Chalk it up to age, but it is getting harder to get me outwardly agitated these days. Yet, there I was yelling at the TV last Sunday night, nearly spoiling a nice dinner.
What stirred my outburst? I’ll tell you: A disturbing report about the Tijuana River, which is now a massive open toilet streaming raw sewage across the border from Mexico into Southern California and spilling directly into the Pacific Ocean.
The lack of both sewage and remediation infrastructure at the US-Mexico border been a mutually ignored problem for years and environmental problems are mounting. For years, Imperial Beach in Southern California has regularly closed its beach due to fecal bacteria issues; many residents have been sickened from swimming in the ocean.
At the point where the Tijuana River crosses the US-Mexico border is a large gated-cement tunnel built years ago for flood control. It also blocks mounds of trash floating in the river before it migrates into the US. On top of the flood control tunnel sits part of the new US border wall, which is readily bypassed by migrants who patiently wait for the flood tunnel gates to open after rainstorms and then float into the US immersed in the raw sewage river water. Both migrants and border agents must be decontaminated once they are fished out on the US side and many get sick.
I’m not done. I have visited Coronado, a beautiful resort island near San Diego. It also is the training area for Navy Seals, the elite special operations military force. For years, Seal trainees have been inflicted with serious fecal bacteria-related diseases from swimming in Coronado ocean waters heavily polluted from Mexican raw sewage.
This story makes you crave some sushi and raw oysters, right? I’m just relieved that I only waded up to my ankles in the Pacific Ocean during my Coronado stay.
The Navy and federal government have both been aware of this environmental disaster for years yet have shown negligent indifference. Recently, Congress tossed a measly $300 million towards the debacle, which is just a small down payment to fix another serious infrastructure fail.
The reality is that much of the US physical infrastructure is crumbling due to years of under-investment. Remember the lead water debacle in Flint Michigan? The bridge collapse in Minnesota? Electrical “brown outs” across the country during the summer? Our roads, bridges, airports, sewage treatment plants, water /gas pipelines, utilities, rural telecommunication, bridges and schools all need material capital investment to restore them to modern standards.
The latest grade of the US infrastructure assets by the American Society of Civil Engineers is an embarrassing D+. This group estimates the US will need to spend nearly $5 trillion over the decade for infrastructure improvements – that’s a big number.
Both political parties have long paid lip service to major new infrastructure spending, but it never transpires. In case you’ve been distracted, the US has a serious national debt problem and its an open question how much our government will be able to spend on infrastructure in the coming years, especially in the aftermath of the COVID crisis.
The massive void in infrastructure spending because of over-indebted governments around the world is creating compelling global investment opportunities in infrastructure assets, including public-private partnership arrangements.
In developing countries, the privatization of public infrastructure assets has been a growing movement for some time and is expected to become popular in the US as well. “Privatization” can mean an outright asset sale, a long-term lease to a private operator or a joint investment in new projects between government and private investors under profit and/or capital sharing arrangements.
Government entities typically play a key role in infrastructure industries. Not only do they invest in the sector, they often regulate it as well. They set or regulate user rates, approve new projects and control operating permits. Accordingly, running a business in concert with a government entity conjures both economic benefits and risks.
There is strong private investor demand for infrastructure assets. Infrastructure can be divided into three main categories - transportation, commodities and data – all of which are starved for new capital. Investors appreciate the durable nature of the assets, long operating contracts, reliable revenues and cash flow, the lack of competition and inflation protection via user rate increases.
We’ve always admired the portfolio diversification benefits derived from real assets, including infrastructure, but are especially enamored now given our current economic outlook. Our working thesis is that massive US fiscal deficits and prodigious money printing will eventually lead to a falling US dollar, a material rise in inflation and to higher interest rates.
Real assets often prosper during a rising inflation event since many operators have the capacity to raise user rates, plus rising costs increase the value of new physical assets. That performance expectation contrasts with stocks and bonds, which typically do not perform as well during periods of rising inflation.
Furthermore, we believe real assets, including infrastructure, will be an effective substitute for fixed interest rate bonds once inflation comes ashore, likely in a couple years. In any market climate, real assets have been a low-correlated asset class to stocks and bonds serving as a solid portfolio diversifier.
One of our favorite infrastructure plays is natural gas pipelines. The demand for natural gas is growing rapidly and at present there isn’t enough gas “toll roads” to transmit the rising gas volumes. Due to an arduous permitting process, new pipelines are hard to construct in the US, which means existing natural gas pipelines are increasing in value.
Furthermore, pipeline operators can raise transmission fees each year to offset inflation. It is an attractive sector with strong profitability and cash flow generation, but unloved right now due to its energy industry association.
Want more proof? Warren Buffet, the famous “value” investor, just made a $10 billion private investment in the midstream natural gas pipeline sector this summer. Seems like a decent buying signal to me.
Until next time, be well…Tim