Here’s a one-page summary of a refinement to the basic leveraged impact story (outlined in prior post). The idea is that the impact investment tranche in a large infrastructure financing would specifically support development of social programs associated with the project (e.g. workforce training or affordability reserves) and receive a return contingent on the programs’ success or lack thereof. More subtly, once fully developed the programs would be explicitly eligible to be included in the capitalized cost of the project for long-term federal infrastructure loan financing (e.g. Wifia). In effect, the development impact loan would be a kind of construction financing taken out by subsidized term financing and amortized over, well, a really long time. So popular social programs can help sell the boring-but-necessary project and it all gets paid for in the long-term capital budget. The impact investor is critical to help ensure that the programs really work (which is their stated mission) but also to amplify the buzz (which they’re also really good at).

Program-Development-Impact-Loan-Concept-One-pager-Inrecap-07312019

The ability to include the development cost of social programs in a infrastructure project is of course kind of gray area in this story – hence explicit eligibility under the loan program is important as an imprimatur. But it’s also a nice policy angle for the loan program’s political proponents — and as long as the credit quality of the borrower is rock solid (usually the case for state and local government and bigger infrastructure agencies), it all can be justified in more-or-less serious economic terms.

The statutory eligibility language would need to be tight — here’s an example of how it might look in current Wifia program statute:

Expanded Eligibility for Community Workforce Training and Affordability Programs

Proposed amendments to 33 U.S. Code § 3906. Activities eligible for assistance:

(5) local workforce development program related to future operation and maintenance of the project, to the extent such costs may be capitalized as determined by the Secretary or Administrator, as applicable, and;

(6) development of a long-term program [including reasonably required and dedicated reserve funds] to address affordability issues arising from any increases in local water rates, charges or taxes that are associated with the revenue source of the project, to the extent such costs may be capitalized as determined by the Secretary or Administrator, as applicable.

Notes:

1. Training cost of individual employees is not capitalizable (since the expense relates to the employee, not the asset) but the cost of establishing a long-term workforce development program may be, if tied directly (in whole or part) to the asset.
2. A reserve fund for water rate affordability may have analogous precedent in capitalizable reserve funds for low-income housing.