In the same way that water infrastructure isn’t built simply to be financed, WIFIA doesn’t exist simply to make loans. Both the loan program and the infrastructure it finances belong in the context of their ultimate purpose – better water resources for communities. That often involves physical water infrastructure, but not always. WIFIA’s mission should — and can — extend beyond the project itself.
As often noted here, WIFIA loan proceeds must be spent on the infrastructure project, but WIFIA loan benefits can be allocated to other non-infrastructure purposes. In practice, the lower debt service requirements of a WIFIA financing usually end up keeping water rates lower than they would have been otherwise.
Lower water rates are great, of course. But once the non-infrastructure allocation principle is established (and even effectively acknowledged by WIFIA itself), the question arises: What other non-infrastructure purposes within a public water system’s scope of responsibility could WIFIA loan benefits go towards? Water equity initiatives? Specific environmental enhancements? Workforce training? COVID-19 recovery efforts? Like many state & local public agency in these interesting times, public water systems have a big ought-to-do list. WIFIA loan benefits should be seen as part of the solution.
There’s a practical problem, however, in utilizing WIFIA loan benefits for innovative purposes. While the benefits are significant on a present value basis (currently about 8% of project cost or about $11 million for the average WIFIA project), they are spread out over a typical term of 35 years after a 5-year construction period – in effect, a few hundred thousand dollars per year for a long, long time. This cash flow profile is suitable for a long-lived infrastructure project or perennial non-infrastructure purposes like lowering water rates. But allocating a small annual increase in cash available over a multi-decade period may be ineffective as a way to actualize more immediate social and environmental initiatives.
Fortunately, there’s a straightforward and efficient solution. In the context of a WIFIA financing, which necessarily involves at least two large debt tranches and a highly rated obligor, adding another small tranche of debt (or simply upsizing the non-WIFIA tranche) to be amortized with a portion of future WIFIA loan benefits is distinctly easy to do. Like a small plug-and-play component for a big system, it functions off what’s already been assembled with much cost and effort. The proceeds of the additional tranche can be allocated to non-infrastructure purposes and (most importantly) are likely to be in about the right useful and exciting scale – say about $3 to $10 million – for many innovative initiatives.
Ah, but is more debt a good idea for innovative initiatives? Shouldn’t those be straight-up funded? Well, in this case – they are, albeit a bit subtly, by a federal loan program. WIFIA loans are of course a form of financing, but the loan benefits are in effect a type of funding, equivalent to a series of very small grants for a very long time. Using a portion of a series of small federal grants to fund an innovative local initiative seems appropriate if that reflects the water system’s community consensus, yes? Okay — then using the grants to amortize the initiative’s dedicated financing is likewise, especially if done in the transparent, precise and efficient context of an overall WIFIA financing.
The concept of financing innovative initiatives from WIFIA loan benefits is fundamentally pretty simple and solid. But like many things that include mixing funding and financing for a real-world purpose, the concept needs a distinct name to encompass the disparate parts and ensure it works only as intended, particularly the ever-slippery debt aspects. The name should also serve as a descriptive way for people in the real-world to refer to a technical solution that might be handy for their real-world initiatives.
Calling the concept a ‘Water Equity Bond’ seems to do the job. Easy to say, for one. More substantively, each term conveys a part of the concept:
Water: Obviously, WIFIA is all about water infrastructure and the concept is centered around WIFIA benefits that might be allocated in connection with a public water system’s responsibility.
Equity: The core of the concept is about the equitable allocation of future WIFIA loan benefits. That’s the real-world discussion about funding that needs to precede anything about financing. This should be the real focus for all the stakeholders involved, the WIFIA program included. As always, arranging equity comes first, only then debt.
Bond: Mostly, a quick way to refer the financing aspect. But likely often a precisely correct description since WIFIA financings usually include a municipal bond issue and the easiest and most efficient way to include a small tranche is through an add-on series to the main event. If a more customized approach is taken, the term still acts as a reference to useful precedents like ‘Impact Bonds’.