What’s the first thing you think about when you see the word “crumble?” To many people, they may think about cookies or Coliseum.
Vice President Biden thinks differently. While we have not frequently quoted Mr. Biden, he recently shook up the world when he said “If I took you and blindfolded you and took you to LaGuardia Airport in New York, you’d think ‘I must be in some third world country.’” “I’m not joking.” “Just in the last decade, the United States has fallen 20 spots when it comes to the quality of infrastructure.” “It’s embarrassing, and it’s stupid.”
Well, Mr. Biden, thanks very much. Better yet, spend a day with me—that’s what I have been saying for years! While I may be influenced by my journeys through Newark Airport, or daily travel through New York’s Penn Station and on New Jersey Transit, I came to the same conclusion several years ago. In fact, as I frequently mention in our discussions and in our ongoing discussions about our niche infrastructure focus, the American Society of Civil Engineers (ASCE) 2013 five year survey concluded that the U.S. infrastructure system including roads, bridges, tunnels, dams, and airports have a GPA of D+. Yes, D+. The good news is this is an upgrade from D in the 2008 survey!
The ASCE estimated that $3.6 Trillion is needed by 2020 to save America’s infrastructure. Others are calling for increased levels of investment as well. A recent CERES report “The Clean Trillion” calls for spending $500 Billion a year by 2020, and then double again to $1 Trillion by 2030. The International Energy Agency estimates that spending $1 Trillion more each year by 2050 is needed to cut to reduce the impact of carbon emissions.
Regardless of the source, all conclusions point to the need for clean energy investment by asset owners who fund these projects while also gaining greater portfolio diversification. At the same time, investing also minimizes exposure to climate risk. The CERES report concludes with ten recommendations including engagement of companies on the business case for energy efficiency and renewable energy sourcing, standardizing clean energy data, encouraging “green banking” to improve capital flows in clean energy, and “boost clean energy investments” to capitalize on the new opportunities across all asset classes of clean tech.
Rather than look at plans or proposals, let’s look at what is actually being done (or not).
- California is in the midst of the worst drought in 100 years, but the Golden State is not the only one facing a problem. The Western region including Colorado, New Mexico, Arizona, and Nevada are all facing shortages of water supplies because of overuse and reduced levels coming from one of the main sources: the Colorado River. The U.S. Bureau of Reclamation says that the flow of the River is lower than in the last 1,000 years. Look at recent pictures of the Nevada’s Hoover Dam and view the low levels of water that now risk future electric power production from the dam. In other regions, fixing leaks will slightly improve supplies, but new water infrastructure investment is required. While it may seem to be irrational, water in the U.S. is at an inflection point. Unfortunately, few outside of water industry professionals are focusing on the problem.
- Water is not just a U.S. problem. Brazil’s reservoirs are running below average levels from reduced rainfall, and electricity prices have risen to record levels as the southeastern region, which houses the dams, suffers through a period of low rainfall with reduced hydro electric power output.
- Goldman Sachs sees an opportunity. While making an investment decision following others and based upon the actions of other investors may not be prudent, Goldman Sachs plans to invest over $40 Billion in clean tech by 2021 according to recent press reports. While the major investment banks are not new participants in the clean tech market, Goldman and others are stepping up lending for project finance with the solar market as one of its major beneficiaries. The good news is that greater interest from players with deep pockets and access to large asset owners has helped to lower the cost curve for renewables.
- Looking at companies such as Coca-Cola and Nike, one of their highest cost resources is water. Global droughts and unpredictable and extreme weather patterns have caused problems that disrupt their supply chains. Both companies have responded with water conservation technologies and Nike’s greater use of synthetic material.
- Con Edison is conducting an analysis to measure the benefits of preparing its infrastructure to meet the challenges of climate change and reduce the impact of future extreme weather events.
- In a recent report, Bain and Company reported that the “simultaneous crumbling of infrastructure in advanced economies and surge of development in developing countries will drive a steady four percent annual growth on infrastructure investment well into the second half of this decade pushing total investment to a figure of $4 Trillion.” The report also stated that “Infrastructure attractiveness will affect the mix of asset allocation significantly. Currently, the majority (roughly 75%) of institutional investors allocate less than 5% of AUM to infrastructure. But target allocations are quickly shifting. Bain expects the majority of investors to allocate 5% or more of AUM to infrastructure in the coming years.”
After the horrendous performance of the clean tech and renewable sectors in 2011 and 2012, the clean tech markets rebounded strongly last year and have gotten off to a good start in 2014. After several years of new start up IPO’s followed by many failures along with strong growth by the survivors, the clean tech industry had reduced a lot of the excess capacity and lowered the cost curve dramatically pointing to lower levels of subsidies required. With solar costs dropping and wind efficiency improving, the cost of renewable energy versus coal, nuclear, and gas has dropped dramatically. More importantly, the construction timeline is dramatically shorter, and, of course, cleaner.
As we view the infrastructure sector, several themes continue to resonate: constrained resources and growing demand. Unfortunately, Vice President Biden only addressed one specific structural issue—outdated facilities. We’re concerned about the growing demand in the U.S. and around the globe. We’re concerned about roads, water pipes, low reservoir levels, and century old electric lines in a 21st Century environment. Pot holes in the North East are a short term problem today, but aging transformers on telephone poles are a bigger long term problem.
With 2 billion new inhabitants expected on the planet by 2050—and most residing outside of the developed world—the greatest potential for growth are companies involved in providing goods and services in building and repairing infrastructure. The benefits are clear—job growth, job creation, economic growth, and of course, significant investor returns for sophisticated investors.
Better yet, repair and replacement of crumbling infrastructure will improve the quality of life. A lot!