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entitled 'Wastewater Infrastructure Financing: Stakeholder Views on a 
National Infrastructure Bank and Public-Private Partnerships' which 
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Report to the Ranking Member, Committee on Transportation and 
Infrastructure, House of Representatives: 

United States Government Accountability Office: 
GAO: 

June 2010: 

Wastewater Infrastructure Financing: 

Stakeholder Views on a National Infrastructure Bank and Public-Private 
Partnerships: 

GAO-10-728: 

GAO Highlights: 

Highlights of GAO-10-728, a report to the Ranking Member, Committee on 
Transportation and Infrastructure, House of Representatives. 

Why GAO Did This Study: 

Communities will need hundreds of billions of dollars in coming years 
to construct and upgrade wastewater infrastructure. Policymakers have 
proposed a variety of approaches to finance this infrastructure, 
including the creation of a national infrastructure bank (NIB) and the 
increased use of privately financed public-private partnerships (PPP). 

In this context, GAO was asked to identify (1) stakeholder views on 
issues to be considered in the design of an NIB and (2) the extent to 
which private financing has been used in wastewater PPPs and its 
reported advantages and challenges. In conducting this work, GAO 
developed a questionnaire based on existing NIB proposals and 
administered it to 37 stakeholders with expertise in wastewater 
utilities, infrastructure needs, and financing; GAO received 29 
responses from stakeholders with a variety of perspectives about an 
NIB. To determine the extent to which wastewater PPPs have been 
privately financed and their advantages and disadvantages, GAO 
identified and interviewed municipalities involved in privately 
financed PPPs and wastewater services companies, conducted case 
studies in states with privately financed PPPs, and conducted a 
literature review. 

GAO is not making any recommendations. While this report discusses a 
number of funding approaches, GAO is not endorsing any option and does 
not have a position on whether an NIB should be established. 

What GAO Found: 

Stakeholders who responded to GAO’s questionnaire discussed issues in 
the following three key areas that should be considered in designing 
an NIB: 

* Mission and administrative structure. While a majority of 
stakeholders supported the creation of an NIB, their views varied on 
its mission and administrative structure. One-third supported an NIB 
to fund only water and wastewater infrastructure, while two-thirds 
responded that it should also fund transportation and energy projects. 
There was no consensus among stakeholders on whether an NIB should be 
administered by an existing federal agency, structured as a government 
corporation, or structured as a government-sponsored enterprise. GAO 
has previously reported that an entity’s administrative structure 
affects the extent to which it is under federal control, how its 
activities are reflected in the federal budget, and the risk exposure 
of U.S. taxpayers. 

* Financing authorities. A majority of stakeholders agreed on an NIB’s 
financing authorities. Specifically, a majority said the federal 
government should provide the initial capital; an NIB should be 
authorized to use a variety of options to generate funds for operating 
expenses and lending; and an NIB should offer a variety of mechanisms 
for financing projects, such as providing direct loans, loan 
guarantees, and funding for the Environmental Protection Agency’s 
existing wastewater funding program—the Clean Water State Revolving 
Fund. 

* Project eligibility and prioritization. Stakeholders’ views varied 
on which types of projects should be eligible for NIB financing, such 
as whether it should exclusively finance large projects. In addition, 
a majority agreed an NIB should prioritize projects that address the 
greatest infrastructure need and generate the greatest environmental 
and public health benefits. 

GAO identified seven municipalities that have entered into privately 
financed PPPs-—contractual agreements in which the private partner 
invests funds in the wastewater infrastructure—-since 1992: Arvin, 
California; Cranston, Rhode Island; Fairbanks, Alaska; Franklin, Ohio; 
North Brunswick, New Jersey; Santa Paula, California; and Woonsocket, 
Rhode Island. Municipal and wastewater company officials GAO 
interviewed identified the following examples of advantages of 
privately financed PPPs: 

* Provide access to financing for municipalities that have difficulty 
using traditional financing sources, such as municipal bond markets. 

* May make operations more efficient, for example, by taking advantage 
of economies of scale by buying key supplies, like chemicals, in bulk.
* May bring new infrastructure online faster than traditional public 
procurement because companies have more flexibility. 

These officials identified challenges of privately financed PPPs, 
including: 

* Local opposition may arise out of concerns about higher wastewater 
rates and the potential loss of municipal wastewater jobs. 

* Private financing is generally more costly than tax-exempt municipal 
bonds because of higher interest rates; a 2002 National Research 
Council study reported that private financing is 20 to 40 percent more 
expensive. 

* Contracts can be costly and difficult to develop because they are 
complex, and municipalities and companies are unfamiliar with this 
type of PPP. 

View [hyperlink, http://www.gao.gov/products/GAO-10-728] or key 
components. For more information, contact David Trimble at (202) 512-
3841 or trimbled@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Stakeholders Addressed Issues in Three Key Areas That Would Need To Be 
Considered in Designing an NIB: 

Privately Financed Wastewater PPPs Are Uncommon and Have Several 
Reported Advantages and Challenges: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Stakeholders Responding to the NIB Questionnaire: 

Appendix III: Summary of Stakeholder Responses to the NIB 
Questionnaire: 

Appendix IV: Published Works Addressing Privately Financed Wastewater 
PPPs: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Stakeholder Support for Financing Mechanisms That an NIB 
Could Use to Generate Funds for Operating Expenses and Lending: 

Table 2: Stakeholder Views on Mechanisms an NIB Could Offer to Finance 
Projects: 

Table 3: Stakeholder Views on Criteria an NIB Should Use When 
Evaluating and Selecting Projects: 

Table 4: Privately Financed Wastewater PPPs Developed Since 1992 
Identified by GAO: 

Table 5: Municipalities and State Agencies Selected for Case Study 
Interviews, by State: 

Table 6: Stakeholder Views on Type of Infrastructure Funded by an NIB: 

Table 7: Stakeholder Views on Administrative Structure of an NIB: 

Table 8: Stakeholder Views on an NIB's Authority to Generate Its Own 
Funds for Operating Expenses and Lending: 

Table 9: Stakeholder Views on Mechanisms an NIB Could Use to Generate 
Its Own Funds for Operating Expenses and Lending: 

Table 10: Stakeholder Views on Self-Sustainability of an NIB: 

Table 11: Stakeholder Views on Financing Mechanisms an NIB Could Offer 
to Finance Projects: 

Table 12: Stakeholder Views on How an NIB Should Distribute Financing 
to Qualified Projects: 

Table 13: Stakeholder Views on Types of Wastewater Utilities an NIB 
Should Have the Authority to Assist: 

Table 14: Stakeholder Views on How an NIB Should Prioritize Eligible 
Projects for Financing: 

Table 15: Stakeholder Views on Criteria an NIB Could Use when 
Evaluating and Selecting Projects: 

Table 16: Stakeholder Views on Minimum Size of Projects Eligible for 
NIB Financing: 

Table 17: Stakeholder Views on Limits on Amount of Financing One 
Project Could Receive From an NIB: 

Table 18: Stakeholder Views on What Activities Should be Eligible for 
NIB Financing: 

Figures: 

Figure 1: Selected Types of PPPs: 

Figure 2: Types of Privately Financed Wastewater PPPs: 

Abbreviations: 

CWSRF: Clean Water State Revolving Fund: 

DBFO: design-build-finance-operate: 

EPA: Environmental Protection Agency: 

GSE: government-sponsored enterprise: 

IRS: Internal Revenue Service: 

NIB: national infrastructure bank: 

NPDES: National Pollutant Discharge Elimination System: 

NRC: National Research Council: 

PPP: public-private partnership: 

RCRA: Resource Conservation and Recovery Act: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

June 30, 2010: 

The Honorable John L. Mica: 
Ranking Member: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

Dear Mr. Mica: 

More than 220 million people in the United States are served by 
municipal wastewater systems. These systems consist primarily of a 
network of sewer pipes and treatment plants that carry and treat 
wastewater and then discharge it, often into surface waters such as 
rivers and lakes. Many systems were constructed more than 50 years ago 
and are reaching the end of their useful lives. The deteriorating 
condition of the nation's wastewater infrastructure has direct impacts 
on human and aquatic health. For example, many older wastewater 
systems lack the capacity to treat increasing volumes of wastewater, 
particularly during periods of wet weather. In addition, cracks in 
sewer pipes allow rain or snowmelt to enter the wastewater system and 
overwhelm its capacity to adequately treat wastewater. As a result of 
these two factors, wet weather can lead to the release of untreated 
wastewater, which introduces significant levels of pollution into 
local water bodies and poses risks to human health and aquatic life. 
The U.S. Environmental Protection Agency (EPA) estimates that over 850 
billion gallons of untreated wastewater are released annually into 
U.S. surface waters. 

Cities, towns, and other municipalities have the primary 
responsibility to fund wastewater infrastructure, and their wastewater 
spending totaled $43 billion in fiscal year 2007, according to the 
U.S. Census Bureau.[Footnote 1] In addition, the federal government 
appropriated $2.1 billion in fiscal year 2010 principally to assist 
municipalities through the Clean Water State Revolving Fund (CWSRF), 
[Footnote 2] which also received a one-time infusion of $4 billion 
through the American Recovery and Reinvestment Act of 2009.[Footnote 
3] However, according to EPA estimates, current federal, state, and 
local spending may not cover the cost of maintaining and replacing 
wastewater infrastructure. Specifically, a 2002 EPA analysis estimated 
a gap between current levels of wastewater infrastructure spending and 
projected future needs of about $150 billion to $400 billion over the 
period between 2000 and 2019.[Footnote 4] EPA has stated that without 
additional investment, the environmental and public health gains made 
under the Clean Water Act during the last three decades could be at 
risk.[Footnote 5] 

Policymakers and wastewater groups have proposed a variety of 
approaches to help bridge this potential gap between current levels of 
spending and future infrastructure needs. One approach would be to 
increase funding to traditional wastewater funding programs, such as 
the CWSRF. Alternative funding approaches could also be used to bridge 
the wastewater infrastructure funding gap. For example, a bill was 
introduced in Congress in 2009 that would establish a clean water 
trust fund to provide a dedicated source of federal funding for 
wastewater infrastructure similar to some of the trust funds that 
Congress has established for other infrastructure and environmental 
programs, such as for highway and transit infrastructure and coastal 
wetlands restoration.[Footnote 6] In addition, several bills have been 
introduced in Congress since 2007 to establish a national 
infrastructure bank (NIB), which could finance wastewater 
infrastructure through a variety of mechanisms, such as directly 
loaning money to eligible projects, guaranteeing municipal bonds to 
lower costs, and pooling loans from numerous smaller municipalities to 
lower costs.[Footnote 7] Similarly, a 1992 Executive Order encouraged 
the use of privately financed public-private partnerships (PPP) and 
stakeholders have since encouraged their use for municipal wastewater 
facilities.[Footnote 8] A PPP is a contractual arrangement in which a 
public entity (such as a municipal government agency) contracts with a 
private sector partner to contribute to the provision of a public 
service by planning, financing, designing, constructing, or operating 
and maintaining a facility or system. These PPP arrangements provide a 
business opportunity for private sector companies. PPP arrangements 
differ in the extent to which the private partner participates in each 
of these activities. When a PPP is privately financed, it can serve as 
an alternative to traditional wastewater infrastructure funding 
sources such as the CWSRF and tax-exempt municipal bonds. 

In this context, you asked us to examine (1) stakeholders' views on 
issues to be considered in the design of an NIB to increase financing 
for wastewater infrastructure and (2) the extent to which private 
financing has been used in wastewater PPPs and its reported advantages 
and challenges. 

To determine stakeholders' views on the design of an NIB, we reviewed 
past legislative proposals and interviewed a variety of stakeholders 
with knowledge of wastewater infrastructure issues, including 
individuals and organizations from the water and wastewater industry; 
financial sector; and federal, state, and local government. Based on 
the information gathered from these sources, we developed and 
administered a questionnaire to obtain the views of stakeholders on 
the design of an NIB. We identified organizational and individual 
stakeholders familiar with wastewater infrastructure financing issues 
and existing NIB proposals based on our preliminary interviews and our 
prior work on wastewater infrastructure financing. We sent this 
questionnaire to 23 national organizations with expertise in the 
wastewater industry in one or more of the following areas: financing 
and operating wastewater projects, constructing and maintaining 
wastewater infrastructure, local and state wastewater infrastructure 
needs, and environmental protection. We also sent the questionnaire to 
14 individuals with expertise in financing wastewater infrastructure 
who are municipal financing consultants, state financing officials, 
officials from private investment firms, or policy consultants. 
Although we sought to include stakeholders with a variety of 
perspectives about an NIB, the views of stakeholders consulted should 
not be considered to represent all perspectives about an NIB. In 
addition, although an NIB could potentially finance many types of 
infrastructure, we limited our stakeholders to those familiar with the 
wastewater sector. We received 18 organizational responses and 11 
individual responses, for an overall response rate of 78 percent. Some 
stakeholders did not answer all of the questions on the questionnaire, 
so the number of responses for each question varies. After analyzing 
the results from our questionnaire, we interviewed staff from the 
Office of Management and Budget and the Internal Revenue Service (IRS) 
to discuss how an NIB might affect the federal budget and U.S. 
taxpayers. 

To determine the extent to which wastewater PPPs have been privately 
financed, we conducted a literature search to identify potential 
privately financed wastewater PPPs initiated since 1992, when 
President Bush signed an Executive Order encouraging these 
partnerships. A privately financed PPP, for purposes of this report, 
is a contractual agreement in which the private partner invests funds 
in the wastewater infrastructure but does not include full 
privatization, in which the municipality sells its wastewater 
infrastructure assets to a private partner (unless the public partner 
can reacquire the assets on preferential terms at the end of the 
contract). It is possible that we did not identify all privately 
financed wastewater PPPs initiated since 1992. To determine the 
potential advantages and challenges of privately financed wastewater 
PPPs, we interviewed officials at six of the largest private companies 
involved in water and wastewater PPPs and officials in municipalities 
who have used privately financed PPPs. In addition, we conducted case 
studies in Alaska, California, New Jersey, and Ohio in which we spoke 
with numerous municipalities in each state about their wastewater 
financing choices to get additional context about why few 
municipalities have entered into privately financed PPPs. These 
municipalities were selected to include municipalities of varying 
sizes, as well as municipalities who are not involved in privately 
financed wastewater PPPs, but who have considered the option in the 
past. We also interviewed officials from EPA and conducted a 
literature search to provide additional context about potential 
advantages and challenges of privately financed wastewater PPPs. A 
more detailed description of our objectives, scope, and methodology is 
presented in appendix I. We conducted our work from June 2009 to June 
2010 in accordance with all sections of GAO's Quality Assurance 
Framework that are relevant to our objectives. The framework requires 
that we plan and perform the engagement to obtain sufficient and 
appropriate evidence to meet our stated objectives and to discuss any 
limitations in our work. We believe that the information and data 
obtained, and the analysis conducted, provide a reasonable basis for 
any findings and conclusions. 

