EPA Exit Memo—Massive Water Infrastructure Investment Needed

January 13, 2017

Environmental Protection Agency (EPA) Administrator Gina McCarthy has highlighted the growing funding needs for water infrastructure in her January 5 Cabinet Exit Memo. EPA estimates that more than $655 billion in investment will be needed in the next 20 years for drinking water and wastewater infrastructure in the United States. This figure, moreover, does not include the cost of replacing lead pipes prevalent throughout the country and implicated in the Flint, Michigan water poisoning disaster. McCarthy emphasizes that the way forward will require innovative financing strategies and a “focus on public/private partnerships.”

The EPA exit memo details the achievements of the agency during the current administration’s tenure with regard to climate change, water, and toxic chemicals. However, budgetary concerns loom large, and the $655 billion investment figure does not account for the significant needs of sources like agriculture, manufacturing, technology, and resource extraction. 

According to the memo, over the past eight years, the federal government has invested $16 billion in wastewater and stormwater infrastructure projects and $9.6 billion in drinking water infrastructure projects. Based on the agency’s $655 billion estimate for required future expenditures, these actual investment figures represent less than 10% of the agency’s estimated required investment for an eight-year period. Tacitly accepting budgetary realities, the memo highlights the need for innovation to make available infrastructure dollars “work smarter and harder.” 

The memo lauds the creation of the Water Infrastructure Resilience and Finance Center and the federal credit program established by the Water Infrastructure Finance and Innovation Act, which Congress has funded at $17 million for 2017, but acknowledges there is much work to be done and calls for a “robust commitment to infrastructure from all levels of government,” including “building capacity for financing.” During the recent US election, both major political parties acknowledged the country’s serious water infrastructure needs and promised to prioritize investment in the decade to come.

The memo echoes concerns raised in McKinsey’s 2030 Water Infrastructure Report, which projects that global water consumption will grow from 4.5 billion cubic meters to 6.9 billion cubic meters by 2030, or 40% higher than current known supplies. The report finds that “business-as-usual” trends are insufficient to meet this increasing “water gap” and outlines a role for stakeholders in sectors beyond government, including agriculture, finance, technology, and public/private partnerships in project development. 

As the EPA memo notes, public/private partnerships have a key role to play in designing, financing, and completing much-needed infrastructure projects, whether in a simple design-build model or a more involved design-build-finance-operate-maintain agreement. PPPs in the water infrastructure pace have grown in popularity over the past decade, including investments by KKR and Suez in Bayonne’s municipal water system. 

O’Melveny offers decades of experience with PPPs and other development, construction, and financing models for large-scale infrastructure projects. We are a recognized leader in the PPP arena, having advised on numerous transformative transactions. Indeed, O’Melveny has helped to guide the evolution of the US PPP framework through our involvement in some of the most ground-breaking and diverse transactions in the sector. Our experience spans most major sectors including ports, water and wastewater, airports and aviation, rail, toll roads, traditional and alternative energy, educational and cultural facilities, and stadiums and arenas.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greg Thorpe, an O’Melveny partner licensed to practice law in California, Junaid Chida, an O’Melveny partner licensed to practice law in California and New York, Barton H. “Buzz” Thompson, Jr., an O’Melveny of counsel licensed to practice law in California, Jake Leraul, an O’Melveny associate licensed to practice law in California, and Heather Welles, an O’Melveny associate licensed to practice law in California contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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