[00:00:00] Speaker A: There's the tariffs themselves and then there's the uncertainty around the tariffs.
[00:00:09] Speaker B: I am Reese Sisdel and this is the future of water, which we talk about all the woods, which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 116 and I can already tell it's going to be a great one. That's because today I'm joined by Greg Goodwin, senior research director of Bluefield Research.
So in the wake of a client webcast last week, uncertain Times, the state of water policy in Washington, something that Bluefield put on for our clients, we wanted to try and answer some of the questions that we didn't get to during the podcast because quite honestly, as Greg and I were talking, we talk too much and we wanted to do everything we could to at least answer some more questions along the way. And if this is a good platform to do so, let us know, give us a review where we are trying to figure out the best ways to address the uncertain times in Washington. What it all means. Everything from executive orders to agency layoffs to tariffs for that matter. It is a day after liberation day when we're recording this. So a lot of questions in the air and we are interested to see how it all unfolds. So that's why, you know, it was good to have or it will be good to have Greg in a conversation answer some of these questions about what's happening in Washington. He's really knowledgeable, particularly when it comes to policy, environment, also the Supreme Court and what it all means. So number of questions came out. So stick with us and we will do our best. And if you have comments or questions, you can always reach out to
[email protected] and we'll do everything to get back to you as soon as possible because we like it. People talk to people, that's where decisions are made. But before we get to Greg, you're gonna have to bear with me a little bit and let me talk about what's caught my attention recently.
So it turns out over this past week that Tim's water in the UK, the UK's largest water utility, serving, I don't know, 17 to 18 million people and the bane of Londoner's existence, it seems in the Press has tapped KKR, the private equity firm, for a 4 billion pound recapitalization. And it comes amid mounting financial and public pressure to deal with this matter. Tims named KKR to do so and the deal is really central to Tims efforts to restructure nearly $20 billion in debt and avoid government intervention. Quite honestly, I don't know what levers that the government actually has.
They are somewhat hobbled. That's the correct term to do anything about it. So KKR's involvement does signal some confidence in finding a turnaround strategy. It also entails some significant losses for senior bondholders, it sounds like. So the utility's operational and I guess reputational challenges, including sewer discharges, rising bills and aging infrastructure are going to remain under scrutiny from regulators and the public for a while going forward. I don't know if they're getting out from under this for decades, quite honestly. So I guess a couple questions or points that come out of this why this interests me. I brought this up in the podcast for one of my favorite podcasts. I think it was in the summer of 2024 I brought in Chloe Meyer from Bluefield to talk about the UK municipal water market, the role of private entities, the asset management planning cycle. We're on amp 8 as they call it. But why is this interesting? So KKR also already holds a minority stake in Northumbrian Water, which is another utility in the uk. UK is the most privatized utility market in the world. And KKR also has prior experience in US water public private partnerships. I think they were involved in Bayonne, New Jersey as well. So it's looking for in this case relatively stable cash generating regulated assets with within infrastructure, upside, decentralized and advanced treatment via Axios Water. So Axis Water, which was launched with xpv, KKR and XPV are partnered on this. KKR invested in a decentralized and compliance driven technology solution or platform. So we've got NEXUM and EOSI and they're focused on things like nutrient management and decentralized utility trends. So this is another aspect of KKR and its approach to the water sector that's worth watching. Alongside xpv, which is more of a specialized water private equity firm boutique. I don't know if that's fair, but definitely it's been interesting watching that unfold. And then lastly just, you know. Well I got two more things that come to mind really. KKR is also seeking out distressed or under under capitalized assets. Tim's Water is a prime example.
They're going to continue to search for that where long term infrastructure upgrades are needed and regulatory reform for big returns for early equity injections come about. So that's why KKR is interested in this as well. But I think the other part not to be overlooked is that's ofwat The UK regulator, what's their role in all of this? Well, the regulator of WAT does need to assess whether KKR's involvement does align with the conditions of the agreement with, with Tim's Water, including the requirement that TIMSS has fit and proper owners, quote unquote, and the financial resilience to move forward. It's also going to evaluate the impact of its Northumbrian stake. Are they okay with KKR having stakes in Northumbrian and Thames Water at the same time? I guess, you know, at the end of the day, Off White really deserves a lot of scrutiny. I mean, I know the privatization of the water sector goes back to the Thatcher days, you know, so it's been a long time. But the regulator has known exactly what the role of private entities in the water sector are going to do, what their obligations are. If they're playing within the bounds of the law, what are you going to do? They do have the potential options to kind of sink some teeth into these entities and offline, they don't deserve a free pass in this. This is a conversation I had internally with one of my colleagues. So that being said, this is a big deal. It's definitely worth watching. I definitely think. If you're interested in this or if this is your space and you're trying to understand whether it be Tim's water, KKR's role in the UK or just the UK municipal water market, our Europe team, based out of Barcelona, they are watching this closely. We've done a number of research notes as well as longer form research reports on the UK market. We've been helping companies across all aspects of the value chain over the last year, if not decade, quite honestly. So if you want to stay abreast, the Europe team is at your beck and call. That being said, let's get to Greg Goodwin and talk a little bit about what's happening in Washington, which is a whole nother headache.