Background: 

Americans rely on wastewater systems to protect public health and the 
environment. These systems are composed of a network of pipes and 
pumps that collect wastewater from homes, businesses, and industries 
and transport it to treatment facilities where it is treated prior to 
being discharged to surface waters. Historically, wastewater systems 
in the United States have been owned and operated by public agencies 
at the municipal level. In fact there are about 16,000 publicly owned 
wastewater treatment plants in the United States, which serve about 97 
percent of U.S. residents served by sewers. The remaining 3 percent 
are served by privately owned wastewater treatment facilities. Laws 
and regulations applying to wastewater treatment and the financing of 
wastewater infrastructure often differ based on whether a treatment 
facility is publicly or privately owned. 

Federal Laws Applying to Wastewater Treatment: 

EPA sets standards for the quality of wastewater that can be 
discharged under the Clean Water Act.[Footnote 9] Under this law, the 
National Pollutant Discharge Elimination System (NPDES) program limits 
the types and amounts of pollutants that industrial and municipal 
wastewater treatment facilities may discharge into the nation's 
surface waters. Both public and private wastewater treatment 
facilities discharging into U.S. waters are required to have NPDES 
permits authorizing their discharges. Generally speaking, municipal 
wastewater treatment facilities are designed to treat typical 
household wastes and certain pollutants in commercial and industrial 
wastes, primarily those identified in the Clean Water Act as 
conventional pollutants.[Footnote 10] Municipal facilities, however, 
may not be designed to treat toxic pollutants, such as heavy metals, 
which more typically occur in industrial waste streams. The Clean 
Water Act authorized EPA to develop pretreatment standards--
implemented as the National Pretreatment Program--to prevent certain 
pollutants, such as toxics discharged by industries into sewers, from 
passing through municipal wastewater facilities and into surface 
waters, or from interfering with the facilities' treatment processes. 
The National Pretreatment Program regulations require publicly owned 
wastewater facilities treating more than 5 million gallons of 
wastewater per day, and receiving certain pollutants from industrial 
users, to develop pretreatment programs. It further requires that 
municipalities possess adequate authority to require industrial users 
to pretreat their wastewater before discharging it into 
sewers.[Footnote 11] The pretreatment standards do not, however, apply 
to industrial discharges into privately owned wastewater facilities. 
Without such standards or a municipal pretreatment program, privately 
owned wastewater facilities may use alternative mechanisms to ensure 
that nonconventional waste is properly treated before it enters the 
sewer system, which according to EPA may be more costly and difficult. 
[Footnote 12] 

Government Funding of Wastewater Infrastructure: 

The Clean Water Act also authorized significant federal construction 
grants to help municipalities build eligible wastewater treatment 
facilities. In the 1980s, concerns about the federal deficit, among 
other factors, led to a transition from these grants to the CWSRF 
program, which was established in 1987. Under this program, the 
federal government provides capitalization grants to states, which in 
turn must match at least 20 percent of the federal grants. The states 
then use the money to provide generally low-interest loans to fund a 
variety of water quality projects at the municipal level, and loan 
repayments are cycled back into the fund to be loaned out for other 
projects. In 2008, states provided CWSRF loans totaling about $5.8 
billion to municipalities and other recipients. States can loan CWSRF 
funds to publicly owned wastewater treatment facilities, but privately 
owned facilities are generally not eligible for CWSRF loans. 

The federal government also helps finance wastewater infrastructure by 
subsidizing municipalities' use of the bond markets through the tax 
code. Municipalities sell bonds to investors to gain an up-front sum 
to use for infrastructure or other purposes; the investors are then 
paid back over time, with interest. The federal government subsidizes 
municipalities' bond issuances by exempting the interest investors 
earn on these bonds from federal income tax, thus lowering borrowing 
costs for municipalities. The Congressional Budget Office estimated 
that the federal subsidy of municipal bonds for all types of 
infrastructure amounted to $26 billion in foregone tax revenue 
annually between 2008 and 2012. The federal government restricts the 
level of private involvement in projects financed by tax-exempt 
municipal bonds, limiting the extent to which private companies can 
benefit from the federal subsidy. 

There are several types of bonds that municipalities can issue to 
finance publicly owned wastewater infrastructure, including general 
obligation bonds and revenue bonds.[Footnote 13] General obligation 
bonds are backed by the full faith and credit of the issuing 
municipality, meaning that the municipality pledges to use revenue 
from taxes to pay back the bond. Municipalities' capacity to issue 
general obligation bonds is often limited by state law. In contrast, 
revenue bonds are backed by the revenue from the facility being 
constructed with bond proceeds--in the case of wastewater, revenue 
bonds are usually backed by revenue from sewer rates. In cases where a 
private company's involvement in a wastewater facility exceeds 
thresholds for issuing municipal bonds, the municipality may still be 
able to issue another type of tax-exempt bond called a qualified 
private activity bond.[Footnote 14] The Department of the Treasury 
limits the volume of private activity bonds that can be issued in each 
state in a given year; the national limit for calendar year 2010 was 
$30.86 billion. In order to issue qualified private activity bonds for 
a wastewater project, a municipality must receive an allocation of 
private activity bonds from their state, which can be difficult 
because wastewater projects generally must compete against projects in 
other sectors, which may include affordable housing, education, and 
health care. 

Although the federal government contributes significant funds to 
wastewater infrastructure through the CWSRF and tax code, 
municipalities have primary responsibility for financing wastewater 
infrastructure. According to U.S. Census Bureau estimates, in fiscal 
year 2007[Footnote 15] municipalities spent about $43 billion on 
wastewater operations and capital projects, while states spent about 
$1.4 billion. Most municipalities pay for wastewater infrastructure 
improvements with sewer rate revenues and by issuing municipal bonds. 
A 2005 National Association of Clean Water Agencies survey of 141 
utilities serving more than 81 million people asked respondents which 
sources of revenue they used to pay for capital improvements to 
wastewater systems. The 75 utilities responding to this question said 
that 49 percent of revenues supporting capital improvements came from 
municipal bonds (both revenue bonds and general obligation bonds) and 
other types of debt, 16 percent from CWSRF loans, 16 percent from user 
charges such as sewer rates, and 19 percent from other sources. 

In addition to obtaining funding for new infrastructure, 
municipalities are also generally responsible for overseeing the 
planning, design, and construction of wastewater facilities. 
Conventionally, wastewater projects follow a design-bid-build approach 
in which the municipality contracts with separate entities for the 
discrete functions of a project, generally keeping much of the project 
responsibility and risk with the public sector. To meet the continuing 
need for wastewater infrastructure, some municipalities have used 
alternatives to this design-bid-build procurement approach, including 
a variety of types of PPPs, which are described in figure 1. In the 
last 30 years, hundreds of municipalities have entered into PPPs for 
the operations and maintenance of their wastewater facilities. In 
addition, some communities have entered into PPPs--often called design-
build-operate agreements--in which the private sector designs, 
constructs, and then operates new wastewater infrastructure for a 
period of time. PPPs can also be developed to include private 
financing, which can serve as an alternative to traditional wastewater 
infrastructure funding sources. 

Figure 1: Selected Types of PPPs: 

[Refer to PDF for image: illustrated table] 

Extent of private sector role: this list is a continuum from Greater 
private sector role to Lesser private sector role. 

Type of PPP: Design-build-finance-operate; 
Private sector role: Designs, constructs, and operates and maintains 
the infrastructure; partially or fully finances. 

Type of PPP: Lease; 
Private sector role: Finances, operates and maintains the 
infrastructure. 

Type of PPP: Design-build-operate; 
Private sector role: Designs, constructs, and operates and maintains 
the infrastructure. 

Type of PPP: Design-build; 
Private sector role: Designs and constructs the infrastructure. 

Type of PPP: Operate-maintain; 
Private sector role: Operates and maintains the infrastructure. 

Source: GAO. 

Note: For a more extensive list of types of PPP arrangements, see GAO, 
Public-Private Partnerships: Terms Related to Building and Facility 
Partnerships, GAO/GGD-99-71 (Washington, D.C.: April 1999). 

[End of figure] 

Proposed Approaches for Bridging the Potential Wastewater Financing 
Gap: 

Policymakers and wastewater groups have proposed numerous approaches 
to bridge the potential gap between current levels of federal, state, 
and local spending and future infrastructure needs. Two such 
approaches build on traditional ways of financing wastewater 
infrastructure: increasing funding for the CWSRF and implementing 
EPA's Sustainable Water Infrastructure Initiative. The CWSRF has seen 
an increase in funding in recent years, from $689 million in fiscal 
year 2009 to $2.1 billion in fiscal year 2010. In addition, $4 billion 
was appropriated to the CWSRF as part of the American Recovery and 
Reinvestment Act of 2009. EPA's Sustainable Water Infrastructure 
Initiative encourages wastewater and drinking water utilities to 
improve the management of their systems, to plan ahead for 
infrastructure needs, and to charge the full cost of their services--
including the costs of building, maintaining, and operating a 
wastewater system over the long term. In its 2002 report about the 
clean water infrastructure gap, EPA noted that if wastewater utilities 
implemented annual rate increases of 3 percent over inflation over a 
20-year period, the infrastructure gap would disappear. 

In addition, wastewater stakeholders and policymakers have also 
proposed a number of alternative approaches that could be used to 
bridge the wastewater infrastructure financing gap. For example, one 
option would be for Congress to create a federal clean water trust 
fund. We have previously examined design issues that would need to be 
addressed in establishing such a fund, including how a trust fund 
should be administered and used; what type of financial assistance 
should be provided; and what activities should be eligible to receive 
funding from a trust fund.[Footnote 16] In addition, a clean water 
trust fund would require a source of revenue. We found that, while a 
number of options have been proposed to generate revenue for a clean 
water trust fund--including excise taxes, a corporate income tax, and 
a water use tax--several obstacles would have to be overcome in 
implementing these options, including defining the products or 
activities to be taxed, establishing a collection and enforcement 
framework, and obtaining stakeholder support. 

Policymakers and wastewater stakeholders have also suggested that 
Congress create an NIB to finance many types of infrastructure, 
including wastewater facilities. Since 2007, three bills have been 
introduced that outline different visions for an NIB or similar entity 
that would finance wastewater infrastructure:[Footnote 17] 

* The National Infrastructure Development Bank Act of 2009 (H.R. 2521) 
proposed establishing a government corporation to finance 
infrastructure projects across sectors, prioritizing those that 
contribute to economic growth, lead to job creation, and are of 
regional or national significance. It would have the authority to 
issue loans, bonds, and debt securities, as well as to provide loan 
guarantees. 

* The National Infrastructure Bank Act of 2007 (S.1926 and H.R. 3401) 
proposed creating an independent federal entity to finance 
infrastructure projects that have "regional and national significance" 
with a public sponsor and a potential federal investment of at least 
$75 million. It would be authorized to issue up to $60 billion in 
bonds, which would carry the full faith and credit of the United 
States; the bond proceeds could be used to finance direct subsidies 
and loans, among other things. 

* The National Infrastructure Development Act (H.R. 3896), introduced 
in 2007, proposed creating two government corporations with an 
intended initial capitalization of up to $9 billion in federal 
appropriations over the initial 3 years. Thereafter, the corporations 
would be self-financed through business income with the possibility of 
converting to government-sponsored enterprises (GSE).[Footnote 18] 

Yet another approach for closing the wastewater financing gap is to 
encourage private investment in wastewater projects, including through 
privately financed wastewater PPPs at the municipal level. The 1992 
Executive Order directed federal agencies to review and modify federal 
policies related to federally-financed infrastructure to encourage 
appropriate privatization--including long-term leases--of 
infrastructure at the local level. Figure 2 shows that the privately 
financed PPPs discussed in this report generally fall into two 
categories: design-build-finance-operate (DBFO) partnerships and lease 
partnerships.[Footnote 19] 

Figure 2: Types of Privately Financed Wastewater PPPs: 

[Refer to PDF for image: illustrated table] 

Type of privately financed wastewater PPPs: Design-build-finance-
operate; 
Project tasks: 
Preplanning and acquisition[A]; 
Finance (outsourced to private company); 
Design (outsourced to private company); 
Construction (outsourced to private company); 
Operations and maintenance (outsourced to private company). 

Type of privately financed wastewater PPPs: Long-term lease for 
existing wastewater assets; 
Project tasks: 
Preplanning and acquisition[A]; 
Finance (outsourced to private company); 
Design[A]; 
Construction[A]; 
Operations and maintenance (outsourced to private company). 

[A] Task outside the scope of the PPP (either performed in house or 
under separate contract). 

[End of figure] 

* DBFO. For new infrastructure or significant upgrades, a municipality 
and a company enter into a DBFO partnership in which the company is 
responsible for designing, constructing, and financing the 
infrastructure and then operating and maintaining it for the term of 
the contract. The municipal partner typically makes payments to the 
company covering both debt service and operations and maintenance. 

* Lease partnership. For existing infrastructure, a municipality and a 
company enter into a lease partnership in which the municipality 
leases wastewater infrastructure assets (such as a treatment plant) to 
the company, which is then responsible for operating and maintaining 
those assets for a set period of time. The company makes a lease 
payment to the municipality in exchange for the opportunity to operate 
and maintain the facility. This payment may be a onetime up-front 
payment, called a concession fee, or lease payments could be spread 
out over the life of the lease. Over the course of the lease, the 
municipality, or the ratepayers, make payments to the company for 
operations and maintenance services and to repay the company's 
periodic lease payments or initial investment (i.e., the concession 
fee). 

While private financing can serve as an alternative to traditional 
infrastructure funding sources, we have previously reported that 
private financing is not "free money"--rather this funding is a form 
of private capital that must be repaid to investors seeking a return 
on their investment.[Footnote 20] Depending on how a privately 
financed PPP agreement is structured, it may also result in joint 
public-private ownership of the wastewater assets being financed, 
which could result in the facility losing its regulatory status as a 
publicly owned wastewater facility as defined pursuant to the Clean 
Water Act. Joint public-private ownership could also result in the 
loss of the municipality's ability to issue tax-exempt bonds. 

Stakeholders Addressed Issues in Three Key Areas That Would Need To Be 
Considered in Designing an NIB: 

Stakeholders who responded to our questionnaire addressed a variety of 
issues in three key areas that would need to be considered in 
designing an NIB: mission and administrative structure, financing 
authorities, and project eligibility and prioritization.[Footnote 21] 
Appendix II lists the organizational and individual stakeholders who 
responded to our questionnaire. Appendix III lists the questions asked 
in the questionnaire and provides the full range of stakeholder 
responses we received. 

While a Majority of Stakeholders Supported the Creation of an NIB, 
Their Views Varied on Its Mission and Administrative Structure: 

About three-quarters of stakeholders (20 of 27) responding to our 
questionnaire supported the creation of an NIB. Seven of these 
stakeholders supported an NIB because it could provide another source 
of funding for critical infrastructure projects. In contrast, 1 of 27 
stakeholders opposed the creation of an NIB for water and wastewater, 
instead supporting increased financing for the CWSRF, which according 
to the stakeholder is a proven mechanism for providing cost-effective 
and sustainable financing. In addition, 6 of 27 stakeholders selected 
"other"--neither supporting nor opposing the creation of an NIB--and 
cited a variety of reasons. For example, two of these stakeholders 
indicated that their positions on an NIB would depend on its 
authorizing legislation and expressed concerns about how a new entity 
would affect the CWSRF. Another indicated that a clear need for an NIB 
had not been established. 

Stakeholders had varying views on an NIB's mission and the 
infrastructure sectors it should finance. Of the 20 stakeholders who 
supported the creation of an NIB, about two-thirds (13) indicated that 
its mission should be to fund infrastructure in multiple sectors, such 
as transportation, energy, water, and wastewater. Among the reasons 
these stakeholders cited for supporting a cross-sector NIB are that it 
would allow for coordination across sectors and that financial experts 
at a cross-sector NIB would be able to easily apply their expertise to 
financing a wide range of projects. In contrast, about one-third of 
stakeholders who supported the creation of an NIB (7 of 20) thought 
its mission should be to fund only water and/or wastewater 
infrastructure. 

Stakeholders suggested a variety of options when asked how an NIB 
should interact with the CWSRF--currently the largest source of 
federal financial assistance for wastewater infrastructure.[Footnote 
22] About half of stakeholders (13 of 29) suggested that an NIB assist 
the CWSRF in a variety of ways including, for example, providing 
additional capital for the CWSRF and helping states leverage their 
CWSRF funds.[Footnote 23] About a third of stakeholders (11 of 29) 
suggested that an NIB act as a complement to the CWSRF. For example, 
according to four stakeholders with this view, an NIB should fund 
larger projects that the CWSRF typically does not have the funds to 
accommodate or multistate projects that can be administratively 
difficult under the CWSRF. In addition, 3 of 29 stakeholders suggested 
that an NIB not have any relationship with the CWSRF; one of these 
noted that state CWSRF programs do not need assistance from an NIB 
because they already have access to federal and state funds, as well 
as bond markets for leveraging.[Footnote 24] 

In addition, there was no consensus among stakeholders on whether an 
NIB should be administered as a new responsibility for an existing 
federal agency, structured as a government corporation, or structured 
as a GSE. More specifically, 4 stakeholders indicated that an NIB 
should be a new responsibility for an existing federal agency, 7 
indicated that an NIB should be structured as a government 
corporation, and 4 indicated that an NIB should be structured as a 
GSE.[Footnote 25] We have previously reported that an entity's 
administrative structure affects the extent to which it is under 
federal control, how its activities are reflected in the federal 
budget, and the risk exposure of U.S. taxpayers.[Footnote 26] 
Specifically: 

* Federal agencies are generally subject to greater federal control 
than government corporations and GSEs. For example, federal agencies 
receive the preponderance of their financial support from 
congressionally appropriated funds, and Congress can use 
appropriations, hearings, other lawmaking, and confirmation of senior 
leadership, as management tools. The President also has significant 
means of control, for example through responsibility for agencies' 
budget proposals, administrative requirements, and the appointment of 
leadership. 

* Although no two government corporations are completely alike, 
Congress has generally established government corporations to provide 
market-oriented public services, such as the Commodity Credit 
Corporation, which stabilizes and protects farm income and prices. In 
general, government corporations are not as dependent upon annual 
appropriations as federal agencies to fund operations--instead, or in 
addition, receiving funds from consumers of their products and 
services.[Footnote 27] As a result of this corporate structure, 
government corporations have been given greater operational 
flexibility by Congress and corporations with mixed public-private 
ownership may be exempt from many executive branch budgetary 
requirements and disclosures. Nevertheless, government corporations 
are subject to some federal oversight by, for example, having some or 
all board members appointed by the federal government, and/or having 
their budgets displayed in the federal budget. 

* GSEs are privately owned, for-profit financial institutions that 
have been federally chartered for a public purpose, such as 
facilitating the flow of investment to specific economic sectors. GSEs 
generally do not lend money directly to the public but instead provide 
liquidity to capital markets by, for example, issuing stock and debt 
and purchasing and holding loans. GSEs are neither managed directly by 
the federal government, nor are their activities included in the 
federal budget. Although the federal government explicitly does not 
guarantee GSE debt obligations, investors have widely assumed that a 
GSE facing a financial emergency would receive federal support, which 
has allowed GSEs to borrow at interest rates below those of other for-
profit corporations. We have previously reported that the structure of 
GSEs as for-profit corporations with government sponsorship has 
undermined market discipline and provided them with incentives to 
engage in potentially profitable business practices that were risky 
and not necessarily supportive of their public missions.[Footnote 28] 
Indeed, the federal government extended support to two GSEs--Fannie 
Mae and Freddie Mac--beginning in September 2008 after they lost 
billions of dollars due to questionable mortgage-related investments. 
[Footnote 29] In addition, we have also reported that developing an 
oversight system for GSEs can be challenging.[Footnote 30] For 
example, regulators must have the resources, expertise, and 
authorities necessary to help monitor GSEs, which, due to the implied 
federal guarantee on their financial obligations, may have financial 
incentives to engage in excessive risk taking. Further, regulators 
must have the stature and authorities necessary to help ensure that 
GSEs operate within the missions for which they were established 
because of incentives for GSEs to engage in activities that are 
profitable but that do not support their missions. 

A Majority of Stakeholders Agreed on an NIB's Financing Authorities, 
Including How an NIB Should Be Funded and How It Should Finance 
Projects: 

Most stakeholders (20 of 22) agreed that the federal government should 
provide all or some of the initial capital for an NIB, though 4 
stakeholders suggested that federal capitalization be augmented by 
private funds.[Footnote 31] In addition, 3 of 22 stakeholders 
suggested that an NIB's initial capital come from user fees and/or 
taxes, similar to a trust fund; such user fees and/or taxes, according 
to 2 of these stakeholders, would provide an NIB with a stable revenue 
flow while spreading out the funding burden. Although most 
stakeholders agreed that the federal government should capitalize an 
NIB, they were split on whether an NIB should continue to rely on 
federal funds (9 of 22), or instead become self-sustaining (6 of 22). 
[Footnote 32] Two stakeholders who supported a self-sustaining NIB 
explained that it should function as a bank--investing only in 
projects that are creditworthy and able to repay their loans. When 
asked about federal funding for an NIB, staff from the Office of 
Management and Budget noted that, for budgeting purposes, the cost to 
the federal government should be determined according to the Federal 
Credit Reform Act of 1990.[Footnote 33] This act requires that covered 
federal entities' budgets include estimates of the government's long-
term cost of issuing loans or loan guarantees, among other things. 
[Footnote 34] 

Most stakeholders (21 of 23) agreed that an NIB should be authorized 
to generate its own funds for operating expenses and lending,[Footnote 
35] with a majority of stakeholders (15) supporting an NIB authorized 
to use multiple mechanisms to generate funds. In their responses to 
our questionnaire, organizations--which are generally more familiar 
with the wastewater industry--and individuals--who are generally more 
familiar with wastewater financing--had different levels of support 
for some of the mechanisms. Most notably, a higher percentage of 
organizations supported allowing an NIB to issue tax-exempt bonds, 
while a higher percentage of individuals supported allowing an NIB to 
charge fees for technical assistance or other services. Stakeholders 
offered a variety of reasons for supporting financial mechanisms. For 
example, several stakeholders emphasized the importance of an NIB 
having a broad range of financial tools for generating its own funds. 
In addition, two stakeholders who supported giving an NIB the 
authority to borrow from the U.S. Department of the Treasury and to 
issue tax-exempt bonds explained that these two options would provide 
an NIB with access to low-cost capital, which could then be passed on 
to projects. When asked about an NIB issuing bonds with tax-exempt 
status, IRS officials noted that there is a general prohibition on tax-
exempt bonds being federally guaranteed. In order for an NIB to issue 
tax-exempt, guaranteed bonds, it would need a statutory exemption to 
this prohibition similar to those granted for bonds in other sectors, 
such as housing.[Footnote 36] Table 1 lists the financing mechanisms 
most commonly supported by stakeholders. 

Table 1: Stakeholder Support for Financing Mechanisms That an NIB 
Could Use to Generate Funds for Operating Expenses and Lending: 

Number of stakeholders who indicated support for mechanism (percentage 
of total responses): 

Borrow directly from U.S. Department of the Treasury: 
Organizational stakeholders: 9 of 11 (82%); 
Individual stakeholders: 7 of 10 (70%). 

Charge application fees: 
Organizational stakeholders: 8 of 11 (73%); 
Individual stakeholders: 8 of 10 (80%). 

Issue tax-exempt bonds: 
Organizational stakeholders: 9 of 11 (82%); 
Individual stakeholders: 5 of 10 (50%). 

Charge fees for technical assistance: 
Organizational stakeholders: 5 of 11 (45%); 
Individual stakeholders: 8 of 10 (80%). 

Issue commercial paper: 
Organizational stakeholders: 6 of 11 (55%); 
Individual stakeholders: 6 of 10 (60%). 

Borrow directly from private investors: 
Organizational stakeholders: 7 of 11 (64%); 
Individual stakeholders: 5 of 10 (50%). 

Charge fees for other services, such as annual monitoring: 
Organizational stakeholders: 4 of 11 (36%); 
Individual stakeholders: 8 of 10 (80%). 

Source: GAO analysis of stakeholder responses. 

Note: This table includes only the 21 stakeholders who supported 
giving an NIB the authority to generate its own funds for operating 
expenses and lending. In addition, the table includes only the 
financing mechanisms supported by a majority of stakeholders. 

[End of table] 

A majority of stakeholders also agreed on some of the mechanisms an 
NIB should offer for financing projects. Organizations and individuals 
had different levels of support for some of the mechanisms--most 
notably, a higher percentage of organizations than individuals rated 
pooling loans and issuing tax-exempt bonds as very important 
mechanisms for an NIB to offer. In explaining the importance of the 
mechanisms an NIB should offer for financing projects, one stakeholder 
noted that direct loans, pooled loans, and/or federal loan guarantees 
from an NIB would help infrastructure projects attract additional 
sources of capital. When we asked staff from the Office of Management 
and Budget about financing mechanisms an NIB could offer to projects, 
they did not have specific views on which mechanisms an NIB should 
offer but emphasized that an NIB should be subject to the Federal 
Credit Reform Act. Table 2 shows stakeholder views on the mechanisms 
an NIB could offer. 

Table 2: Stakeholder Views on Mechanisms an NIB Could Offer to Finance 
Projects: 

Number of stakeholders who rated mechanism as very important 
(percentage of total responses): 

Issue direct loans to infrastructure projects: 
Organizational stakeholders: 10 of 12 (83%); 
Individual stakeholders: 9 of 11 (82%). 

Pool loans for several infrastructure projects into a larger bond 
issue to lower the cost of borrowing: 
Organizational stakeholders: 8 of 9 (89%); 
Individual stakeholders: 6 of 11 (55%). 

Provide federal loan guarantees for infrastructure projects: 
Organizational stakeholders: 8 of 11 (73%); 
Individual stakeholders: 7 of 11 (64%). 

Issue tax-exempt bonds on behalf of infrastructure projects: 
Organizational stakeholders: 8 of 10 (80%); 
Individual stakeholders: 5 of 11 (45%). 

Provide funding to CWSRF programs: 
Organizational stakeholders: 9 of 14 (64%); 
Individual stakeholders: 5 of 10 (50%). 

Source: GAO analysis of stakeholder responses. 

Note: While a total of 18 organizations and 11 individuals responded 
to the questionnaire, not all stakeholders rated each mechanism. In 
addition, this table includes only the mechanisms rated as very 
important by a majority of stakeholders. 

[End of table] 

Finally, stakeholders suggested various measures to mitigate the 
potential risk of exposing taxpayers to the financial losses that 
could result from multiple municipalities defaulting on NIB loans. 
Measures suggested by stakeholders included the use of strict credit 
and underwriting standards in selecting projects and the maintenance 
of adequate reserves, which could serve to absorb financial losses. 
Other suggestions included requiring general-or revenue-obligation 
pledges or insurance from utilities and municipalities. When asked 
about risk-mitigation measures, staff from the Office of Management 
and Budget noted that current infrastructure financing programs have 
developed a variety of measures to mitigate taxpayer risk. For 
example, the Department of Agriculture's Rural Utilities Service 
provides grants and loans for eligible drinking water and wastewater 
projects in rural communities. Office of Management and Budget staff 
said that this program mitigates risk by not releasing grant funds to 
the recipient communities until the project is completed. 

Stakeholders' Views Varied on What Projects Should Be Eligible for 
Financing, but a Majority of Stakeholders Agreed on How Projects 
Should Be Prioritized: 

Stakeholders had a variety of views on the types of projects that 
should be eligible for financing from an NIB. Specifically, half of 
stakeholders (12 of 24) indicated that projects of all sizes should be 
eligible for NIB financing, while a third (8 of 24) noted that only 
large projects should be eligible.[Footnote 37] Three stakeholders 
explained that they support financing projects of all sizes because 
smaller projects may address important infrastructure needs. Support 
for an NIB that finances exclusively large projects was stronger among 
individual stakeholders than among organizational stakeholders, though 
few stakeholders defined what they meant by "large." For example, two 
stakeholders supported an NIB that finances exclusively large projects 
because it could fund projects beyond the capacity of the CWSRF. In 
contrast, another stakeholder opposed an NIB that finances exclusively 
large projects, explaining that one NIB proposal set a threshold of 
$75 million or more, which could render many wastewater projects 
ineligible. Similarly, stakeholders had a variety of views on whether 
NIB financing should be limited to publicly owned and operated 
utilities.[Footnote 38] Specifically, 9 of 23 stakeholders thought all 
types of utilities should be eligible for NIB financing, while another 
9 of 23 thought that only publicly owned utilities should be eligible. 
[Footnote 39] Three stakeholders indicated that an NIB should assist 
private utilities and PPPs--in addition to public utilities--because 
the utilities' consumers and the general public would still benefit. 

