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July 29, 1999

Rural Water Project Financing

By

Testimony before the Committee on Resources - United States House of Representatives

Chairman Doolittle, Members of the Committee:

Thank you for the opportunity to testify before you today. The views I express in this testimony are my own and should not be construed as representing any official position of The Heritage Foundation.

This Subcommittee on Water and Power is now considering the federal financing of rural water projects. These projects are controversial primarily because of the large share of the costs that the federal government would pay. An even more fundamental question should be asked, however: Is any federal role justified in this area? Many of the newer, proposed rural projects reflect a troubling expansion of the Bureau of Reclamation's (BOR) mission--from one of a construction agency to that of yet another economic development agency and environment protection agency.

Although Congress and the Clinton Administration appear to have agreed some time ago that it would make sense to transfer responsibility for some BOR projects to states, local communities, and the private sector, the pace of progress on this front has been pitifully slow. Moreover, Congress appears more than willing to authorize and finance new federally controlled rural water supply projects. The era of big government water projects is not over.

Congress cannot seem to resist the opportunity to seize control of responsibilities for water resources that belong to states, regions, local communities, and the private sector. Each time Congress contemplates another proposed rural water project, it must face squarely the question of what the role of federal bureaucrats will be in developing and managing our nation's water resources, and, more specifically, the role of the Department of the Interior. So far, Congress's decisions have disappointed many of us.

Financing Rural Water Projects

Although the federal government has supported water projects since the turn of the century, as the General Accounting Office (GAO) often notes, these programs have been based on a long-standing policy of full reimbursement for its contributions to the projects. Although many of these loans may have been forgiven or reduced, the original and continuing intent is that beneficiaries of the program would bear the costs of the program. That practice appears to be changing, however: According to the Congressional Research Service and the GAO, for the more recent rural water supply projects, the non-reimbursable component has been higher than typical for traditional reclamation projects. The non-reimbursable share can be as high as 75 percent to 85 percent or more. In the case of the proposed Lewis and Clark Project, the federal government's share, depending on one's definition of cost, is as much as 80 percent.

This increase in non-reimbursable costs certainly appears a function of the fact that more of these projects have a greater proportion of non-reimbursable requirements, particularly to meet such environmental objectives as water quality, fish and wildlife, and conservation requirements. Objectives that federal bureaucrats might deem as "achieving public policy objectives" or "in the national interest," imply that they are not in the interest or within the ability of individual local communities to achieve such goals as well.

The most important thing to remember is that the federal funding of rural water projects in the Upper Great Plains states only perpetuates the long-held but mistaken notion that water is not valuable enough for people and businesses to own and manage wisely. I reject this view. Federally subsidized construction of these projects will not fundamentally alter the economic base of this region of the country. Indeed, while the infusion of federal dollars may provide something of a boost to the region, in the end the boost will not lead to long-term, sustained change but instead to addiction to federal dollars. Ultimately, such projects will just be added to the myriad expensive and often duplicative special-interest pork dressed up as federal economic development programs.

If we look to the federal experience with the Economic Development Administration (EDA), according to the GAO, in areas in which there have not been incentives to produce sufficient private-sector investment for economic development, federal interventions consistently prove to be temporary at best. To quote the GAO:

the study found that EDA's program had a very small effect on income growth rates during the period the aid was received and no significant effect in the years after the aid ceased.

The Subcommittee may want to consider asking the GAO to do a similar study of the impact of federal owned water projects on economic development.

Indeed, this history of program failure seems destined to continue. The GAO has reported on more than one occasion that these types of rural water projects do not fit federal funding criteria for programs at the Department of Agriculture, Environmental Protection Agency (EPA), or the BOR--criteria I would assume are in place to protect the financial interests of the federal government, that is, the interest of U.S. taxpayers. In addition, the people in these areas do not support the project enough to pay for it even though the per capita costs are quite modest.

The GAO states that the cost of the rural water projects is $282.9 million in 1993 dollars and it is designed to serve 300,000 people in 14 counties. This is equal to $943.00 per person. Even using a per-family figure and assuming five-person families, we are talking about only $4,715 per family, much less than the cost of a used car and financed over a much longer period of time at lower rates of interest.

Despite the low cost, every survey the GAO has done in the area demonstrates that the people in these communities are unwilling to pay for the system through increased water fees. Why should taxpayers throughout the nation be asked to pay for a project that the beneficiaries refuse to fund? If the potential economic and other benefits are real, then you would expect to see an interest among local water users. But the local community thinks the project is worth less than a used car, so why should the nation's hard-working taxpayers value it more highly? Why should Congress take more money from hard-working taxpayers to pay for such lifestyle improvements as landscaping?