All right, so I'm joined here by Greg Goodwin, senior Research Director at Bluefield Research. Greg, how's it going?
[00:07:55] Speaker A: Doing well. How are you, Rhys?
[00:07:57] Speaker B: Pretty good, pretty good. Just, I don't know, living the dream. Doesn't have to be my dream, it's just a dream.
It's a weird, weird time in the world.
You know, I don't think it, you know, while perspectives matter, I think things. Things seem a little crazy out of Washington and so hence the reason for this, this podcast, a little bit of background for the listeners of which you're well aware, and that is we did a webcast last week for our clients and then some. It was called Uncertain Times, the state of water policy in Washington. And that was last week. Now it is April 3rd. So we're a day after Liberation Day. So the world has changed even further. But we'll see what we can do with this conversation to, you know, kind of talk around that. And really the reason for this podcast, and I'm calling it a mailbag edition of sorts, but really we talk too much, and that is on the webcast. We went through, I'd say, 20 or so slides about what's happening in Washington and what the water industry should think about, but there are always time constraints and we only got to a short number of questions. So what I was hoping to do with you today is talk through some of those questions that came our way on the back end through the, through the chat and hopefully address some questions, concerns from not only the attendees of the webcast, but if you're a future podcast listener, you get the benefit as well. So I've got, I'd say 11 or 12 questions here. So does that make sense to you, Greg? Go through them?
[00:09:40] Speaker A: Yeah, totally. I know we, we probably got a little too much into the weeds on certain slides that sometimes it's hard to, you know, take the 30,000 foot view. But yeah, it totally makes sense.
[00:09:49] Speaker B: So as we go into this, I know everybody didn't attend the webcast, so you don't have the advantage of seeing the slides in the deck and everything we talked about. So Greg and I hopefully will give a little bit of background on what exactly we are talking about or why we're talking about these questions specifically. So I'll start with the first one and maybe I'll just kick it off. So the question came up on an exhibit. It was sort of by the numbers, as we called it, and it was, you know, US and Canada market forecasts and sizing from 2025 to 2030. And really it was about why are we talking, why are we having this webcast and why should the water industry be interested in this? And the bottom line is what we're trying to display was it's a big market, Tom. It's probably, quite honestly, often overlooked and. But it's something that we were trying to put in context and not just running quickly through the numbers. So according to our forecast over the next five years, this is our last forecast. We're about to update. Our forecast, as I said then, for the municipal water and wastewater sector is about a $1.26 trillion market over that period. So pretty Big, right. If you add in stormwater, that's about another $289 billion of outlays during that same period. And then more recently, as we had put out a recent industrial forecast, there's about $340 billion of outlays over that same period, and that's across 16 different industrial verticals.
So that was sort of the landscape itself. And for what it's worth, the top companies in water that we track every year, every quarter, quite honestly, they represent in any given year about $300 billion. These are publicly traded companies and their water revenues represent about 300 billion. So all in all, we're talking about $1.9 trillion in market forecast plus you know, what's happening for these companies. So pretty significant. And one question that came up was on the market sizing that you've laid out, is that total or annualized? Well, the bottom line is for strategic planning, you, what we're really talking about is an all in number over the period. In this case for industrials, what the question was really addressing was 340 billion over those five years grows a little bit every year. Every segment is a little bit different from data centers to the oil patch, meaning, you know, midstream water hydraulic fracturing. So it's pretty significant. And that is why we want to display this. But one reason I wanted to include this question on the podcast was just to show the scale of the water industry and why everybody should care, whether it be in Washington or outsiders looking at. So all right, let's bring you into this, Greg. So one question came up.
If The San Francisco vs EPA decision, recent Supreme Court decision, will lead to more minute and niche requirements, as they put it, shouldn't that make permitting more complicated going forward?
[00:13:06] Speaker A: Yeah, so I think this was in response to a slide we had that was getting into sort of the regulatory sphere and how that's shifting. So we highlighted a couple of recent and pending Supreme Court decisions that have kind of had an effect on the regulatory market overall. So this is one from earlier this actually. Well, last month at this point, so early March. So this is basically the decision that the question before the court was about whether non numeric limits within permits for NPTs under the Clean Water act are permissible under that law. So that was the answer that they gave to that question was no by 5 to 4.
