By John Ryan
U.S. public infrastructure renewal was never going to be easy, but several current trends suggest that it will soon be even more challenging. Federal infrastructure loan programs are a proven policy tool, and their capabilities should be expanded in specific and practical ways to prepare for the hard times ahead. Extending the maximum term of loans from the EPA’s successful Water Infrastructure Finance and Innovation program is a great place to start.
A Gloomy Outlook
The near-term outlook for U.S. public infrastructure renewal isn’t as positive as it has been for the last several years. Many economic, political and social factors are headed in the wrong direction, and all at the same time.
The economic environment is, as always, the predominant factor. Inflation simultaneously increases both the cost of projects and resistance to tax or rate rises. More fundamentally, higher interest rates and lower growth (perhaps even a recession) will put pressure on scarce local funding.
To say that national politics are currently polarized is an understatement, to put it mildly. And they’ll likely stay that way (at best) for at least several years, meaning that large further increases in federal funding support for local infrastructure can’t be expected with any confidence.
The social factor is more nebulous but seems to reflect the gloomy unease of the other two. The everyday physical necessity of public infrastructure ensures that there’ll always be some type of consensus about renewing it. But at the project level, where the hard decisions are made, there seems to be less consensus about the objectives of that renewal than before. Until just recently there appeared to be growing or largely settled agreement about the high importance of including climate change, sustainability and other ESG objectives in project scope, backed by an apparently accepted regulatory framework. Now that prioritization doesn’t seem so clear. It’s entirely possible that much less ambitious objectives – business-as-usual, fix-it-for-now – will gain traction and define the public infrastructure we’ll have to live with for decades to come.
Maybe things won’t be as bad as the negative outlook for these macro factors suggests. Certainly, there will be regional and sectoral variability. But the factors themselves are pervasive on many interconnected levels and not easy to manage directly. They’ll likely play out, for bad or worse, in the general direction they’re going now. Rather than rely on unexpected luck, it makes sense to start thinking now about practical tools, especially at the federal level, to mitigate the worst effects of the challenging times to come for public infrastructure renewal.
Federal Infrastructure Loan Programs
It’s perhaps not surprising that federal credit programs had their origin in the Great Depression. In good times, such programs provide valuable enhancements to encourage policy outcomes in specific areas, but much of the heavy lifting gets done elsewhere. That characterization seems especially correct for the recent history of U.S. federal infrastructure loan programs operating in a benign environment of low rates of interest and inflation, slight but steady economic growth and wide-open credit markets.
It’s in the hard times that loan programs can show their real value as a federal policy tool. Hopefully, we’re not headed back to the conditions of the Great Depression, but some of the solutions policymakers came up with during that time will, like it or not, probably be relevant to our near-term future.
Successful federal infrastructure loan programs are already in place, most notably the DOT’s TIFIA and the EPA’s WIFIA. The fact that WIFIA is basically a copy of TIFIA (and both served as the model for the DOE’s new carbon capture infrastructure loan program, CIFIA) shows that policymakers fully understand that we don’t need to reinvent the wheel. But the programs can be improved, incrementally and in specific ways, to mitigate clearly defined regional and sectoral issues. Simply expanding the size of loan programs is of course a good outcome (and there’s likely to be plenty of demand for that) but unlocking their real potential value will require an expansion and refinement of their capabilities – in effect, the programs’ range of useful loan products.
Designing loan products should not be a theoretical exercise in wishful thinking. Practical constraints and limits abound, especially when a product requires any kind of legislative action. Regardless of the action’s possible benefits or apparently compelling logic, a hard-eyed realpolitik mindset will be required to accomplish anything in the current political environment. Proposed products and improvements should be specific, easily defined and understood. They should not require much (if any) legislative or regulatory amendment. And above all, they shouldn’t cost very much.
Working within narrow limits and exogenous constraints to effect small changes is not exactly inspiring policymaking. But that misses a critical point. It’s much more important at this stage to demonstrate that loan programs’ untapped potential can be unlocked and produce solid, useful results, however minor, than to propose far-reaching changes that fail in Congress or have Solyndra-like unintended consequences. A series of small, successful improvements in the near-term will set the stage for transformational changes later – when they may be really needed.