And it certainly does not seem as though we are talking about a water shortage, but more about water quality. But assuring a supply of clean water does not mean that the federal government has to take over. Indeed, for the amount of money area residents are willing to pay, it would be a lot cheaper for them to contract out to Evian, Deer Park, or some other private water supplier to truck pristine water into their communities for eating, drinking, bathing, and the like. And the overall environmental impacts of that solution are probably much less.

A New Mission for the Bureau of Reclamation to Justify New Projects?

Over the past three decades, the BOR has moved away from the construction and operation of traditional, large, multipurpose water supply projects. And within the past decade, the mission of the BOR has shifted to focus more on environmental quality, in this case water quality, as another branch of the EPA. Indeed, the BOR's self-described mission today is

to manage, develop, and protect water and related resources in an environmentally and economically sound manner in the interest of the American public.

Congress should rein in, rather than expand, the Department of the Interior. These new economic development and environmental protection roles and the movement into more states allow Congress to justify more federally financed, special-interest public works projects. And, of course, the BOR's bureaucracy appears more than willing to reinvent and expand its budget and reach if given the opportunity. We do not need another EPA or EDA for the West. For example, a June 1996 GAO report counts more than 72 federal programs or other initiatives cutting across 8 departments and agencies that either directly or indirectly support water quality protection. Similarly, the EPA's [author says merely "agency"] strategic plans submitted to Congress as a requirement of the Government Performance and Results Act reveal that there are 342 economic development programs managed by 13 agencies with little or no coordination among them.

The shift in the BOR's mission, and Congress's willingness to fund projects consistent with this expanded mission, is detrimental to our nation's water resources. So long as a free market does not apply to water, no one will have the incentive to use it wisely or to invest in more advanced technologies or lifestyle changes that will conserve it. And certainly such policies will make any effort to transfer responsibility or to privatize existing assets and develop water markets more difficult. For example, the often unexpected costs of environment requirements that are added to projects (either directly through the BOR or by federal laws or programs) have the effect of discouraging beneficiaries or investors who otherwise might be interested in assuming responsibility for the asset because they are afraid that there would be no certainty with regard to the costs. The tension within the BOR's budget to pay for these activities competes with the need for funds simply to operate and maintain existing facilities.

Policy Recommendations

The best way to help to support the water supply needs of rural areas of this country is for the government to look toward water markets and privatization of existing assets. This means the federal government must get comfortable with the idea of doing less rather than more. A new federal water policy for the 21st century should be one in which Congress and the Administration work together and with state, regional, and local governments to develop local and private alternatives that would meet their water needs. Ultimately, this would reduce significantly, if not eliminate, the federal role.

If the true purpose of these rural water supply projects is to meet growing demand for water to support the needs of cities and industry, then the water users themselves should provide the funding. A demonstrated need is a signal to the private sector that there is a secure revenue stream to justify the financing of a project. Successful private investment can minimize the costs and the involvement of the federal government in many of these projects.

Today, between 7 percent and 10 percent of water supply projects in the United States are privately funded. The trend for an increasing number of states, counties, and municipalities is to look to the private sector to build and maintain the necessary infrastructure, such as wastewater treatment plants, prisons, schools, highways, and airports. Indeed, other nations already are way ahead of the United States in their privatization of such infrastructure. In Great Britain, 100 percent of water and water treatment facilities are privatized; and, in France, 75 percent are privatized.

The United States should be a leader, not a follower. This trend toward federal financing of rural water projects moves us in the wrong direction. Instead, Congress should:

  • Allow local communities to determine water resource needs and to work cooperatively with private entities to provide what is needed to meet those needs.

  • Require better information about whether a project is economically viable and produce an expected return on investment before making any decisions.

  • Develop a better understanding of the extent to which environmental and other policies place constraints on local water resources.

  • Resist pressures to reinvent the BOR's mission. There is no reason for the federal government to fund the 73rd water quality program or a 343rd economic development program.

  • Act to transfer responsibilities for existing assets to states, local communities, and the private sector.

Congress should take steps to get the federal government out of the business of building and maintaining water projects. The federal government should not be in direct competition with private entities or provide generous subsidies to special interests at great cost to the U.S. taxpayer.

Angela Antonelli is a former Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation,

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