Stakeholders generally agreed on what costs should be eligible for NIB 
financing. More than three-quarters of stakeholders agreed that 
capital projects (24 of 26) and planning and design costs (19 of 25) 
should be eligible but that routine operations and maintenance costs 
(24 of 26) and ratepayer assistance (16 of 20) should not be eligible. 
Four stakeholders noted that capital and planning and design costs 
should both be eligible because they are closely linked--planning and 
designing are essential components of carrying out capital projects. 
Nine stakeholders explained that operations and maintenance activities 
and/or ratepayer assistance should be funded by utilities through the 
rates that they charge their customers. One stakeholder also explained 
that many utilities have not raised rates enough to invest in the 
needed operations and maintenance for their systems. Our past work has 
highlighted similar concerns, noting that many utilities were not 
routinely charging the full cost for wastewater services.[Footnote 40] 

A majority of stakeholders said an NIB should use a combination of 
methods to allocate funding to eligible projects; such methods include 
directly funding projects ranked using specific criteria, allocating 
funding to sectors, or allocating funding to states.[Footnote 41] 
Stakeholders had differing views on which combination of methods 
should be used. The most commonly supported methods were directly 
funding projects ranked using specific criteria and allocating funding 
to infrastructure sectors. Stakeholders provided a variety of reasons 
for supporting these methods. For example, one stakeholder supported 
directly funding projects ranked using specific criteria to ensure 
that the projects most in need--including smaller projects--would 
receive assistance. In addition, 2 stakeholders explained that 
allocating amounts by sector would be necessary to ensure that each 
sector receives funding, while 3 others noted that the differences 
between sectors would make it difficult for an NIB to evaluate 
projects across sectors. 

Stakeholders also agreed that an NIB should prioritize projects that 
address the greatest infrastructure need and that generate the 
greatest public health and environmental benefits. One stakeholder 
explained that these three criteria are the main reasons for 
wastewater regulations. However, another stakeholder questioned how 
"greatest infrastructure need" would be defined. Our past work has 
highlighted similar concerns, noting that infrastructure "need" is 
difficult to define and to distinguish from a wish list of capital 
projects.[Footnote 42] It can also be difficult to measure 
environmental and public health benefits. For example, while the CWSRF 
uses a uniform set of measures to help determine efficient and 
effective use of CWSRF resources, our past work has found that a lack 
of baseline environmental data and technical difficulties made it 
difficult to attribute benefits specifically to the CWSRF.[Footnote 
43] A complete list of criteria supported by a majority of 
stakeholders is shown in table 3. 

Table 3: Stakeholder Views on Criteria an NIB Should Use When 
Evaluating and Selecting Projects: 

Number of stakeholders who rated criterion as a high priority 
(percentage of total responses): 

Projects addressing the greatest infrastructure need: 
Organizational stakeholders: 11 of 11 (100%); 
Individual stakeholders: 7 of 8 (88%). 

Projects generating the greatest public health benefit: 
Organizational stakeholders: 12 of 14 (86%); 
Individual stakeholders: 5 of 8 (63%). 

Projects generating the greatest environmental benefit: 
Organizational stakeholders: 10 of 14 (71%); 
Individual stakeholders: 5 of 8 (63%). 

Projects of national or regional significance: 
Organizational stakeholders: 6 of 13 (46%); 
Individual stakeholders: 6 of 10 (60%). 

Projects for communities that have difficulty accessing other sources 
of revenue, such as bond markets: 
Organizational stakeholders: 8 of 14 (57%); 
Individual stakeholders: 4 of 9 (44%). 

Source: GAO analysis of stakeholder responses. 

Note: While a total of 18 organizations and 11 individuals responded 
to the questionnaire, not all stakeholders rated each criterion. In 
addition, this table includes only the criteria rated a high priority 
by a majority of stakeholders. 

[End of table] 

Privately Financed Wastewater PPPs Are Uncommon and Have Several 
Reported Advantages and Challenges: 

We identified seven privately financed wastewater PPPs developed since 
1992. Municipal and wastewater services company officials we 
interviewed identified numerous potential advantages to these 
partnerships, including faster construction of new facilities, access 
to alternative sources of financing, increased efficiency, and access 
to outside experts and technology solutions. Officials also identified 
numerous potential challenges to these partnerships, including public 
and political opposition, the higher cost of private financing, and 
concerns over a loss of municipal control over wastewater equipment, 
operations, or rates.[Footnote 44] 

Seven Municipalities Have Developed Privately Financed Wastewater PPPs 
Since 1992: 

As shown in table 4, we identified seven municipalities that have 
developed privately financed wastewater PPPs since 1992. 

Table 4: Privately Financed Wastewater PPPs Developed Since 1992 
Identified by GAO: 

Municipality: Arvin, CA; 
Company: U.S. Filter (now Veolia Water); 
Year initiated: 1999; 
Type: Lease & DBFO; 
Initial term (years): 35; 
Assets included: Lease: existing treatment plant; DBFO: upgraded 
treatment plant components; 
Up-front payment (Y/N): Yes. 

Municipality: Cranston, RI[A]; 
Company: Triton Ocean State LLC (now Veolia Water); 
Year initiated: 1997; 
Type: Lease; 
Initial term (years): 25; 
Assets included: Treatment plant, collection system, pumping stations, 
industrial pretreatment; 
Up-front payment (Y/N): Yes. 

Municipality: Fairbanks, AK; 
Company: Golden Heart Utilities; 
Year initiated: 1997; 
Type: Lease & Asset Sale[B]; 
Initial term (years): 30; 
Assets included: Lease: treatment plant; Asset sale: collection system; 
Up-front payment (Y/N): Yes. 

Municipality: Franklin, OH[C]; 
Company: Wheelabrator EOS (now Veolia Water); 
Year initiated: 1995; 
Type: Lease & Asset Sale[D]; 
Initial term (years): 20; 
Assets included: Asset sale: treatment plant; Lease: one process 
within the treatment plant; 
Up-front payment (Y/N): Yes. 

Municipality: North Brunswick, NJ[E]; 
Company: U.S. Water (now United Water); 
Year initiated: 1995; 
Type: Lease; 
Initial term (years): 20; 
Assets included: Collection system & pumping stations[F]; 
Up-front payment (Y/N): Yes. 

Municipality: Santa Paula, CA; 
Company: Santa Paula Water, LLC[G]; 
Year initiated: 2008; 
Type: DBFO; 
Initial term (years): 30; 
Assets included: New water recycling facility; 
Up-front payment (Y/N): No. 

Municipality: Woonsocket, RI[H]; 
Company: U.S. Filter (now Veolia Water) with third-party financing 
through LaSalle Bank and ABN AMRO; 
Year initiated: 1999; 
Type: DBFO; 
Initial term (years): 20; 
Assets included: Upgrade of existing treatment plant; 
Up-front payment (Y/N): Yes. 

Source: GAO. 

[A] Since officials from Cranston declined to speak with us, this 
information about Cranston's privately financed PPP is derived from 
publicly available sources. 

[B] The city of Fairbanks leased its wastewater treatment plant, which 
falls within this report's definition of a privately financed PPP. 
Fairbanks sold its collection system, which falls outside of the scope 
of this report. 

[C] The wastewater treatment plant involved in the 1995 lease and 
asset sale was originally owned by the Miami Conservancy District, a 
flood-control agency in southwestern Ohio. The treatment plant serves 
the communities of Franklin, Carlisle, and Germantown, as well as 
unincorporated areas of Warren and Montgomery counties. 

[D] The city of Franklin leased a portion of its wastewater treatment 
plant, which falls within this report's definition of a privately 
financed PPP. Franklin sold other parts of the treatment plant. 

[E] The North Brunswick lease was terminated in 2002. 

[F] North Brunswick also leased their drinking water assets, including 
a treatment plant, as well as the distribution system. 

[G] Santa Paula Water, LLC, is a partnership between PERC Water and 
Alinda Capital. 

[H] The wastewater treatment plant involved in the 1999 DBFO serves 
multiple communities: Woonsocket, Rhode Island; North Smithfield, 
Rhode Island; Cumberland, Rhode Island; Bellingham, Massachusetts; and 
Blackstone, Massachusetts. 

[End of table] 

Although all seven of these municipalities entered into privately 
financed wastewater PPPs, their reasons for doing so differed, as did 
the contract terms. Two examples illustrate these differences: 

* Santa Paula, California, entered into a DBFO in 2008. The city of 
Santa Paula had an existing wastewater treatment plant that was not 
compliant with the waste discharge requirements of the Los Angeles 
Regional Water Quality Control Board.[Footnote 45] The city entered 
into a consent agreement with the board in which it agreed to achieve 
full compliance with water quality requirements by December 15, 2010, 
or else face $8.5 million in penalties. According to city officials, 
the Santa Paula City Council decided to enter into a DBFO partnership 
because it believed a DBFO would be less expensive than a traditional 
procurement and could better ensure the city would meet its deadline. 
The city awarded a contract to Santa Paula Water--a company formed by 
PERC Water and Alinda Capital--to design, build, and finance a new 
water recycling facility as well as to operate the facility for 30 
years. Through monthly service fees, the city is to repay Santa Paula 
Water for its investment in the plant and pay for operations, 
maintenance, repair, replacement, and a profit margin. PERC Water owns 
the treatment facility over the 30-year contract term, after which 
ownership reverts to the city. 

* Fairbanks, Alaska, entered into a lease partnership in 1997. 
Fairbanks' wastewater treatment system faced a multimillion dollar 
deficit and needed substantial capital improvements. However, 
according to a city official, Fairbanks city residents were reluctant 
to approve bond issuances, and local government officials were 
reluctant to raise rates. In addition, Fairbanks was in a unique 
situation in that the city owned several other utilities, including a 
telephone utility and an electric utility. The city was approached by 
a consortium of companies that proposed to buy or lease all the city's 
utilities, and voters approved the action. As part of this deal, 
Golden Heart Utilities leased the wastewater treatment plant in 1997 
for a 30-year term. In exchange, the company pays Fairbanks about 
$33,000 per month in lease payments. Golden Heart Utilities also 
operates and maintains the treatment plant, and its service fee is 
paid by ratepayers. 

Reported Advantages of Privately Financed Wastewater PPPs: 

Municipal and company officials we spoke with identified several 
potential advantages of privately financed wastewater PPPs for 
municipalities as compared with traditional publicly financed, 
operated, and maintained wastewater facilities. 

Faster Delivery of New Facilities or Facility Upgrades: 

The most commonly cited advantage was the potential for faster or more 
certain delivery times for new facilities or facility upgrades, as 
compared with traditional public procurement.[Footnote 46] Three 
municipalities cited faster delivery times as a reason they entered 
into privately financed PPPs; in two cases, the municipalities were 
facing regulatory deadlines that required them to upgrade their 
facilities or pay fines. Company and municipal officials told us 
private procurement may be faster because it is more streamlined than 
public procurement. This view was echoed in a 1992 publication on 
wastewater treatment privatization, which stated that wastewater 
industry officials believe PPPs in which a company designs, builds, 
and operates a facility can save time because design, construction, 
and operations are not compartmentalized, so design and construction 
phases can overlap.[Footnote 47] Similarly, in a 2000 publication, a 
chapter discussing PPPs in the wastewater sector points out that, in a 
privately financed PPP, companies are not bound by the same 
administrative regulations as federal and state construction 
projects.[Footnote 48] In addition, officials from Franklin, Ohio, and 
Woonsocket, Rhode Island, told us that they believe it took less time 
to secure private financing than public financing, an advantage 
specific to privately financed PPPs. 

Access to Alternative Sources of Wastewater Infrastructure Financing: 

The next most commonly cited advantage of privately financed PPPs was 
access to alternative sources of wastewater infrastructure financing. 
For example, officials from Arvin, California, told us the city did 
not access the bond market because of its low credit rating, even as 
the city faced regulatory compliance concerns. Similarly, an official 
from Fairbanks, Alaska, said it was difficult to convince the public 
to approve bonds, preventing the city from using municipal bonds to 
finance wastewater infrastructure. 

Cost and Operational Efficiencies: 

Another advantage cited by company and municipal officials and 
publications we identified is that privately financed PPPs may bring 
cost and operational efficiencies to wastewater collection and 
treatment. Several municipal officials told us companies can take 
advantage of economies of scale in a privately financed PPP by, for 
example, buying key supplies, such as chemicals, in bulk. The 2000 
chapter that discussed PPPs in the wastewater sector also noted that a 
primary way companies can reduce costs is through managing their three 
chief expenses--labor, electricity, and chemicals. By operating a 
number of plants, a company can spread staff--and costs--more widely. 
However, other officials we spoke with noted that efficiencies can 
also be achieved by public utilities without a privately financed PPP. 
For example, one regional utility said that it achieved economies of 
scale by constructing regional plants, each of which served multiple 
municipalities. In addition, according to a 2002 study of 
privatization of water services by the National Research Council 
(NRC), the private sector is not necessarily more efficient than the 
public sector and vice versa.[Footnote 49] 

While company officials said a privately financed PPP can operate more 
efficiently by making better capital investment decisions, this may 
depend on the terms of the PPP contract. According to officials at one 
company, municipal governments face political pressure to keep costs 
down in the short term, which can lead to higher costs in the long 
run. Company officials told us that a contract that makes the private 
partner responsible for both capital upgrades and maintenance can 
incentivize decisions that save money in the long run. For example, 
according to PERC Water officials, in its privately financed PPP with 
the city of Santa Paula, the company invested its own funds above the 
signed contract price for energy efficient equipment expected to 
reduce energy consumption and operating costs over the 30 year term of 
the contract. In contrast, if a contract passes capital repair costs 
through to municipalities, one municipal official told us that 
companies may have an incentive to under invest in maintenance. In 
such circumstances, delaying maintenance could result in savings for 
the private partner but impose higher costs on the municipality by 
hastening the need for capital repairs. 

Access to Expertise and Technology Solutions: 

Another commonly cited advantage of privately financed wastewater PPPs 
is that the private partner may have greater access to expertise and 
technology than some municipalities.[Footnote 50] For example, 
officials from one company told us it spends $200 million a year on 
research and development and can draw on this research to solve 
problems municipalities have not been able to solve on their own. 
Similarly, according to a 2000 publication on municipal wastewater 
treatment outsourcing, wastewater treatment companies may have more 
experienced personnel and better access to the latest technologies if 
wastewater treatment is the company's core business.[Footnote 51] For 
example, an official from Fairbanks, Alaska, told us that prior to 
entering into a privately financed PPP, his city had been unable to 
process the sludge from its wastewater treatment plant into a useful 
form. Golden Heart Utilities used a technology to convert the sludge 
into compost, which is now sold to the public. This access to 
expertise and technology may be particularly important for small-and 
medium-sized communities, which may lack the expertise to upgrade or 
operate plants to meet regulatory standards, according to the 2002 NRC 
study. 