So essentially yes, the answer to this, the short answer is yes, that this would be more complicated. So you know, each of those permits that no longer meets sort of that standard or needs to be reformulated in some way will need to have specific figures associated with whatever contaminants or outputs are within the permit itself that could have been maybe more simply formulated before in sort of a narrative form taking into account the body of water being discharged to that. Now that's no longer going to be kind of accepted as sort of a legal standard under that ruling. So, yeah, there's long term concerns by legal and environmental analysts about the capacity for issuing those permits, how much time they're going to take, how complicated they're going to be. So definitely the answer to that is yes, it will certainly be more complicated going forward.
[00:14:48] Speaker B: Yeah. And maybe this is a segue. I'm sort of jumping ahead a little bit or at least on the back end. Greg, as you can see, I've moved a question around for you because these comments kind of lead into the next one, and that is consent decrees. Right. And I think that was one area where you would express some concern is not the right word, but I would say you at least posited that as an example, consent decrees may have to be maybe challenged or may have to be altered, adjusted, rewritten, and sort of for context. You know, if you, you know, using the EPA data, which is really where we got these numbers in the municipal sector, there are about 107 enforcement actions for municipal and industrial, they're about 129 and the cost of compliance for each, respectively. So municipal is about $56 billion and the industrial is about 3.2 billion. So pretty significant dollars. They do play out over about, I don't know, 20, 25 years. They do take a long time to address these concerns. But one question was, is Chicago's $15 billion consent degree, are those costs being included? Otherwise this seems underestimated. What do you think, Greg?
[00:16:12] Speaker A: Yeah, so I mean, I think what we were trying to do there, and you see the headline about that, this sort of NPTY's permit regime has been overturned. And then people want to know exactly what does it actually mean? And I don't think anybody knows the exact answer to that quite yet. But the idea was that we were trying to find places where you might be likely to see kind of early effects of how that would play out, just based on complexity of different types of permits, how those are issued. And so that's kind of, I think, what we were thinking around sort of the CSO element and that's where those figures come from, from sort of the data that we collect around that. So I think we took a look around the Chicago context itself. I don't think that was actually included in there just in terms of the magnitude that is within that specific project, the Chicago Deep Tunnel, which is I think over 10 billion by itself. So I think that over all that figure likely didn't include that for whatever reason. So we probably bumped that up a little bit just based on some of the larger projects that exist in some of these massive cities that have kind of a combined sewer design and have legacy of issues that they need to address for the federal government that are like you said, they're several decades long. I mean the one in Boston goes back to the 70s and what have you. They're long tail sort of projects that take a long time and have a lot of dollars associated with them. But that was kind of the idea with sort of that progression from the slide around the Supreme Court is just sort of get, get one sort of view of how this could play out long term based on sort of how that permitting program works for certain municipal systems.
[00:18:01] Speaker B: Yeah, I agree and I think the attendee, I'll call it the person asking the question, and I don't was asking whether it's included in those numbers. I don't know why it wouldn't be. I don't know if that's a matter of the way the data was taken from the epa, whether it falls into some other category. One comment that did come out of it and we did some analysis on this a couple years ago when it comes to consent decrees overall and hopefully I'm not digressing too much, but that is enforcement is really over time we've looked at the data shifted away from the federal government. It really has over time been pushed increasingly down to the state and local level. And the reason for that is, you know, the federal government does not want to from on high, so to speak, you know, issue these penalties and such. It should be dealt with at a, at a more local level and that the data has, has showed exactly that. All right, so let's shift gears a little bit. Go to. This would be question number four, if I'm reading correctly. So Trump 2.0, will any deregulation as expected, will that impact, what will this impact on the digital water market be?
[00:19:21] Speaker A: Well, I think around that. I think a lot of those decisions are made based on considerations of ROI overall. So probably less sustainability driven to begin with. So I wouldn't expect to see a huge impact overall with that just regulatory stance overall. I don't know. That's my general feeling. I don't know what you think about that, Reece.
[00:19:49] Speaker B: Yeah, I think, look, the expectation is any chance that they can dial back regulations and that seems to be the case. It's been demonstrated starting at the Supreme Court, it's working its way down into the state and local levels and including the local or state judiciaries.
