I’ve analyzed a series of Environmental Impact Bonds (DC Water, Atlanta, FRB etc.) and, to be brutally honest, the common characteristic they all share is ‘ineffectiveness’. Despite gushing PR, they’re all too expensive, too small, and too idiosyncratic to accomplish anything other than buzz itself. An expensive and misleading form of advertising or virtue signalling.

But they’re not necessarily ‘pointless’. What I also see is that some components of the deals might, if incorporated in more efficient structures, might actually be useful while losing nothing of their virtue. In fact, their virtuous quality can cast a helpful, consensus-building glow on the efficient parts (which tend to be pretty boring). Example is below (click for PDF), adapted from a presentation I did in the summer:

A recent article in The Atlantic, The Toxic Bubble of Technical Debt Threatening America, describes a fundamental concept that ought to be central in infrastructure policy discussion:

A kind of toxic debt is embedded in much of the infrastructure that America built during the 20th century. For decades, corporate executives, as well as city, county, state, and federal officials, not to mention voters, have decided against doing the routine maintenance and deeper upgrades to ensure that electrical systems, roads, bridges, dams, and other infrastructure can function properly under a range of conditions. Kicking the can down the road like this is often seen as the profit-maximizing or politically expedient option. But it’s really borrowing against the future, without putting that debt on the books.

I wrote about the same thing in a 2017 Governing op-ed, Deferred Public Spending: The Credit Card from Hell:

When infrastructure maintenance is deferred or a pension contribution is skipped, critics of imprudent public spending are quick to label it as “kicking the can down the road.” But that doesn’t really capture the essence of the practice. It’s a form of borrowing. More cash is available in the current period, but a future obligation in the same amount, plus accrued costs, is created. Just like a loan.

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: