The passage of the Infrastructure Investment and Jobs Act (IIJA), which was signed into law in November 2021, is already starting to drive funding to some of America’s most important and chronically underfunded infrastructure projects. The $1.2T bill includes much-needed funding for traditional and next-generation infrastructure areas such as roads and bridges, electrification, rail, broadband access and clean water. For a thorough breakdown of the bill, please check out our piece on Congress passing the IIJA. Most of the IIJA’s impact will play out over decades, but with spending already underway and key plans formulating, we highlight a few projects poised to benefit in the near term.
Key Takeaways
A combination of federal logistics and urgency will determine the extent to which programs receive IIJA funding in 2022. The bill tasks cabinet-level departments such as the Department of Transportation (DOT) and the Department of Energy (DOE) with distributing apportionments to states. Within these departments, several agencies announced allocations from the IIJA that will be available in 2022:
Clean water initiatives such as pipe replacement could be among the first projects to receive IIJA funding tranches because longstanding programs exist to deliver this kind of investment. For example, the Drinking and Clean Water State Revolving Funds (DWSRF and CWSRF), the main mechanisms by which the EPA will distribute funding to the state level, originated in 1996 and 1987, respectively. The bill dramatically increases funding levels for these programs, but the framework to distribute resources to the state level is largely in place.4 Conversely, the DOE’s many next-generation infrastructure investments may take longer to mobilize, as 56 of the department’s 69 IIJA-funded projects originate with the bill.5
Another factor likely to impact timing is whether a program provides discretionary or formula grant funding. Discretionary funding requires states to create proposals and essentially compete for additional allocations, whereas formula grants are automatically distributed to states based on a statutory methodology. The extra steps associated with competitive funding add a layer of red tape, and thus can delay implementation. However, formula grant initiatives such as the Airport Infrastructure Grant and Bridge Formula programs can roll out funding as soon as this year.6 Overall, about 60% of IIJA state-level funding is formula-based.7
The federal government is also pushing funds toward projects that expand port capacity in a bid to counter recent supply chain bottlenecks related to the pandemic. As of January 2022, a record 109 cargo ships were waiting to enter the Port of Los Angeles, a testament to ongoing supply chain challenges.8 Although current port expansion projects are unlikely to be completed in time to alleviate the current situation, the Biden administration is making a point of distributing these funds as soon as possible in an effort to protect against future supply chain issues. As a result, the DOT awarded $241M for various port expansion projects last December, barely a month after President Biden signed the IIJA into law.9 In 2022, the U.S. Army Corps of Engineers (USACE) will follow this allocation up by dedicating almost $4B toward coastal port and inland waterway improvement projects.10
Some long-stalled projects are finally moving forward due to the IIJA, while other projects could be poised to advance to their next stages on schedule.
Most programs funded by the IIJA represent long-term investments that will not translate into new construction projects until the mid-2020s. The process of moving infrastructure funds from federal coffers to state and then local governments is time-consuming, and construction projects are also seldom known for their brevity. For reference, Congressional Budget Office forecasts suggest the federal government will disburse 51% of authorized IIJA funding by 2026 and 86% by 2031.23 Infrastructure spending is likely to accelerate in 2023 as federal agencies build out logistical frameworks for new infrastructure programs, streamline approval processes and engage with states on competitive grants.
In our view, longer duration spending could be positive for the infrastructure space, as infrastructure companies need time to hire personnel or otherwise scale capacity. Rapid infrastructure spending is not always optimal. For example, in 2009 lawmakers designed the American Recovery Reinvestment Act and its $48B transportation infrastructure allocation as short-term stimulus.24 But in practice, the pace at which the bill authorized the DOT to distribute funding left federal dollars on the table as local governments and companies struggled to identify “shovel-ready” projects. The gradual spending mechanics featured in the IIJA could prove more appropriate for infrastructure spending.
Conclusion
We believe 2022 could be an important year for infrastructure projects and the companies in the space, particularly those associated with clean water and ports, which are priorities for the Biden administration. Several agencies are already distributing IIJA funding to the state level, with more slated to unveil their strategies in the coming months. Infrastructure projects often require patience from everyone involved, as it takes time for funding to make its way to the shovels. However, the plan to implement IIJA funding gradually is likely to generate stronger tailwinds for the infrastructure space in years to come.
Related ETFs
PAVE: The Global X U.S. Infrastructure Development ETF seeks to invest in companies that stand to benefit from a potential increase in infrastructure activity in the United States, including those involved in the production of raw materials, heavy equipment, engineering, and construction.
AQWA: The Global X Clean Water ETF seeks to invest in companies advancing the provision of clean water through industrial water treatment, storage and distribution infrastructure, as well as purification and efficiency strategies, among other activities.
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