A question of renewal

Ageing US infrastructure presents major new growth and investment potential as politicians, planners and investors consider new ways to drive its renewal in 2018, says The Boston Company’s Brock Campbell.

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The devastating impact of the 2017 US hurricane season raised timely questions about US national infrastructure in the face of an increasingly uncertain climate. Hurricane damage in southern states, such as Florida and Texas, shone a spotlight on the resilience of key utilities, such as power grids, and highlighted the need to improve safety.

More broadly, after decades of under investment in transportation, public buildings, water treatment systems and other forms of vital infrastructure, many investors now see huge potential in infrastructure renewal and development. Indeed, the US is now witnessing its greatest infrastructure investment need in over a century, according to Brock Campbell, a portfolio manager with The Boston Company Asset Management.

"Infrastructure investment has been ignored for far too long in the US and we anticipate a major resurgence in this area which could be supported by a range of favourable cyclical, secular and structural tailwinds,” he says. “Infrastructure renewal was a cornerstone of President Donald Trump’s election campaign but also has almost universal support politically and we believe much can be achieved.”

The devastation caused by hurricanes Irma, Harvey and Maria as well as other weather events in 2017 is likely have a stimulating effect on infrastructure spending in 2018, says Campbell. “Building products are likely to see a rise in near-term demand as rebuilding takes place and the authorities try to boost resiliency for bridges and roads. Taking a longer view, we think that so-called electricity grid hardening1 and introducing smart grid technology systems could also see huge investment in coming years.”

Beyond the short-term effect of the hurricanes, some wonder if US infrastructure is in crisis. National think tank The Center on Budget and Policy Priorities is just one voice urging federal government and individual states to invest more in roads, bridges, water treatment systems and other forms of vital infrastructure.

Certainly, cracks are starting to show, with crumbling US roads and other infrastructure increasingly evident. The American Society of Civil Engineers (ASCE) recently gave US infrastructure a D+ or ‘poor’ rating, estimating almost US$4 trillion in GDP could be lost by 2025 due to the country’s ageing transport, energy and water systems.2

Productivity and sheer economics are not the only factors driving calls for fresh infrastructure investment. Increasingly, public health is also of concern.

A major 2014 water contamination scandal in Flint, Michigan3 – which saw dangerous levels of lead and other toxins enter public drinking water supplies – underlined the need for coordinated, robust and environmentally sound infrastructure planning and spending.

The US Environmental Protection Agency’s fifth report to Congress on public water system infrastructure needs4 said investment of US$384.2bn was needed for infrastructure improvements through 2030 for water systems to continue to provide safe drinking water to the public. Other areas such as highways and electricity will require similar large-scale investment to raise declining standards and meet the needs of a growing and increasingly mobile and ageing population.

The question of who foots the bill for what President Trump hopes will be a US$1trillion national infrastructure investment bonanza remains an open question. While Trump initially appeared to favour public private partnerships (PPPs) as a key driver of his infrastructure plans, recent US government pronouncements on funding have been more nuanced.5 This has raised questions on PPPsand exactly who will pay for the majority of infrastructure spending in the months and years ahead.

One controversial project unlikely to be tied directly to wider national infrastructure funding, however, is Trump’s plan to build a new border wall with Mexico. According to Campbell, the project could nevertheless provide a boost to suppliers and companies working on wider infrastructure projects. However, he adds its political sensitivity means it is unlikely to be directly linked to more overarching infrastructure renewal.

"Ultimately we suspect the project could provide some sort of incremental growth opportunities for firms supporting infrastructure. The big problem is that while there is bipartisan political support on infrastructure development per se, any attempt to tie this to the building of the wall might damage that consensus,” he says.

INV01039 013 TBCAM Infrastructure Graph 1

Energy drive

Looking ahead, Campbell sees infrastructure investment opportunities across a range of sectors such as roads, bridges and schools but is particularly positive about the potential to develop new energy infrastructure – thanks to the growth in shale energy extraction. While the sector faced significant financial pressures from 2014 to 2015, Campbell is confident oil and gas pipeline companies can now regroup and drive ahead with major new projects.

“One of the most compelling areas for infrastructure development is the energy sector. After a period of financial stress in the sector, balance sheets are looking healthy again and there is an almost insatiable appetite to get pipelines built,” he says.

“From an energy perspective, the shale revolution has changed everything. It’s shifted how the US sources its hydrocarbons and unearthing these resources is creating a huge infrastructure need. In terms of tailwinds, Trump’s election meant a wholesale change in the tone of industry regulation and his administration looks set to provide a much more pro-growth backdrop to pipeline approval.”

Beyond energy, some basic water systems are in urgent need of maintenance and renewal. With many water authorities run by municipalities, ownership and financial support is highly localised. Yet Campbell believes new business models may be needed to inject the capital required to improve infrastructure in the sector, with private companies likely to play an increasingly pivotal role

“Currently, over 84% of the water infrastructure in this country is owned by municipalities and we don’t think they’re spending enough to maintain the system,” he says. “Since the Flint, Michigan crisis people have started to realise more money needs to be put in the ground to improve infrastructure.”

In Campbell's view, "water supply renewal presents a unique opportunity and a large part of this could be funded through PPPs – with private companies acquiring water assets and operating them in a highly regulated fashion as we already see with US electric and gas utilities. This could encourage a huge injection of fresh capital into an area that’s starved of investment," he says.

TBCAM senior portfolio strategist, Bill Adams agrees: “Due to the fragmented nature of US infrastructure, one of the biggest sources of funding for water has, historically, been through the municipal bond market." he says. While there is some incremental ability for some municipalities to continue to borrow, many are now starting to reach their limits. There is an opportunity here for the private sector to step in.”

Beyond energy and water, Campbell also sees broad future opportunities in the social care sector, as the US moves to address the needs of its ageing population.

“We think the development of senior housing and social infrastructure will see huge growth in the future. In the US the number of people older than 65 is set to spike over the coming decade and this will require much more extensive amenities and supporting infrastructure for older people. As a country we haven’t even come close to meeting this demand and we think this presents significant growth opportunity,” he concludes.

What to watch in 2018:

  • Increased activity in the shale infrastructure sector
  • News on funding for federal and state projects
  • Renewed focus on basic infrastructure and resilience

1. ie introducing measures to make the electricity grid more resilient.
2. ASCE: ‘Failure to act: closing the infrastructure investment gap for America’s economic future’, 09 March 2017.
3. CNN: ‘Flint Water Crisis Fast Facts’, 14 June 2017.
4. EPA: ‘Drinking Water Infrastructure Needs Survey and Assessment’, April 2013.
5. Bloomberg: ‘Trump’s Change of Heart Puts $1 Trillion Building Plan in Limbo’, 01 October 2017.

This is not investment advice. Regulatory Disclosure