On the Water

Fri 07 Dec 2018

There is no question that the U.S. water infrastructure needs repair. The unprecedented flooding and droughts across the country over the past 15 years and the lead contamination of public water in Flint, Mich., are just a few examples that highlight widespread need for more resilient water infrastructure.

While there has been movement to improve U.S. infrastructure – including a $1 trillion plan recently announced by the current administration to boost infrastructure investment – the need for construction in this area may go well beyond current plans.

According to the American Water Works Association, the total costs to replace all pipes in the United States could very well pass $1 trillion – that’s before any work on roads, bridges or other projects contemplated in the plan by the current administration.

More than one-third (41 percent) of survey respondents in the Mazars USA 2017 US Water Industry Outlook said they expect capital expenditures to increase in excess of 5 percent compared to the prior year. While water is currently a very small contributor to the overall construction industry, there are still very large water-related projects with important construction components.

For example, the water management project being developed in Fargo-Moorehead Metropolitan Area Flood Diversion Channel P3 Project, which will markedly reduce flood risk. Add to that the fact that there are many pipes that will need replacing soon – 39 percent of respondents estimated less than 10 years of useful life remaining in their water mains – and there are plenty of potential opportunities for constructions projects today.

While it can still be a challenging process to get water-related construction projects off the ground, there are a few key factors that are critical: innovation, risk-sharing mechanisms and financing.

Innovation

At the forefront of innovation in water-related construction are environmental regulations compliance, reduced capital and operating costs, and real-time monitoring/smart management. The technologies developed address challenges at different levels of the treatment, distribution, use and collection cycle of water management, and they will affect the opportunities for the construction industry.

On one end, innovation targeted at large-scale treatment facilities and distribution/collection networks is focused on reducing capital and operating costs, particularly those associated with maintaining or enhancing distribution networks.

The traditional economic model for funding these distribution network improvements is collecting tariffs from users, and banking on these long-term future cash-flows to finance construction. As a result, having a financing mechanism in place is essential for the civil engineering construction vertical to play in that field.

On the other end, improved technology offers promising solutions at the point of use and creates opportunities in residential and industrial construction. For example, not all water must be of drinking quality, and self-sustainable building, encompassing re-use of grey water and/or rain water for lawn irrigation, production processes, toilets or showers, is a less expensive and easier to implement solution that has been gaining momentum.

Finally, real-time monitoring/smart management is becoming a critical element of innovation.

Smart metering and data analytics foster more detailed and accurate metrics to identify weaknesses and highlight opportunities for improving water and wastewater operational cycles.

Construction companies targeting water-related projects must incorporate these technologies into their plans for greenfield and brownfield developments.

Risk-Sharing Mechanisms

Water projects, like all major construction undertakings, are dependent on the developer’s ability to predict future cash flows and profitability. The accuracy of these projections is a challenging exercise, and the reality sometimes differs significantly, due to delays, poor estimation processes and failed risk management.

As the industry seeks to address challenges, limit costs and attract capital, it will benefit from alternative procurement methods, also known as public-private-partnerships (P3). This alternative procurement process, which allocates risks to different stakeholders based on their ability to manage them, results in on-time and on-budget project delivery, and thus reduces construction companies’ risks.

This model has proven important to successful infrastructure plans in a number of developed countries. Companies looking to seize opportunities in water-related projects should build teams of experts who understand the water sector, can educate the construction company team, and can facilitate connections with P3 players.

Financing

As underscored in the above-referenced Outlook, financing is readily available for infrastructure projects. The administration’s proposed tax incentives and infrastructure bills suggest that even more capital can be expected for the sector in the coming years. However, the water segment is hampered by its small size relative to projects in transportation, roads and bridges, ports and airports.

Thus, the water industry must ensure its voice is heard and is part of the suite of ideas for the administration and Congress to attract its share of the infrastructure capital pool. As education around the importance of water continues, infrastructure financing will inevitably come through municipal bonds for state programs, public utilities or listed investor-owned utilities.

One barrier to greater infrastructure investments, resulting in additional construction spending, might be wider customer acceptance. In today’s model, rate payers end up funding these investments, which is particularly troubling in jurisdictions with aging infrastructure where rates have increased to a point of becoming an excessive burden to water users.

Construction companies can take advantage of alliances and programs such as the Water Resources Development Act, which seeks to better manage the country’s water resources, to ultimately bring down financing costs.

With the right mix of factors, it is likely that water-related construction and development in the United States will continue to grow. Those companies that can work with municipalities, utilities and other stakeholders to address local water infrastructure challenges and secure available financing will be positioning themselves well for that growth.