Challenges and Opportunity in the U.S. Water Infrastructure Market

Trends in the U.S. infrastructure market are constantly shifting. In today?s market, there is arguably no sector facing a more critical shortfall between demand and investment than the U.S. water market. In a 2013 study, the EPA gave the U.S. water and wastewater infrastructure a subpar ?D? grade. Portions of the water delivery system date back more than 100 years and there are an estimated 240,000 water main breaks each year. Over the next 20 years, the EPA estimates that $384 billion in investment is required to repair and sustain our water system. Similarly, wastewater infrastructure requires an estimated $300 billion in investment, with the majority needed to fix and expand pipes to reduce leaks and sewer overflows accounting for 900 billion gallons of untreated sewage being discharged each year.

Projected Market Growth
Since 2010 spending in this market has declined due to municipal budget challenges and a lack of federal government emphasis. In addition, capital expenditure in the U.S. water and wastewater market slowed significantly in 2013 while municipalities continued to deal with budget uncertainties.

FMI projects the combined water and wastewater construction market will grow 2.5 percent annually over the next five years to $40.3 billion. While forecast expansion is steady, the rate of projected growth is tempered by uncertainty surrounding access to necessary funding.

Access to Funding

Faced with lingering budget challenges and limited funding resources, federal, state and local agencies are unable to fund the necessary infrastructure project costs. Recent federal programs seek to bridge the funding gap and broaden investment sources. The Water Resources Reform and Development Act passed in June 2014 will allocate $12.3 billion to fund water resource projects over the next 10 years. Included in this legislation is the Water Infrastructure Finance and Innovation Act, which will provide $350 million in direct subsidies for Army Corps of Engineers and EPA projects. While this level of federal funding is modest relative to demand, this loan program can support as much as $3.5 billion in water infrastructure projects over the next five years. In addition, the White House recently launched a $10 billion loan fund aimed at financing water and other infrastructure projects in rural areas.

These federal programs are all the more interesting in that they encourage private investment in water infrastructure. The United States lags behind many international markets in utilizing public-private partnerships (P3s) to fund and operate water and wastewater projects. Facilitating private investment in the U.S. water and wastewater market is an important path to growth in the coming years for all industry stakeholders.

Regulation
The EPA continues to push more stringent regulations. Under the Safe Drinking Water Act, the EPA is mandating enhanced surface water treatment and water disinfection to improve public water system quality. Nutrient management regulations are also driving demand for wastewater treatment upgrades, including improved biological and nutrient removal technologies such as membrane bioreactors. While not significant catalysts for increased spending at this point, these regulatory measures continue to expand and shape better industry practices.

Persistent Drought Conditions
Regions throughout the United States including the Southwest are suffering from severe, multi-year drought conditions. Serving a seven-state region, the Colorado River basin has lost 17 trillion gallons of water since 2004. These surface and groundwater conditions are forcing municipalities to turn to alternative water technology. States such as California and Oklahoma are streamlining the permitting process for such projects, which may accelerate broader adoption of desalination and water reuse nationwide.

Rising Industrial Demand

Construction, engineering, operations and maintenance, and equipment companies are turning to industrial markets to augment their municipal water and wastewater market exposure. A common theme across all industrial water applications is the growing need to preserve limited freshwater resources for domestic use. Therefore, industrials are under pressure to self-supply water, especially in drought regions.

The power sector remains the largest industrial consumer of water, with the North American oil and gas boom contributing to the increased stress on surface and groundwater supplies and driving demand for water treatment, reuse, transport, disposal and storage. This trend extends across the continent, from the Alberta oil sands to the bottom of the Eagle Ford Shale in Northern Mexico.

The North American mining industry is another growing industrial water market, as companies require increased access to reliable water supplies for ore extraction and processing, as well as for treating mine effluents. In light of ore price volatility, mining companies seek more cost-effective water solutions to boost processing efficiency. Pharmaceutical and chemical industries, are also commanding improved solutions to water access and processing efficiency due to regulatory, scarcity and cost factors.

Opportunity
The critical needs throughout the municipal and industrial water ecosystems are mounting. While project funding remains unpredictable and in a transitional state, this market offers significant opportunity in the coming years. Both municipal and industrial growth will benefit construction, engineering and O&M services firms that are well-positioned in this space. Underpinning this expected rise in activity is the continued evolution of water technology and equipment, as well as public and private funding mechanisms.

Greg Powell is a vice president with FMI Capital Advisors, Inc., FMI Corp.?s Investment Banking subsidiary. He focuses on mergers and acquisitions and business continuity transactions for construction, engineering and building product manufacturing companies. He can be reached at 919.785.9217 or via email at gpowell@fminet.com.

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