Stuck at LaGuardia, an Infrastructure Bull Doubts No. 1 Bet

  • Confidence fading that $1 trillion program will happen in 2017
  • Healthcare, taxes, geopolitical threats take precedence

It was during a flight delay over New York’s LaGuardia Airport that David Richardson affirmed his decision to trim his bold bet on water projects.

Just weeks earlier, in the aftermath of Donald Trump’s election, Richardson had shifted about half of Impax Asset Management’s $6.3 billion to water projects with a focus on the U.S. He figured that the new administration would finally be able to address America’s aging infrastructure, and he wanted Impax to be part of the action.

Then his arrival at LaGuardia was delayed -- because of flooding, he said. That got Richardson, executive director of the London-based firm, second-guessing exactly how long it was going to take for politicians to start spending the $2 trillion experts say America’s infrastructure will need over the next decade.

So Impax cut its stake in water projects to 46 percent of its assets with an eye to trim more. Not a big reduction, true, but other investors now share his skepticism about the U.S. getting anything done soon. They worry that Congress and a president focused on health care, tax reform and geopolitical threats means they can mark down 2017 as yet another lost year for fixing infrastructure.

“People who were very optimistic at the beginning of Trump’s presidency are now looking for infrastructure spending to be more of a 2018 thing,” said Jose Garza, a research analyst at Gabelli & Co. in Rye, New York. “It’s been shuffled behind other priorities.”

The S&P Global Water Index climbed to a record high this week and has gained nearly 12 percent since Trump was elected. Many of the companies whose stocks are in the index are based outside the U.S.

Investment Need

Pictet Asset Management, which has about $6 billion invested in water, sees much of the U.S. industry as fully valued and has been taking profits on some positions, according to Geneva-based portfolio manager Simon Gottelier. 

Flood waters in Oroville, California, on Feb. 15, 2017.
Flood waters in Oroville, California, on Feb. 15, 2017.
Photographer: Michael Short/Bloomberg

“Clearly the Trump administration is planning to spend on infrastructure,” Gottelier said. “It could come in the next 12-24 months.” 

It’s not as if there isn’t a need. Spending on municipal water and wastewater will climb to $532 billion through 2025, a 28 percent increase over the last decade, according to a Bluefield Research estimate. Old pipes cause 240,000 water-main breaks each year at a cost of $2.6 billion, according to the U.S. Environmental Protection Agency. Lead has been showing up in drinking water around the country, not just in Flint, Michigan. California agreed this month to spend $275 million to repair the Oroville Dam spillway before the rainy season starts.

Flood waters in Oroville, California, on Feb. 15, 2017.

Photographer: Michael Short/Bloomberg

Investors who want to get in on water infrastructure spending can buy the stocks of utilities, those of their suppliers, or municipal utility bonds.

Infrastructure Fix

Trump campaigned on a $1 trillion infrastructure fix over 10 years. As big a number as that is, it’s only about half what the American Society of Civil Engineers said will be needed in additional funding to meet the $4.59 trillion it would take by 2025 to make up for years of neglect. 

The president’s budget director said April 20 that Trump will propose spending $200 billion in taxpayer dollars on infrastructure. Leveraging private investment would boost the outlay to $1 trillion, he said. The administration hopes to send an infrastructure package to Congress “probably by summer or this fall,” U.S. Department of Transportation Secretary Elaine Chao said during an April 24 event in Ohio.

It’s unclear how much of that would be devoted to water projects, though EPA Administrator Scott Pruitt told a conference of mayors last month that water investments would match those for highways, bridges and airports. During the campaign, Trump said everyone deserves safe drinking water, and that “water infrastructure will be a big priority.’’

“Water is the oil of the 21st century,” said Phil Mezey, chief executive officer of Itron Inc., a smart-meter supplier to U.S. water and power utilities.

‘Coming Fast’

The administration’s initial plan called for addressing infrastructure after passing measures on health care and taxes. But the health-care bill failed to even get a vote and Trump started talking about combining it with infrastructure to attract support from Democrats.

“Probably use it with something else that’s a little bit harder to get approved, in order to get that approved,” Trump said during an April 18 appearance in Kenosha, Wisconsin. “But infrastructure is coming and it’s coming fast.”

The timing is “still a little bit up in the air,’’ depending on whether a bill moves alone or with other legislation, DJ Gribbin, special assistant to the president on infrastructure policy, said April 12 at a Wall Street Journal forum in Washington.

Report Card

In its 2017 report card on infrastructure, the American Society of Civil Engineers said federal, state and local governments have committed $45 billion to upgrade water and wastewater infrastructure, but needs to spend another $105 billion over the next 10 years. Dams, levees and ports could use $124 billion more over the next decade to close the funding gap, the report card said.

Other types of infrastructure spending, like building bridges, repairing highways and upgrading airports, require permits and approvals that can bog down work for years. Fixing existing water pipes and pumps can be done faster.

“Water pipes won’t be litigated,” Richardson said. “Bridges and highways require environmental impact statements. 

“Water is an under-appreciated asset,” he added. “There’s a lot to love and a lot to be cautious about.”

(A previous version corrected David Richardson’s job title.)

(Adds S&P water index in 6th paragraph.)
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