I’ve recently been doing a lot of interesting work on a benefit-cost analysis of borrowing under a growing federal infrastructure loan program, the Water Infrastructure Finance and Innovation Act (Wifia). The scope of the BCA is narrow — just a comparison of a Wifia loan to a comparable tax-exempt bond alternative. But since the vast majority of Wifia borrowers and applicants are highly-rated public water systems with plenty of access to the TE bond market, that comparison is the most important one.

The really interesting part is not the comparison of interest rates per se (that’s straightforward — basically UST vs. bond YTM) but evaluating Wifia’s rate lock and optionality in contrast to what it would cost to duplicate with a (hedged, callable) bond.

To demonstrate the various components, I created an Excel educational model. A macro-less version is in the download menu — if you’re interested in a functional model, leave a reply from link at top. The user guide is displayed below.

Here’s a short (and very preliminary) summary of the thinking so far:

One of the principal reasons, I think, to integrate an impact tranche into a larger Alternative infrastructure financing is to achieve some leverage on the social and environmental impact of the project. Each aspect of impact might be individually small (relative to project size), but the aggregate potential value, in comparison to an impact tranche that is also small (relative to project size) might achieve decent results.

I did some rough (and highly hypothetical) numbers on this, really to start to get a sense of scale. The Excel model is in the Download menu — sans goal-seek macros and not at all user-friendly anyway. But the on-open results in the impact tabs illustrate the ‘aggregate and leverage’ idea.

From what I’ve seen so far, the few and highly-publicized environmental impact bonds (EIBs) completed recently really allocate most risks to the funding source (the issuer), not the investor. When the press release smoke clears, the EIBs are pretty much high-credit quality loans with a lot of interesting packaging.

Below is a chart I sketched out for another project that shows where they might fit on a spectrum of various types of ESG project capital types. The EIBs are all in the upper left quadrant — in contrast to investors who take real risk on unproven green tech (lower right) or even project finance non-recourse lenders in renewable energy deals (in the middle).

To be fair, EIBs are still very much in the small bench prototype stage. At the least they need to get a lot of bigger. Since publicity value doesn’t really increase with size, they’ll need to develop more substantive features (something that larger size also makes more worthwhile). My guess is that their development path will lead to about the middle of risk allocation — in effect, a kind of specialized project finance — which is not a bad market precedent.

I was involved (behind the scenes) in developing a panel for the Federal P3 Conference here in Washington a few days ago. The theme was ‘deconstructing’ and ‘demystifying’ P3s — the real focus was to prompt a discussion on the New Alternative Framework. Which, after playing to a full house, is what happened.