I think you're right. I mean, I think at the end of the day, and this probably shouldn't change that the, you know, ROI centric deployments focused on things, things like efficiency, cost improvements are paramount. Right. If that's doesn't, if that doesn't pencil out, it's probably not worth it. Now sometimes they do pencil out because the regulations are making them do one thing or another, the utilities or the industrial industrials themselves. So I think, you know, and that's not to say they haven't been doing it, but it is an ongoing challenge that the digital water vendors really do need to emphasize the value creation, whether it be leak reduction, labor productivity, maybe even in, in light of this rather than regulatory compliance. Because if the regulations are not there, what's the point? Or they're reduced. So it's a little bit of a tough question to see how it plays out. I think more than anything, business strategy wise, I would stay the course and just convince the end user the demand side of the equation, the value and the value of, in the return on investment if they deploy those tools. All right, so one part of the discussion, this is number five, one part of the discussion was about layoffs, about voluntary retirements across the board at all these government agencies. We've seen a number of executive orders pushing that through DOGE or not. But one question was about, we talked about epa, we talked about things like fema, we talked about bureau reclamation. One thing we really didn't address was usgs. And so USGS may be affected as well. That was the question. What do you think, Greg?
[00:22:02] Speaker A: Yeah, so I mean USGS is under Department of Interior and like all the other cabinet level agencies. There's been statements about pretty substantial budget cuts and reductions in workforce that are associated with that. I don't think USGS has gotten the amount of headlines as say EPA or Department of Energy or other programs that are maybe more prominent or have been highlighted more so in the media so far. But I don't think there's any reason to think that that won't be affected just based on the way that these cuts are sort of being made wholesale across agencies and sub agencies. There's been a couple of sort of, you know, personal interest stories of people who've worked in Specific agencies that have talked about what's happened in their specific realm and so forth. So there's definitely, you know, that element to it. I haven't seen specific numbers that are associated with usgs, but I don't think there's any reason to think that it would somehow be exempted from what's going on. So that'd be my, my first pass at that. I don't know if you've heard anything more recent.
[00:23:10] Speaker B: No, not specifically, but I do put it in the same light of things like noaa. Right. No one really thinks about the fact that NOAA really does underpin our analysis of weather, climatic events. It is important. It adds value. In the case of usgs, they do things like hydrologic and aquifer monitoring. In the case of the West, I remember years ago, you know, during the California drought where digital companies were coming to us asking us how can they do real time monitoring. What else can be done? When it comes to these USGS wells, they are really valuable in understanding water usage in the West. Could it be better 100%. Is it going to be fully automated overnight by some AI tool potentially being proposed? I doubt that. So yeah, I agree with you. It's, it's probably falls in line with everything else when it comes to layoffs. All right, so let's get to number six. So one of the comments or slides that was made, one of the things we do at Bluefield is we've been tracking IIJ spending across 10 key programs. When the program was rolled out, across those 10 programs, we're looking at about 51/billion dollars being rolled out. This is congressionally authorized spending. And you know, that's sort of what Congress had signed off on. And after the inauguration in January, there was a temporary freeze or impoundment on. Was it all funds? Definitely IIJ and SRF funds by an executive order from January 20th to February 5th. So $13 billion of funds were frozen. And so the question becomes, do we have more details on those impoundments? And was the 13 billion from a specific set of programs or a certain point in the funding pipeline? Do we have any more clarity on that? What do you think, Greg?
[00:25:19] Speaker A: So if I recall, and I may be a little bit off on this in terms of what we were displaying, but I think that was mostly associated with iija. So that would have been primarily SRF funds, small amounts from say with the other programs that were part of that package, but most of it probably through clean water and drinking water, SRF funding overall, which would be through EPA as far as kind of, you know, the, the full status of everything, it's kind of hard to keep track of what has been released and what is still, you know, being attempted to be held back within omb.
I know at least some of those SRF funds were, you know, they. They had their own sort of. Well, at least, you know, the way they framed it, their own sort of internal vetting that they wanted to go through. I know there were some issues that were broached about a green fund program under ira. I mean, that's separate, but there were all these kind of rationales put out for why they were impounding these funds that were supposed to be reaching their sort of contractual obligations at the time. So I guess that's probably not a super satisfying answer overall at the moment right now. I know there have been recipients that have gotten the funding that was obligated to them in that time frame. I think some of that's working its way out. I also think that some of that is going to get elevated to probably the Supreme Court to try to overturn some precedent there. It's still kind of a blurry picture, I think. I don't know if I had the latest around that, but that's my first pass around that. That might not be super satisfying for listeners, but I think it's part of the reality that we're in right now in this interregnum of sort of who does what and why and who decides.
