Private Sector an Oasis for Thirsty San Antonio

For decades, San Antonio tried and failed to find a new long-term source of water. Voters killed a major reservoir project in 1991; more than a decade later, partnerships with a South Texas supplier and, later, a Central Texas one were canceled; and in 2005, a controversial deal to buy water from a mining company was scrapped. 

So how did the city finally agree last month to bring in 16 billion gallons of new groundwater per year?

Simple: Let the private sector do it.  

In a deal unlike any struck before by the San Antonio Water System, two private companies will be paid to do all the work for the $3.4 billion project, known as the Vista Ridge pipeline. Austin-based BlueWater Systems holds an abundance of groundwater rights in central Texas' Burleson County and will pump the water, while the Spanish engineering and technology company Abengoa will build the 142-mile pipeline from the county to San Antonio. 

The pipeline, proponents say, is a perfect example of government embracing the private sector, which is better at taking on risk and getting things done efficiently and on time. But detractors say the private sector has its pitfalls. Private projects tend to be more expensive (the Vista Ridge water will cost at least $3.4 billion over 30 years, some of the most expensive ever sold in Texas); financial deals and contracts are more complex to work out and could fall apart; and private companies may have questionable reputations. 

"The private company isn't there for public interests, they're there for their own profit," said Amy Hardberger, a professor of water law and policy at St. Mary's University who has been a fierce critic of the Vista Ridge deal. "[Working with private companies] sounds great on paper, but it has not yet been really effective. It's always had unintended price consequences."

The San Antonio Water System disagrees, saying it has long hoped for a private partner to deal with political and bureaucratic logjams that got in the way of previous projects. Long distrusted by rural counties, the city was always rebuffed in its attempts to buy their groundwater directly.

But in this case, BlueWater has already spent millions striking deals for water rights with rural landowners. Avoiding a similar urban-rural political fight, Abengoa will be negotiating with landowners along the pipeline route, not San Antonio. 

Still, sticker shock has been an issue. Vista Ridge water will cost $2,300 per acre-foot, more than what desalinated water will cost the city. Paying for the project will increase San Antonio water rates by about 16 percent. 

That's in part because pipeline investors expect a 13 percent return. And the private project doesn't qualify for state loans, which come with much cheaper interest rates. It doesn't help that Moody's gave Abengoa a low credit rating of "B2" in August, indicating that it is risky for investors, which critics have said could spook lenders. It is not Abengoa's credit rating, but the San Antonio Water System's, that will determine the interest rate, the water utility insists. But not all experts are so sure. 

"The underlying credit of Abengoa will influence the rate," said Sharlene Leurig, who directs the sustainable water infrastructure program at Ceres, which advises cities and utilities on water projects. "It will be impossible to disentangle that."

Carlos Cosín, the head of Abengoa's water business, said in an interview that the company's lenders have no concerns about its credit rating. The company has designed and built desalination plants in Texas, and while this is the first time it will also own and operate the infrastructure, Cosín said he's confident the model will be attractive to other utilities.

But he and the company would not answer questions about potential legal troubles facing Abengoa, which also works in renewable energy and is using a $1.45 billion federal loan to build a solar plant in Arizona. Amid allegations that it owed subcontractors as much as $40 million, the Arizona Republic reported in January that the U.S. Department of Labor and U.S. Immigration and Customs Enforcement were investigating Abengoa subsidiaries.  

"Abengoa makes, and always has made, every effort to comply with federal and state laws and regulations," the company wrote in a statement to The Texas Tribune. In the interview, Cosín said, "Abengoa never ever has failed in one single project. And we have more than 100 projects running worldwide."

San Antonio officials have expressed confidence in Abengoa, and said that both companies made the deal as sweet as possible. For instance, if politics or changing hydrology lead to pumping cutbacks in Burleson County, Abengoa will bear the cost, not San Antonio. 

Those types of risks are usually invisible to taxpayers in a public project, but not in a private one, said Rick Geddes, an associate professor of infrastructure policy at Cornell University. Unlike a public utility, which might not realize risks until it's too late, investors thrive on risk as long as there's a return.  

"There's no free lunch," Geddes said. "Investors are happy to take on risk, but they're going to charge you for it."

Disclosure: The San Antonio Water System was a corporate sponsor of The Texas Tribune in 2012 and 2013. A complete list of Tribune donors and sponsors can be viewed here.