^{A more rational pie starts with WIFIA amendments}

When Coke, Pepsi and Dr Pepper battle each other for market share, it might result in an improvement in one or more of the products (Schumpeter’s ‘creative destruction’) or, more likely for such similar items, a zero-sum outcome that’s a win for some shareholders and a loss for others. Fine — that’s how profit-maximizing private-sector markets work.

But when three federally subsidized infrastructure financing ‘products’ — WIFIA loans, SRF loans and tax-exempt bonds — have such a degree of overlap that they compete with each other for ‘market share’ in US water capex, how should we view that? Federal taxpayers are the ‘shareholders’ in all three with respect to subsidies [1] and their goal is not profit-maximization but ‘national public good’ maximization. Obviously, an intentional and unified federal policy was not responsible for this ‘Coke-Pepsi-Dr Pepper’ outcome — it was the result of organic and siloed development. But now that the outcome is clear, especially in light of WIFIA’s eight-years of operation, what should be done to improve federal taxpayers’ return in terms of public good maximization?

In theory, I suppose, you could argue that allowing the three financing ‘products’ to continue competing might have some value with respect to ultimate policy design — a kind of creative destruction phase for policymakers to observe what works and what doesn’t. But is that useful at this point? We’re talking about basic water projects, long-established water agency borrowers, and straightforward project financing principles. To the extent any ‘experimentation’ was necessary, WIFIA’s interaction with SRFs and bonds for the last eight years provides sufficient — and in retrospect, entirely predictable — evidence that if displacement among the products can happen, it will, and in accordance with simple observable factors like borrower cost and levels of federal funding. No mysteries there.

More realistically, the status quo will lead to zero-sum outcomes — pointless competition influenced primarily by ‘advertising’ and ‘branding narratives’ pushed by lobbyists and interest groups, without any improvement in the ostensible objective of all three, US water infrastructure as a national public good.

Well, so what? Federal taxpayers are not exactly ‘activist shareholders’ when it comes to such relatively minor and highly technocratic matters as US federally subsidized water infrastructure finance. The zero-sum status quo is safe in their hands.

But what about the ‘consumers’ — US water sector agencies and stakeholders? In happier times, they might not have cared too much, either. As long as the three products remained on offer, and they could take advantage of periodic ‘specials’ that favored one product over another (e.g., due to atypical interest rates or a big dollop of federal funding), the state of the overall ‘market’ wasn’t their concern.

With harder times, that indifference is likely to change, for two reasons. First, although federal taxpayers will remain oblivious, federal policymakers looking for couch change or motivated by ideology can attack apparently ‘duplicative’ programs, as has already been seen in the WH FY2026 Budget Proposal.

Second, and much more substantively, borrowers facing increasingly difficult funding challenges will start looking for federally subsidized financing ‘products’ which not only have the traditional lower interest rate but can facilitate more affordable hikes in taxes and water rates through loan features (e.g., slower amortization, debt service deferral, etc.). When they become aware that WIFIA loan terms are relatively easy to redesign and amend for that purpose, the contours of the larger ‘market’ in which WIFIA loans interact with SRF loans and bonds will also be more relevant. If WIFIA is significantly improved, potential synergies between the now-differentiated ‘products’ will become more apparent, and borrowers may be motivated to seek improvements in the other two, though that’s more difficult [2].

WIFIA improvement is necessary in itself, of course. But the process can be a bridge to a more unified and rational approach to the whole federally subsidized water infrastructure finance ‘marketplace’. Stakeholders and their advocacy groups should consider the value of this proactively, as it’s in the interest of both water sector borrowers and federal taxpayers [3]. Even policymakers seeking to find budgetary couch change or score ideological points might find some things they like in it.

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Notes

[1] Tax-exempt bond investors are ‘shareholders’ in the non-subsidized part of the bond ‘product’. But they are ‘consumers’ of the federal subsidy via tax shelter, and their interest in that subsidy is not aligned with either federal taxpayers or bond issuers: They maximize profits by gaining the biggest possible tax-exemption from the former, while sharing the least possible part of the value of it with the latter.

[2] The SRF statutory framework is long-established and covers a huge amount of ground — perhaps the best that can be done there is to consider the importance of predictable funding and encourage leverage, including by improved SWIFIA loans. Tax-exempt bond change through tax-code amendment is a whole other world.

[3] The interest of tax-exempt bond investors is more complicated. Their profit-maximizing goal would be best achieved by a monopoly on the ‘market’, so ideas about improving the public good by making other federally subsidized finance sources more useful (and hence more competitive with bonds) will be quietly (or even surreptitiously) resisted. Perhaps the prospect of synergies leading to a win-win outcome (a bigger US water capex pie) could soften their resistance? Or, more subtly, that a clear (even dominant) role in an intentional federal water finance policy might be a good defense against future 2017-type cuts? I don’t know.