Investing in Aging Infrastructure

Investing isn’t just in dollars and cents, but in time, energy, and talent
By Mike Drai

According to Cohen and Steers, infrastructure services (global energy, utilities, transportation and communications sectors) represents a $40 trillion global market opportunity by 2030. U.S. water infrastructure represents a $195 billion market opportunity by 2040, according to a report by the American Society of Civil Engineers. However, the need to maintain infrastructures is imperative to our quality of life.

Due to the very public instances of infrastructure failures, including the San Bruno pipeline disaster and the Flint Water Crisis, Americans are more aware of the need for safe utilities. Unfortunately, municipal governments are strapped, making it harder to replace infrastructure until there’s a disaster or crisis that demands attention. Coupled with the need for skilled labor, this is a market where project costs can climb exorbitantly, and carry drastic repurcussions if taxpayers aren’t satisfied.

Investing in aging infrastructure will remain a priority for years to come due to the following:
Lack of Capital: With billions, if not trillions, in repairs it will likely take years for municipalities to earmark the dollars it takes to manage these updates. Many cities will need to raise taxes and utility costs (which are highly regulated and take years to increase the rates of) and ensure access to the right manpower to complete these projects.

Regulation: America’s regulatory policies are being rolled out very slowly, dragging out the repair process. For example, of the 42 requirements Congress mandated for pipeline safety in 2011, only 26 have been completed by the Pipeline and Hazardous Materials Safety, a division of the Department of Transportation.

Public Safety and Health: With this problem coming to a head, dozens of public safety agencies are weighing in on the issue, bringing the need for investment in this space to public attention. According to a recent survey by the Centers for Disease Control and Prevention, many of the outbreaks of disease related to drinking water were linked to aging and crumbling water systems (431 cases of illness, 102 hospitalizations and 14 deaths).

Areas of Investment
Gas Infrastructure: The need for maintenance, repair and placement for distribution gas infrastructure is alarming, with 92,993 miles of pipeline infrastructure considered high risk, according to the Department of Transportation. The last time this market saw substantial investment was World War II. In 2015, the Obama Administration submitted to Congress a recommendation on projects that would take substantial investment including: A $2.5 billion Energy Department initiative to improve natural-gas distribution; at least $ 1.5 billion to improve and extend the life of the crucial Strategic Petroleum Reserve.

Water Infrastructure: Water infrastructure, including sewers and water mains, are also in need of repairs and industry groups are coming down hard on this. In 2013, The American Society of Civil Engineers gave the United States a “D” grade for the state of its aging wastewater infrastructure.

In addition, the EPA says to maintain water infrastructure at an acceptable level, more than $384 billion will need to be spent by 2031. Capital investment needs for the nation’s wastewater and storm water systems are estimated to total $298 billion over the next 20 years, according to the American Society of Civil Engineers. The society also notes that pipes represent the largest capital need, comprising three quarters of total needs –fixing and expanding the pipes will address sanitary sewer overflows, combined sewer overflows, and other pipe-related issues.

Roads and Bridges: America’s network of 60,000 bridges and roads is vast and far reaching. With thousands of bridges built during a time with millions of less cars on the road, this infrastructure is in need of maintenance and repair. According to the American Road and Transportation Builders Association (2016) every state has some degree of bad bridges that need to be repaired. With thousands of cars on bridges every day, shutting down a bridge for an extended period of time isn’t a viable solution. The Federal Highway Administration (2016) estimates it would cost $20.5 billion annually for the next 16 years to properly update existing bridges.

A Critical Need: The substantial upgrades required in the aforementioned areas and deterioration of our aging infrastructure in the U.S. will likely require millions of dollars of investment for years to come. And the investment isn’t just in dollars and cents, but in time, energy and talent. It’s critical that governmental agencies begin to form action plans and strategies to complete these projects with both the assistance of local municipalities and private companies who can act as government contractors and invest in improving the quality of life for Americans.

Mike Drai is a Managing Director at Sterling Partners, a Chicago based private equity firm. He may be reached at mdrai@sterlingpartners.com

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