Up-front Payments to Municipalities: 

Several municipal and company officials also cited up-front payments 
to municipalities as an advantage of privately financed PPPs. Up-front 
payments to municipalities could be used to finance wastewater 
infrastructure improvements, but company and municipal officials told 
us these payments could also be used to finance other priorities, such 
as a pension fund or municipal budget gap. Although six of the seven 
municipalities that entered into privately financed PPPs received up- 
front payments from their private partners, at least three used part 
of the payment for nonwastewater-related activities. One municipal 
official told us his municipality was motivated to enter into a 
privately financed PPP so that it could use the up-front payment to 
supplement its general fund and scale back a planned property tax 
increase. Similarly, the mayor of Akron, Ohio, proposed that the city 
lease its wastewater assets and use the up-front payment to fund a 
scholarship program that would allow all Akron students to attend the 
University of Akron. Voters ultimately rejected this proposal. In a 
1997 response to congressional questions about wastewater PPPs, EPA 
pointed out that up-front payments can be viewed as loans from the 
company to the municipality and will require wastewater users to repay 
the company, with interest.[Footnote 52] According to EPA, an increase 
in user fees can result when an up-front payment exceeds the 
previously outstanding local debt on the wastewater treatment 
facilities. We have highlighted similar considerations about the use 
of up-front payments in the transportation sector.[Footnote 53] 

Increased Focus on Other Municipal Functions: 

Finally, company and municipal officials said that privately financed 
PPPs may allow local governments to increase their focus on other 
functions, such as police and fire services.[Footnote 54] In contrast, 
however, some municipal officials told us they would not consider 
entering into a privately financed wastewater PPP because they believe 
wastewater treatment is a core municipal duty. According to the 2002 
NRC study, local officials are in part drawn to private participation 
in their wastewater utilities because of the need to focus civic 
energies and resources on more immediate social problems. Although the 
role of a municipal government in a privately financed PPP may change, 
it is still important. For example, according to the NRC study, if a 
utility's operations are transferred to the private sector, the public 
sector's importance does not diminish but rather changes from that of 
operator to contract manager--a role that can require new talents and 
skills. Similarly, an official in Woonsocket, Rhode Island, told us 
that carrying out a privately financed PPP contract on a daily basis 
takes more time and expertise than he expected, because even simple 
questions can require a review of the city's 1,000-page contract with 
its private partner. 

Reported Challenges to Considering and Developing Privately Financed 
Wastewater PPPs: 

Municipal and company officials also identified a number of potential 
challenges to considering and developing privately financed wastewater 
PPPs. 

Public and Political Opposition: 

The challenge cited most often by municipal and company officials was 
public and political opposition. These officials told us that the 
public is sometimes concerned about the possibility that a company 
would not be as responsive to ratepayers as a municipality, about job 
losses for municipal employees, and about sewer rate increases. For 
example, North Brunswick, New Jersey, entered into a privately 
financed PPP in 1995, but terminated that agreement in 2002, in part 
because of public reaction to rate increases. An official from 
Fairbanks, Alaska, told us some residents feel the city "gave away" 
its wastewater utility in its privately financed PPP deal, and they 
object to a company profiting from running the utility. In at least 
one case, opposition from citizens as well as interest groups derailed 
the development of a privately financed PPP in Akron, Ohio. 

Financing Challenges: 

Municipal and company officials said that making private financing 
attractive to municipalities may be a challenge for a variety of 
reasons: 

* Private financing generally costs more than public financing. 
Municipal and company officials told us that private financing 
typically costs more than tax-exempt municipal bonds. In its 2002 
study, the NRC reported that the federal tax exemption on municipal 
bonds gave municipal borrowers a 2.5 percent to 3 percent cost 
advantage over private bonds. The NRC study also reported that, for 
municipalities, private financing is roughly 20 to 40 percent more 
expensive than public financing. Municipal officials told us the 
profit motive of companies may also drive up the cost of a privately 
financed PPP. However, one municipal official in Woonsocket, Rhode 
Island, noted that the speed at which private financing can be 
obtained could still result in a lower overall cost, due to the time 
saved. Similarly, company officials told us they are able to 
compensate for the higher cost of financing over the course of a 
contract term. For example, officials cited tax rules generally 
allowing companies to depreciate capital, and their ability to find 
cost savings through efficiencies as ways to offset their costs over 
the contract term. 

* Combining private financing with public financing is difficult. In 
writing the contract for a privately financed PPP, the parties must 
carefully follow IRS tax rules to avoid changing the status of 
existing tax-exempt municipal bonds to taxable bonds. IRS officials 
told us that, under the tax code, a municipality in such a partnership 
could continue to issue tax-exempt general obligation bonds to finance 
wastewater infrastructure only under certain circumstances. For 
example, a sewage facility could be financed with 50 percent private 
financing and 50 percent tax-exempt general obligation bonds, if no 
payments from the private partner or ratepayers secure the public debt 
or are used to pay the public debt service. Under these rules, it is 
especially difficult for a municipality in a privately financed PPP to 
issue tax-exempt revenue bonds--often the preferred type of bond for 
wastewater facilities--because the revenue bonds are secured by 
payments from ratepayers. According to an official from the Office of 
Chief Counsel, which advises the IRS, a privately financed PPP can be 
financed with tax-exempt qualified private activity bonds if it meets 
criteria in applicable statutes and regulations.[Footnote 55] However, 
one company official said that the volume caps imposed on the issuance 
of private activity bonds in each state limit their availability for 
wastewater projects; he advocated lifting the state volume caps. 
[Footnote 56] 

Concern about Loss of Municipal Control: 

Several municipal officials told us another challenge is their concern 
about the loss of control over municipal wastewater facilities and 
rates. Officials at one municipality told us they chose not to pursue 
a privately financed wastewater PPP in part because they believed they 
would lose some control over rate setting and system growth. According 
to a 2000 chapter that discussed PPPs in the wastewater sector, 
[Footnote 57] in a privately financed PPP, a local government's 
control over a facility's operations depends on the contract's terms. 
For example, officials in Santa Paula, California, told us they 
experienced a loss of control over plant design, choice of equipment, 
and construction oversight after entering into their DBFO. The 
officials explained that, while the city's contract with its private 
partner includes performance specifications, the city has no control 
over the methods the company uses to achieve those specifications. 
Further, because the city does not have detailed knowledge of the 
facility or its operations, it may not be able to pass on such details 
to other operators when its current contract ends. 

Lack of Experience with Privately Financed PPPs: 

Municipal and company officials also cited their lack of experience 
with privately financed wastewater PPPs as a challenge to the 
development of such partnerships. For example, one municipal official 
commented that few municipalities will want to be the first to try 
something new and potentially risky. Another municipal official echoed 
that concern, commenting that there are few examples showing this 
model can work effectively in the United States. A company official 
told us that municipal officials are concerned about being locked into 
a relationship with a private partner for a long-term contract and the 
difficulties of maintaining a good relationship during that time. 
Company officials also cited the need for more education about 
privately financed PPPs to explain their advantages. 

Costly and Difficult Contracting: 

Municipal and company officials also told us that developing a 
contract for a privately financed wastewater PPP can be costly and 
difficult, in part, because of the lack of experience of companies and 
municipalities with these contracts and, in part, because of their 
complexity. For example, an official from Santa Paula, California, 
told us the city's attorneys did not have experience with DBFO 
contracts, so the city hired specialized counsel to develop the DBFO, 
resulting in legal fees three times greater than for a traditional 
procurement. A company official told us the complexity of privately 
financed PPPs and the differences between this type of procurement and 
traditional procurement can result in slower transactions. One 
municipal official noted that part of the complexity associated with 
developing a privately financed PPP contract is transitioning 
employees from the public to the private sector. In addition, the 2002 
NRC study noted that the preparation of adequate contracts is 
expensive and time-consuming, and outside legal and engineering 
expertise is usually needed. We have cited similar concerns for 
highway PPPs.[Footnote 58] One municipal official noted that 
communities often look to privately financed PPPs when they are 
financially stressed, but this might make it difficult to hire 
experienced contractors and consultants to protect the interests of 
the community. 

State and Federal Laws: 

Finally, municipalities may encounter difficulties entering into 
privately financed PPPs due to state and federal laws as follows: 

* State laws. Municipal officials cited state laws that, in some 
cases, outlaw the use of the same contractor to design and build a 
wastewater treatment facility as a challenge, which would prohibit the 
use of DBFOs, as well as other design-build PPPs. Specifically, a 
municipal official in Ohio told us he would like to pursue a DBFO, but 
state law requires design and construction to be bid separately from 
one another, and also requires different trades be bid separately, 
such as electrical and plumbing. Ultimately, he told us, this prevents 
design-build contracts, with or without private financing. Echoing 
this point, a company official told us that developing privately 
financed PPP contracts is complicated by the fact that every state has 
its own procurement rules. 

* Federal financial interest. According to EPA officials, prior to 
accepting private financing, municipalities must repay any remaining 
federal investment for facilities built under the construction grants 
program of the 1970s and 1980s, as well as any other federal grants. 
Officials from Franklin, Ohio, told us some of the up-front payment 
from the private partner was used to repay the existing federal 
interest in the wastewater plant, since it was built with federal 
grants in 1972. EPA officials told us that, although most facilities 
that received funds through the construction grants program are now 
fully depreciated with no remaining federal financial interest, some 
other more recent grants, including construction grants that are still 
awarded to the District of Columbia and U.S. Territories, 
congressionally directed grants for particular wastewater facilities, 
and direct grants through states under the American Recovery and 
Reinvestment Act, would also be subject to early payback. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to EPA, IRS, the Office of 
Management and Budget, and the U.S. Department of the Treasury for 
review and comment. These agencies did not provide written comments to 
us. EPA and IRS provided technical comments, which we have 
incorporated as appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to appropriate 
congressional committees, Secretary of the Treasury, Administrator of 
EPA, Director of the Office of Management and Budget, Commissioner of 
IRS, and other interested parties. The report will also be available 
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff members have any questions regarding this report, 
please contact me at (202) 512-3841 or trimbled@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. Key contributors to this 
report are listed in appendix V. 

Sincerely yours, 

Signed by: 

David C. Trimble: 
Acting Director: 
Natural Resources and Environment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

To determine stakeholders' views on the issues to be considered in 
designing and establishing a national infrastructure bank (NIB), we 
reviewed past legislative proposals and wastewater industry position 
papers on establishing an NIB. In addition, we interviewed 
stakeholders with knowledge of a variety of wastewater infrastructure 
issues, including individuals and organizations from the water and 
wastewater industry; financial sector; and federal, state, and local 
government; and obtained their views on establishing and designing an 
NIB. 

Based on the information obtained through these interviews, and our 
review of reports and legislative proposals, we developed a 
questionnaire to gather information about stakeholder views on an 
NIB's mission and administrative structure, financing authorities, and 
project eligibility and prioritization. We pretested the questionnaire 
with four stakeholders from a variety of backgrounds and made changes 
based on their input. 

In addition to developing the questionnaire, we identified 
organizational and individual stakeholders familiar with wastewater 
infrastructure financing issues and existing NIB proposals. We 
developed this list based on our preliminary interviews and prior GAO 
work on wastewater infrastructure financing. We sent the questionnaire 
to 23 national organizations with expertise in the wastewater industry 
in one of the following areas: financing and operating wastewater 
projects, constructing and maintaining wastewater infrastructure, 
local and state wastewater infrastructure needs, and environmental 
protection. In addition, we identified individuals involved in 
wastewater infrastructure financing to provide additional perspective 
on the creation and design of an NIB. We sent the questionnaire to 14 
individuals with expertise in financing wastewater infrastructure, 
including: consultants who provide advice to municipalities; state 
financing officials; officials from private investment firms; and 
policy consultants who have studied an NIB or wastewater 
infrastructure financing. Although we sought to include stakeholders 
with a variety of perspectives about an NIB, the views of stakeholders 
consulted should not be considered to represent all perspectives about 
an NIB. In addition, although an NIB could potentially finance many 
types of infrastructure, we limited our stakeholders to those familiar 
with the wastewater sector. 

We received responses from 18 organizational stakeholders. Of the 5 
organizational stakeholders that did not respond, 2 told us they could 
not come to a consensus on behalf of their organization.[Footnote 59] 
We also received responses from 11 individuals. Our overall response 
rate was 78 percent. Some stakeholders did not answer all of the 
questions on the questionnaire, so the number of responses for each 
question varies. For a list of the organizational and individual 
stakeholders that responded to the questionnaire, see appendix II. 
Appendix III provides the responses that stakeholders gave regarding 
design issues to be considered in creating an NIB. 

To provide additional context about the potential implications of an 
NIB's design on the federal budget, and its risk to U.S. taxpayers, we 
reviewed prior GAO reports, as well as reports by the Congressional 
Budget Office. We also spoke with officials at the U.S. Department of 
the Treasury, the Internal Revenue Service, and the Environmental 
Protection Agency (EPA). In addition, after analyzing the results from 
our questionnaire, we interviewed staff from the Office of Management 
and Budget to discuss how an NIB might affect the federal budget and 
U.S. taxpayers. We conducted a similar interview with officials at the 
Department of the Treasury; however because the current administration 
is still deliberating issues related to an NIB, Treasury officials 
could not comment on specific issues discussed by stakeholders 
responding to our NIB questionnaire. 

To determine the extent to which wastewater public-private 
partnerships (PPPs) have been privately financed, we conducted a 
literature search of online databases to identify academic and news 
articles discussing privately financed wastewater PPPs initiated since 
1992, when President Bush signed an Executive Order encouraging such 
partnerships. Despite these efforts, it is possible that we did not 
identify all privately financed wastewater PPPs initiated since 1992. 
For purposes of this report, a privately financed wastewater PPP is a 
partnership involving the core business of collecting and treating 
municipal wastewater between a municipality (or other public entity) 
and one or more private partners in which the private partner(s) 
contribute private funds to the partnership. For our report, the 
public partner must retain a long-term interest in the facility. This 
means that, if the private partner acquires an ownership stake in any 
of the wastewater assets, the public partner must be able to reacquire 
the assets on preferential terms at the end of the contract. 

To determine the potential advantages and challenges of privately 
financed wastewater PPPs, we conducted interviews with officials from 
six of the seven municipalities we identified that entered into a 
privately financed wastewater PPP since 1992; officials from Cranston, 
Rhode Island, declined to speak with us. In addition, we conducted 
case studies in four of the states in which privately financed 
wastewater PPPs have occurred: Alaska, California, New Jersey, and 
Ohio. As part of our case studies, we spoke with numerous 
municipalities in each state about their wastewater financing choices 
to get additional context about why few municipalities have entered 
into privately financed PPPs. These municipalities were selected to 
include municipalities of varying sizes, as well as municipalities who 
are not involved in privately financed wastewater PPPs, but who have 
considered the option in the past. We also spoke with state officials 
as needed to understand more about the legal context within each 
state. Table 5 includes a list of the municipalities and state 
agencies we spoke with as part of our case studies. 

