By John Ryan
The WIFIA loan program offers an interest rate derived from current U.S. Treasury (UST) yields at loan closing. Other large-scale federal infrastructure loan programs like TIFIA and CIFIA do the same. The underlying idea is that the loan should cover the government’s interest cost of funding it. The program’s appropriations can then be devoted primarily to offset expected credit losses. Since very few losses are expected from investment-grade loans to infrastructure projects, WIFIA’s surprisingly small annual appropriations can go a long way. It’s not a bad approach to federal infrastructure lending in general.
For most borrowers, a rate based on the federal government’s own cost of borrowing should be attractive. It’s a little more complicated for WIFIA because nearly all the program’s borrowers so far are highly rated water agencies that can issue very cost-effectively in the tax-exempt municipal bond market where yields are often close to (or even below) the UST curve. Still, if a WIFIA loan’s interest rate is at least roughly comparable to a borrower’s muni bond alternatives, the loan’s other features (term, flexibility, construction rate lock and reset, etc.) are highly beneficial for financing large-scale, long-lived infrastructure projects. For this class of WIFIA borrower, a sub-UST rate isn’t necessary.
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SRF-WIN Sub-UST Proposals
WIFIA’s base UST rate has worked well so far, but it’s not intrinsic to the program’s mission. In 2018, the proposed SRF-WIN Act included a 20 percent discount to WIFIA’s base UST rate (subject to certain adjustments and limitations) for those SRFs which receive less than 2 percent of annual federal grant funding. This is a significant discount, amounting to about 10 percent of loan principal on an NPV basis. As you’d expect, there was a lot of support for the proposal among qualifying SRFs and related stakeholders. But two serious objections were raised by advocacy groups representing WIFIA’s water agencies, which as noted above are by far the largest component of program borrowers to date:
- The proposed specific eligibility requirement appears to be arbitrary and unrelated to underlying water infrastructure policy objectives.
- Loans with sub-UST rates inevitably require significant budget authority, regardless of an SRF’s typically high credit rating. This would be a dramatic shift in WIFIA’s current modus operandi.
These two objections raise substantive points. My own opinion is that both could have been adequately answered or addressed, and I assume that the Act’s proponents thought the same. But in the end, the opponents prevailed and although some parts of the SRF-WIN Act were incorporated and passed in the American Water Infrastructure Act of 2018 (AWIA), the sub-UST provisions were not.
A Different Approach
Regardless of the outcome for the SRF-WIN Act, sub-UST WIFIA lending to SRFs is potentially too valuable a tool to be dismissed. However, I think a different approach is required, both to pre-emptively answer the objections raised in 2018 and (more importantly) to clarify the purpose and expected policy outcomes of such lending.
It’s well-known that the vast majority of SRFs are not optimally leveraged. The problem is not a lack of access to cost-effective debt. As very highly rated public-sector entities, SRFs can issue tax-exempt bonds at near-UST rates, just like WIFIA’s typical water agency borrowers. Unlike those borrowers, however, SRFs aren’t financing their own infrastructure projects, but on-lending to smaller entities that do. The WIFIA loan features for large projects noted above may be compelling for water agencies, but they’re of limited value for SRF leveraging. In contrast, a sub-UST rate would be central to the economics of leveraging and may be exactly the feature required to encourage SRFs to consider doing more of it.
Expanded WIFIA leverage would be a cost-effective option to maintain lending capacity growth in this critical resource for smaller water projects.
Encouraging SRF leverage is clearly a WIFIA goal, and the program’s SWIFIA provisions effectively acknowledge that SRFs are a distinct class of borrowers. If sub-UST rates are a feature that could help achieve WIFIA’s goals for this class, they should be considered a valid policy option even if not particularly important to other borrower classes or consistent with WIFIA’s (relatively short) operational history. In this context, the availability of sub-UST rates specifically to those unleveraged or under leveraged SRFs that would benefit most by expanding their capacity with a WIFIA loan would appear to be directly related to the goal. Eligibility provisions related to maximizing the marginal benefit would be anything but arbitrary.
The additional appropriations required for sub-UST lending to SRFs should not interfere with continued funding for WIFIA’s water agency borrowers. SRF funding can be separately proposed and segregated for the purpose, as was done for SWIFIA’s $5 million budget authority in 2022. Perhaps more importantly, the relatively high budgetary cost of sub-UST lending should be specifically evaluated in terms of the potential positive impact of increased SRF leverage, not what works for a different borrower class which can utilize other WIFIA loan features. Since SRF leverage can dramatically improve the utilization of annual federal grants, the overall net benefit-cost numbers for federal taxpayers might be surprisingly positive.
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WIFIA’s ability to encourage SRF leverage and a correct evaluation of the net federal cost of the tools required to do so are especially important in a landscape of increasing federal fiscal constraints. Despite the U.S. water sector’s obvious and ever-growing infrastructure needs, annual federal grant funding for SRFs might not keep pace – or could even be cut, as was recently proposed. Expanded WIFIA leverage would be a cost-effective option to maintain lending capacity growth in this critical resource for smaller water projects.
WIFIA’s success is largely due to the innovative ways that the program used its initial capabilities to create value for its original class of borrowers. Why not add to those capabilities – and that success – by permitting the program to consider sub-UST rates for another class of borrowers, the SRFs?
John Ryan is principal of InRecap LLC, 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 EPA’s WIFIA loan program and related topics.