Extending WIFIA’s Maximum Term
Since operational inception in 2017, the WIFIA loan program has been remarkably successful. This was achieved primarily by providing one type of financing enhancement for large-scale water infrastructure projects – costless interest rate management options during construction. In the recent benign environment, this was useful to lock in low interest rates and reduce overall financing cost slightly. But that benefit was enough to differentiate WIFIA loans from tax-exempt municipal bonds. The relative attractiveness of the loan product created a solid volume of high-quality loan applications which in turn allowed WIFIA to establish an effective and efficient loan execution platform. It’s now a great resource for the U.S. water sector. But the program can – and should – do more.
One small but very specific change to the program would be useful and illustrates the broader point. WIFIA’s current statutory maximum loan term is 35 years post-construction. That should be extended to 55 years or even longer for water infrastructure projects with long useful lives.
Many equipment-intensive water infrastructure projects have useful lives of about 30 years. For these, a 35-year term is completely adequate. But in two sectors – stormwater systems and large-scale water management projects like reservoirs – the assets involved are largely structural with much longer useful lives. For many of these, a longer WIFIA loan term can be justified.
How does extending WIFIA’s maximum term look in the context of the three factors outlined above?
The economic benefits of a longer loan term for the water agency are straightforward:
- A longer loan amortization schedule means lower funding will be required for annual debt service. It’s not a huge impact, but it goes in the right direction, especially for near-term payments. Payments in 40 or 50 years should, even with minimal economic growth, be relatively less painful.
- WIFIA’s interest rate management, optional pre-payment and U.S. Treasury pricing features become more valuable when utilized in a longer-term loan. This will reduce overall financing rates.
- Cost can be more appropriately spread across the generations that will benefit from the project’s construction and renewal.
Extending WIFIA’s maximum loan term will require a minor legislative change, so involving the political factor is unavoidable. But there are reasons to believe that this might be a realistic proposal:
- Water infrastructure and infrastructure loan programs are generally areas of rare bipartisan agreement.
- Very long-term lending is in fact an intrinsic federal strength, relative to private debt markets. The marginal cost to federal taxpayers of an extended loan term will be almost immaterial.
- The change itself is easily explained and justified by engineering reality. There’s also a direct recent precedent: TIFIA’s maximum loan term was extended to 75 years in the 2021 Infrastructure Investment and Jobs Act.
- A WIFIA loan amount is limited to 49 percent of project cost. The program explicitly allows ‘sculpted’ amortization schedules, including faster repayment of the non-WIFIA debt that generally constitutes the 51 percent balance. Very long-term WIFIA loans will complement, not displace, tax-exempt bonds issued within that market’s preferred 30-year time horizon. Since a WIFIA loan and bond financing mix can allow otherwise stalled projects to proceed, resulting in higher issue volume, the municipal bond industry should support the change.
The impact on any social consensus factor for such a minor, technical change in a federal loan program will of course be very slight, if there’s any at all. But it’s value in this context is in what a successful proposal for change would demonstrate, a message that can be amplified:
- Extending WIFIA’s maximum loan term highlights the perspective that infrastructure renewal should be designed for the long run. That’s the right perspective to help build a consensus for many objectives that don’t seem to have much immediate value – investment in climate change adaptation, long-term environmental sustainability and improved quality of life for future generations.
- Perhaps most importantly, a successful effort to extend WIFIA’s maximum loan term would encourage more of the same type of incremental expansion in loan product capability, both at WIFIA and other federal infrastructure loan programs. Even small successes stand out in tough periods and help keep bigger goals alive – as noted above, a series of small successes is the basis for transformational change.
Just a First Step
Like the U.S. public infrastructure challenge itself, expanding the capabilities of federal loan programs won’t be easy. But we’re starting with a base of successful programs, the value of which will become increasingly obvious as economic, political and social factors continue trending in their current direction. Now is not the time for major initiatives which sound great but are unlikely to be successful. But it is time to start proposing small, incremental changes that can succeed and will be effective in predictable ways. Extending WIFIA’s maximum loan term is a good first step.
John Ryan is principal of InRecap LLC. InRecap is focused on debt alternatives for the recapitalization of basic public infrastructure. Ryan has an extensive background in structured and project finance. He recently served as an expert consultant to the U.S. Environmental Protection Agency and is a frequent contributor to WF&M on WIFIA topics.
