Sinkholes and Sewage Spills Foretell a Major Crisis

Last year was the worst year for sinkholes and sewage spills in U.S. history.

What caused them? I’ll tell you in a minute. But here is a hint: The answer will make investors in water pipe makers a lot of money.

Earlier this year, I attended Gabelli’s Second Annual Water Infrastructure Conference, held in Manhattan. Of all the presenters, Thomas Rooney, president of Insituform Technologies, had the most eye-opening story. He told attendees about the looming crisis arising from our decaying water and wastewater infrastructure — namely, leaking and breaking pipes.

But more importantly, Rooney gave us some tangible evidence that shows just how bad things are getting. The most important was the record number of sinkholes and sewage spills in the U.S. last year. Leaking or breaking pipes are the biggest causes of these things in our cities.

A water pipe that leaks (or breaks) either allows dirt to get in the pipe or allows sewage to get out.

If dirt gets in the pipes, then the pipes carry the dirt away. Eventually — even if the pipes carry only tiny amounts of dirt away each day — this weakens the ground above the pipes. This ground lies below — and supports — our roads and buildings. Sooner or later, the ground gives way, creating the gaping sinkholes that swallow up cars and houses and even lead to people’s deaths. One such sinkhole in Los Angeles was 30 feet deep and shut down a stretch of highway. Another in Grand Rapids, Mich., cut off the water supply to residents, who then had to live under a "boil water advisory."

That’s Scenario One. Conversely, sewage may leak out. If sewage leaks out, then you have major health issues in the surrounding environment. Last year alone, more than 3.5 million people became ill from E. coli and other toxins released from over 40,000 sewage spills in the U.S., according to the EPA. Then there are the beaches.

More than 1.5 million people get sick in Southern California every year because of bacterial pollution in the ocean — much of it coming from broken pipes, according to a study by UCLA and Stanford. And in Hawaii last year, Waikiki Beach had to close after 40 million gallons of raw sewage flowed into the water after a water main pipe broke.

As bad as 2006 was, "This year is shaping up to be even worse," Rooney said. "From Hawaii to New York, Alaska to North Carolina and everywhere in between, an epidemic of breaking pipes is causing unprecedented havoc."

There Are People Who Still Don’t Believe It

However, because people can’t see these things, they have a harder time believing there is something wrong. As long as water is cheap, as long as their faucets and showers provide clean water and they don’t get sick after a weekend at the beach — well, they don’t worry.

What you don’t see under the sink, behind the walls and under the ground are the unseen working parts of water infrastructure. These are easily forgotten old economy things — pipes and valves and other parts made from stainless steel, brass ingots, cast iron and more.

When this water infrastructure breaks down — because it is old and in desperate need of repair — then those expectations will no longer hold true.

In many parts of the country, we are at that breaking point.

As Rooney said: "Just because you aren’t standing ankle deep in sewage doesn’t mean it won’t affect you." He used the analogy of the aging power grid before the big blackout in 2003. Before that, no one cared about the aging power grid. Afterward, all kinds of wheels were set in motion to correct the problem.

"Most water and sewer pipes in the United States were built 60 years ago — but were meant to last 50 years," Rooney says. "Do the math."

Even when cities start to tackle the problem, they have little awareness of the extent of the problems. Rooney told a story about Atlanta, where his company is part of a pipe rehabilitation project. After completing work on 100 miles of pipe, the city held a celebration to mark the occasion. Rooney noted there are 15,000 miles of pipe in Atlanta. This is the problem in many cities.

It Gets Worse

Things get even worse, hard as it is to believe. Rooney’s company deals with small-diameter pipes. "A little-known secret," Rooney said, is the fact that the large-diameter pipes — those 40-50 inches in diameter, often made of concrete — are starting to leak in Los Angeles, New York and other major cities. When these pipes go, it will be front-page news, disrupting the water supply and affecting the health of millions.

How did things get this bad? The issue is political will. The social pain involved in digging up a whole street makes it hard to tackle. When you have a harried mayor trying to deal with a budget, guess what gets cut out? It isn’t the funding for schools, I can tell you. And no one wants to raise water rates.

One attendee asked, "Why doesn’t the EPA mandate these things get fixed?" Rooney scoffed, "The EPA is about spotted owls, frogs and fishes." The EPA’s focus is simply elsewhere, even while this huge environmental and health issue hangs over our heads. Once again, you can’t depend on the government to protect you.

Investors, Though, Aren’t Ignoring Water Anymore

But, smart investors are starting to take notice of the opportunities in water…

It’s endlessly fascinating to me how investment fashions and moods shift over time. In 2006, when I came to Gabelli’s first water infrastructure conference, there was a relatively small audience — maybe a couple of dozen money managers and analysts. This time, the room was full. There must have been over a hundred people at different times.

Water is now heating up as a global investment topic. Investors who stick with the right water investments ought to do quite well.

Chris Mayer

October 2, 2007

The Daily Reckoning