[00:00:00] Speaker A: 318 acquisitions, 11 states, seven years.
That's Central States Water Resources. Since 2019, they're averaging more than 45 acquisitions per year.
That's not growth, it's called a roll up. And it's also one of the most aggressive consolidation plays in the US Water sector today.
So be on the lookout for more insights.
I am Rhys Tisd and this is the Future of Water which we talk about all the ways which companies, utilities and people addressing the challenges and opportunities in water. This is episode 144 and Charlie Seuss and I are going to be talking about state revolving funds and really the outlook for federal water infrastructure funding going forward. See if I can tease some perspectives out of him to give you some insights on where we think the market's heading towards a cliff or not.
Given the number of questions coming our way lately, it feels like the right time to dig into this topic. I've talked about it before in snippets, but this time you get a full episode. Utilities, contractors, equipment suppliers, and quite honestly, Wall street, they're all trying to understand what comes next for federal funding, how money is moving through the market and what does it mean for project activity, but also publicly traded company revenues.
Charlie spent a lot of time working through these issues, so I'm hoping he can separate the headlines from the realities and share some perspectives like I said. So with that being said, let's get to Charlie and get into state revolving funds and all the other federal dollars hitting the streets or not.
All right, so I'm joined here by Charlie Seuss. Charlie, what's going on in Chicago?
[00:01:47] Speaker B: Well, the White Sox are above.500 for I think, the first time in like four years. So things are exciting.
Good time to be a Chicago baseball fan.
[00:01:57] Speaker A: If that's all it takes, then you live a cherished life. Because for the rest of us, I don't know if that makes the grade. In fact, I was Talking to Dave McGimpsey this morning on his podcast and he was saying that the Seattle mariners are in first place, but they're under.500 as far as wins go. So as I told him, you know, they're very good bad baseball team, but sports talk. You're in Chicago, I'm in Boston. That's all most people, it feels like, want to talk about.
And I didn't even think about it. But you're a Southsider fan as opposed to a Cubs fan. Interesting.
Well, Charlie, so one of the things you look at is primarily is the US Municipal water sector and what we've done recently we've put out some analysis on state revolving funds. But there's also just been the bigger question about are we heading towards a federal funding cliff?
And I've talked about it on this podcast in prior episodes. I've talked about it with Dave McGimcy once again.
But I thought I'd now make an episode of this because we've been hit up so many times and we're working towards some other research in this area really showcasing the data and what we're seeing as well as our perspectives. But at least and voice alone I can tap into you. And so let's lay the foundation. So when we talk about federal funding, federal funding channels for water and wastewater utilities specifically, what are we talking about? So when I ask you that question, what are the areas that you think of?
[00:03:40] Speaker B: Yeah. So at the federal level there are, you know, probably three primary channels that we're focused on and that we're tracking. Those are going to be the state revolving funds which touch kind of the broadest range of utilities and project types. These are going to be the below market rate loans that form the backbone essentially of federal funding for drinking water and clean water infrastructure.
There's also the Infrastructure Investment jobs Act of 2021 or IIJ.
This is an infusion of about 31 billion into the Drinking Water State Revolving Fund and another 13 or so into the Clean Water SRF Fund, expanding some of these existing channels, adding a significant amount of money into the lead service line and merging contaminants channels. And then the last bucket at the federal level is wifia. So the Water Infrastructure Finance Innovation act, kind of a different instrument, targets fewer, typically larger, much larger projects with similar kind of low cost supplemental loans but longer repayment horizons.
And then the last one is maybe kind of in the mix here is ARPA. So that's the American Rescue Plan act of 2021.
This is a one time $1.9 trillion federal stimulus during COVID signed in March 2021, a chunk of that went to water. We'll I think hopefully get into that in our conversation later.
But those are going to be the main buckets I think at the federal level we're obviously tracking state funding mechanisms as those become increasingly important.
[00:05:19] Speaker A: So we're talking state revolving funds, iij, which overlays with that, that's the channel and then wifia and then like you said, arpa. All right, well let's start with state revolving funds because that's something we've looked at more recently. We just released Data Insight.
