I put some thought into WIFIA statutory eligibility for portfolios of small dam removal and rehabilitation projects in 2023, CWIFP Loans to Small Dam Funds and Small Dam Financing Co-Op. Now I’m thinking that the concepts could be relevant in HR 6229 for all WIFIA and CWIFP small projects.
As I’ve written about a number of times, WIFIA as a federal loan program ought to be focused on large very creditworthy loans — this focus plays to federal strengths and can mitigate some federal weaknesses. This is especially true for project finance, a complex specialty that even private-sector lenders can find challenging.
How Can WIFIA Efficiently Lend to Small Projects?
But small, less creditworthy water projects are a big category that’s even more in need of federal financing assistance to unlock what limited local funding is available. Trying to do something to improve WIFIA’s capabilities in this area makes a lot of sense, both in terms of real-world policy outcomes and, well, politics. Program renewal (maybe even survival?) is going to need a broader base than large, well-heeled water systems who can consider a WIFIA loan an ‘occasionally useful‘ option for sophisticated interest rate management. You need some folks in the mix who really benefit from (and appreciate!) basic financing at UST rates, even if it’s a few basis points off the latest yield curve. WIFIA needs policy and political additionality, as it were.
Just lowering minimum project size and ‘prioritizing’ small communities, however, is no more than declaring a policy intention — necessary but not sufficient. WIFIA is simply not going to be very good at efficiently originating and processing a multitude of small project finance loans. On their side, small communities will see that notwithstanding a low minimum project size and a welcoming attitude, WIFIA’s general statutory framework is fundamentally suited to deal with institutional-scale Aa2/AA borrowers, a daunting process in which it’s not at all easy for small projects to succeed. Previous EPA announcements for prioritizing small loans didn’t result in any significant demand — if there wasn’t a stampede for $5m loans, why would that happen with a $1m threshold? More substantial accommodation is required.
The SWIFIA Principle
How — realistically — to make progress without distorting what makes the WIFIA Program uniquely effective as a federal infrastructure loan program in the first place? I think the answer lies in an analogous path, already successfully trodden — SWIFIA loans. This WIFIA capability, enacted in the 2018 AWIA bill, allows the Program to make big loans to SRFs against a portfolio of small loans. This approach allows WIFIA’s federal lending strengths and scale economies to become available to small projects through non-federal intermediaries — a kind of ‘wholesale’ to ‘retail’ supply chain. (SWIFIA ought to get far more utilization — but that’s another topic).
Since the essential policy principle of WIFIA lending against a portfolio has been established — and can be highlighted as such — policymakers can focus on the required legal and financial mechanisms. In one sense, they’re not mysterious — there’s the SWIFIA precedent to begin with, and then there’s all the well-established machinery of an immense financial sector devoted to long-term loan portfolio securitization, not the least of which are the federally backed home mortgage giants, Fannie Mae and Freddie Mac. Plenty to work with.
Still — no one should expect an overnight transformation. Even the much-vaunted New Deal success story of 30Y home mortgages, roughly analogous to a federal effort to broaden efficient credit access for small project financings, took about twenty years to accomplish in its current form. That’s as it should be — ‘narrative spin’ and politically oriented policy ‘priority’ statements are quick, easy, and can get the ball rolling. But real and sustainable transformation is an organic development that will take time and persistence.
First Step in HR 6229
Perhaps the process could begin with a small and highly technical-seeming addition to the current HR 6229 bill?
As I described in the prior posts about small dams and CWIFP, the addition works with an existing WIFIA eligibility category for small project ‘combinations’, §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.
Small project combinations are frequently financed with WIFIA, but always for a large single investment-grade borrower (an ‘eligible entity’) implementing a long-term multi-project capital plan. It’s a very useful feature for transactional efficiency and for overcoming, where necessary, the $20m minimum project size threshold. (And, oh btw, very handy for option-style interest rate management — more on that in future posts).
Multiple borrowers (a ‘combination of eligible entities’) submitting a single application for a combination of small projects are also eligible, which appears to go in the right direction. But there’s a roadblock — the required ‘common security pledge’ is interpreted (and perhaps was intended) to include at least full cross-default and cross-acceleration and probably in effect joint and several liability. Communities obviously won’t take that risk on each other. It’s the equivalent of requiring home mortgage borrowers to guarantee everyone else’s mortgage in the HOA before being eligible for a federal support. Total non-starter.
A slight modification of this extreme security requirement could make a huge difference. The possible addition to HR 6229 sketched in the one-page PDF above simply ‘loosens up’ the language in §3905.10 to allow WIFIA to consider other types of ‘security arrangements’ in a small project combination application as long as other WIFIA loan credit and seniority standards can be achieved. Technical assistance for small projects, already emphasized in HR 6229, could be expanded to help a group of small project borrowers and other eligible stakeholders put together something that might work. Assistance in these specialized financial technical matters is likely to be sorely needed, and the process of providing it would provide an early-stage venue for brainstorming with the Program.
Note the new language and technical assistance doesn’t specify what eligible security arrangements should be, or even what the Program is likely to approve. It simply says: “Other arrangements for small project combinations are not excluded — we’re open-minded and we’ll work with you”. Isn’t that pretty much the same political message that the current HR 6229 language lowering minimum project size is sending?
What an Eligible Security Arrangement Might Look Like
As described in the prior small dam posts, I can see how a combination of small projects and small borrowers, none of which can meet WIFIA size and credit requirements on their own, could successfully apply for a big SWIFIA-style loan. Something like this:
Yes, I know — a lot of boxes and financial terms. But in actuality such a structure is simply utilizing straightforward ‘securitization’ portfolio mechanics, analogous in policy terms to SWIFIA SRF loans. Remember that WIFIA only finances 49% of the project cost — 51% of the money had to come from other sources in any case. It may not be difficult to ‘pool’ the 51% that would have gone into individual small projects anyway (e.g., from SRF loans or grants) into portfolio sub-debt and equity categories.
A few other considerations:
- The overall policy direction of expanded federal financing for small projects is consistent with the ‘states should fund their own infrastructure’ statement from Trump’s WH FY26 Budget Summary. Low-risk, large-scale financing is something the federal government is good at (e.g., home mortgage markets) but lower-credit, small-scale funding is challenging (e.g., pre-New Deal home mortgage income requirements). If you want states and localities to fund their own infrastructure (which after all is an integral part of national social and economic well-being), support them with financing.
- The 55Y loan term amendment in HR 6229 would work very well with an expanded scope for small project combinations. The 55Y term is suitable for long-lived, life-essential projects (e.g., pipe systems, sewers, levees). Such projects usually have a lower technical and credit risk profile — lower debt service payments of a 55Y term helps with the latter. I can imagine specific long-lived portfolios being put together. Most importantly, allowing small projects to access such a uniquely long loan term might be a game-changer for localities. Again, the analogy with the 30Y term available in the federally supported home mortgage market applies — prior to that, mortgages were limited to five- or ten-year bullets. The longer term made a big difference in home ownership, to say the least.
- One downside should be considered – WIFIA-eligible small project combinations could represent competition for SRFs. But as noted above, if an SRF was going to make a loan to a small project anyway, wouldn’t a sub debt or other more value-added part of the capital structure be a better use of their limited financing capacity? WIFIA and SRF loans have worked well together in many individual projects due to their complementary features. Applying this principle on a portfolio basis would have scale economies and scope for innovation for both sources of federal financing. More generally, WIFIA and SRF policy needs coordinating to avoid competition and overlap in any case — working together on small project portfolios are naturally part of that discussion, so why not get it started?