No matter how you slice it, investing in a water system is expensive.
It just takes a quick glance at the price tags of some of Denver Water’s current infrastructure projects to get the point.
The utility is investing $700 million in the North System Renewal project, $380 million to expand Gross Reservoir, $100 million to upgrade its Hillcrest storage tanks and pump station and $6 million to replace pipes in the Highland neighborhood.
Whether it’s electricity, roads, sewer or water, most people understand the need to maintain and upgrade the critical infrastructure that makes up a vibrant city. But figuring out how to pay for these big ticket items is much more complex — and a question recently posed by the World Bank and China’s Ministry of Finance.
So, who did they ask?
Leading U.S. and international financial experts, including Denver Water’s very own chief financial officer, Angela Bricmont.
When the Brookings Institution ranked Denver Water 5th nationally in water investment performance, the World Bank took notice, and they invited Bricmont to speak with financial leaders in Chengdu, China, to explain how the utility uses bonds to finance necessary, but expensive, infrastructure projects.
Currently, there is no municipal bond market in China, but financial leaders hope to change that by learning from organizations, like Denver Water, with a century of successful bond performance.
“We’ve had a municipal bond market in the U.S. for 100 years, and we’ve seen peaks and valleys in the market, like the tech bubble, stock market crashes and other events,” Bricmont said. “China is hoping to learn from our experiences to build a strong program.”
Simply stated, a bond is a loan.
Instead of going to the bank for money, an entity can issue a bond, where various investors can loan money toward a specific project. Because the bond market is competitive, the market drives interest rates down, making large loans more affordable. And with staggering population growth, China is looking for a way to increase funding opportunities for vital infrastructure projects.
Chengdu is a megacity in China’s south western Sichuan province, and it’s home to more than 18 million people — 25 times the population of Denver. The Chinese government is working hard to maintain and build infrastructure to keep up with rapid population growth, but it all comes with a hefty price tag.
Because Denver Water is funded by rates and fees for new service, not taxes, the utility has to expand its financial portfolio to keep water bills as low as possible.
That’s where municipal bonds come in.
“Issuing bonds, versus borrowing from a bank, allows Denver Water to benefit from its high credit rating to get the lowest rates the market will pay with no strings attached,” said Bricmont.
Bricmont said financial leaders in China were most interested in how U.S. ethical and regulatory oversights operate and what financial metrics an organization needs to attract investors. They also were interested in how independent credit rating agencies work, and what makes Denver Water’s bonds attractive to investors.
Because Denver Water has Aaa ratings with all three independent credit rating agencies in the U.S., investors are more likely to choose our bonds because they carry lower risk — a strategy that has saved $8.5 million over the last five years.
This was a popular topic of conversation among Chinese financial leaders — how does Denver Water achieve that Aaa rating?
“It’s not just the dollars we have in the bank that strengthen our rating,” Bricmont told attendees. “How we plan for the future, the governance structure of our organization, how we handle emergencies, what we communicate to our customers, and the financial transparency and accountability we exhibit all play into our rating,” she said. “Credit rating agencies are looking at the entire organization, and investors are looking for a strong, stable organization because they carry lower financial risk.”
Bricmont was awestruck with the growth in China.
“You hear about the megacities in China, but it’s beyond comprehension until you see it. Even then, the growth is still almost unbelievable,” she said. “With a desperate need for infrastructure, there are amazing capital resources in China that are currently untapped. A municipal bond market in the country will truly have a global impact,” said Bricmont.
“I’m excited to see the innovation, technology and creativity China will bring to not only the water industry, but infrastructure as a whole, once the bond market opens up new funding sources for these massive projects.”