You know of all the, the analysis of, of the projects we've collected, the awarded projects, the intended use plans and those projects.
So let's just talk baseline state revolving funds, irrespective of iija.
So what does that landscape look like in terms of srf?
[00:05:58] Speaker B: Yes. So my colleague George, who is under the weather and wasn't able to make it today, led this kind of overhaul of our SRF data analysis.
Part of that was looking kind of at the historical view of where has that money gone to date over the last five years. The other side of it was looking at funding requests and what's in the pipeline. So what we found at kind of a high level is since 2020, the EPA has awarded about $73 billion to over 13,000 projects through the state revolving funds, drinking water and clean water.
And then when we looked at our, in kind of our analysis of funding requests through the state's intended use plans, that signaled the demand of about $140 billion across another 17,000 projects.
So twice what the system has funded over the last five years.
Which again is kind of documenting this gap between what's available and what's actually
[00:06:56] Speaker A: needed in state revolving funds. For those not in the know, that really is the primary or maybe most consistent channel for federal dollars to, to get to the states and ultimately the utilities. Right. Those programs are long established since the late 80s.
So when we looked at all these projects and as you mentioned, George has done a deep dive into this, we've categorized all these projects, which is sort of a bit of a treasure trove of information.
Where are the dollars concentrated? Which segments within the water sector subsegments are winning funding and which are piling up in the queue. Can any insights on data wise on where the dollars are going?
[00:07:45] Speaker B: Yeah, so I'll throw a few figures at you here. Wastewater treatment, I think huge theme in the data really dominated in terms of where the awards have gone. About 61% of total SRF awards went towards wastewater treatment treatment plants. More broadly came in at about 30.3 billion, or 41% of the total.
Then when we look at the types of utilities or utility sizes that are actually accessing and securing this funding, large and very large utilities are capturing about 71% of that treatment plant funding, driven by a number of capacity upgrades and regulatory drivers.
PFAS is going to be another major theme in the data. We saw that funding grow from about 14 million in 2020 to around 584 million in 2024.
So increasing about 40 times in that short period lead Service line, kind of a similar story in terms of going from I think it was about 141 million to over $1.2 billion in awards over that same period.
Both of these PFAs and lead service lines are partially driven by IIGA funding that was earmarked or channeled towards those two categories in terms of the SRF programs. And then the last one would be in terms of the kind of major themes that we're finding in this data is stormwater.
So we've seen pretty accelerated award activity in the stormwater space. We're still waiting for some data from EEPA for the second half of 2025, but as a whole, 2025 Stormwater SRF Awards are expected to be about double from the previous year. So definitely a lot in the pipeline, about $4 billion in kind of laid out in intended use plans for stormwater projects, and about a third of that is concentrated in the Northeast. So really seeing some clear trends in the stormwater space.
[00:10:01] Speaker A: So. All right, so that's baseline.
What is interesting is large and very large utilities are capturing a big chunk of it. You know, I think one of the questions that come our way more recently or a couple times, and that is, you know, has the, has the size of the pie of utilities right, or more utilities getting access to capital through things like I hasn't made a difference. So. And I don't know if there is a good answer to that. It's a little cloudy looking from period to period, but IJ seems to have change the conversation, at least I, broadly speaking, I would say that it has put a spotlight on infrastructure. And it's not just water, waste water, it's transportation.
It's more wide sweeping than that. But infrastructure is critically important.
The previous administration thought it was.
But how transformational has it been? Any thoughts or you have any perspectives on that?
[00:11:05] Speaker B: Yeah, I think that's one of the big questions we've been kind of wrestling with over the past year or so.
Overall, it's had a real impact, but maybe just a bit more narrow than what was expected or what certain headlines have suggested. I think the regulatory uncertainty that we've seen over the last couple years around PFAS, MCLs at the national level, the uncertainty around lead service line inventories and the timeline for that, we haven't actually seen, I think the bulk of activity in those two spaces, which make up a huge portion of the total appropriations for IIGA water funding.
