Can Water Escape the Infrastructure Finance Model?

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10 October 2013 | Christopher Gasson

Is the public infrastructure finance model irreparably broken? It is something one has to consider when one looks at the collapse of public spending on infrastructure across Europe and North America. The thought also seems to have history on its side.

Most governments think about public infrastructure as something that benefits everyone, but is either free or subsidised at point of use. The idea is that it enables modern life, and has to be paid for out of the common purse so that everything else can happen. The reality is somewhat different. Yes, public infrastructure is for the common good, but paying for it is a bit more complicated.

The infrastructure finance we currently rely on is the result of a bet by politicians during the 1930s that if they borrowed money to build things, it would put people to work and improve the economy, and the borrowings could be paid back out of the increased tax revenue that resulted from economic growth.

The bet paid off. The economy did grow after the 1930s, but four things have happened since then. First, the link between local infrastructure spending and local economic improvement has been gradually eroded by globalisation: a dollar spent on building something in Detroit or Dubai will find its way out of the city much more quickly in a world of international construction giants, imported earth-movers, sky-high crude oil prices, and offshore production of consumer goods, than might have been the case 50 years ago. Second, the revenue streams which might be available to service infrastructure debt are being squeezed by unavoidably rising social costs. Here, I mean the fact that people are living longer in retirement, and their medical expenses are increasing. Third, inflation has remained low for the past two decades. This means that the real cost of repaying the principal on past borrowings is much higher than it was 30 years ago. Finally, one might add in a whisper that not only are growth rates in the developed world much lower than they were a generation ago, but they are less likely to be influenced by local spending on physical infrastructure (education might do more good than shovel-ready projects, for example).

Altogether this means that while the last great recession of the 1930s could be ended with the help of massive infrastructure spending, that recipe has largely not worked this time around. In the US, the recovery has come from the revolution that is taking place in the energy sector, rather than the 2009 stimulus package. China’s massive infrastructure spending has left a lot of debt around the country, while failing to address the declining rate of growth.

There may be some Utopian solutions to getting the infrastructure model to work again, which would involve much better global economic cooperation and a commitment to pay more in taxes, but rather selfishly I feel it is time for the water sector to check out of this infrastructure business model and come up with something better.

What made me think of this is our forthcoming American Water Summit. It seems to be happening at a pivotal time for the US water sector. Capital expenditure on water and wastewater infrasructure in the US has been falling steeply this year. This has been largely due to the absence of cheap federal money, a situation now made worse by the shutdown. At the same time, we are seeing a lot more creativity in the market, with trades union funds like Ullico investing in private water projects, mainstream utilities like New York’s DEP reaching out to private operators for savings, and cities like Indianopolis refinancing themselves through utility asset transfers. We are bringing together most of the people at the cutting edge of this creativity next month for our American Water Summit (see www.americanwatersummit.com for details). I really sense that this is a better time for new ideas in the US water sector than at any time in the previous ten years.

I will see you there – and you can hear where I think this whole thing is headed.

 

This insight was originally posted on Global Water Intelligence. To read the original insight, click here.