Forty-five thousand pounds of arsenic, 49,000 pounds of lead, 1.4 million pounds of barium, 91,000 pounds of chromium and 140,000 pounds of manganese: That’s a brief inventory of the annual output of cancerous byproducts from the Tennessee Valley Authority’s (TVA) Kingston Fossil Plant, which earlier this month leaked its waste into the water supply of the surrounding area following the failure of a holding pond.

The TVA disaster is certain to reignite the debate over the environmental impact of coal-fired power plants around the country. But grave as the implications of the spill are for residents of eastern Tennessee, they’re by no means the most serious threat to America’s drinking water supplies.

Rather, that dubious distinction goes to the ongoing deterioration of thousands of miles of water pipes and mains serving the country’s major cities. Much of this infrastructure was installed before the turn of the last century, and it’s coming apart.

In recent years we’ve seen a growing number of local reports of flooding in urban areas due to cracked mains and pipes. The result has been immense property damage and wasted water, driving up system costs. The bad news is we’re certain to see more going forward. In fact, the water main breaks and sewer leakages seen to date have been merely a warning that millions of miles of underground pipe are reaching the breaking point.

One reason for the breakdown: A decades-long trend of dramatic underinvestment in water infrastructure replacement, largely the result of it being at the bottom of the priority list for the cash-strapped municipalities that continue to own and operate 80 percent of the country’s water systems. In fact, municipalities have been notorious for diverting the portion of water rates for upkeep to general uses.

In a 2002 report, Clean Water and Drinking Water Infrastructure Gap Analysis, the Environmental Protection Agency (EPA) concluded the water system investment gap continues to widen. EPA’s estimate at the time–which has almost certainly risen since due to a growing shortage of skilled labor and rising raw material costs–was some USD500 billion nationwide would have to be spent over 20 years on water systems, with 60 percent solely for upgrading transmission and distribution pipes and mains. Failing that, the agency warned number of pipe failures will dramatically accelerate in the next several years.

Even in the best of times, state and local governments are hard pressed to come up with that volume of dollars on their own. And this year promises to be more difficult than most. Going into 2009, 43 states and scores of municipalities are facing very real and immediate budget shortfalls. In fact, over half have already sliced their budgets, raided reserve funds and/or raised revenue to balance their budgets for the coming year. And the longer the US economy slumps, the more they’ll have to tighten their belts.

Most water and sewer projects are financed with tax-advantaged municipal bonds. The market for these has unfrozen since the heart of the fall 2008 credit crisis. But with investors’ risk aversion at historically high levels, demand has been slack, and yields remain relatively high. As a result, this avenue too has been closed.

Enter the incoming Obama administration, which has pledged a “New Deal” for increased infrastructure spending, with a focus on “shovel ready” projects that can push a lot of dollars into the US economy quickly. Happily, there’s no shortage of these in the water industry. This month, the US Conference of Mayors presented a list of 11,391 local projects with a total price tag of USD73 billion that are “shovel ready,” some USD15 billion of which are in water and wastewater. Importantly, these projects also have the support of organized labor–namely the National Utility Contractors Association (NUCA)–a major supporter of the ascendant Democratic Party.

As is the case with all things political, investors have every right to be skeptical until the money is actually appropriated. These projects, however, are both relatively easy to fund through existing programs and create jobs. That’s why NUCA has proposed USD10 billion in federal aid be granted for water and sewer projects. That strongly increases the odds the money will be granted and spent.

There are several ways to play increased spending on water projects in the US, as well as globally. Suez Environnment (France: SEV, OTC: SZEVY) is a leading player on virtually every continent in water and waste, offering a very wide range of services. Its chief French rival Veolia Environment (NYSE: VE) is as well, though energy contributes the lion’s share of its revenue.

German giant Siemens (NYSE: SI) has become a leading player in water treatment via a series of recent acquisitions. And Shaw Group’s (NYSE: SGR) prowess in engineering and infrastructure–as well as winning contracts–should ensure it a share of the business as well.

For those in search of a pure play, however, my favorite bet is Insituform (NSDQ: INSU). The rehabilitator of water and sewer lines has several lines of business. The largest is its North American sewer rehabilitation services.

The company’s most innovative product is its fast-growing “trenchless” repair service to aging and cracked pipes. Rather than dig up and replace actual pipes, the process involves injecting a compound into the pipe itself which acts to seal any breaches. The result is a lower cost and far less intrusive repair.

Insituform has languished in recent years, as overly aggressive expansion by prior management ran up against a brick wall of stagnant to falling system investment by municipalities. As a result, despite the success of trenchless repair, the overall business sagged and the share price fell sharply over the past few years.

Starting this year, however, management’s turnaround efforts have begun to bear fruit. Third quarter profits rose 66 percent from last year’s levels on a 10 percent revenue boost. Those results topped Street expectations as the Energy and Mining division, formerly known as Titeliner, posted sales and profit gains of 31 percent and the company’s conventional sewer rehabilitation operations showed their first signs of life in several years.

In the US, the company won a USD10.33 million deal with Connecticut Water Service (NSDQ: CTWS), which has ramped up its capital spending by 41 percent for 2009 to take advantage of its home state’s new multiyear plant to upgrade its existing pipeline infrastructure. The company also reported making great strides in Europe and announced a promising joint venture in India, a country with water infrastructure needs multiple of America’s.

As is the case with any engineering company, contract backlog or prospective revenue from orders yet to be filled is a key barometer of Insituform’s future health. As of the end of the third quarter, that stood at USD292.9 million, up slightly from USD289.8 million at the end of the second quarter and well above the USD259.0 million recorded at the beginning of 2008 and a year earlier level of USD224.6 million. That’s impressive growth, considering the fact that overall industry spending was flat, and it should accelerate going forward.

Backlog has grown most impressively in Asia, with the company posting a roughly 60 percent sequential surge in the third quarter from second quarter levels. That may slow in the coming months, a global growth weakens. But given the immense needs of that increasingly supply strained region, it promises to be a major profit center in coming years.

The company has also been on the move in Canada, winning a USD4.4 million contract to rehabilitate 14,750 miles of water lines in the city of Victoria. That could be the precursor to a lot more business as well, as Canada too ramps up its infrastructure spending to shake off economic weakness.

Foreign operations do add an element of risk for earnings, due to the ebb and flow of global growth and currency swings. But as for balance sheet risk, the company reduced its interest expense by 12.8 percent in the third quarter from year earlier levels. Cash of more than USD90 million–excluding roughly USD2 million in restricted cash–covers total debt (virtually all of which is long-term) by a 1.5-to-1 margin.

Insituform’s success hasn’t gone completely unnoticed by the market, as the shares have recently rallied. The stock, however, still trades at less than 1.5 times book value and one times annual sales, despite a projected long-run profit growth rate of 17.5 percent. That’s solid value, considering the lion’s share of revenue is derived from governments and regulated utilities, some of the most reliable payers around.

Insituform, a new addition to the New World 3.0 Portfolio, is a buy up to USD20.