So there's a lot left in the pipeline there. And the kind of big question is the trajectory of it. So it stands at, overall, we're looking at about 51 billion inappropriate funding for water programs under IGA. 30 billion of that has been obligated to states, so claimed by states, and then 11 billion and counting has actually reached utilities at the project level. So $0.22 on the dollar, if you want to frame it like that, actually reaching utilities. There's a number of reasons, I think, behind this, both at the federal and state level.
We have a couple reports that unpack that a bit, but just generally speaking, various bottlenecks at the state level, permitting delays, cost volatility, that's forced rebids, and ultimately, at the current rate, we're probably not going to see the full amount of IJ funding reach utilities until the early to mid-2030s.
It's, it's by no means closing this kind of funding gap. It's a finite federal injection of funding.
Whereas when you look at the EPA's kind of need surveys for water, wastewater, stormwater, we're looking at about $1.2 trillion in total needs over the next 20 years.
[00:13:12] Speaker A: Yeah, I think your comment about the trajectory is a really interesting one. I think you and our colleague Ethan Edwards did some, if you want to call it back of the envelope analysis of, you know, what has been the pace of funding at different periods and sort of kind of gauging, you know, how fast are things moving and there's an accelerated rate where even in that pace it's still early 2000-30s. But if it goes on the more recent trend of rollouts or awards, then it's going to be 2035. And so, and we can get into this. I think, you know, one of my questions is are we heading towards a cliff or not? But, but I think that's a really interesting aspect. And I think also the state revolving funds, it is a baseline, right? You have the baseline, you have IJ on top of that.
I don't get a sense that it's going to disappear. But let me, let me table that question for a little bit because I want to get through some of the other funding areas at least briefly. And that is beyond SRFs and beyond IIJA, how should we think about WIFIA and ARPA? Do you have any perspective on that? How important are they? Are they rolling out a lot of money? Are they influencing a lot of projects? What's your take?
[00:14:32] Speaker B: Yeah, that's a good question. I think a lot of the focus has been on state revolving funds and iha, but WIFIA and ARPA are definitely significant parts of the puzzle. So WIFIA is the EPA's federal loan program that provides long term low cost credit assistance for large credit worthy projects for water, wastewater, stormwater, typically covering about just under half of eligible project costs. Also leveraging other sources such as srf, munity bonds and grants to kind of help lower all the all in capital costs here.
Since it was launched, I believe WIFIA has closed more than 150 loans totaling around $23 billion in financing and supporting over $50 billion in project investment. So that's generated billions in estimated interest savings for borrowers and really helped position it as a centralized but still kind of pretty specialized tool in the water infrastructure, kind of capital stack if you will. So it's still a valuable tool but what we have seen in recent years is kind of a shrinking role in the market as the annual loan volume for WIFIA has fallen in recent years prompting some calls for reform. So it's something we're keeping an eye on. Will be interesting to see how that plays into certain budget negotiations as the year unfolds.
[00:16:02] Speaker A: Yeah, and this is something I've mentioned this. I was actually at the Connecticut chapter AWWA last week. Feels like a year ago now, but last week I was there and they were meeting in Plymouth, Massachusetts and so I went and speaking with them.
A couple of things came up, you know, one was SRF and sort of, I think the general feeling was it's a bit of a hassle. And then in terms of wifia, you know, these are gold plated projects, you know is some people call it, they're big, they're more typically applied to large cities. They work for the politicians. So whenever Wythia comes up in Washington you can always see the politicians seeing it as oh I can go stand in front of this big facility that's been built. But I know as I mentioned and credit is deserved to John Ryan from is it nrecap who's done some interesting analysis through looking at WIFIA and the trends. Right. I think he's really pointed out that yeah, the dollar, the projects are still being awarded through wifia but as far as total usage has gone down and I think his theory, correct me if I'm wrong Charlie, is that part of that is it's relative to other sources. Right. So money is either less expensive in other places and so you know, the utilities and cities or towns or are going to other sources rather than wifi. And I think even to say so much as it may be even competing with SRF in some cases, if not complementary. So I think that's really interesting analysis. So that program's not differing, but like you said, it does play a role in federal funding water infrastructure in the U.S.
so what about ARPA? Where do we stand on that? This is something that is a little bit more behind the scenes, should I say? We definitely get some questions about it, but not a lot and partly because it's got a time horizon on it. So what do you think about that, Charlie?