[00:27:14] Speaker B: Yeah, I don't. Finding satisfaction these days is going to be tough, but here I'll see if I can throw something out there just for context. So As I mentioned, $51 billion appropriated, right? That's congressionally authorized spending of that in our last update, 40% of that. So about $20 billion of that has been obligated. So these are binding commitments between the respective government agencies. EPA for like state revolving funds, for example, in the states. Right. So those are legal agreements or commitments. So that's 40% and then project level awards. Right. So we're looking at about 67. $7.7 billion has been awarded for specific projects at utilities. And so that's only 15% of the total. So that's 15% of the $51 billion has hit the street, as I would say. So the challenge is, and not to go back into the entire webcast, but SRF funding in particular, which is where the lion's share of this funding is being channeled through for these 10 programs.
This is for things like lead and PFAS, Western Water et cetera, it takes a long time. And the program does play out over five years. Right. So it's going to take a while. Every state is different. They have different prioritization requirements, they have different programs. You know, even within each state there's a clean water program, a drinking water program.
And so it just takes time. And usually, you know, what we're expecting is to see more results by, I think, late September, early October, as far as the numbers go. So that's why we are talking about it. What I think, if anything, if there's a takeaway during the discussion and this kind of gets back to the $13 billion, is there's a lot of federal dollars that are exposed to pullbacks through impoundments. One can argue whether impoundments are legal or not. That's ultimately is Greg, you and I have talked about going to go to the Supreme Court at some point, whether they actually have the authority to do so or if Congress even has the spine to stand up for its own job. Right. I mean, they're the ones who control the purse, but so far they haven't made a whisper as far as I can tell. So that was really the point of the discussion. All right. With that, I'm trying to keep it between the ditches here. So it appears that most actions pertaining to the EPA were suggested in Project 2025. So what we've seen thus far is the, as the attendee stated, I actually liked Mandy Gunasakar's comment that increased targeted funding might be directed to the state revolving fund comment. That's the question. So, Greg, would you like to make a comment?
[00:30:20] Speaker A: Well, the way that I'm interpreting this is, you know, kind of a continuation in sort of earmarks, congressionally directed spending from Congress itself. So, I mean, between I think it was 2012 and 2022, there was a, you know, like a decade long moratorium on earmarks. So basically for anybody who's not kind of, this is the pork barrel spending, where you basically have the member of the House that's directing money directly to a project in their district.
That was the way that things were done for a long time. And then there's been different periods of time where individual members of the House or senators say, let's move it back to a more neutral way of going to the states and then they decide how that's going to go. So that moratorium ended in 2022. So there's been an uptick in how much money is funneled through congressionally directed spending over the last couple of years. It's pretty significant. I think there's some people who look at the long term viability of the SRF program and are concerned about basically the state match part of it. Is this the beginning of maybe a death spiral since it's not going through the typical payback channel that makes the fund rotate. So certainly I, I think that could be a continuation of a trend that already exists. I mean, it certainly fits into more of a partisan valence and I wouldn't be surprised to see more funding that is around EPA spending to be more kind of targeted at pet projects and things that can be used for more of a partisan lean. So that's my first take on it.
[00:32:09] Speaker B: Yeah. I think in the background is that Mandy Gunasikara authored, I think, the EPA chapter of Project 2025. And really that in that chapter, it's my understanding, I haven't read Project 2025, but what I would say is that what they're calling for is a dismantling of things like climate regulations, reversing clean energy incentives, but also curbing EPA's authority, I think seemingly under the guise of economic protection. So as a result, what this really does is favors things like fossil fuel interests. That's one aspect of it. I would also say, and I agree with you, it kind of pushes it down to what seems to be like even, you know, do these become, these earmarks become political pet projects, so to speak. And it eliminates any prioritization or systematic way of distributing funds. But also, as we noticed through iija, there were a lot of contingencies tied to the state revolving funds. Right. Whether they need to focus on disadvantaged communities, for example. That was one, that's something that the Trump administration is really going after, not just an SRF or ij. We're seeing that with the CHIPS Act. We're seeing it across the board. So any way they can do that. I think you raised a really good point. And this came up actually at least a year ago. I mean, you and I talked about this specifically. I think it was the Congressional Research Service had put together a report on the impact of earmarks as a whole and their rise in their, in their utilization. And I think that is a concern for the states and the state revolving fund programs, because just for clarity, these state revolving fund programs, the primary goal is to provide low interest loans to these utilities in these communities who need to invest in infrastructure, clean water or drinking water. There are instances if it is a community that is unable to pay the loan back, they may turn into grants. So there is Sort of a structure in place. But if earmarks become the norm, right to your point, a continuation of earmarks or maybe even a proliferation of some form of earmark, politically selected or arbitrarily selected projects, and they become grants, those loan dollars don't make it back into the program. And so it does ultimately undermine the long term interest of the state revolving fund. So.
