In a prior post, I raised the idea that CWIFP should be allowed to lend to revolving funds that in turn lend to smaller dam rehabilitation and removal projects. This was based on an analogy to WIFIA’s explicit ability, reinforced by SWIFIA legislation, to make loans to SRFs. This post will sketch out that idea a little further.
Analogous Policy Objectives
The federal government has a lot of genuine strengths as a large-scale lender to US public infrastructure projects – cost-effective interest rate management, loan terms far longer than market, structural flexibility, etc. – that go beyond just offering cheap loans.
Large projects can utilize these features efficiently in large loans from federal programs. Smaller projects usually can’t, for any number of eligibility and transactional reasons. Yet smaller projects are the ones that would benefit most from financing alternatives.
There are two ways to address this. One is to add special provisions and policy objectives to federal infrastructure loan programs to ensure that small loans to small projects (especially in disadvantaged communities, etc.) are also being done. This approach is not ideal. Small-scale project financing is not a federal strength – arguably, it’s a weakness, or at best highly inefficient. And there is inevitably an element of federal centralization that not everyone agrees is the best way to support US local infrastructure renewal.
I think the other solution is much better, both in theory and in practice – have the federal program make large loans (with all their useful features) to local public-sector or policy-oriented lenders who in turn make loans to their local small projects. More efficient, less centralized, broader eligibility [1]. That’s the goal of SWIFIA. The DOT’s TIFIA has something similar.
Analogously with these established precedents, especially with respect to policy objectives and implementation efficiency, CWIFP should be able to make loans to local funds that will specialize in small dams.
Under Current WIFIA Statute
CWIFP doesn’t have explicit authority to do this under current WIFIA law. Even if some SRFs could make loans to small dams (e.g., as part of a larger state infrastructure bank), WIFIA loans to SRFs are limited to drinking and clean water projects specified in the CWA legislation.
But there is possible path in WIFIA’s eligible projects section, §3905.10:
A combination of projects secured by a common security pledge, each of which is eligible under paragraph (1), (2), (3), (4), (5), (6), (7), or (8), for which an eligible entity, or a combination of eligible entities, submits a single application.
Paragraphs 1 and 8 are relevant to dams and specifically noted in CWIFP’s site, as is this paragraph 10.
The interpretation of a “common security pledge” is central. A group of different projects getting together to apply for a single large WIFIA loan but with each offering separate security for the loan won’t work.
But if a separate eligible entity (the §3904 list includes various forms suitable for financial role) plans to lend individually to separate, eligible projects, then the “combination” occurs only at that entity. The security pledge that the lending entity will offer for a WIFIA loan is “common” is the sense that the one pledge covers the entity’s entire portfolio.
It needs to go further, however. If the lending entity is a thinly capitalized shell in which the only real security is in the individual loans, then the common pledge is not substantive. But that arrangement would probably fail WIFIA’s creditworthiness tests anyway. To get to an investment-grade standard on a relatively small and chunky portfolio of loans, the lending entity will need a fair amount of real capital beneath the WIFIA loan — federal or state grants, philanthropic, subordinated impact investor tranches, maybe even a slice of private-equity. A WIFIA loan is limited to 49% of the aggregate project cost — that’s probably the maximum amount of investment-grade senior debt possible in this situation, so I think it’s safe to assume that all other capital is subordinated in some way.
Now the common pledge for the senior WIFIA loan will have independent value, not just a pass-through of the individual loans. The “combination” at the lending entity is now also substantive — security in the individual projects is being combined into a single asset (the loan portfolio) and shared in various ways among the lending entity’s investors and WIFIA. It’s worth pointing out that security pledges in this kind of small loans are really about contractual cash flows (from local taxes or user fees), not the value of tangible collateral. In effect, completely fungible cash flows are being combined and shared without regard to individual loans.
I think this approach should comply with the letter and spirit of the language in §3905.10, especially since it effectively requires that the lending entity works in basically the same way as an explicitly eligible SRF. But it’s not bulletproof by any means. The language can be interpreted with a conservative slant, extrapolating “common” to mean full cross-collateralization, for example. And there’s always the basic rule of the disinclined bureaucrat – whatever is not expressly and literally permitted is prohibited.
Statutory Paths
Increasing the certainty of CWIFP’s ability to lend to small dam funds will involve a statutory change. Possible paths would range from minor word changes in §3905.10 (e.g., clarifying that “combination” and “common” requirements are satisfied by a lending portfolio) to full-blown SWIFIA-like statement with new definitions.
In the near-term, however, I think any proposed changes should be very limited until the demand for, and utility of, CWIFP loans to funds becomes clearer. It’s still early in a long-term process of program development and evolution. Perhaps the best way for now is simply some version of a study of the topic like the one proposed for collaborative delivery in Section 4 (b) of last year’s HR 8127. The study could include an assessment of the need for small dam finance, how revolving funds could address this need, various structural alternatives, and finally, required legislative changes for implementation.
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Notes
[1] This is recognized to some extent by the program itself. From page 16 of the current WIFIA handbook:
By including multiple projects in a single loan, borrowers gain:
Financing certainty for all the included projects expected to be constructed in a 5-year period. Borrowers can request disbursements for any project included in the loan immediately following closing until one year after substantial completion of the final project.
The ability to use WIFIA loans to finance smaller projects that would not individually meet the WIFIA program’s minimum project cost requirement, $5 million for small communities and $20 million all other communities.