[00:18:18] Speaker B: Yeah, I think the tricky thing with ARPA is the data is a bit messier and more limited due to certain reporting requirements, but at a high level.
We do know that of the $350 billion in ARPA, state and local fiscal recovery funds, states have directed about $20 billion or 10% of their allocations to water related infrastructure.
So when include local government allocations, total ARPA commitments to drinking water, wastewater, stormwater is actually exceeds 25 billion nationwide. But again, this is a one time deadline driven funding surge.
And on top of that we are approaching the deadline. So all the funds were required to be obligated by the end of 2024 and then required to be spent by the end of 2026. So ARPA is effectively winding down at this point as a capital source and almost leaving a lot of utilities and cities and counties out to dry in a sense that they've been relying on this funding for say lead service line replacement projects and other critical infrastructure in recent years. In a lot of cases, there's no game plan for filling in that gap.
[00:19:41] Speaker A: All right, so where we started, I think one of the things worth calling out, we've looked at the state revolving funds and when you look at the intended use plans, we're looking at, was it 17,000 projects? I think that's the number. But it was totaling $140 billion, right? $140 billion is more than the entire CAPEX OPEX spend.
If that's not redundant. It is now CAPEX and OPEX for the water wastewater sectors in the US in any given year.
So there's always been this disconnect between funding commitments, shovel ready projects.
The water sector moves slowly.
Why is it so hard? This is one of the things I know definitely frustrates outsiders looking in investors.
Do we have a perspective on that at least as far as you're concerned, Charlie?
[00:20:35] Speaker B: Yeah, I think it's a complicated, complex question.
There's this kind of disconnect between political cycles and infrastructure timelines that, you know, just don't line up. The authorization for, you know, construction is this kind of long chain of events. So I think that's part of it. You also have maybe more importantly the kind of state implementation capacity that varies, you know, pretty dramatically in some cases.
Just looking at IJ specifically, the kind of utilization of available funding shows some pretty large discrepancies. So you have kind of a more concentrated group of states that are really seeing the most impact from that funding. And then material costs, when we're looking at the last five or six years, that's going to be a big piece of puzzle here as well.
At times, material costs going up 50% in a short two year period, 2020 to 2022.
This led to a lot of kind of redesigns and rebids that have pushed back a lot of project timelines. And then lastly, I think I maybe touched on this before, but the timeline for IIJ funding and SRF channels really stretches well beyond the initial kind of 2021-2026 period. For IJ, you have again a lot of boxes to check once that funding gets from the state to the project level, drawing out timelines two, three years.
And the cadence of all this has definitely been slower than what the initial headlines implied or predicted.
[00:22:27] Speaker A: So now for the $64,000 question.
Taking into account inflation, I think we've changed it to 64 million dollar question. So since my youth. But looking ahead, what is the next era of federal water funding look like? And so you can define the era.
I use that term broadly speaking, because the bigger question is are we heading towards a cliff or.
And what's the impact on the water sector? What are we thinking about internally when it comes to that? Because this is the question that everybody's asking ultimately.
[00:23:06] Speaker B: Yeah, it's a great question and an important one I think, for ij. You know, these are supplemental tailwinds that are finite.
At the same time, we. There's a lot of room for growth in PFAS and LSL funding specifically. We have not seen the bulk of those appropriated funds reach utilities yet. So that's something we're looking at closely and we'll be watching to see if that activity ramps up as we've gotten a little bit more regulatory certainty in recent months or last 12 months. But eventually that's going to taper into the2030s at the current pace of award. So in that sense, I think it's maybe inaccurate to say we're heading towards the cliff. It's going to be a little bit more gradual than that. But then when we look at the baseline SRF appropriations, we're only talking about about 2 to 3 billion dollars per year historically.