All right, well, let's, let's change gears. Here we go. So I think we actually did address this in the conversation with the webcast and partly because I think I specifically said I like energy. I think it's interesting. And so US LNG versus Russian gas return, what are the investment implications? I don't know if Russian gas is going to what extent it's making its way into Europe already, whether it be through existing channels or even through potential black market. But US LNG is likely to maintain momentum. And this is really whether it be to Europe as well as Asia. My comment was that the oil patch in the US is going to benefit long term. Since 2015, the US producers have been able to export to other markets. The Russia, Ukraine war created a big opportunity to supplement what was lost from the Russians, whether it be through Nord Stream, et cetera. So I think Bluefield's focus, our focus isn't necessarily on LNG directly, but what I think it will be, will be on midstream water. Midstream water management. Places like the Permian Basin is what in Texas and New Mexico as well as the Appalachian. So that would be the Marcellus Shale. We've looked at that over the years in the past. But if no one's talking about renewables anymore because the IRA and those subsidies or incentives have been curtailed, I'm not a full believer in that. Maybe the oil patch is, it's not going away. I don't even say it's back in play because it hasn't gone anywhere. Never produce more oil and gas than we have in the history of the world. If anything, the oil producers are equally concerned about what's happening in Washington because two things. They're concerned that everybody, the Department of Interior is being laid off or fired and therefore no one's going to be able to process their permits to explore for oil and gas on federal lands. That's one. And then secondly, they don't want to drill, baby drill, because the more they drill, the price of oil or gas goes down.
So they do have a bit of a floor. So, you know, when it's $70 a barrel, for example, I think they're Pretty comfortable. It gets below 50, it's a whole nother matter.
[00:37:32] Speaker A: Well, and if there's a general economic slowdown, will that be a concern as well? Nobody needs oil as much as they do when there's a boom. Right. So with what's going to happen now in terms of projections for the rest of the year and kind of the global slowdown based on all of deliberation, will be interesting to see how that affects the outlook there.
[00:37:56] Speaker B: Yeah, it'll be interesting.
Well, I shouldn't say interesting.
We are curious to see how this unfolds. All right, so I have a little bit more fun here. So water from Canada, one of the questions that came up had to do with the Boundary Waters Treaty, International Joint Commission, Are those at risk given what's happening with Canada?
I think there was the remark about the faucet is now open from Canada. What are your thoughts, Greg, on our relationship with Canada and what are we going to get out of them?
[00:38:37] Speaker A: Well, I mean, as far as the actual physical faucet, I'm not sure how that factors in. It was more of a rhetorical device. I think the early, I mean, it's been, what, not even three months, the posturing around different bilateral relationships, particularly with our most immediate neighbors, is probably what nobody predicted a couple months ago. I don't know what that actually means in terms of actual action. I don't think it would be terribly surprising based on what's happened so far, to hear additional saber rattling about shared water resources across the international border, whether it's the Great Lakes or other, you know, sources that come from the Canadian Rockies down through, you know, the, the topography. So how that actually plays out, I, I doubt would be actually anything substantive policy wise.
Doesn't mean that there won't be remarks around it that could, you know, further degrade how the two countries are currently relating to each other.
[00:39:46] Speaker B: I think when you start talking about treaties and international treaties at that, I suspect they'll go well beyond the, this current presidential and congressional terms in a discussion such as that. But you never know. Trump is now talking about a third term, so we'll see where that goes as you roll your eyes on the other side. But. All right, let's change gears again. And this may be apropos Liberation Day. Are manufacturers reshoring due to administration pressure?
Probably a little early to say that, but I think, you know, one of the questions, obviously it was about tariffs and material prices and what all that means. But what do you think, Greg? We're going to see reshoring of the supply chain.
[00:40:39] Speaker A: Well, I mean, there's been other policies that have been, you know, more measured and directed in this way. I mean, it's kind of the genesis of baba, which is itself not a brand new thing. I mean, some of that goes back to the 30s. So there's small amounts of, I would say probably companies that we look at in the space that have moved certain product lines or parts of product lines that made sense to do so. I mean, I'm thinking about things like pumps and valves and pipes to some degree. I don't think it's a big enough share of probably some of these companies portfolios and where they're targeting to think about that. I mean, if you think about how long it takes to set up new manufacturing within the U.S. i mean, we're probably talking years in most cases.