Table 5: Municipalities and State Agencies Selected for Case Study 
Interviews, by State: 

Alaska: 
State agencies: 
* Department of Environmental Conservation; 
* Regulatory Commission of Alaska; 
Municipalities and local utilities: 
* Anchorage; 
* Fairbanks; 
* Juneau; 
* Palmer. 

California: 
State agencies: 
* State Water Resources Control Board; 
Municipalities and local utilities: 
* Arvin; 
* Central Contra Costa Sanitary District; 
* Fillmore; 
* San Francisco Public Utilities Commission; 
* Santa Paula. 

New Jersey: 
State agencies: 
* New Jersey Board of Public Utilities; 
Municipalities and local utilities: 
* Atlantic County Utilities Authority; 
* Cape May County Municipal Utilities Authority; 
* North Brunswick; 
* North Hudson Sewerage Authority. 

Ohio: 
State agencies: 
* Not applicable; 
Municipalities and local utilities: 
* Akron; 
* Franklin; 
* Metropolitan Sewer District of Greater Cincinnati; 
* Tricities Authority. 

Source: GAO. 

[End of table] 

To obtain additional information about private sector views on the 
advantages and challenges of privately financed wastewater PPPs, we 
interviewed officials at the six largest water and wastewater services 
companies in the United States: American Water, CH2M Hill, Severn 
Trent Environmental Services, South West Water Company, United Water, 
and Veolia Water. We also interviewed officials from PERC Water, a 
water recycling company involved in the privately financed wastewater 
PPP in Santa Paula, California. In addition, we interviewed officials 
from EPA and numerous stakeholders in the water and wastewater 
industry, including national associations representing wastewater 
utilities, consultants that advise municipalities on wastewater 
financing decisions, and representatives from the financial sector 
involved in water and wastewater infrastructure financing. 

Finally, we also conducted a literature search to identify 
publications that discuss the advantages and challenges of privately 
financed wastewater PPPs in the United States. After reviewing various 
publications, we included the 10 publications that: (1) focused on the 
wastewater industry in the United States; (2) discussed the advantages 
and challenges of wastewater PPPs; and (3) specifically addressed the 
use of private financing in the context of a PPP. Throughout the 
report, we cite the advantages and challenges identified in these 10 
publications to provide additional context to the information gathered 
in our interviews. See appendix IV for a complete list of the 
publications we identified. 

We conducted our work from June 2009 to June 2010 in accordance with 
all sections of GAO's Quality Assurance Framework that are relevant to 
our objectives. The framework requires that we plan and perform the 
engagement to obtain sufficient and appropriate evidence to meet our 
stated objectives and to discuss any limitations in our work. We 
believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions. 

[End of section] 

Appendix II: Stakeholders Responding to the NIB Questionnaire: 

The following stakeholders responded to our questionnaire regarding 
design issues to be considered in creating a national infrastructure 
bank. The individuals who responded to our questionnaire presented 
their personal views and not the views of the organizations for which 
they work. 

Organizations: 

American Council of Engineering Companies: 
American Public Works Association: 
American Rivers: 
American Society of Civil Engineers: 
American Water Works Association: 
Association of Metropolitan Water Agencies: 
Clean Water Action: 
Clean Water Construction Coalition: 
Council of Infrastructure Financing Authorities: 
Food & Water Watch: 
Government Finance Officers Association: 
National Association of Clean Water Agencies: 
National Association of Water Companies: 
National Utility Contractors Association: 
The Associated General Contractors of America: 
The United States Conference of Mayors: 
Water and Wastewater Equipment Manufacturers Association: 
Water Environment Federation: 

Individuals[Footnote 60]: 

Everett M. Ehrlich, ESC Company: 
Paul Eisenhardt, Eisenhardt Group, Inc. 
John A. Flaherty, Carlyle Infrastructure Partners: 
James T. Gebhardt, New York State Environmental Facilities Corporation: 
Stan Hazelroth, California Infrastructure and Economic Development 
Bank: 
Mark Kellett, Northbridge Environmental Management Consultants: 
Eric P. Rothstein, Galardi Rothstein Group:
Kenneth I. Rubin, PA Consulting Group: 
Bernard L. Schwartz, BLS Investments, LLC: 
Stephen M. Sorett, McKenna Long & Aldridge: 

[End of section] 

Appendix III: Summary of Stakeholder Responses to the NIB 
Questionnaire: 

This appendix provides information on stakeholders' responses to our 
questionnaire addressing design issues to be considered in creating an 
NIB. The questions asked in the questionnaire are reproduced below, 
[Footnote 61] along with a tally of stakeholder responses for each 
closed-ended question.[Footnote 62] 

1. What types of infrastructure should an NIB provide financing for? 

Table 6: Stakeholder Views on Type of Infrastructure Funded by an NIB: 

An NIB should provide financing for a variety of types of 
infrastructure, which could include, among others, transportation, 
energy, water, and wastewater infrastructure; 
Number of organizational stakeholders: 8; 
Number of individual stakeholders: 5. 

An NIB should finance only water and wastewater infrastructure; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 3. 

An NIB should finance only wastewater infrastructure; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 1. 

An NIB should not be created; 
Number of organizational stakeholders: 1; 
Number of individual stakeholders: 0. 

Other; 
Number of organizational stakeholders: 4; 
Number of individual stakeholders: 2. 

Total responses; 
Number of organizational stakeholders: 16; 
Number of individual stakeholders: 11. 

No answer; 
Number of organizational stakeholders: 2; 
Number of individual stakeholders: 0. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

2. What should be the mission of an NIB? 

Stakeholders provided a variety of open-ended responses to this 
question, which are discussed in the report as appropriate. 

3. If an NIB is created, how should it be structured? 

Table 7: Stakeholder Views on Administrative Structure of an NIB: 

As a new responsibility for an existing federal agency; 
Number of organizational stakeholders: 2; 
Number of individual stakeholders: 2. 

As a government corporation, either wholly-owned by the government or 
mixed-ownership (government and private ownership); 
Number of organizational stakeholders: 2; 
Number of individual stakeholders: 5. 

As a government-sponsored enterprise (a private enterprise with 
implicit public backing, similar to Fannie Mae and Freddie Mac); 
Number of organizational stakeholders: 2; 
Number of individual stakeholders: 2. 

Other; 
Number of organizational stakeholders: 4; 
Number of individual stakeholders: 2. 

Total responses; 
Number of organizational stakeholders: 10; 
Number of individual stakeholders: 11. 

No answer; 
Number of organizational stakeholders: 8; 
Number of individual stakeholders: 0. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

4. What relationship, if any, should an NIB have with the existing 
state-level Clean Water State Revolving Fund programs? 

Stakeholders provided a variety of open-ended responses to this 
question, which are discussed in the report as appropriate. 

5. How should an NIB initially be capitalized? 

Stakeholders provided a variety of open-ended responses to this 
question, which are discussed in the report as appropriate. 

6. Should an NIB have the authority to generate its own funds for 
operating expenses and lending using different financing mechanisms? 

Table 8: Stakeholder Views on an NIB's Authority to Generate Its Own 
Funds for Operating Expenses and Lending: 

Yes, an NIB should be able to use the following financing mechanisms 
to generate its own funds (see table 9 for the list of mechanisms); 
Number of organizational stakeholders: 11; 
Number of individual stakeholders: 10. 

No, an NIB should not have the authority to generate its own funds; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 1. 

Other; 
Number of organizational stakeholders: 1; 
Number of individual stakeholders: 0. 

Total responses; 
Number of organizational stakeholders: 12; 
Number of individual stakeholders: 11. 

No answer; 
Number of organizational stakeholders: 6; 
Number of individual stakeholders: 0. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

If you answered "yes" to question 6, which mechanisms should an NIB 
have the authority to use to generate is own funds? 

Table 9: Stakeholder Views on Mechanisms an NIB Could Use to Generate 
Its Own Funds for Operating Expenses and Lending: 

Issue tax-exempt bonds; 
Number of organizational stakeholders: 9; 
Number of individual stakeholders: 5. 

Issue commercial paper; 
Number of organizational stakeholders: 6; 
Number of individual stakeholders: 6. 

Borrow directly from the U.S. Department of the Treasury; 
Number of organizational stakeholders: 9; 
Number of individual stakeholders: 7. 

Borrow directly from commercial banks; 
Number of organizational stakeholders: 4; 
Number of individual stakeholders: 5. 

Borrow directly from private investors; 
Number of organizational stakeholders: 7; 
Number of individual stakeholders: 5. 

Borrow directly from international entities on the global capital 
market; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 4. 

Charge application fees; 
Number of organizational stakeholders: 8; 
Number of individual stakeholders: 8. 

Charge fees for technical assistance; 
Number of organizational stakeholders: 5; 
Number of individual stakeholders: 8. 

Charge fees for other services, such as annual monitoring; 
Number of organizational stakeholders: 4; 
Number of individual stakeholders: 8. 

Other; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 1. 

Total responses; 
Number of organizational stakeholders: 11; 
Number of individual stakeholders: 10. 

Source: GAO analysis of stakeholder responses. 

Note: This table only includes the 21 stakeholders who supported 
giving an NIB the authority to generate its own funds for operating 
expenses and lending. 

[End of table] 

7. Should an NIB become self-sustaining after its initial 
capitalization? By self-sustaining, we mean an NIB that is fully 
reliant on funds that it generates, rather than on continued federal 
funding. 

Table 10: Stakeholder Views on Self-Sustainability of an NIB: 

Yes, an NIB should be become self-sustaining and not continue to rely 
on federal funds; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 3. 

No, an NIB should not become self-sustaining and continue to rely on 
federal funds; 
Number of organizational stakeholders: 5; 
Number of individual stakeholders: 4. 

Other; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 4. 

Total responses; 
Number of organizational stakeholders: 11; 
Number of individual stakeholders: 11. 

No answer; 
Number of organizational stakeholders: 7; 
Number of individual stakeholders: 0. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

8. How important is it that an NIB has the authority to provide each 
of the following financing mechanisms? 

Table 11: Stakeholder Views on Financing Mechanisms an NIB Could Offer 
to Finance Projects: 

Issue tax-exempt bonds on behalf of infrastructure projects: 
Organizations; 
Not at all important: 0; 
Moderately important: 1; 
Very important: 8; 
Should not be provided by an NIB: 1; 
Total responses: 10; 
No answer: 8. 

Issue tax-exempt bonds on behalf of infrastructure projects: 
Individuals; 
Not at all important: 1; 
Moderately important: 0; 
Very important: 5; 
Should not be provided by an NIB: 5; 
Total responses: 11; 
No answer: 0. 

Issue tax-credit bonds on behalf of infrastructure projects: 
Organizations; 
Not at all important: 1; 
Moderately important: 3; 
Very important: 6; 
Should not be provided by an NIB: 0; 
Total responses: 10; 
No answer: 8. 

Issue tax-credit bonds on behalf of infrastructure projects: 
Individuals; 
Not at all important: 1; 
Moderately important: 1; 
Very important: 3; 
Should not be provided by an NIB: 5; 
Total responses: 10; 
No answer: 1. 

Pool loans for several infrastructure projects into a larger bond 
issue to lower the cost of borrowing: Organizations; 
Not at all important: 0; 
Moderately important: 1; 
Very important: 8; 
Should not be provided by an NIB: 0; 
Total responses: 9; 
No answer: 9. 

Pool loans for several infrastructure projects into a larger bond 
issue to lower the cost of borrowing: Individuals; 
Not at all important: 1; 
Moderately important: 1; 
Very important: 6; 
Should not be provided by an NIB: 3; 
Total responses: 11; 
No answer: 0. 

Issue direct loans to infrastructure projects: Organizations; 
Not at all important: 0; 
Moderately important: 1; 
Very important: 10; 
Should not be provided by an NIB: 1; 
Total responses: 12; 
No answer: 6. 

Issue direct loans to infrastructure projects: Individuals; 
Not at all important: 0; 
Moderately important: 1; 
Very important: 9; 
Should not be provided by an NIB: 1; 
Total responses: 11; 
No answer: 0. 

Provide federal loan guarantees for infrastructure projects: 
Organizations; 
Not at all important: 0; 
Moderately important: 3; 
Very important: 8; 
Should not be provided by an NIB: 0; 
Total responses: 11; 
No answer: 7. 

Provide federal loan guarantees for infrastructure projects: 
Individuals; 
Not at all important: 1; 
Moderately important: 2; 
Very important: 7; 
Should not be provided by an NIB: 1; 
Total responses: 11; 
No answer: 0. 

Issue commercial paper on behalf of infrastructure projects: 
Organizations; 
Not at all important: 1; 
Moderately important: 3; 
Very important: 1; 
Should not be provided by an NIB: 2; 
Total responses: 7; 
No answer: 11. 

Issue commercial paper on behalf of infrastructure projects: 
Individuals; 
Not at all important: 2; 
Moderately important: 4; 
Very important: 1; 
Should not be provided by an NIB: 4; 
Total responses: 11; 
No answer: 0. 

Provide grants to infrastructure projects: Organizations; 
Not at all important: 3; 
Moderately important: 2; 
Very important: 6; 
Should not be provided by an NIB: 1; 
Total responses: 12; 
No answer: 6. 

Provide grants to infrastructure projects: Individuals; 
Not at all important: 2; 
Moderately important: 0; 
Very important: 3; 
Should not be provided by an NIB: 6; 
Total responses: 11; 
No answer: 0. 

Provide funding to Clean Water State Revolving Fund programs: 
Organizations; 
Not at all important: 1; 
Moderately important: 0; 
Very important: 9; 
Should not be provided by an NIB: 4; 
Total responses: 14; 
No answer: 4. 

Provide funding to Clean Water State Revolving Fund programs: 
Individuals; 
Not at all important: 1; 
Moderately important: 1; 
Very important: 5; 
Should not be provided by an NIB: 3; 
Total responses: 10; 
No answer: 1. 

Other: Organizations; 
Not at all important: 0; 
Moderately important: 0; 
Very important: 2; 
Should not be provided by an NIB: 0; 
Total responses: 2; 
No answer: 16. 

Other: Individuals; 
Not at all important: 0; 
Moderately important: 0; 
Very important: 1; 
Should not be provided by an NIB: 0; 
Total responses: 1; 
No answer: 10. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

9. If an NIB suffers from financial losses due to municipalities 
defaulting on loans or commercial paper, taxpayers may be at risk to 
cover those financial losses. How should an NIB mitigate this 
potential risk to taxpayers? 

Stakeholders provided a variety of open-ended responses to this 
question, which are discussed in the report as appropriate. 

10. How should an NIB distribute financing to qualified projects? 

Table 12: Stakeholder Views on How an NIB Should Distribute Financing 
to Qualified Projects: 

Directly from an NIB to the qualified project; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 3. 

From an NIB to existing federal programs (such as the Clean Water 
State Revolving Fund), which select qualified projects; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 1. 

