The U.S. water infrastructure design and construction market perfectly reflects the tension between needs and funding present in many U.S. infrastructure markets today. On one hand, water infrastructure needs are too great for markets to remain flat for long. On the other hand, funding sources remain unable to provide the necessary level investment.
Despite the contradicting forces of needs and funding, FMI forecasts slow growth in the water infrastructure market in 2013. Overall growth in construction put in place is expected to grow just below 2 percent. The water supply market, which accounts for 37 percent of the market, will grow at approximately 1.1 percent, while the sewage and waste disposal market, roughly 63 percent of the market, will grow at 2.1 percent. To explain FMI’s modest optimism, this article outlines the depth of the funding challenges that municipalities face and the tremendous needs in U.S. water infrastructure while commenting on recent developments that point toward growth.
Primary sources of funding for water projects include local user and connection fees, government bonds and State Revolving Funds. The Great Recession choked traditional funding sources for municipal water infrastructure. The housing meltdown decreased revenues from connection fees and curtailed new user fees. Tax revenues at all levels of government declined sharply and are still recovering. The bond market remains tight, and, as a result, municipalities struggle to tap this source of funding.
On top of current funding challenges, many systems were already underfunded. The EPA, in the 2007 Drinking Water Infrastructure Needs Survey and Assessment, projected drinking water infrastructure needs totaling $334.8 billion from 2007 to 2027 . Making matters worse, not all water utilities charge sufficient water rates to fund capital projects. Instead, many rates are set primarily to cover operating expenses. When major projects are required, these water authorities rely on tax dollars, which the recession made scarce in the years since.
Despite funding challenges, the U.S. water infrastructure market will grow to meet the needs of aging infrastructure and increased demand. The pause in investment caused by the recession only added to the backlog of necessary work. Aging infrastructure, regulatory compliance and increased demand will drive investment in water infrastructure over the long term.
The majority of the U.S. water infrastructure system, including its drinking water, wastewater and storm water infrastructure, was built after World War II. Some systems were even constructed more than 100 years ago. As a result, many of these systems are at or beyond their useful lives.
Many older systems are long overdue for significant investments as they create water quality and public health concerns. In August 2004, the EPA estimated that combined sewer overflow discharges 850 gals of untreated sewage into surface waters each year. In the same report, the EPA found that sanitary sewer overflows are responsible for the discharge of 3 billion to 10 billion gals annually due to broken or blocked pipes.
Many of these systems are in violation of federal code and under consent decrees from the EPA. FMI analysis of EPA documentation finds 21 cities under consent decrees from the EPA. The impact of consent decrees will drive major investments in these cities, with many cities requiring a total investment of more than $1 billion.
EPA consent decrees provide the political capital for municipal authorities to pursue major investments. That said, they also result in increased water rates during a time already characterized by economic hardship. As a result, the timing of these investments is hard to predict. The City of Atlanta, for example, received an extension in 2012. The extension pushed the compliance deadline of its 1999 consent decree from 2014 to 2027 . While Atlanta has already invested three-quarters of the near $2 billion required, the estimated $455 million remaining will occur sometime during the next 14 years instead of the next year and a half.
According to the U.S. Geological Survey’s most recent water use report in 2005, municipal water consumption accounts for only 11 percent of total water usage in the United States. The remaining 89 percent of usage is the result of agriculture (34 percent), power generation (49 percent) and industry (6 percent). The USGS is not expected to publish an updated report until 2014. The report will likely show an increase in water usage in mining and oil and gas extraction.
Recent strength in commodity markets has led to increased levels of mining activity. Specifically, this activity has led to the development of new mines and the redevelopment of existing mining assets. Strength in the mining sector creates tremendous amounts of water infrastructure work as water is an essential resource to mining activity.
Another fundamental shift that has occurred since the 2005 report is the application of hydraulic fracturing and horizontal drilling to unlock oil and natural gas resources found in shale formations. Thus far, the implications of shale development are less certain for water infrastructure. While water issues related to shale gas exist, the fragmented nature of shale gas exploration and production has slowed the development of water infrastructure opportunities on a broad scale. Consolidation of upstream shale gas activities is occurring. Nevertheless, it remains to be seen when a major breakthrough in shale gas water infrastructure will occur.
What to Expect in 2013
The contrasting story lines of needs and funding will remain in the U.S. water infrastructure market in 2013. Despite the head winds to growth created by funding challenges, FMI is confident the water infrastructure market for design and construction will return to slow growth in 2013 as a result of improvements in economic fundamentals linked to the water market, such as housing and tax collections, and the ever present needs of the system. The housing market, for example, is slowly beginning to show signs of life. The National Association of Home Builders and Wells Fargo Housing Market Index rose to its highest point since May of 2006 in November 2012. While the head winds to growth remain very real, these modest signs of life, combined with the previously discussed needs, should make 2013 the year when the water infrastructure market finally returns to growth, even if only at 2 percent.
Randy Giggard is manager of FMI’s Market Information Group and Rick Tison is a consultant for FMI Corp., which is the largest provider of management consulting, investment banking and research to the engineering and construction industry.
1. U.S. Environmental Protection Agency. (2007). Drinking Water Infrastructure Needs Survey and Assessment. Retrieved from: http://water.epa.gov/infrastructure/drinkingwater/dwns/index.cfm
2. U.S. Environmental Protection Agency. (2012). Sustainable Water Infrastructure. Retrieved from http://water.epa.gov/infrastructure/sustain/sustainable_infrastructure.cfm
3. U.S. Environmental Protection Agency. (2004). Report to Congress: Impacts and Control of CSOs and SSOs. Retrieved from http://cfpub.epa.gov/npdes/cso/cpolicy_report2004.cfm
4. U.S. Environmental Protection Agency. (2012). Atlanta Will Get More Time to Complete Sewer Upgrades/City, state and federal government reach proposed agreement to extend the deadline to 2027. Retrieved from http://1.usa.gov/LJ8HWM
5. U.S. Geological Survey. (2005). Estimated Use of Water in the United States in 2005. Retrieved from http://pubs.usgs.gov/circ/1344/
6. National Association of Home Builders. (2012). Builder Confidence Rises Five Points in November. Retrieved from http://www.nahb.org/news_details.aspx?sectionID=134&newsID=15597