With the particular news of yesterday, there's the fact that there doesn't seem a whole lot of rationale between some of the figures that have been issued, the authority to actually issue them to begin with, how long they're going to last, if there's going to be. There are small inklings. It looks like, at least on the part of some people in both the House and the Senate, on both sides of the aisle, that they see that this is probably kind of an issue and they're maybe making the tiniest steps towards taking back the power that they constitutionally have to do this. So it's really a hard sort of atmosphere to plan for. If you're a producer, you know, how to interpret these tariffs that were issued the other day, how to interpret them, how long are they going to last? You know, do you, do you get into, you know, making your plans for reshoring and then they get eliminated? You know, it's sort of a tough. There's the tariffs themselves and then there's the uncertainty around the tariffs. When you put them together, it's very difficult to, to kind of forecast how manage your supply chain and so forth. So I mean, I think it's too early to say. I would doubt that it's a great signal for a lot of companies looking at their futures of what to make of some of this news. So I don't know. That's my kind of general take.
[00:42:55] Speaker B: No, I think it's hard to pin down and I think as I mentioned earlier, one of the things we do is we look quarterly at the top publicly traded companies. We see what they're saying. There's not a lot of detail. You know, partly because annual reporting, there's a Bit of a lag. Right. They're really looking at 2024 and by the time they're sort of their books were closed and they're moving forward on their reporting, you know, only then was the Trump administration coming in, into power in the, in the White House.
I, we suspect that next quarter there'll be more discussion about it and maybe even more so now after Liberation Day. But you know, a couple companies that did jump out in our notes, and I think I mentioned this on the webcast, companies like Badger Meter, I mean they were exposed to Mexico, but Mexico seems to have gotten a bit of a pass yesterday, at least more so than others. Itron same thing. You know, they flagged Mexico as a, there's a tariff risk zone. Watts Water Technologies is a company we track. They continue to source raw materials. I mean, there's certain things that you have to go to China for. So to extract oneself or the company from places like China or Asia, it's pretty tough to do. So I mean, the administration can certainly argue that this is going to have to play out over the better part of a decade because that may be what it takes to reorient some of these supply chains if that is in fact the course we continue to go. Now, it is worth stating that these are executive orders and so whomever is the president can repeal those executive orders.
They're not set forth by Congress at this point. Other companies, and just to throw it out there, Xylem, they said that they were only exposed about 5% or so, approximately 5% to China as a result of post 2020 supply chain reconfiguration. At least that's what our notes were showing. And then other companies, Mueller Water and IDEX Corporation, that's the idea company, they not ID Laboratories, they had emphasized the benefits of their local supply chains, that they were somewhat insulated, which limits their exposure. But I think, you know, those are just a couple examples of, you know, what we were talking about in the webcast. So does that make sense to you, Greg? Anything else, dad?
[00:45:37] Speaker A: No, I think, yeah, to your point, they obviously there was some, some murmurs in the first quarter, but you know, it, the rubber didn't really hit the road on this until I guess just yesterday in terms of what we're going to see going forward in some ways. So that picture is likely to evolve pretty quickly as we move forward in 2025.
[00:46:00] Speaker B: Yeah, exactly. All right, now let's get to our last question.
How has the federal share of water infrastructure funding declined and what's the outlook going forward? What do you think?
[00:46:14] Speaker A: I mean, I think we talked about this a little bit on the webcast. In terms of that overall share, I think the high point was in the early 70s when the Keystone laws around water quality after the EPA was formed, so Clean Water Act, Safe Drinking Water act were formulated that you saw around 30% of the overall funding for water infrastructure was the norm in the early 70s, and that's down to, I think, less than 5% today. Actually, Brookings put out a study last week. It was bigger than just water infrastructure, but basically showing some of these trends of amount of spend per gdp, amount of spend, federal versus state versus local. And you can see this overall basically kind of deferment and capital investment. And if you want to look at it in terms of a priority of the, you know, it moving down on the list over the past three or four decades. So that. That definitely tracks with kind of, you know, how we were sort of looking at things.
So, yeah, it's definitely been more of a state and local make up the. The share today than it has or say, like the last half century.
[00:47:29] Speaker B: Yeah, I mean, I think it has been pushed to state, state and local. I think I was just reviewing our upcoming treatment plant and system forecast. That's looking at, as we say, internally at vertical infrastructure. The pipe forecasts are coming out soon thereafter. We're sort of railing out those numbers. But the point being is, you know, the federal government's role overall has declined. I think you actually raised this several. A year or two ago, it was interesting. We were talking about, I think it was infrastructure week or IIJA and what all this means.
And it's $55 billion of new funding that goes to water, wastewater, infrastructure, broadly speaking. But it still pales in comparison to what the federal funding or what that investment was in the 70s. So I assume it was, you know, Nixon had signed all these into law or Congress had appropriated the funds. But everybody gets all excited about this about IJ and how big it is, but it's pretty small compared to what it was. And that was after we were seeing rivers on fire and all sorts of horrors that one would think, hopefully, that we will never revisit that again. But I'm not sure at this point.
