The Exchange

Good as Gold: America’s Water Crisis Spells Opportunity for Investors

The Exchange

By John Chevrette, President, Black & Veatch Management Consulting

The current drought that has wreaked havoc on American farmlands, resulting in higher prices for corn, soy, and other agricultural commodities, conjures up memories of the infamous Dust Bowl of the 1930s.

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Supporting this comparison, federal scientists recently recognized July as the hottest month ever recorded in the Lower 48. The combination of blistering heat and limited rainfall has resulted in more than half of all U.S. counties to be designated USDA disaster zones. As a result, millions of American farmers, ranchers, and businesses are learning the hard truths about the value of water.

Water as an Investment Opportunity

With limited relief from recent rainfalls, and projections of warm, dry weather in 2013 across much of the U.S., we once again see that the true value of water is, in fact, significant enough to roil markets and governments alike. At the same time, today's professional investors have begun to understand that there's opportunity here, and a much less volatile one than other basic resources like oil and gas offer. It is not just the value of water itself. What should also attract investors is the urgent need to develop new water sources, rehabilitate old water infrastructure, and enhance access to the hidden value suggested by a new industry term, "resource recovery."

Throughout the United States, many infrastructure systems built right after World War II are no longer adequate to meet current — and certainly not future — water needs. In turn, that inadequacy threatens overall economic growth and the viability of whole communities.

The good news is that the technology and expertise already exist to solve the myriad of challenges facing our water infrastructure. It is fair to say that the universal need for water tangibly justifies a water-related investment strategy simply because, if we don't solve our water problems, there won't be much of anything else left worth investing in.

To avert such a doomsday scenario, today's cash-strapped municipalities must recognize that they cannot shoulder the financial responsibility alone. With depressed revenue collections and exploding long-term liability costs, they don't have the wherewithal. Even as the economy improves, many of them won't have it in the future, to maintain or bring their water systems up to code. It will be imperative that municipalities overcome long-standing resistance to accepting innovative financing solutions such as private investment and private/public partnerships to meet their immediate and future needs.

The Money Is There

Private equity firms are already taking notice and at least one, Alinda Capital Partners, is totally dedicated to investing in high-quality infrastructure projects. To balance the needs of its pension fund clients, Alinda looks for infrastructure assets in North America and Europe that have a strong operating record and can demonstrate a potential for steady, growing, and predictable cash flow; strategic competitive advantage; and limited commodity or merchant risk.

An oft-overlooked stakeholder in critical infrastructure investing is the end-use consumer. Though consumers rely on the critical infrastructure services provided by municipalities to obtain and dispose of water, few seem to accept that these systems must be paid for in an equitable manner. Consumers must accept the reality that water is not free and, to ensure the viability of our conveyance and treatment systems, they will have to pay more in the future.

There Are Options for Water-Minded Investors

The investment options are likewise multifarious. Infrastructure investment  —  the actual engineering and equipment needed to get the job done — is only one area. Here we have global corporations that market water technology and hardware among other diverse unrelated products and services. There are also companies, like my own, focused on the integration of water and other infrastructure necessities, as well as relatively sizable companies solely dedicated to water.

Water is just one, albeit indispensable, infrastructure sector where greater private investment is now crucial. A strong call has also been sounded for the private capital investment needed to revitalize our transportation system. The point is, all infrastructure prospectuses are interrelated. You just can't build a bridge over non-existent water. Water, telecommunications, and energy: an investment in one is an investment in all. In turn, such a holistic approach supports private investment in all businesses that depend on state-of-the-art infrastructure to operate profitably.

It seems simple enough, yet we still have a way to go in the United States. It's been estimated that, relative to the sizes of their economies, Canada has seven times more private infrastructure investment than the U.S, while Latin America, the Caribbean, and Europe all have 3-1/2 times more than we do. Fortunately, there are strong voices throughout our government — leading Democrats and Republicans alike — who don't need to be persuaded that policies encouraging private capital resources will yield immense societal dividends. As those voices prevail, and as each of the stakeholders comes to realize the importance of this precious resource, investments in infrastructure will appreciate accordingly.

John Chevrette is the President of Black & Veatch's Management Consulting Division, which addresses key challenges affecting water, electric and gas utilities. Chevrette joined Black & Veatch in 2012 and has more than 20 years of industry consulting experience, working with domestic and international electric utilities, energy services and gas pipeline companies. He earned his Bachelor's degree in Industrial and Labor Relations from Cornell University and has a Master of Business Administration from the Wharton School of the University of Pennsylvania. He has developed and deployed several successful consulting offerings in the areas of automated meter infrastructure, modern grid, IT strategy and operations, and asset management and optimization.

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