From an NIB to individual states, which select qualified projects; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 1. 

Some combination of the above; 
Number of organizational stakeholders: 8; 
Number of individual stakeholders: 6. 

Other; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 0. 

Total responses; 
Number of organizational stakeholders: 11; 
Number of individual stakeholders: 11. 

No answer; 
Number of organizational stakeholders: 7; 
Number of individual stakeholders: 0. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

11. What types of wastewater utilities, if any, should an NIB have the 
authority to assist? Please check all that apply. 

Table 13: Stakeholder Views on Types of Wastewater Utilities an NIB 
Should Have the Authority to Assist: 

State, local, and nonprofit (such as a rural sewer district) utilities 
that own and operate wastewater infrastructure; 
Number of organizational stakeholders: 9; 
Number of individual stakeholders: 9. 

Utilities engaged in public-private partnerships with publicly owned 
but privately operated wastewater infrastructure; 
Number of organizational stakeholders: 7; 
Number of individual stakeholders: 9. 

Private utility companies that own and operate wastewater 
infrastructure; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 6. 

An NIB should not have the authority to directly assist wastewater 
utilities; 
Number of organizational stakeholders: 2; 
Number of individual stakeholders: 0. 

Other; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 2. 

Total responses; 
Number of organizational stakeholders: 12; 
Number of individual stakeholders: 11. 

No answer; 
Number of organizational stakeholders: 6; 
Number of individual stakeholders: 0. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

12. Assuming constrained resources, by what method should an NIB 
prioritize eligible projects for financing? 

Table 14: Stakeholder Views on How an NIB Should Prioritize Eligible 
Projects for Financing: 

First-come, first-served; 
Number of organizational stakeholders: 0; 
Number of individual stakeholders: 0. 

Use a formula to allocate a specific amount for each infrastructure 
sector, such as transportation, energy, or wastewater; 
Number of organizational stakeholders: 1; 
Number of individual stakeholders: 1. 

Use a formula to allocate a specific amount for each state; 
Number of organizational stakeholders: 1; 
Number of individual stakeholders: 0. 

Rank projects according to specific criteria; 
Number of organizational stakeholders: 2; 
Number of individual stakeholders: 2. 

Some combination of the above options; 
Number of organizational stakeholders: 8; 
Number of individual stakeholders: 5. 

Other; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 2. 

Total responses; 
Number of organizational stakeholders: 15; 
Number of individual stakeholders: 10. 

No answer; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 1. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

13. What should be the level of priority for the following criteria 
that an NIB could use to evaluate projects and select those that 
should be financed? 

Table 15: Stakeholder Views on Criteria an NIB Could Use when 
Evaluating and Selecting Projects: 

Projects addressing greatest infrastructure need; 
Number of Stakeholders: Organizations; 
Low priority: 0; 
Medium priority: 0; 
High priority: 11; 
Total responses: 11; 
No answer: 7. 

Projects addressing greatest infrastructure need; 
Number of Stakeholders: Individuals; 
Low priority: 1; 
Medium priority: 0; 
High priority: 7; 
Total responses: 8; 
No answer: 3. 

Projects generating greatest environmental benefit; 
Number of Stakeholders: Organizations; 
Low priority: 0; 
Medium priority: 4; 
High priority: 10; 
Total responses: 14; 
No answer: 4. 

Projects generating greatest environmental benefit; 
Number of Stakeholders: Individuals; 
Low priority: 2; 
Medium priority: 1; 
High priority: 5; 
Total responses: 8; 
No answer: 3. 

Projects generating greatest public health benefit; 
Number of Stakeholders: Organizations; 
Low priority: 0; 
Medium priority: 2; 
High priority: 12; 
Total responses: 14; 
No answer: 4. 

Projects generating greatest public health benefit; 
Number of Stakeholders: Individuals; 
Low priority: 2; 
Medium priority: 1; 
High priority: 5; 
Total responses: 8; 
No answer: 3. 

Projects serving the largest number of people; 
Number of Stakeholders: Organizations; 
Low priority: 1; 
Medium priority: 8; 
High priority: 4; 
Total responses: 13; 
No answer: 5. 

Projects serving the largest number of people; 
Number of Stakeholders: Individuals; 
Low priority: 2; 
Medium priority: 4; 
High priority: 3; 
Total responses: 9; 
No answer: 2. 

Projects generating the most economic growth and jobs; 
Number of Stakeholders: Organizations; 
Low priority: 1; 
Medium priority: 7; 
High priority: 6; 
Total responses: 14; 
No answer: 4. 

Projects generating the most economic growth and jobs; 
Number of Stakeholders: Individuals; 
Low priority: 3; 
Medium priority: 1; 
High priority: 5; 
Total responses: 9; 
No answer: 2. 

Projects of national or regional significance; 
Number of Stakeholders: Organizations; 
Low priority: 1; 
Medium priority: 6; 
High priority: 6; 
Total responses: 13; 
No answer: 5. 

Projects of national or regional significance; 
Number of Stakeholders: Individuals; 
Low priority: 1; 
Medium priority: 3; 
High priority: 6; 
Total responses: 10; 
No answer: 1. 

Projects with the greatest current and projected use; 
Number of Stakeholders: Organizations; 
Low priority: 2; 
Medium priority: 8; 
High priority: 2; 
Total responses: 12; 
No answer: 6. 

Projects with the greatest current and projected use; 
Number of Stakeholders: Individuals; 
Low priority: 2; 
Medium priority: 2; 
High priority: 4; 
Total responses: 8; 
No answer: 3. 

Projects serving a population with the lowest median household income; 
Number of Stakeholders: Organizations; 
Low priority: 3; 
Medium priority: 5; 
High priority: 5; 
Total responses: 13; 
No answer: 5. 

Projects serving a population with the lowest median household income; 
Number of Stakeholders: Individuals; 
Low priority: 4; 
Medium priority: 2; 
High priority: 3; 
Total responses: 9; 
No answer: 2. 

Projects for communities that have difficulty accessing other sources 
of revenue, such as bond markets; 
Number of Stakeholders: Organizations; 
Low priority: 1; 
Medium priority: 5; 
High priority: 8; 
Total responses: 14; 
No answer: 4. 

Projects for communities that have difficulty accessing other sources 
of revenue, such as bond markets; 
Number of Stakeholders: Individuals; 
Low priority: 2; 
Medium priority: 3; 
High priority: 4; 
Total responses: 9; 
No answer: 2. 

Projects that include private financing; 
Number of Stakeholders: Organizations; 
Low priority: 2; 
Medium priority: 6; 
High priority: 3; 
Total responses: 11; 
No answer: 7. 

Projects that include private financing; 
Number of Stakeholders: Individuals; 
Low priority: 4; 
Medium priority: 1; 
High priority: 4; 
Total responses: 9; 
No answer: 2. 

Projects that are ready to begin construction; 
Number of Stakeholders: Organizations; 
Low priority: 8; 
Medium priority: 2; 
High priority: 3; 
Total responses: 13; 
No answer: 5. 

Projects that are ready to begin construction; 
Number of Stakeholders: Individuals; 
Low priority: 1; 
Medium priority: 4; 
High priority: 4; 
Total responses: 9; 
No answer: 2. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

14. Should an NIB exclusively finance large infrastructure projects? 

Table 16: Stakeholder Views on Minimum Size of Projects Eligible for 
NIB Financing: 

Yes, an NIB should exclusively finance large infrastructure projects; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 5. 

No, an NIB should finance infrastructure projects of all sizes; 
Number of organizational stakeholders: 8; 
Number of individual stakeholders: 4. 

Other; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 1. 

Total responses; 
Number of organizational stakeholders: 14; 
Number of individual stakeholders: 10. 

No answer; 
Number of organizational stakeholders: 4; 
Number of individual stakeholders: 1. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

15. Should there be a limit on the amount of financing that one 
project can receive from an NIB? 

Table 17: Stakeholder Views on Limits on Amount of Financing One 
Project Could Receive From an NIB: 

Yes, there should be a maximum limit related to the overall financial 
resources of an NIB; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 7. 

No, there should not a maximum limit; 
Number of organizational stakeholders: 3; 
Number of individual stakeholders: 3. 

Other; 
Number of organizational stakeholders: 1; 
Number of individual stakeholders: 0. 

Total responses; 
Number of organizational stakeholders: 7; 
Number of individual stakeholders: 10. 

No answer; 
Number of organizational stakeholders: 11; 
Number of individual stakeholders: 1. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

16. In your opinion, which of the following wastewater infrastructure 
activities should an NIB finance? 

Table 18: Stakeholder Views on What Activities Should be Eligible for 
NIB Financing: 

Routine operations and maintenance; 
Number of stakeholders: Organizations; 
Yes: 1; 
No: 15; 
Total responses: 16; 
No answer: 2. 

Routine operations and maintenance; 
Number of stakeholders: Individuals; 
Yes: 1; 
No: 9; 
Total responses: 10; 
No answer: 1. 

Planning and design of wastewater infrastructure projects, such as 
feasibility review, permitting, environment reviews, or 
preconstruction planning; 
Number of stakeholders: Organizations; 
Yes: 13; 
No: 3; 
Total responses: 16; 
No answer: 2. 

Planning and design of wastewater infrastructure projects, such as 
feasibility review, permitting, environment reviews, or 
preconstruction planning; 
Number of stakeholders: Individuals; 
Yes: 6; 
No: 3; 
Total responses: 9; 
No answer: 2. 

Ratepayer assistance to low-income households; 
Number of stakeholders: Organizations; 
Yes: 3; 
No: 9; 
Total responses: 12; 
No answer: 6. 

Ratepayer assistance to low-income households; 
Number of stakeholders: Individuals; 
Yes: 1; 
No: 7; 
Total responses: 8; 
No answer: 3. 

Capital costs, such as reconstruction, rehabilitation, replacement, or 
expansion; 
Number of stakeholders: Organizations; 
Yes: 14; 
No: 2; 
Total responses: 16; 
No answer: 2. 

Capital costs, such as reconstruction, rehabilitation, replacement, or 
expansion; 
Number of stakeholders: Individuals; 
Yes: 10; 
No: 0; 
Total responses: 10; 
No answer: 1. 

Source: GAO analysis of stakeholder responses. 

[End of table] 

17. In addition to design issues discussed above related to 
administration, authorities, financing prioritization, and financing 
eligibility (questions 1 through 16), what other design issues should 
be considered in designing and establishing an NIB, if any? 

Stakeholders provided a variety of open-ended responses to this 
question. 

18. Please provide any additional information that would be helpful to 
GAO in better understanding potential issues related to establishing 
an NIB. 

Stakeholders provided a variety of open-ended responses to this 
question. 

[End of section] 

Appendix IV: Published Works Addressing Privately Financed Wastewater 
PPPs: 

We identified the following published works which address privately 
financed wastewater PPPs and were published since 1992: 

Haarmeyer, David. "Environmental Infrastructure: An Evolving Public- 
Private Partnership." in Seidenstat, P., Nadol, M., & Hakim, S. 
America's Water and Wastewater Industries: Competition and 
Privatization. Vienna, VA: Public Utilities Reports, 2000. 

Heilman, John and Gerald Johnson. The Politics and Economics of 
Privatization: The Case of Wastewater Treatment. Tuscaloosa, AL: 
University of Alabama Press, 1992. 

Landow-Esser, Janine and Melissa Manuel. "Environmental and 
Contracting Issues in Municipal Wastewater Treatment Outsourcing." in 
Seidenstat, P., Nadol, M., & Hakim, S. America's Water and Wastewater 
Industries: Competition and Privatization. Vienna, VA: Public 
Utilities Reports, 2000. 

Matacera, Paul J. and Frank J. Mangravite in Seidenstat, P., 
Haarmeyer, D., & Hakim, S. Reinventing Water and Wastewater Systems: 
Global Lessons for Improving Water Management. New York: J. Wiley, 
2002. 

National Research Council. Privatization of Water Services in the 
United States: An Assessment of Issues and Experience. Washington, 
D.C.: National Academy Press, 2002. 

Seidenstat, Paul, Michael Nadol, and Simon Hakim. "Competition and 
Privatization in the Water and Wastewater Industries." in Seidenstat, 
P., Nadol, M., & Hakim, S. America's Water and Wastewater Industries: 
Competition and Privatization. Vienna, VA: Public Utilities Reports, 
2000. 

Seidenstat, Paul. "Organizing water and wastewater industries to meet 
the challenges of the 21st century." Public Administration and 
Management (8:2), 69-99 (2003). 

Seidenstat, Paul. "Global Lessons: Options for Improving Water and 
Wastewater Systems." in Seidenstat, P., Haarmeyer, D., & Hakim, S. 
Reinventing Water and Wastewater Systems: Global Lessons for Improving 
Water Management. New York: J. Wiley, 2002. 

Sills Jr., James H. "The Challenges and Benefits of Privatizing 
Wilmington's Wastewater Treatment Plant." in Seidenstat, P., 
Haarmeyer, D., & Hakim, S. Reinventing Water and Wastewater Systems: 
Global Lessons for Improving Water Management. New York: J. Wiley, 
2002. 

Traficante, Michael A., and Peter Alviti, Jr. "A New Standard for a 
Long-Term Lease and Service Agreement." in Seidenstat, P., Haarmeyer, 
D., & Hakim, S. Reinventing Water and Wastewater Systems: Global 
Lessons for Improving Water Management. New York: J. Wiley, 2002. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David Trimble, Acting Director, (202) 512-3841, or trimbled@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Sherry L. McDonald, 
Assistant Director; Hiwotte Amare; Elizabeth Beardsley; Janice 
Ceperich; Philip Farah; Cindy Gilbert; Maylin Jue; Corissa Kiyan; 
Carol Kolarik; Anu Mittal; Marietta Mayfield Revesz; Janice M. Poling; 
and Ben Shouse made significant contributions to this report. Also 
contributing to this report were Carol Henn, William B. Shear, and 
James Wozny. 

[End of section] 

Footnotes: 

[1] Fiscal year 2007 includes data for each individual government's 
fiscal year that ended between July 1, 2006, and June 30, 2007. The 
Census Bureau also reports that state governments spent about $1.4 
billion on wastewater in fiscal year 2007. 

[2] Pub. L. No. 111-5, Div. A, Tit. VII, 123 Stat. 115, 169. Under the 
CWSRF program, the federal government provides grants to states, which 
use the money to provide generally low-interest loans to fund a 
variety of water quality projects at the municipal level. 

[3] The federal government also funds wastewater infrastructure 
through other programs. For example, the Department of Agriculture's 
Rural Utilities Service provides grants and loans for wastewater 
infrastructure improvements to rural communities, including those with 
populations of 10,000 or less. In fiscal year 2010, this program 
received an appropriation of nearly $569 million, primarily for grants 
and loans to support wastewater and other environmental 
infrastructure. Pub. L. No. 111-80 (2009), § 123 Stat. 2111. 

