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Opportunities and Solutions for a Crumbling Infrastructure

crumbling infrastructurePresident Obama’s Fix-It-First program, announced during the February 2014 State of the Union address, calls for $40 billion in spending on a backlog of urgent repairs and upgrades to America’s infrastructure. This is in addition to the $31 billion that went into infrastructure as part of the American Recovery and Reinvestment Act of 2009.

However, the total of approximately $70 million doesn’t come near to the sum of $3.6 trillion that the American Society of Civil Engineers (ASCE) says is needed for all forms of infrastructure in the U.S. by 2020. In its Report Card for America's Infrastructure, released in March 2013, the ASCE gave the nation a grade of D, stating that America's critical infrastructure—principally, its roads, bridges, drinking water systems, mass transit systems, schools and systems for delivering energy—may soon fail to meet society's needs.

Water and Wastewater

Included in that $3.6 trillion is at least $384 billion to improve the nation’s drinking water infrastructure. This figure was arrived at in the EPA’s Drinking Water Infrastructure Needs Survey and Assessment of 2013 wherein the agency says the federal government must spend that much to ensure the safe delivery of water to Americans for the next 20 years. The sum includes publicly owned wastewater pipes and treatment facilities, combined sewer overflow (CSO) correction and stormwater management in 34,000 wastewater facilities and water quality projects.

At VMA’s 2013 Market Outlook meeting, Thomas Decker of Brown and Caldwell gave a substantially higher estimate of the amount of money needed for water and wastewater infrastructure investment. He said that more than $1 trillion needs to be invested in the next 25 years. “America will be using 65% more water by 2025 than currently,” and Decker’s estimate takes into account the vast amounts of water needed for energy production, which currently accounts for 49% of all the water we produce, treat and generate.

Whatever the actual amount, it is substantial, and there is no question that aging and deteriorating water lines, undersized water treatment facilities with ancient technology and inadequate water storage reservoirs all need to be upgraded. That should mean many opportunities for valve, actuator and control distributors, manufacturers, and the companies that supply to them. Certainly the need is there; the problem is that the funding is not.

Public Funding

While funding for roads and bridges has traditionally been achieved through a tax on fuel, the 18.4 cents per gallon charge is no longer enough to cover infrastructure needs. In fact, the highway fund is nearing insolvency, and President Obama is traveling around the country in an effort to drum up support for new legislation to pay for transportation construction projects that are already going on around the U.S.

water burstBut there has never been such Federal funding in place for water and wastewater. Water treatment is a municipal responsibility, and municipal revenues were dealt a serious blow after the 2008 recession.

Decker pointed out in his presentation that a big part of the problem funding water infrastructure is that it is a victim of its own success. Municipalities historically have been able to keep the water running under even the most difficult conditions, so the general public is generally not aware of the problems with the aging systems. It is only when water mains erupt or sewage lines burst that the population pays much attention to this utility. Thus, when it comes time to propose funding, there can be vociferous opposition to any proposals that would mean tax or utility rate increases.

Utilities are now recovering to a small degree from the recession and earning more tax revenues while edging closer to charging full price for water. This means more money for improvements and repairs.

However, severe weather events over the last couple of years have combined with ever more stringent EPA regulations to put additional pressure on local systems, meaning there still are not enough funds to repair and refurbish the older waterworks. And while developers do pay a portion of the costs associated with infrastructure upgrades for new developments, keeping pace with population growth presents an ongoing financial challenge for every municipality.

It has been suggested that part of the problem could be alleviated through the passage of legislation that would allow for private activity bonds and low-cost Treasury money to fund upgrades and refurbishments. Unfortunately, federal bureaucracy and political power plays have stalled any advances on these initiatives. But even if they were passed, there seems to be no cohesive plan to halt the slow but steady decline of the nation’s infrastructure.

Private Investment

However, an interesting solution was offered in a recent investment article, which suggests that rather than being a drain on public coffers, water infrastructure could actually be an opportunity for investors.

Simon Gottelier, co-manager of the Water Strategy fund for international investment house Impax Asset Management, sees water as a long-term growth opportunity. He said he U.S. has been under-investing in its water system for decades, so the need for refurbishment is actually an opportunity for investors. Water quality issues and the extreme weather events that are challenging water systems are also factors that point to growth in this sector, according to Gottelier, who actually favors water utilities as an investment. This is good news for utilities looking for ways to raise the money needed for improvements and refurbishments. It is also good news for the companies supplying to those utilities.

Gottelier recommends investment in the companies that provide materials and expertise for infrastructure development and repair. He recommended buying into pump, valve and pipe manufacturing companies along with EPC and management firms that provide service to the utility companies.

Gottelier is not alone in his position on water utilities. Jason Gibbs, vice president and portfolio manager at Dynamic mutual funds, favors water utilities because they are stable businesses. They are regulated, and provide essential services with no competition, so he sees growth for the companies and their investors.

While governments at all levels struggle with ways to raise money, it may be that the answer to fixing the crumbling water infrastructure in the U.S. lies, at least in part, with private investment.

Kate Kunkel is senior editor of VALVE Magazine. Reach her at This email address is being protected from spambots. You need JavaScript enabled to view it. .

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