WASHINGTON -- Tax-exempt bonds will probably be needed to help finance the Clinton Administration's goal of providing running water within the next six years to Americans that do not have it, market participants say.

Federal grants envisioned for the project "are going to be insufficient to meet the need, and we're trying to craft something to help leverage the moneys that are available to achieve the goals," said J. Donaid Porter, a principal with the water utility group of Morgan Stanley & Co.

"I think a slice of this is going to inevitably come through the municipal market, but it's going to require some work and some creativity to succeed," said a lobbyist who requested anonymity.

Earlier this month, Agriculture Secretary Mike Espy announced the administration's Water 2000 initiative, in which the federal government will find.ways to ensure that the 500,000 U.S. households still without tap water will receive it before the next century.

The first step in that effort was a conference last week sponsored by the Department of Agriculture where participants discussed, among other things, how to finance the new water systems.

Espy wants the money to come mainly from federal grants. But Porter and others who attended the conference said the scope of the problem is so large that the federal government could not afford to fund the entire project. Estimates for the water initiative's cost range from $25 billion to $30 billion. Participants did not estimate the amoum of bonds that might be issued, nor did they discuss whether there would be any tax law impediments to financing with m-exempts.

"This is going to be not just putting pipes up to a home but in all likelihood providing some wastewater facilities and perhaps wells and improvement in the quality of the water," in many areas which do not have central water systems, Porter said.

Possibly the biggest impediment to fmancing the new systems is the fact that the remaining areas without running water in the U.S. are extremely poor, and thus bad credit risks. The areas include the rural South, parts of Appalachia, and Indian reservations in the West.

"They're basket cases financially," said James N. Smith, the executive director of the Council of Infrastructure Finance Authorities, who attended the Agriculture Department's seminar. "They're not the kind of communities that really lend themselves to going out into the market."

Smith said some of the financing could be accomplished through a proposal now before Congress that would create a revolving loan program that states could use to finance construction and modernization of drinking water treatment systems.

Smith said most versions of the bill he has seen contain a component for special assistance to rural communities that would include interest rate writedowns on loans, extensions of repayments, and other ways to help poorer communities finance their drinking water needs.

But the lobbyist who requested anonymity said he believed the entire Water initiative could not be accomplished without some kind of additional program combining private financing with federal credit enhancements. But direct federal loan guarantees would probably not be wise hecanse they would expose the government to too much risk, he said.

"This is an area where people who are creative in the positive sense of the ' word could find some excellent opportunities for developing instruments or ways of financing these things that link some private-sector risk with public-sector risk, and enable you to get the job done in a way that you cannot accomplish in a tight budget environment through direct appropriations," the lobbyist said.

"My recommendation would be for the investment banking community to sit down and come up a plan for how this would work, showing how it's safer than loan guarantees and much cheaper than direct appropriations," he said.

The next step in the initiative is unclear. The conference "was very much the first cut at this" as participants were "just trying to get our arms ar~nd the problem right now," Porter said. "There are no easy answers and the problem is a daunting one."

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.