[4] EPA, The Clean Water and Drinking Water Infrastructure Gap 
Analysis (Washington, D.C.: September 2002). In the report, EPA notes 
that this gap is not inevitable and could be addressed in part if 
wastewater utilities raised the rates they charge consumers. EPA 
estimates a potential gap for drinking water infrastructure as well. 

[5] The Federal Water Pollution Control Act Amendments of 1972, Pub. 
L. No. 92-500, § 2, 86 Stat. 816 codified as amended at 33 U.S.C. §§ 
1251-1387 (2010) (commonly referred to as the Clean Water Act). 

[6] Water Protection and Reinvestment Act of 2009, H.R. 3202; the bill 
would establish a trust fund to assist clean water and drinking water 
infrastructure projects. Our previous work has found that numerous 
issues would need to be addressed in the design of a clean water trust 
fund. See GAO, Clean Water Infrastructure: A Variety of Issues Need to 
Be Considered When Designing a Clean Water Trust Fund, [hyperlink, 
http://www.gao.gov/products/GAO-09-657] (Washington, D.C.: May 29, 
2009). 

[7] The bills included the National Infrastructure Development Bank 
Act of 2009 (H.R. 2521), National Infrastructure Bank Act of 2007 (S. 
1926 and H.R. 3401), and National Infrastructure Development Act (H.R. 
3896). 

[8] Executive Order 12803 was signed by President Bush on April 30, 
1992. 

[9] Wastewater treatment generally involves two steps, called primary 
and secondary treatment. During primary treatment, solid materials 
such as sand and grit are removed from wastewater. Secondary treatment 
usually involves using bacteria to remove organic material from 
wastewater. Under the Clean Water Act, municipal wastewater treatment 
plants are required to provide secondary treatment for wastewater. In 
addition, over 30 percent of wastewater treatment plants also provide 
advanced treatment for wastewater, which can clean wastewater to even 
greater levels by, for example, removing nutrients. 

[10] Conventional pollutants treated in municipal wastewater 
facilities include: biochemical oxygen demand, total suspended solids, 
fecal coliform, pH, and oil and grease. 

[11] In addition, National Pretreatment Standards apply to certain 
categories of industrial dischargers into sewers connected to 
municipal wastewater facilities, regardless of whether the municipal 
facility has a pretreatment program. 

[12] The Resource Conservation and Recovery Act (RCRA) regulates 
treatment, storage, and disposal of hazardous waste, among other 
things. RCRA regulations generally exclude sewage conveyed for 
treatment at publicly owned treatment facilities from the standards 
and permit requirements for managing hazardous waste. However, the 
RCRA exemption for privately owned facilities only excludes the 
discharge authorized under an NPDES permit; handling of wastes before 
and during treatment, as well as generated sludges may be subject to 
hazardous waste rules. 

[13] Municipalities can also issue Build America Bonds, which the 
federal government subsidizes through tax credits (rather than tax- 
exempt interest). Build America Bonds were authorized in the American 
Recovery and Reinvestment Act of 2009 and can be issued in 2009 and 
2010. According to the U.S. Department of the Treasury, as of April 
30, 2010, states, municipalities, and other local entities had issued 
194 Build America Bonds worth $19.8 billion for projects that include 
sewer or water utility improvements. 

[14] Under the Internal Revenue Code and applicable regulations, 
generally a bond is a private activity bond when more than 10 percent 
of the bond issue proceeds is to be used for private business use--
such as where a private contractor is leasing a facility receiving 
such proceeds--and if the payment of the principal or interest on more 
than 10 percent of the proceeds is derived from or secured by an 
interest in property used for a private business use. Whether a bond 
involving a PPP facility meets these criteria is determined by the 
facts and circumstances surrounding the PPP arrangement. See 26 U.S.C. 
§ 141, 26 C.F.R. § 1.141-3 (2010). While interest on a private 
activity bond is generally taxable, interest on qualified private 
activity bonds for exempt facilities such as sewage facilities can be 
tax-exempt if the bonds meet applicable criteria. See 26 U.S.C §§ 
103(a)-(b)(1), 141(e)(1), 26 C.F.R § 1.142(a)(5)-1 (2010). 

[15] Fiscal year 2007 includes data for each individual government's 
fiscal year that ended between July 1, 2006, and June 30, 2007. 

[16] See [hyperlink, http://www.gao.gov/products/GAO-09-657]. 

[17] The Build America Bonds Act (S. 2021), introduced in 2007, 
proposed an entity similar to an NIB but did not include wastewater 
infrastructure among the eligible projects. This act proposed granting 
recognition to a multistate transportation finance corporation, which 
would be authorized to issue up to $50 billion in bonds--providing 
federal tax credits in lieu of interest--to finance qualified 
infrastructure projects. The Build America Bonds Act is different from 
the Build America Bonds authorized by the American Recovery and 
Reinvestment Act of 2009. 

[18] GSEs are privately owned, for-profit financial institutions that 
have been federally chartered for a public purpose, such as 
facilitating the flow of investment to specific economic sectors. 

[19] State law may limit or condition contract arrangements available 
to municipalities. 

[20] See GAO, Highway Public-Private Partnerships: More Rigorous Up- 
front Analysis Could Better Secure Potential Benefits and Protect the 
Public Interest, [hyperlink, http://www.gao.gov/products/GAO-08-44] 
(Washington, D.C.: Feb. 8, 2008). 

[21] A total of 29 stakeholders--18 organizations and 11 individuals-- 
responded to our questionnaire. However, because not all stakeholders 
responded to each question, the total number of responses varies for 
each question. While we aggregated the counts of organizational and 
individual stakeholders' views for reporting purposes, the tables in 
this section include information on separate organizational and 
individual stakeholder views. 

[22] This paragraph is based on stakeholder responses to an open-ended 
question. As such, some stakeholders suggested multiple ways in which 
an NIB could interact with the CWSRF. 

[23] Twenty-seven states currently leverage their CWSRF funds by using 
some of their SRF assets, such as federal capitalization grants, as 
collateral in the public bond market. 

[24] Eight stakeholders suggested a variety of other possible 
relationships between an NIB and the existing CWSRF. For example, one 
stakeholder explained that the EPA and the CWSRF could help identify 
eligible projects for NIB assistance whereas another suggested that an 
NIB could push the CWSRF programs to fund more innovative and 
sustainable infrastructure. 

[25] It is difficult to gauge the overall level of support for each 
potential administrative structure because 6 stakeholders selected 
"other" rather than indicate a specific administrative structure for 
an NIB and another eight stakeholders did not respond to the question. 

[26] See GAO, Federally Created Entities: An Overview of Key 
Attributes, [hyperlink, http://www.gao.gov/products/GAO-10-97] 
(Washington, D.C.: Oct. 29, 2009); and GAO, Fannie Mae and Freddie 
Mac: Analysis of Options for Revising the Housing Enterprises' Long-
term Structures, [hyperlink, http://www.gao.gov/products/GAO-09-782] 
(Washington, D.C.: Sept. 10, 2009). 

[27] For example, the Federal Deposit Insurance Corporation is a 
government corporation that insures deposits in and is financed by 
premiums paid by banks and thrift institutions. 

[28] See [hyperlink, http://www.gao.gov/products/GAO-09-782]. 

[29] On September 6, 2008, the Federal Housing Finance Agency, the 
regulator for two large housing GSEs, Fannie Mae and Freddie Mac, 
established itself as their conservator given that they had lost 
billions of dollars due to questionable mortgage-related investments 
and that their deteriorating financial condition threatened the 
stability of financial markets. The Congressional Budget Office 
estimates that Fannie Mae and Freddie Mac conservatorships could cost 
taxpayers nearly $400 billion over the next 10 years. 

[30] See GAO, Housing Government-Sponsored Enterprises: A Single 
Regulator Will Better Ensure Safety and Soundness and Mission 
Achievement, [hyperlink, http://www.gao.gov/products/GAO-08-563T] 
(Washington, D.C.: Mar. 6, 2008); and GAO, Housing Government-
Sponsored Enterprises: A New Oversight Structure Is Needed, 
[hyperlink, http://www.gao.gov/products/GAO-05-576T] (Washington, 
D.C.: Apr. 21, 2005). 

[31] This paragraph is partly based on stakeholder responses to an 
open-ended question. As such, some stakeholders suggested multiple 
ways in which an NIB should be capitalized. 

[32] Seven of 22 stakeholders selected "other," neither supporting nor 
opposing a self-sustaining NIB. Three of these stakeholders explained 
they would support a self-sustaining NIB but were unsure whether it 
would be feasible. 

[33] Pub. L. No. 101-508, Title XIII, § 13201(a) (1990) (amending the 
Congressional Budget Act of 1974), 104 Stat. 1388-610, codified at 2 
U.S.C. §§ 661-661f (2010). 

[34] Federal entities calculate these costs by multiplying the 
expected dollar amount of loans by a program's credit subsidy rate, 
which is calculated to include the possibility of a borrower default 
and other factors that could affect the risk to taxpayers. 

[35] Of the remaining 2 stakeholders who responded to this question, 
one opposed giving an NIB the authority to generate its own funds for 
operating expenses and lending to ensure that an NIB focuses on 
funding infrastructure projects rather than raising capital, and 
another selected "other," neither supporting nor opposing giving an 
NIB the authority to generate its own funds for operating expenses and 
lending. 

[36] 26 U.S.C. §§ 149(b)(1), 149(b)(3)(C) (2010). 

[37] Four of 24 stakeholders responded "other," neither supporting nor 
opposing an NIB that finances only large infrastructure projects. Two 
of these stakeholders suggested that an NIB should directly fund 
larger projects but should also use the state CWSRF programs to fund 
smaller projects. 

[38] Since 2 stakeholders provided multiple answers in response to the 
question on this topic, the number of responses is greater than 23. 

[39] Of the 9 stakeholders that supported only publicly owned 
utilities, 2 supported only publicly owned and operated utilities, 
while 7 supported publicly owned and operated utilities, as well as 
publicly owned utilities with PPPs. In addition, 2 of 23 stakeholders 
did not think an NIB should directly assist wastewater utilities, and 
5 of 23 stakeholders expressed other views. 

[40] See GAO, Water Infrastructure: Information on Financing, Capital 
Planning, and Privatization, [hyperlink, 
http://www.gao.gov/products/GAO-02-764] (Washington, D.C.: Aug. 16, 
2002) and GAO, Water Infrastructure: Comprehensive Asset Management 
Has Potential to Help Utilities Better Identify Needs and Plan Future 
Investments, [hyperlink, http://www.gao.gov/products/GAO-04-461] 
(Washington, D.C.: Mar. 19, 2004). 

[41] This question allowed respondents to check an individual option 
for an NIB to use in allocating funding to eligible projects or to 
check that an NIB should use a combination of options and specify 
which options. 

[42] See GAO, Opportunities for Congressional Oversight and Improved 
Use of Taxpayer Funds: Budgetary Implications of Selected GAO Work, 
[hyperlink, http://www.gao.gov/products/GAO-04-649] (Washington, D.C.: 
May 7, 2004) and GAO, U.S. Infrastructure: Agencies' Approaches to 
Developing Investment Estimates Vary, [hyperlink, 
http://www.gao.gov/products/GAO-01-835] (Washington, D.C.: July 20, 
2001). 

[43] See GAO, Clean Water: How States Allocate Revolving Loan Funds 
and Measure Their Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-06-579] (Washington, D.C.: June 5, 
2006). 

[44] Our examination of privately financed PPPs did not include an 
evaluation of the effect of these agreements on communities' sewer 
rates and cost or level of service. Since most of the privately 
financed PPPs we identified are more than 10 years old, reliable 
information about these issues was not readily available. 

[45] The Los Angeles Regional Water Quality Control Board, a part of 
the California Environmental Protection Agency, conducts a broad range 
of activities to protect ground and surface waters under its 
jurisdiction, including enforcing water quality laws and regulations; 
preparing, monitoring compliance with, and enforcing waste discharge 
requirements, including NPDES permits; and implementing and enforcing 
local storm water control efforts. 

[46] This advantage would also apply to design-build partnerships that 
are not privately financed. 

[47] Heilman, John and Gerald Johnson, The Politics and Economics of 
Privatization: The Case of Wastewater Treatment (Tuscaloosa, AL: 
University of Alabama Press, 1992). 

[48] Haarmeyer, David in Seidenstat, P., Nadol, M., & Hakim, S., 
America's Water and Wastewater Industries: Competition and 
Privatization (Vienna, VA: Public Utilities Reports, 2000). 

[49] National Research Council, Privatization of Water Services in the 
United States: An Assessment of Issues and Experience (Washington, 
D.C.: National Academy Press, 2002). 

[50] Other types of PPPs could also offer access to expertise and 
technology. For example, an official from one municipality involved in 
an operations and maintenance PPP told us that the contract resulted 
in efficiencies after the private partner installed technology to 
monitor its facility remotely via the Internet. 

[51] Landow-Esser, Janine and Melissa Manuel in Seidenstat, P., Nadol, 
M., & Hakim, S., America's Water and Wastewater Industries: 
Competition and Privatization (Vienna, VA: Public Utilities Reports, 
2000). 

[52] EPA, Response to Congress on Privatization of Wastewater 
Facilities, EPA-832-R-97-001a (Washington, D.C.: July 1997). 

[53] See [hyperlink, http://www.gao.gov/products/GAO-08-44]. 

[54] PPPs without private financing may also bring this advantage. 

[55] For more information, see discussion on page 8 and footnote 14 of 
this report. 

[56] Several bills (H.R. 537, S.3262, H.R. 4213, and H.R. 4849), 
introduced in the House of Representatives and the Senate, would 
exempt water and wastewater projects from the volume caps imposed on 
the issuance of private activity bonds in each state. 

[57] Haarmeyer, David in Seidenstat, P., Nadol, M., & Hakim, S., 
America's Water and Wastewater Industries: Competition and 
Privatization (Vienna, VA: Public Utilities Reports, 2000). 

[58] See [hyperlink, http://www.gao.gov/products/GAO-08-44]. 

[59] In addition, we received a questionnaire from a respondent not in 
our original selection. The respondent's views are not included in the 
results presented in this report. However, the respondent was opposed 
to an NIB, explaining that infrastructure projects have access to 
traditional sources of financing such as the tax-exempt municipal bond 
market and the Clean Water State Revolving Fund (CWSRF). According to 
the respondent, any new funds should be directed to the CWSRF. 

[60] One additional individual responded to our questionnaire but 
requested that his name and organization not be listed. 

[61] Stakeholders were also asked to provide the reasons for their 
responses to each question. 

[62] In each table in this appendix, the category "No answer" includes 
respondents who checked "No answer/no opinion," as well as respondents 
who left the question blank. 

[End of section] 

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