robecosamen
Water and me: US water challenges in Flint and beyond

Water and me: US water challenges in Flint and beyond

01-06-2016 | Article

The town of Flint, Michigan first entered the spotlight when Michael Moore’s documentary "Roger and Me" outlined the impact of auto-factory layoffs on his working class hometown. Almost 30 years later, Flint is in the spotlight once again, but for an entirely different reason. Flint’s water crisis began when the city decided to switch its water source to the local river as a cost cutting measure. However, it failed to invest in the anti-corrosive chemicals that such a change required.

  • Thomas Guennegues
    Thomas
    Guennegues
    CFA, Senior Equity Analyst

As a result, the different chemical composition of the new water caused old lead pipes to corrode, leaching lead into the water supply and contaminating the population. To add insult to injury, this ignorance of safety rules did not translate into to lower prices for customers, as the average annual water bill in Flint was USD 864, or about the double the US average.¹ Also, the municipality now has to replace all pipes, for which it has requested USD 55 million from Congress.²

But the water crisis goes beyond Flint. Although the case reflects the local government's inadequate response to the crisis, it also puts the spotlight on the entire country’s dilapidated water infrastructure, which has been rated at D- by the American Society of Civil Engineers. Fixing the country’s infrastructure would cost and estimated USD 1.7 trillion through 2050. Compounding the issue and at the heart of the Flint crisis, is the US’s fragmented water system: 84% of the water systems and 98% of the wastewater systems are owned by municipalities, which when faced with budget constraints, cut costs. Moreover, the staff operating water systems in the smaller municipalities is often poorly trained and equipped to oversee water safety.

Private companies have slowly been consolidating the industry, starting in a few states where regulations were favorable to this evolution. This trend is now gathering pace. Because private water utilities already operate a large asset base, the investments required following an acquisition can be more easily spread and the impact on the customers much lower. In addition, these companies are able to make efficiency improvements to their operations, allowing them to reduce water rates. More importantly, private companies are subject to more stringent EPA3 control than municipality-owned systems.

Regulators increasingly view privatization as a way to improve the safety and quality of the service delivered to the customers. And while most municipalities will still find it difficult to part with the management of their water systems, wastewater systems should see a strong privatization wave in the midterm. The biggest listed companies like American Water Works and Aqua America will be the main beneficiaries of this trend, which will allow them to post high single digits to low teens growth, way ahead of their peers in the utilities sector.

1 http://www.theguardian.com/us-news/2016/feb/17/flint-water-crisis-michigan-contaminated-water-bills-food-water-watch-study
2 http://www.wsj.com/articles/flint-set-to-begin-replacing-lead-pipes-1457121838?mod=mktw
3 Environmental Protection Agency

Disclaimer RobecoSAM

The information contained on these pages is solely intended for Qualified Investors in accordance with the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) domiciled in Switzerland, Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in Liechtenstein, Austria, Germany, Sweden, UK, France, Netherlands or Italy holding a distributor license or herewith requesting respective information on products and services in their capacity as Professional Clients.
Some funds about which information is shown on these pages fall outside the scope of the Swiss Collective Investment Schemes Act of 26 June 2006 (“CISA”) and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA). Some funds about which information is shown on this website may not be available in your domicile country.
To view the Robeco/RobecoSAM products that are registered/available in your country, please go to the respective Fund Selector and select your country of domicile. Neither information nor any opinion expressed on this website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco or RobecoSAM product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can all be obtained free of charge at the Robeco offices in each country where Robeco has a presence.

By clicking “I agree” you confirm that you/the company you represent falls under one of the above-mentioned categories of addressees and that you have read, understood and accept the terms of use for this website.

Decline