the sweet spot where the capital investment actually reduces the risk and the funding is allocated efficiently.
As a financial issue, there are various factors that can lead to a decrease in the inevitable replacement costs. Factors to decrease the estimate include condition assessment and other asset-management strategies that help extend an asset’s life.
Condition assessment provides the information needed to replace only those pipes that need to be replaced. In fact, condition assessment helps bridge the critical gap between investment and risk.
Historically, utilities have had budgeted funds on an annual basis for intermittent system repairs and rehabilitation. This level of funding is typically inadequate to address the replacement costs.
Utilities should, especially during economic downturns, allocate a portion of the funding to a new capital-budget line item called condition assessment.
Condition-assessment technology has been developed in recent years that targets in-use, pressurized, large-diameter pipes.
The application of this technology as part of a systematic condition-assessment plan and asset-management program can offer utilities the ability to address some of the most high-cost/high-risk issues when dealing with underground assets.
Condition assessment will help prioritize repair and replacement programs. Many utilities turn to these types of services only when an emergency or crisis occurs.
According to condition-assessment experts like Brian Mergelas, president and chief executive officer of Pressure Pipe Inspection Co., there are potential cost savings for utilities that do planned periodic inspections instead of waiting until an emergency mobilization effort is required.
Using advanced condition-assessment technologies helps find and correct leaks on large diameter mains, which presents a significant opportunity to save both water and the operational costs of pumping and treatment.
The water industry has the accountability to address the issue of aging infrastructure. The financial industry has the fiduciary duty to address all of the financial risks to protect investors and bondholders.
Bonds for asset replacement should not be issued based solely on an “end of lifespan” decision. The actual, real-time condition of a pipeline should be a major consideration.
Gregory M. Baird is the managing director and chief financial officer of AWI Consulting LLC, which is developing strategies to address aging water infrastructure issues at the federal, state and local levels. He recently served as chief financial officer of Aurora Water in Aurora, Colo.