So, yeah, I think there, as I've said before, there is no white knight from Washington that's going to come save the day. Unfortunately, if anything, the role of the federal government and spending is. I was having a conversation with someone yesterday. I think it was the CBO had just put out real concerns about debt levels. And we're racing, our debt levels are so high now.
How are you going to recover? And the only way to do so is cut spending but also raise taxes because the net difference is so huge and we're spiraling like a freight terrain down the tracks. And that's a real concern that while we're concerned about state revolving funds and federal funding, I think that's a overarching economic concern. That is real.
[00:49:52] Speaker A: Yeah, I saw a news story about potential credit downgrading of the federal government coming up potentially this year, depending on how this plays out. So never a dull moment.
[00:50:04] Speaker B: No, no, not at all. So with that being said, I think that was my last question or the listener's last question.
So with that, I'll set you free. But I think what we are, we appreciate the attendees. What we are thinking is finding ways to kind of open up more of a dialogue about what's happening in Washington on a more regular basis. It feels, you know, whether that's needed long term or is it an acute issue or is it more chronic where we need to be doing this on a regular basis. So kind of talking internally, best approaches, best ways to do it that are easy for the listener, easy for, admittedly our team here and being able to provide real value. So be on the lookout for what we do next. And no promises, but we are listening. So. All right, Greg, I'll set you free. Thanks a million. And we'll talk again soon.
[00:51:03] Speaker A: Thanks, Rhys.
[00:51:04] Speaker B: Cheers.
All right, so I think that was great conversation with Greg. Appreciate him jumping on a little bit of free form conversation there. So I like that. Couple quick thoughts. Just where we are. And I'll just reiterate, I think I did this in the webcast, but that is political volatility or policy volatility, excuse me, really equals market uncertainty and uncertainty. That is the killer. The intersection of the Supreme Court rulings, executive orders, Project 2025 proposals, they really do signal a reorientation of environmental governance, that is things related to water, wastewater, pushing things from federal to state control.
So that's going to impact permitting, it's going to impact funding flows, how those dollars are actually utilized, as well as compliance obligations across the water sector.
Another thing to think about is, you know, following the funding structures, not the headlines. You know, while IJ headlines emphasize historic investment or significant investment, the execution risk remains high given what's happening in Washington. That being said, courts in many cases have pushed back, so federal funding has been held up to some extent. So we'll see how that plays out. Congress may be just letting the courts deal with this, but you know, the courts really don't have any enforcement ability to do so. But also business strategies really need to account for state by state variability, project delays, which are likely going to happen. Just uncertainty in and of itself and shifting federal priorities. I think the other thing to think about, speaking of Liberation Day tariffs, right, if prices are going to climb, are people going to defer spending until they have some certainty of what the prices are for certain pieces of kit and equipment that come from outside of the US There's a lot going on. And this also includes a role at earmarks and you know, which are related to political whims at the local level. And then lastly, as I mentioned, at the very end, it's amazingly, it's been a strong couple of years. As I had a conversation with someone yesterday, the thought that we would have emerged from COVID We didn't even emerge from COVID we just blew through Covid and with strong tailwinds. And these tailwinds were really strengthened by IIJ and other stimulus funds delivered from quite honestly, both sides of the aisle. So we all need to own this. But as I said to someone yesterday, it also feels like we've been on an antibiotic and that is stimulus and we are starting to or seemingly building resistance which might be catastrophic. That is our debt levels are getting so high and no one wants to be the bad guy and rein it in. So it is a legitimate concern that we all need to be looking at. And this is where congressional leadership comes into play, where we can't just be spending to our heart's desire and lowering taxes at the same time. In fact, we probably need to be increasing taxes as well as reining in spending. That will continue to allow us and our lifestyles to some extent to be sustainable because otherwise, given the uncertainty in the global markets, trade war, not our own economic stability is critical to moving forward so as we know it.
So with that being said, that's a wrap for number 116. So thanks for being part of the journey. We're still in 2025, so let's enjoy it while we can before we sign off. If you're in Boston, Barcelona, I'm going to throw it out there. Chicago, New York, the Bay Area, Paris, let us know we'd enjoy the opportunity for a meeting because all those places, Bluefield is there. So help us help you figure out what's going on in water. Send us a Note to water expertsluefieldresearch.com with any topic ideas you'd like us to discuss. We're doing this for you, not us. We like to talk, but not that much. Tell a friend about it. That's how the word gets out there. When things go viral, everybody learns. Hopefully this podcast in these water industry insights been brought to you by the one and only Bluefield Research. To learn more about us, Visit
[email protected] until we talk again. Be well, be safe, and take care.
[00:55:43] Speaker A: Sa.