And this is a fraction of the total annual need. So that kind of leads us to the bigger question of where does federal funding for water capital projects stand now versus where it was maybe 50 years ago. And the answer is that it's down from about 33% in the 70s to 4% today. So this has been a decades long decline in the role of the federal government for water ratepayers. Municipal bonds, private capital in some cases are filling that gap in the most cases.
And then I think when we think about where the opportunities are again, there's a lot of great information in those intended use plans. I think it really paints a helpful picture of what states are prioritizing what a utility's needs look like in the years ahead.
That's demand that runs kind of well ahead of what the current awards are. Wastewater treatment, stormwater management, pfas and lead service line programs in states like Illinois and Ohio. There's a lot of need there. And we're going to be continuing to watch this as we unpack the data each quarter when we update it.
[00:25:25] Speaker A: Yeah. So I agree with your thoughts. Right.
I think you put it correctly, the tailwinds are finite, particularly for things like iija. ARPA is another good example.
But yet at the same time, some of these funds, in the case of IJ are going to take time to roll out. But ultimately are we heading towards a cliff? Yes, because it was prescribed to be so. Right. You know, this is another curveball. Actually. Someone internally in our office was talking about it a couple weeks ago. The question was, you know, maybe the states and the utilities are better off that the federal government is less involved because they don't get whipsawed by congressional decisions that if they're so reliant on these federal funds directly and then they're at greater risk. So I don't know. That's the other side of the equation where I think everybody deserves clean drinking water. I think everybody deserves wastewater treatment services.
And so, you know, the federal government, it's part of me feels like part of it is their job. I think that's why investing in infrastructure beyond just transportation or space exploration, that's not infrastructure, but I'm going to throw it out there or defense. You know, one of the points that I brought up several times in presentation is that, you know, in 2023, looking at the numbers we spent was it 214 times more on the fence than we did on water and wastewater infrastructure? And it's pretty, it's Astronomical. The difference, we spent more on space exploration, I think six times more.
So as far as federal funding goes. But at the end of the day, are we heading towards that cliff? So, yes, in terms of these finite projects, and I do think the market as a whole has benefited in recent years by talking about infrastructure. I stand by that.
The bigger concern, and I'm sorry Greg Goodwin's not here, he's been in Australia at Oswald.
But one of his, I wouldn't call it a soapbox, but I would say he's increasingly concerned about earmarks and state revolving funds and sort of the.
Not immediate erosion of those dollars. If state revolving funds are going at a state level, are going to politically chosen earmarked projects, it's sort of like the waves of the beach washing up on a sandcastle. Like little by little it begins to break down.
Is that the case? I don't know. You know, it's easy to be a cynic these days, but I think that's one of the challenges. And this, like you said, this is the question that everybody's asking because I think more than anything, particularly the publicly traded firms, they're being challenged by Wall Street.
They've benefit, you know, the argument is, oh, you've done well over the past couple years, you've been, you've been benefiting from all these stimulus funds. Well, you know, the part, the music's about to stop and so what does that mean?
And I think they are making, making.
Well, I'll just get at it, right? So I know that like Badger Meter, if you look in their financial deck that they put out recently, our team was looking at, they were looking at Bluefield's capital improvement plan data and it was saying, where are those capital improvement plans? Where are, were they budgeting their dollars?
And for the case, in the case of Badger, metering was at the bottom of the list, right? It was way down as far as priorities go. So their argument is we've actually done well, you know, irrespective of IIJA and or state revolving funds.
So I think that's an argument that is being made to Wall street to say, you know, our business is sustainable, our revenues will continue to grow. And I think you further support it by the fact that a lot of the dollars From State, from IJA 1, they haven't hit the street. But also 50% of that is going to lead and PFAS. So if you're a metering company, you should be in good shape.
As far as we can tell, that's, that's what it shows us.
All right, well, there you go. So, Charlie, you know, thanks for. You were going to be on this anyways and. But you filled in with poise to cover for.
For our colleague George. So thanks a million for doing that on. On a Friday. And I don't know if you could even hear the lunch crowd. We even had to push it back to lunchtime. So the lunch crowd in the adjacent room has been a little bit rowdy. So apologies to the listeners if you had to hear the chitchat.
