Predicting the water sector impact of a Trump Administration
A popular game here in the Washington, D.C., area right now is to guess how the incoming administration will impact various sectors from finance to shipping to manufacturing. Some may see this a fool’s errand, especially for such a non-standard president-elect who has proven to be anything but predictable and has proven the seers wrong on many fronts.
I have a different view. I believe that reflection within a sector is never a waste of time. Of course, reflection can turn into paralysis, so the reflection must be balanced with action as well.
One great perspective on how the Trump Administration may impact the water sector was provided by Tracy Mehan of the American Water Works Assn. (AWWA). Mehan believes that there will be greater investment in the water sector than we’ve seen in the last decade; however, it will be less than has been promised by the incoming administration. I do not disagree with this assessment (which is a good policy, as Mehan is about as sound of a thinker as we have in the water sector), and I want to build upon his analysis as I throw my hat in the ring and try to stare into the crystal ball on how the Trump Administration will influence progress in the water sector.
Background on Investment
Needs for Water Infrastructure A hallmark of infrastructure, in general, and water infrastructure, in particular, is that it is primarily a bipartisan topic, or better said, a non-partisan topic. There are certainly differences in opinions on specific issues, such as the level of regulatory involvement, but there is widespread consensus that water infrastructure—as a whole—is in bad shape, as noted by the American Society of Civil Engineers (ASCE) recent report card that gives both the Drinking Water and the Clean Water sectors a “D.” And there is similarly general consensus that the sector needs a serious amount of investment in order to right the ship. As Mehan points out, the Trump Administration states that “crystal clear water” is “vitally important” and that clean water is a “high priority.”
Solutions to address the need for investment in the water sector reflect an “all-of-the-above” attitude when it comes to the flavor of this investment, be it public, private, or both. We are seeing new public funding and financing options, such as the Water Infrastructure Finance and Innovation Act program, a growing trend towards utility formation in the storm water sector, and the leveraging of Clean Water and Drinking Water State Revolving Fund assistance for expanded water infrastructure investment. Regarding private investment and project delivery, the use of non-traditional approaches to facilitate private financing, such as public-private partnerships, green bonds and Pay-for-Success programs, are on the rise. A new type of “impact” investors who seek measurable progress in social or environmental areas along with a return on investments are playing a greater role in private financing.
A 2014 report from the Great Lakes Protection Fund states that $1.9 billion of investment originated from these investors between 2009 and 2013, and that these investments are growing at an average rate of 26% annually. A current estimation from the Ecosystem Marketplace is that the global market for green infrastructure is at $25 billion (with a majority of this amount going towards direct subsidies to encourage sustainable agriculture practices in a watershed context). Clearly, there is interest and capacity from the private sector to help answer the call for water infrastructure investment needs.
The Need for the Business Case
In order to encourage more investment in the water sector, we need to make the business case for the water infrastructure investments. Some may be screaming at the page now and saying, “But we already do make the business case!” I do not disagree with this belief. However, as a recently released report by the Brookings Institution focusing on drinking water utilities found, 88% of Americans believe action is needed to address the country’s water infrastructure challenges, but only 17% of utilities estimate that they can cover existing service costs through rates and fees.
This finding illustrates a disconnect between identified needs and the public’s willingness to pay to address these needs. All of this points to a deficiency in effectively making the case that the investment needed will provide the return required to be a valuable investment—whether this is through economic gains made, profits achieved or costs avoided. Ultimately, this disconnect results in a limited ability for many communities to be able to pursue needed upgrades and may lead these communities to face increasing pressure to take on an exceedingly significant amount of debt to address identified needs.
With a “business-minded” administration coming into power, making an effective business case for water infrastructure investment is all the more important. We have heard about the “$1 trillion infrastructure investment plan,” as well as conflicting opinions regarding how this investment would unfold, but it seems clear that, while the Trump Administration has proposed triple the budget for the Clean Water and Drinking Water State Revolving Fund programs, a majority of investment for water infrastructure will come from the private sector. This provides further motivation to seek a business-like view of these investments.
But let’s pretend that being business minded matters regardless who sits in the Oval Office. And let’s recognize that being “business minded” is not mutually exclusive to promoting sustainability and an environmental ethic. When we do this, we become open to various funding sources and financing structures. We study how investments generate economic, social and financial returns. We search for new and innovative ways to reduce costs of infrastructure implementation and find value where it otherwise seemed difficult or impossible—or just was never envisioned in the first place.
On many fronts, we are doing all of the above already. Another way to illustrate investment value is to identify the “no-action” cost. For instance, a recent study released by AWWA found that $1 trillion of investment is needed over the next 25 years just to meet demands in water infrastructure needs—but more significantly, this study found that a delay on action could double this amount. A 2012 ASCE report, titled “Failure to Act,” estimates that the cost to each U.S. family due to crumbling infrastructure is $9 per day, or $3,400 per year, and an investment of $3 per family per day could reduce or eliminate the costs through proactive infrastructure investments.
A prescient McKinsey study from 1994 rightly articulates the need for infrastructure leaders to consider consumers of infrastructure services and notes that those that rely on Thames Water to supply drinking water would choose Thames if given a choice. This is a strong argument for viewing infrastructure as a service-focused sector instead of a “an industry of hard hats and operational focus more than focus groups and customer segmentation.”
A strong motivator for many communities to invest in infrastructure is the return on economic value for investments. A study by the Water Environment Federation (WEF) and the Water Reuse Assn. highlights that for every dollar of SRF funding results in $0.93 in federal tax revenue. Similarly, a 2008 study led by the U.S. Conference of Mayors found that every dollar of water and sewer infrastructure investment increases GDP by $6.35 in the long run and that adding one job in the water and sewer sector creates 3.68 jobs in other sectors to support that job. In the stormwater sector, a 2013 study by the Environmental Finance Center found that the return on every dollar invested in stormwater management infrastructure led to between $3.16 and $1.45 of overall economic value for communities such as Lynchburg, Va.; Anne Arundel County, Md.; and Baltimore. Further, this study found that over 1,400 jobs could be created through $100 million of investment in storm water management infrastructure in places like Lynchburg alone. In Prince George’s County, Md., the Community-Based P3 program focusing on urban storm water runoff has projected upwards of 5,000 jobs associated with a 30-year program to retrofit 15,000 impervious acres.
While the studies previously mentioned have helped to illustrate the value of investing in the water sector, more still needs to be done. EPA has established the Water Infrastructure and Resiliency Finance Center (WIRFC), which is helping to push the discussion forward on investment potentials in the water sector and should prove to be a catalyst for further quantification for returns provided through water infrastructure investments. The WIRFC will be critical in helping to educate and inform the water sector on the role of private investment, which is likely to play a major role, as previously mentioned. This is critical in light of issues highlighted in a recent New York Times article that discusses the complexity of injecting private equity into public water infrastructure projects and programs. These issues include long-term asset ownership, potential major rate hikes for the public, and expected rates of return of 8% to 18%, which is a range far above capital market returns.
With the change taking place at the federal level, it is time to continue the momentum generated in making a strong case for investment in the water sector and look for ways to increase this activity even further. One lesson from Flint is that this community may be a canary in a coal mine for our future if we don’t develop effective messaging on the value of investment in our sector, both in clean water and drinking water. And if we can do this, we should expect the new administration to make good on the promises on facilitating a significant increase overall investment, regardless of views on issues like climate change or the role of regulations. The bottom line for the Trump Administration should be that betting on the water sector will pay off now and in the future.