You may have heard that US infrastructure is in bad shape.
You can arrive at any of our major airports from coast to coast and when you compare it to what you might see in Beijing, Shanghai, Hong Kong or Seoul you will realize just how great of a need there is for a capital infusion.
However, many folks have not been to the emerging worlds to see how far ahead of the infrastructure game they are in comparison with the US, so only a few people are really aware of just how badly decayed many of these systems are and how complex and costly they will be to fix. This lack of awareness is particularly true for those systems buried under ground and invisible to the public eye like our important drinking water and sewage systems.
So the straightforward question is: “How bad is it?”
Every four years, the American Society of Civil Engineers (ASCE) produces a ‘report card’ on US infrastructure and in their last report completed in 2013 the overall grade was a highly unsatisfactory ‘D+’. Yes, to be clear, we are talking about the same grading system many of learned in public elementary school with A for great, B for good, C for satisfactory (but don’t think about getting a job anytime soon), D for unsatisfactory, and F for Failure.
A further breakdown of the grades shows that Water Systems were the laggards of the group:
|Drinking Water systems||D|
|Waste Water systems||D-|
The main driver of these grades is the age of these water systems, with most being built around World War II (1939-1945), and in many cases in the Northeast of the U.S., much earlier. There are many conflicting estimates on how much it will cost to repair, upgrade and extend these systems (which we will review below), but no matter which you prefer, the conservative costs are huge and can easily top $1 Trillion dollars over the next 20-30 years in the US alone.
The macro economic, business and health & lifestyle implications and impact of the decayed standing of these systems is immense in terms of future investment requirements. The persistent question is always “Where the money will come from to pay for these investments?” especially since the federal government has been increasingly pushing these obligations down the food chain to the local government level. While this local capital funding ‘gap’ expands dramatically over the next decade, these entities will be forced to rely increasingly on the private market to support these efforts. Some areas may include expanded volumes in the municipal bond markets, which generate new areas such as Green Bonds, Sustainable Financings, Specialty Asset Financing and Real Asset Financings. The major investment management houses like BlackRock are stepping into this arena and working with huge global players like Zurich whose Chief Investment Officer recently announced the doubling of their investment in Green Bonds to $2 Billion dollars.
In addition, the equipment, design and building companies poised to take advantage of these future projects will represent strong investment opportunities for investors, particularly the new generation of millennial wealth investors coming online between now and 2030. The numbers cited in research and bantered about at conferences from various wealth platforms, managers and companies like the Harvard Club and the United Nations ranges from $45 to $60 Trillion dollars of inheritance being transferred inter-generationally. The main trend being highlighted as part of this transition is the increased focus of these investors on sustainable investments and market return based impact investments, with water being an ever-rising topic, pun intended.
New York City has one of the largest and oldest public drinking water systems in the US. For many years, drinking water (coming from upstate NY) was distributed throughout the five boroughs of the city (Manhattan, Bronx, Brooklyn, Queens, Staten Island) using two main tunnel systems.
Tunnel 1 activated in 1917 and serving Manhattan and the Bronx
Tunnel 2 activated in 1936 serving Brooklyn, Queens and Staten Island
For many years, these were the only conduits for drinking water into a city of over 10 million inhabitants and neither was redundant to the other or could even be shut down for maintenance or repair. In 1954, city and state officials, realizing how precarious this situation was, started discussing the development of a new tunnel to relieve these systems.
Work finally began on Tunnel 3 in 1970 and has progressed in fits and starts through multiple stages ever since with the current “expected” completion date around 2020.
Tunnel 3 activated in 2013 as a redundant system for Manhattan with estimated finish date of 2020
In the end, this single Tunnel 3 infrastructure project will cost around $6 Billion and will have taken around 50 years to complete!
So what are the cost estimates for renewing these systems nationally and how do they vary across systems?
