It’s a simple change. WIFIA’s current maximum loan term is 35 years post-construction. That should be extended to at least 55 years for long-lived water infrastructure projects.

The topic has been covered in previous posts: WIFIA 55-Year Loan Term (September 2020) and Extended Term for WIFIA Loans (February 2021).

Same Story

The basic story hasn’t changed. Although interest rates are significantly higher than before, the benefit of a 55-year term WIFIA loan relative to a 35-year term one is about 6% lower PV of debt service, or about $6 million for a $100 million project. The other numbers (minor FCRA cost increases, lower tax-expenditure) are also about the same:

The primary driver of the increased benefit – a longer term’s relatively greater utilization of US Treasury flat-forward pricing – also remains the same:

There’s even a bill in Congress, the Water Infrastructure Finance and Innovation Act Amendments of 2022, that has precisely the same language for a 55-year term as the WIFIA Improvement Act of 2020 did. (There are other things in the 2022 bill, too, but that’s a topic for another post.)

Different World

What’s changed – a lot – is the outlook for the economic, political and social context in which US water infrastructure renewal will develop in the coming years. Federal infrastructure loan programs are likely to be an increasingly important federal policy tool in more challenging conditions. Here’s a recent post: Hard Times Ahead.

In the relative optimism of recent years, extending the maximum term of certain loans in a small sectoral program for large water utilities might have seemed…well, not exactly a compelling priority, regardless of logic or potential benefits. I think it was seen as a minor change for some Western water management projects that had other issues with the WIFIA program (federal budgeting) and useful only to a regional constituency. The WIFIA Improvement Act of 2020 went nowhere.

A pessimistic outlook will – or at least, should – change that perception. Yes, it’s still a minor change and only applicable to long-lived water projects. But more relevant in a tough environment:

• Local funding will be even scarcer, especially for types of infrastructure where it’s easier to kick the can and defer renewal – like stormwater systems. These projects tend to be mainly composed of long-lived, structural assets which could support and benefit from a 55-year loan term. As more water agencies look for WIFIA loans to mitigate the effects of higher interest rates and inflation, they’ll be plenty with long-lived assets. And they’ll be looking for every penny of benefit they can get. That constituency will be national in scale and highly motivated.

• Federal infrastructure loan programs will need to expand their capacity but also their capabilities. Not big, transformational changes (that’ll be impossible) but many small, specific modifications to loan products that have predictable benefits. Extending WIFIA’s maximum term is a perfect example of what’ll be required. As such it can serve as a demonstration that, despite overall political polarization and dysfunction, at least one area of federal policy can be successful. It shouldn’t be difficult — TIFIA just extended their maximum term (to 75 years, no less) in the 2021 IIJAA. A win for WIFIA’s maximum term will encourage more of what will work.

• More subtly, longer terms for infrastructure loans help shift the focus to the long run, where it belongs, and away from a business-as-usual mindset. That focus matters for evaluating investment in climate change, long-term environmental sustainability and quality of life for future generations. It’s no secret that the ESG agenda doesn’t seem to have the kind of consensus behind it as it did recently – a trend that is likely to get worse. An extended term for WIFIA loans is a small step in the right direction.

A lot of decisions about US public infrastructure will need to happen in the near future. That’s not a choice. For the past decade at least, there was reason for optimism that those decisions would include additional investment for sustainability, social goals and climate change adaptation.

But suddenly, that optimism doesn’t look so justified anymore, as yet more articles like this appear. Now it seems almost certain that funding for anything other than bare bones replacement will face economic, political and social headwinds.

Local infrastructure funding will have to deal with anxious tax and rate payers that are already beset with inflation and slow growth. Federal funding, so recently looking bright, could dry up in a wholesale change in the political environment and changing priorities.

Right or wrong, that’s how it is. Hard times mean a focus on short-term, just-good-enough solutions. Unfortunately, climate adaptation investment only has really obvious value in the long-term.

