In August 2021, the U.S. Secretary of the Interior declared the first-ever Tier 1 shortage for Colorado River operations. The water shortage to begin in 2022 means a substantial cut to Arizona’s share of the Colorado River, with the central Arizona agricultural users identified as the most impacted by the water reduction (Colorado river shortage, 2022).
The announcement didn’t come as a surprise. Arizona’s water professionals have been expecting and preparing for this. The federal government’s declaring a Tier 1 shortage beginning in January 2022 is because of the Lake Meads water level projection falling to 1,075 feet or lower by the end of the year. For the last two decades, the Colorado River Basin has been experiencing the worst drought, worsened by the warming climate. The over-allocation of the Colorado River also contributed to Lake Mead’s dropping water levels (Tier 1 Shortage, 2021).
Stuart and Gilroy (2022) say that this year’s announcement of Arizona’s Tier 1 water shortage reminds us that the public water infrastructure requires ongoing investments to sustain the state’s economic growth. According to the article, the state owes its progress to major water works projects like the Central Arizona Project or Salt River Project’s network of dams, reservoirs, and canals. These projects were made possible through public and private partnerships (P3s), an extensive collaboration between federal, state, and private entities.
The article highlights the importance of P3s to deliver critical infrastructure in the U.S. and other parts of the world, especially when ratepayer taxes alone are insufficient to fund costly infrastructure projects costing billions of dollars to build, operate, and maintain.
In 2013 the U.S. Environmental Protection Agency estimated that $7.4 billion is needed to improve, repair, and upgrade existing water infrastructure by 2030. This figure does not include expansions required to accommodate population growth.
Advantages of Public-Private Partnerships
P3s are usually employed on significant projects with substantial upfront costs and involve a commitment by the private firm to operate and maintain in the long-term that spans decades – projects that governments don’t have enough resources to carry out.
Using P3s in infrastructure investments transfers the risk of financing massive amounts of money, negotiating with local landowners when development has to pass privately owned lands, and maintaining and operating the infrastructure to private companies.
When the projects are completed, the government must pay private companies for the costs over several decades from collected user fees.
While P3s are used to construct infrastructure, some are used to secure and deliver resources such as water to accommodate population growth and even meet to comply with state and legislative environmental standards such as providing and operating wastewater and treatment plants to prevent pollution problems.
Examples of projects in the United States that utilized P3s
San Antonio, Texas, entered into P3 in 2016 to expand its water pipes to accommodate the increase in population. The project cost USD 923 million for a 30-year contract. Santa Clara, California, also entered a 30-year, USD 600 million P3 to secure water from multiple sources. Other states like Chicago, Atlanta, and Baltimore partnered with private firms to comply with environmental regulations under the EPA and state regulations.
In Arizona, significant funding earmarked by their legislators for their critical water projects can help boost the government’s ability to enter into P3s to help expand and improve their infrastructure and meet environmental challenges. Successful implementation of PPPs to fund needed and critical infrastructure will also support the state’s economic growth and progress.
There are clear benefits to using P3s when building infrastructure, such as access to private-sector finance and skills, the transfer of risk to the private sector, and increased transparency are some of the advantages.
However, there are also risks associated with P3s; for example, development, bidding, and ongoing cost under P3s can be much greater than traditional government procurement processes.
There is also a cost attached to the debt, and finance from PPPs will only be available when it is clear that the project generates a return on investment borne either by the customers or government subsidies.
Hence, before entering into a P3s to fund infrastructure projects, governments should consider its pros and cons and ensure that the risks are minimized through careful risk management.
Colorado river shortage 2022 Fact Sheet. Retrieved from https://new.azwater.gov/sites/default/files/media/ADWR-CAP-FactSheet-CoRiverShortage-081321.pdf
Tier 1 Shortage: What Does it Mean for us Here in Arizona? (2021, 9 August). Amwua. Retrieved from https://www.amwua.org/blog/tier-1-shortage-what-does-it-mean-for-us-here-in-arizona
Stuart, A. & Gilroy, L. (2022, 8 July). Arizona made a major investment in water. Here’s how to maximize it. Retrieved from https://www.azcentral.com/story/opinion/op-ed/2022/07/08/arizona-water-future-lies-how-leverage-public-private-partnerships/7821384001/