WASHINGTON -- The Environmental Protection Agency is asking the bond community to help it draft rules to carry out President Bush's recent executive order promoting the sale of wastewater treatment plants and other public assets to private businesses.

In an unusual "inclusionary rulemaking" notice issued last week, the agency said it wants parties interested in privatizing such assets to sign up by July 24 to help it draw up guidelines for approving the proposed sales.

The chief issue before the agency is whether to change its policy of requiring 100% public ownership of treatment facilities to permit partial or even majority ownership by a private firm.

State officials said the agency's notice provides an unusual opportunity for Wall Street firms who have been pushing for privatization to help make the government's rules on asset sales more rational. But they caution that many of the most onerous regulations are not in EPA's hands, and thus the agency may be able to do little, in itself, to make privatization more attractive.

"The problem is the tax laws since 1986 really do not facilitate this kind of investment," said James Smith, executive director of the Council of Infrastructure Financing Authorities, whose members manage the financing of wastewater treatment facilities.

"It's all very well, and commendable, for EPA to try to examine what statutory hurdles are out there so they can encourage investment, but the first hurdle is the tax laws," he said.

The three principal obstacles in the tax code are its stringent restrictions on the private use of facilities financed with tax-exempt bonds, its greatly extended depreciation schedules for plants and equipment, and the loss of the investment tax credit, Mr Smith said.

Without significant tax incentives, most private companies would not be interested in taking over a wastewater utility, he said. As proof, he noted that no such facility has been sold in the last five years.

"These are not big money-making operations to begin with," he said.

Roberta Savage, executive director of the Association of State and Interstate Water Pollution Control Administrators, agreed that the tax burdens have been the chief obstacles to privatization, and that the EPA alone cannot make takeovers more profitable for businesses.

"What is needed is a coming together of the Congress, the Treasury, and the EPA, all working with the state agencies to develop a program that could be used nationwide," she said.

Beyond the tax laws, another of the most burdensome restrictions on privatization was promulgated by the Office of Management and Budget, not the EPA, Mr. Smith said. The OMB's rule requires private purchasers of projects built with government grants to fully reimburse the government for the grants.

The OMB has been reviewing the rule, but so far has been reluctant to revise it, Mr Smith said. Likewise, the Treasury has said it is examining some tax-exempt bond restrictions, but has not moved to liberalize them or any other tax law obstacles.

With key departments of the administration balking at carrying out the executive order, Mr Smith said, privatization advocates will have to go to Congress to get any far-reaching changes in tax law or other regulations.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.