The WIFIA Loan Program is not like TIFIA. But could it end up like US ExIm?

Federal infrastructure loan programs are meant to improve US infrastructure.  Obvious, right?  That’s probably the outcome when the program makes project finance loans.  But the story is more complicated when a program actually makes highly rated balance sheet loans.

Does this techy financial distinction matter?  Yes – a lot.  If you want federal infrastructure loan programs to accomplish very specific goals (e.g. build more new toll roads), then subsidized and customized financing for a specific project is the way to go.  But if the goal is to more broadly improve US infrastructure in a particular sector (e.g. better water systems), and there are plenty of established and credit-worthy local public agencies in that sector already responsible for this, it’s more straightforward to make balance sheet loans to these agencies on terms that encourage (but don’t dictate) better infrastructure outcomes.

This difference is playing out now in two federal infrastructure programs that are very similar in legislative design but headed in radically different directions – TIFIA and WIFIA.

TIFIA was intended to do project finance loans, and that’s what the program has largely done.  In a project financing, the borrower is a limited purpose company whose sole asset is the project being financed.  The source of repayment for the loan is project cash flow, so the lender is subject to the risks of project revenues and expenses.  It’s not always easy to find project loans on terms that are cost-effective enough to make the numbers work, especially when the revenue source is new and unproven, as it is in greenfield toll roads.  As a result, a fully committed TIFIA loan priced at Treasuries provides a significant benefit, in many cases enough to make the project viable where it wouldn’t otherwise be.  The subsidized loan is at least likely to accelerate project schedule or improve some design features.  It’s clear that in addition to loan proceeds (which must be spent on program-defined ‘Eligible Assets’), loan value (cost saving relative to expensive alternatives) will cause some impact on the infrastructure project itself.  That’s the ‘additionality’ – something that wouldn’t have otherwise happened – of a TIFIA project finance loan.

TIFIA follows the classic rationale for national government infrastructure loan programs.  It sounds very neat — in theory.  In reality, project financing is all about micromanagement, something that federal government bureaucracies aren’t especially good at.  Or complex risk management, customized transaction execution, timely responsiveness etc. etc.  In fact, other than the ability to write giant checks (and absorb equally giant losses), project financing does not really play well to federal government strengths.  TIFIA’s complicated and less-than-painless real world results reflect this mismatch. 

WIFIA was closely modeled on TIFIA, and perhaps the program was expected to do project financings in the water sector.  But instead, since its inception, the water program has almost exclusively made balance sheet loans to highly rated public sector water agencies.  In a balance sheet loan, the borrower’s overall financial capability (i.e. its balance sheet) is on the hook for repayment, not just the specific cash flows of the financed asset.  Highly rated public water agencies in the US have a lot of financial capability, so WIFIA loans can be safe for taxpayers and relatively straightforward to assess and execute.  And big if, that’s required.  Like TIFIA, WIFIA loan proceeds must be spent on the project directly.  But unlike a TIFIA project financing, WIFIA loan value is added to the agency’s general balance sheet pot – cash savings are fungible – and changing the project may or may not be the best use.  More on this below.

Balance sheet loans to highly rated borrowers actually play to federal strengths or at least avoid weaknesses – and WIFIA has corresponding had a better start (and is on a dramatically better trajectory) than TIFIA.  But the story is not quite so simple.  Yes, balance sheet loans to highly rated public agencies are much easier to make than project finance loans – but why would these agencies want or need them?  And more fundamentally, what’s the policy point of this?

There’s a precedent of a ‘successful’ federal balance sheet lender to soberly consider here – the US Export-Import Bank.  The vast majority of ExIm’s loans are to highly rated corporations for financing sales they would have done anyway.  An ExIm loan is a little cheaper than their corporate debt alternatives and as such worth the effort, especially on a repeat basis.  However, it’s hard to see why this isn’t just a windfall to private shareholders since otherwise nothing has apparently changed.  Opponents of the program call it ‘corporate welfare’; its defenders claim that more subtle benefits actually accrue to the nation.  Or that critical loans are also made to smaller borrowers.  Or that the program is actually profitable for taxpayers, etc. etc.  The opponents seem to have the better logical arguments, but the defenders apparently make the better political case since the program continues.  Not a shining model of policy clarity in any case.

WIFIA appears to be avoiding TIFIA’s earnest but depressingly ineffective project finance path.  But is the program destined to become the US water sector version of ExIm, a slick and politicized balance sheet lender that delivers clear benefits to favored constituents for distinctly obscure policy reasons?

Probably not so far — and maybe definitely not if the issue is correctly surfaced and addressed.  Although both are balance sheet lenders, WIFIA is different than ExIm in two fundamental ways:

• WIFIA’s borrowers are public-sector agencies who can issue tax-exempt bonds.  For highly rated issuers, tax-exempt rates aren’t that different from WIFIA’s Treasury rate in the standard 30-year market.  WIFIA benefits really only arise when the water agency is trying to do something in capitalizing an infrastructure project that they wouldn’t (always) do anyway – a longer construction period or longer loan term – and that on average will result in better projects.  Though still subtle, there’s a clearer possible connection between a WIFIA loan and a specifically intended real-world policy outcome than in ExIm’s case.

• More importantly from an anti-windfall perspective, as closely regulated and often locally owned public-sector entities WIFIA borrowers are pretty much limited to allocating the benefits of a WIFIA loan within the community’s system (i.e. the public).  Even if the lower debt service cost of a WIFIA loan isn’t completely reflected in some change in the infrastructure asset being financed, the rest will end up in something – lower water rates, better O&M etc. — that improves water service for the community, which was the point of improved infrastructure in the first place.

It’s worth threading through the implications of these difference in some detail.  When a highly rated public water agency with a big shovel-ready project receives a WIFIA loan, they can save about 10% of the project’s cost in terms of the present value of debt service.  If that project has been years in planning and its engineering must integrate into many other aspects of the system, it’s likely that the WIFIA loan value will (and should) be directed to some other priority or mix thereof.  That’s not a bad result in terms of the broadest policy perspective of improving water service for Americans.  But WIFIA is an infrastructure loan program, yes?  What’s the likely additionality for actual infrastructure assets?

In the short term, the honest answer may be – not much.  But if the water program is eventually perceived to be a more-or-less permanent fixture among the financing alternatives that public water agencies are constantly evaluating, then long-term planning will start to reflect the incorporation of WIFIA’s special loan features.  Those plans will ultimately result in shovel-ready projects that, when financed with the expected WIFIA loan, will connect loan program cause and policy effect.  Not as obvious as TIFIA’s make-or-break additionality of course.  But over time, and in the large scale of basic infrastructure assets, perhaps much more significant overall impact for US water infrastructure.

WIFIA so far appears to have set the right foundations for this kind of substantive outcome, albeit more by way of organic development than precise planning.  But all sorts of things might derail it at this relatively early stage.  Misguided policy might force the program back into the less-effective but more-easily understood land of project finance.  Or some interaction of big-scale money and politics might figure out a way to generate less publicly spirited windfalls.  A conscious in-depth re-examination of the WIFIA’s policy goals and the realistic paths to achieve them would make a lot of sense.