WIFIA Vector ChartThere is a lot of talk these days about the importance of infrastructure to our way of life, especially with regard to energy. Often overlooked in the infrastructure discussion is the critical role of water. Energy is nice, but as the Navajo say, ?Water is Life.? Yet the water infrastructure in the United States is outdated, deteriorating and analogous in quality and efficiency to the legendary telephone operator switchboard. Future water demand is now projected to outpace supply by at least 40 percent and require trillions of dollars of new infrastructure development.

In the realm of needed funding options for these critical infrastructure projects, one significant piece of legislation was signed into law earlier this year. The Water Resources Reform & Development Act, signed by President Barack Obama in June, includes the Water Infrastructure Finance and Innovation Act (WIFIA), a $12.3 billion bill aimed at addressing water and wastewater infrastructure projects. While the passing of WIFIA is seemingly a step in the right direction for water financing, many questions have been raised.

What is WIFIA?
Patterned after the successful Transportation Infrastructure Finance and Innovation Act (TIFIA), WIFIA is a pilot program to promote private-sector investment in water infrastructure by offering government-sponsored financing at below-market cost of capital. This article will discuss what WIFIA does and how it does it, including program qualifications and limitations, its relationship to existing state-sponsored programs, its intended encouragement of public-private partnerships, as well as related implications, issues and opportunities.

What does WIFIA do?
WIFIA provides a five-year pilot loan and guarantee program for water infrastructure development, commencing with $40 million for 2015 and increasing to $100 million in 2019. While these amounts appear small, WIFIA appropriations are not for loans and guarantees themselves, but to provide loss reserves against which loans and guarantees may be granted. While TIFIA reserves were in the 10 percent range, historical losses on water project financing have been much lower than in transportation, so the projected reserves may be as low as 3 percent, which would support $3 billion of pilot financing alone. As in the case of TIFIA before it, WIFIA is widely expected to expand, perhaps more than tenfold.

What does a WIFIA loan cost? ?
WIFIA provides for interest on its loans at (no less than) the prevailing long-term Treasury rate, matched to maturity of the loan (10-year T-bill for a 10-year loan, etc.). In addition, there is a moratorium on payment of principal and interest extending for five years after project completion or, in the case of State Revolving Fund (SRF) loans, the date of loan disbursement. Assuming (as in the case of TIFIA) Treasury rates on interest and a modest loan administration fee, the economic/financial effect of below-market cost of capital on a discounted cash flow basis is equivalent to a significant cash grant that can materially reduce project cost.

Who administers WIFIA?
WIFIA is jointly administered by the U.S. Environmental Protection Agency (EPA), for financing of drinking water and wastewater infrastructure enhancement, etc., and the U.S. Army Corps of Engineers (Army Corps), for flood control, waterways, navigation and water control projects, etc.

Who qualifies?
Other than a limited exception project cost floor of $5 million or more for rural/tribal projects, WIFIA financing is available to project sponsors of individual projects costing $20 million or more. It is also available to SRFs that aggregate multiple projects. In order to address concerns with WIFIA replacing the prevailing use of State Revolving Funds and related municipal bond financing, WIFIA gives SRFs a right of first refusal to finance any WIFIA-qualified project before WIFIA financing can proceed. ?

What projects qualify? ?
Projects eligible for EPA-administered financing are those publicly-sponsored projects eligible for assistance under SRF drinking and pollution control funds, enhanced energy efficiency, water treatment infrastructure, etc. Army Corps-administered financing is available for flood, hurricane and storm control, environmental restoration, navigation, waterways and ports, etc. Projects must also satisfy standards of creditworthiness, including dedicated revenue streams and rated debt (if other than senior debt), as well as other customary loan approval standards. Financeable activities include project construction, real property acquisition, planning, development and construction carrying costs.

How does WIFIA work?
Based upon project and other risk/return assessments, the EPA or Army Corps, as applicable, offers a low-interest loan (or, in its discretion loan guarantee). Loan proceeds are then accessed from the U.S. Treasury at long-term Treasury rates (matched to loan maturity), against establishment of a loan/guarantee default reserve. The EPA/Army Corps then allocates the loan to the approved project sponsor and project, subject to the five-year moratorium on principal and interest. When the loan is repaid to the EPA or Army Corps, as applicable, the EPA/Army Corps repays the Treasury with interest at the applicable Treasury rate. Going forward, the applicable debt/guarantee default ratio and matching debt default reserve may be adjusted from time to time based upon historical positive or negative returns to Treasury. As noted earlier, based upon the generally favorable historical record of water project defaults, current expectations are for a WIFIA loan default reserve significantly lower (perhaps as low as 3 percent) than the historical reserve for TIFIA loans (approximately 10 percent).

What are the WIFIA program limitations?
Subject to a discretionary exception for up to 25 percent of total WIFIA financing, WIFIA is available for only 49 percent of eligible project costs. Further, in order to moderate the subsidy effect of WIFIA and other federal-sourced financing and subject to an exception for certain rural projects, projects receiving WIFIA financing may receive no more than 80 percent of their total funding from federal sources. Additional limitations include application to WIFIA-financed projects of both Davis Bacon (essentially requiring union-scale wages) and Buy-American requirements (subject in the case of the Buy American Act to no more than a 25 percent cost increase), a provision for non-subordination of WIFIA financing in bankruptcy that may limit some supplemental sources of financing, and a controversial ban on supplemental tax-exempt financing for any project receiving WIFIA financing assistance (TIFIA did not have such a ban).

How does WIFIA promote public-private partnerships?

As noted earlier, WIFIA is part of the larger Water Resources Reform & Development Act that is intended to encourage public-private partnership (private-contracted supply of public service) and private sector debt (including taxable bonds) or equity investment in water infrastructure. Separate from the WIFIA subsidized financing, specific legislation authorizes Army Corps promotion of public-private partnerships that benefit from the combination of Army Corps agreements with state/local/private entities for financing of at least 15 water resource development projects, potential waiver from certain federal regulation, streamlined project approval, and Army Corps technical assistance. Each project approved by the Army Corp must, however, seek and obtain specific Congressional authorization and appropriation.

What are the issues?
While the detailed manner of WIFIA financing is still subject to interpretation and supplemental regulation, issues that WIFIA has raised include concern with an appearance of federal assumption of control from? states and local financial markets, the potential for inefficiencies in the allocation of joint administration between the Army Corps and the EPA, including in particular concern that the EPA is much better at stopping development than at subsidizing it, and, perhaps most controversial, the ban on tax-exempt financing supplemental to WIFIA (for the 51 percent of project cost not WIFIA-financed) that was apparently both a compromise on projected loss of tax revenue and a window of opportunity for public-private partnership participation.? Inasmuch as approximately 70 percent of United States water utilities rely on some level of tax-exempt bond financing, the implication of the ban of supplemental tax-exempt financing for WIFIA-financed projects is of obvious concern and the result remains to be assessed.

What are the opportunities? ?
How well WIFIA will function in practice will require someone doing the math on the capital cost differential (and potential cash grant/capital cost subsidy effect) of the difference between capital structured with tax-exempt bonds versus WIFIA financing. Private equity may find attractive the combination of capital cost savings and the competitive pricing pull of privatization. Pension funds and other investors may be attracted to the historically more-stable and secure returns on water projects generally. Privatization, should it occur, may push market consolidation, as has happened in some other infrastructure, such as energy. Because many of the water project financings are relatively small, perhaps there are even financial engineering opportunities in loan sale/syndication or even securitization. ?

Roger Rosendahl is a partner in the Washington, D.C. and San Francisco offices of Stoel Rives LLP.

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