The Environmental Protection Agency (EPA) estimated in 2013 that the required capital investment in drinking water systems was $384 Billion (in 2010 dollars) over 20 years to 2030. The American Water Works Association (AWWA) on the other hand puts the estimate at around $1 Trillion dollars to replace the most critical infrastructure needs (representing approx. 50% of the 1 million miles of pipes in the ground today) by 2035. Finally, According to the ASCE report card mentioned earlier in this blog, over the next couple decades, waste water systems will require another $298 Billion, levee systems around $100 Billion and dam systems around $21 Billion. These estimates vary in time horizon, cost coverage and growth expectations, which can make them hard to reconcile, but however you evaluate the overall costs, they are going to be huge and more importantly, require much larger investment levels than are being made today.
Many US utilities have been criticized for ‘living on borrowed time’ in terms of under-investing in the maintenance and upkeep of their systems (in order to lessen price increase ‘shocks’ to their customers in most cases), but this is changing quickly. Annual investment in water systems is expected to grow from around $13 Billion in 2010 to around $30 Billion by 2040, with federal funding through programs like the Drinking Water State Revolving Fund (DWSRF) covering less than 10% of these needs today (let alone the future needs). Most of these funds are currently being raised in the municipal bond market, where Utilities (all) represented about 14% of the $3.2 Trillion market of issued bonds in 2012. Looking at the emerging Green Bond market, we can see this growing focus as well. Municipal bonds represented 12% of the $53.2 Billion in total outstanding labelled green bonds as of the end of 2014.
The economic impact of investing in these systems is significant and undeniable! In a report prepared for the US Conference of Mayors in 2008, the long-term impact of an investment in water infrastructure on private output was estimated at $6.35 per dollar invested (accumulated over 20 years). This equates to a return of 9.7% annually (second highest among the utility groups analyzed). While other studies have found conflicting estimates, both larger and smaller, the majority clearly show a strong positive economic impact from investing in water infrastructure.
While the main focus of these investments will be to replace existing pipes and equipment, there is also a strong opportunity for these local governments to go beyond just ‘reproducing the past’ and to invest in new technologies that can relieve stress on their systems while expanding the range of capabilities that can be derived from them. For instance, Philadelphia is looking to avoid an estimated $6 Billion investment in traditional waste water and storm water infrastructure by investing in ‘green’ infrastructure such as permeable surfaces, rooftop gardens, rainwater capture systems and more that will allow it to meet its needs (including mandated EPA improvements) at a lower cost (estimated at $1-$1.5 Billion). This can simultaneously create a more resilient, decentralized system that benefits its communities in multiple ways including aesthetics (translate to property values), health and well-being and community engagement. The technology allows for distributed technology to be at the places where the needs are the greatest to satisfy market demands, e.g. California’s drought and Arizona’s empty water aquifers. Or take the city of Portland, which recently announced a contract with a company named Lucid Energy to install a new water pipeline that will not just deliver water to city residents but also produce electricity from the water flowing through the system that will be sold to the local utility, Portland General Electric, helping to offset the costs of the project.
Crisis creates Opportunity
In Asia (China and Korea in particular), the character for “Crisis or Danger” is also the same character for “Opportunity”; therefore, the popular saying Crisis creates Opportunity is appropriate for our concluding shared thoughts with you.
Historically, oil or “Black Gold” made many entrepreneurs fabulously wealthy and created the largest revenue generating companies in the world today (e.g. ExxonMobil generates over $1.2 billion of revenues every day). Today, water or “Blue Gold” is fast becoming the new opportunity for entrepreneurs, both developers and investors, to create the next generation of wealth and abundance here in the US and globally.
Water or Blue Gold will be where newly generated wealth creates significant abundance in all forms, from jobs to economic prosperity to health and well-being for all of our communities.
Stay tuned for more articles in our series on water, which we will explore, develop and share with you.
Christopher Meissner was formerly a vice president with France Telecom building wireline and wireless products across multiple international markets, and currently is now at Columbia studying to complete his Masters in Sustainability Management.
Gregory Mark Hill was formerly in M&A and tech investment banking in New York and Silicon Valley, venture capital in China, and now is in private equity to the sustainable sector and also serves as adviser to both impact start-ups and social entrepreneurial organizations such as Ashoka & The Global Good Fund.