Is there any way to make it easier to include long-term value in today’s public infrastructure decisions, at least from a federal perspective? I think federal infrastructure financing programs could help a lot. A long-term policy perspective comes naturally to programs that offer loans with terms of 40 years (WIFIA) or even 75 in some cases (TIFIA). Apart from low interest rates, stretching out amortization schedules and other structural refinements mean that short-term funding impacts can be minimized. And future repayment comes when the value of additional investment is seen (perhaps even welcomed) in real time.

If only from a practical, realpolitik viewpoint, I also think federal infrastructure loan programs are worth extra attention right now. The programs have solid bipartisan support and usually fly way beneath our polarized political storms. They’re easy on the federal deficit and easy to expand in size and capability, given the federal government’s unique strengths as a long-term lender. Several are operating successfully already, a proven base to work with and a model for copies, like CIFIA.

Maybe there’s better news ahead. But despite my natural optimism, something tells me that the next few years are going to be challenging. We shouldn’t give up on continuing positive climate change policies, of course. But it’s time to start looking for practical solutions to keep that positive direction going in more difficult times.

New article online at Water Finance & Management with Chad Praul of Environmental Incentives.

Federal loan programs like WIFIA and impact investors share important common goals. The investors need bigger scale to connect with US essential public infrastructure. WIFIA needs innovative proposals.

Realizing better outcomes in US infrastructure renewal through innovative financing won’t be easy. But it’s a critical path in real-world decisions about funding and consensus building. A long road — WIFIA and impact investors should go together.

US essential public infrastructure will be renewed, no question. Because otherwise it won’t work or will fall down, a reality-based fact that a Pittsburgh bridge apparently decided to remind us about last week.

The real question is whether or not the rebuilt projects will include innovative approaches to climatic, environmental and social issues.

The answer to that depends on an even realer question: How to pay for the additional cost? Sure, almost everybody agrees on the ESG objectives. But there’s much less consensus paying to achieve them. That creates a strong bias for a minimal cost, business-as-usual approach just to get the job done. The community needs this bridge now, right? Hard to argue with that.

One way out of this conundrum, I think, is to address the heart of the matter — the universal issue of paying for stuff — before rebuilding decisions are forced to be made. If you want innovative approaches to be included in essential public infrastructure, you’ll need to have innovative approaches to funding and financing it in order to achieve a consensus quickly. Not theoretical or legislative aspirations. But on the shelf, in sufficient scale and ready to go.

It’s probably too late for this Pittsburgh bridge. But don’t worry — efforts to develop innovative funding and financing won’t be wasted. Plenty more stories like this to come.

Yes, I know. Direct loans are so much easier. Borrowers prefer them. The cost to federal taxpayers is the same as with guarantees, at least as measured by FCRA scoring for discretionary appropriations. And they make for great press releases, because everybody knows what a loan does, but guarantees are a bit more obscure.

Really, I get it. But for WIFIA and its highly rated public agency borrowers, try and answer these questions:

• What’s the point of a federal program making direct loans to a large Aa2/AA- public water agency that has complete access to a well-functioning capital market? Why is a federal program duplicating all the mechanics of financing that are available (and delivered a lot more efficiently) in the market? Do you think capital markets stakeholders (and their lobbyists) are justified in opposing unnecessary federal competition? How are direct loans in this case consistent with OMB Circular A-129’s requirement that “private lending is displaced to the smallest degree possible by agency programs“?

• Why are highly rated water agencies even applying to WIFIA? Might it be primarily the free interest rate option? Sure, that makes WIFIA look successful, but what does it accomplish for infrastructure? Is the value enough to change project design — or does it just go to reduce water rates a little, often for rich communities?

• What’s the cost to federal taxpayers of the free options? Federal funding losses caused by interest rate re-estimates don’t show up in the FCRA score. Instead they’re dumped in an off-budget account with Permanent Indefinite Authority that eventually will be settled with mandatory appropriations. But if huge funding losses are nearly certain, is the apparent low cost of WIFIA’s direct loans relying on a kind of FCRA accounting loophole? Do you think that’ll end well?

I don’t think there are good answers to any of these questions and the implications aren’t positive for the program’s future. But I also think there’s a path forward: WIFIA should begin to develop its guarantee capabilities to support highly rated public water agencies in another way, by enabling innovative projects and funding sources. That’s the point.