All right, Charlie, so with that being said, last question. What, what are you working on next? Anything in the pipeline, so to speak?
[00:30:38] Speaker B: Yeah, so a lot in the queue as always.
We've got, you know, state profiles kind of breaking down, water and wastewater markets coming out, more coming out this summer. Florida will be the next one that we'll be looking at.
We also have our network forecast for US and Canada coming out soon as well. So that's looking at projected spend for pipes for drinking water collection networks, as well as various appurtenances, valves, high trench span holes, and looking at some of the macro factors shaping that.
That segment. So a lot in the works.
And yeah, the funding conversation is definitely not going away. So people have questions. We're always happy to jump on a call and talk IJ and srf.
[00:31:29] Speaker A: Yeah, no, I agree with you. And this is something we've been talking about, and we're sort of putting our heads together to maybe pull together a deck of some kind to support our clients. But if you do have questions, don't hesitate to ask. That's what we're here for. So, Charlie, I'll let you go. It's Friday. Enjoy the weekend. And I guess. Go Socks.
[00:31:54] Speaker B: There we go.
[00:31:55] Speaker A: There you go. Red socks, white socks. I'm not gonna, not gonna, not gonna choose, but all right, take it easy. Thanks again.
[00:32:02] Speaker B: Thanks, Rhys.
[00:32:04] Speaker A: All right, so it's great to have Charlie on. Super helpful, lots of thoughts, and I can promise you he knows a lot more than what he just shared with us there.
So if you do have any questions, you can always reach out to him.
So I guess lastly, as we are now doing at the end of these segments, I'm talking about what caught my eye this past week. Well, Argentina just put Buenos Aires water on the block, so this might be a little bit further afield than what we usually talk about. But this is something I love, that is Latin America. So the Malay government launched a $500 million tender to privatize ISA, the Drinking Water and wastewater utility serving Buenos aires. So that's 3.4 million residential customers, about 25,000 miles, or should I say kilometers of water network.
And it's got a bid deadline for the end of August. So this is interesting. Well, one is.
One reason is that Latin America privatization, the wave is back.
Brazil has restructured SEBESP and opened its sanitation sector. Chile has run private concessions for decades. Colombia has established public private partnerships and Mexico has moved a little bit cautiously at the municipal level. But Argentina is now an aggressive mover in the region. They've obviously had changed the government. The government is moving towards the private sector in a number of different ways. So this is not surprising in many respects. And it'll definitely be the highest profile water transaction in Latin America in several years. So if it closes cleanly, which remains a huge question, it might reset the expectations across the region.
Secondly, you know, watch out for the Brazilian operators. So Sebespi and Ajeya have both confirmed interests and that's strategic, not coincidental. So post privatization, Brazil utilities are seem to be building regional footprints and they're interested in Buenos Aires signals, you know, the early stages of maybe a Latin America water consolidation story led by Brazilian capital. We'll see.
It's interesting. It's not the European multinationals that dominated the privatization wave.
And really the bottom line is lastly, and that is this is one of the biggest privatizations in a decade. So it'll be interesting to watch the bidder strategy, the concession structure and how essentially the social contract gets managed, because these deals are pretty gnarly, they take a long time and it is traditionally drawn a core group of, of players that are active in Latin America. And it, and it definitely requires a certain risk profile that is not palatable to many investors. So I really like this. It's interesting. I'm not saying it's good or bad, I'm just saying it's interesting to see how the water sector is evolving because at the end of the day, irrespective of the path, water, wastewater, infrastructure needs to be invested in, it needs to be maintained.
And if the public sector can't do so, then there's certainly private capital, at least some private capital out there that's willing to do so.
It's just not always appealing to the ultimate stakeholders, and that is the customers.
So we'll see what happens in Argentina. So that being said, that's what caught my eye this past week.
If you have any ideas for other topics we should tackle, you can always reach out to
[email protected] this is the Future of Water from Bluefield Research and I've said this before and I'm going to say it again. There's no better time to be in the water sector because there are lot of challenges ahead and it's water is the one thing we can't live without. So until next time, be well, be safe and take care.
