Fostering innovation in the US water sector is a core WIFIA Loan Program policy objective.  It’s right there in the name.  The Program has had a great start on the infrastructure finance part.  But a clear story about enabling innovation has yet to emerge.  It’s a tough objective.

WIFIA faces intrinsic challenges in this part of its mission.  Most importantly, ‘innovation’ and ‘investment-grade credit rating’ aren’t exactly a natural match.  Innovation almost always entails risk, and financing it involves a different kind of capital than the investment-grade loans that WIFIA offers.

Certainly, a WIFIA loan to a highly rated public water system can finance an innovative infrastructure project or even an experimental technology – if the system takes all the risk and puts its solid creditworthiness behind the loan.  No problem.  But can the Program then honestly claim to have enabled the innovation?  It’s conceivable that the low cost and other features of a WIFIA loan might have made a slight but essential difference in the project’s overall numbers, just enough to get it over the edge of infeasibility and into greenlight land.  That’d be a solid win, right?

But it’s not likely to happen.  WIFIA finances relatively large water infrastructure projects being designed and built by established and experienced public water systems.  Apart from their own (often substantial) capabilities, these systems can turn to major contractors who will doubtless be including their best ideas and the latest technology in their bids for the business.  Highly rated public water systems can also confidently assume that they’ll have access to the tax-exempt bond market, a long-established source of federally subsidized, low-cost financing for public infrastructure projects.  During this planning process, the feasibility of a project has likely been solidly determined well before a WIFIA loan is even considered.  In the baseline mix of engineering numbers (the really critical factor) and financial projections (precisely anchored in detailed bond market data), WIFIA loan benefits are simply a late-stage enhancement.  Sharp-eyed finance staff at the system will of course want to add these to the mix as they finalize their part of the project, the financing plan.  But the project will go forward regardless.

Realistically, if WIFIA keeps doing what it’s proving to be very good at (making large-scale investment-grade loans with unique structural features), the chance that the Program will also actually enable (as opposed to simply finance) innovation in US physical water infrastructure is pretty much zero.  In a puritanical policy world, this would be noticed.  In the real world of politics, spin and press releases, it won’t.  Nevertheless, it is true.

But it is also true that essential public infrastructure – especially water infrastructure – is not just about physical assets.  Not at all.  Local public water systems will naturally focus on the pumps and pipes, including technological systems-related innovation.  They’re good at it.  Federal policy should encourage a focus on how those pumps and pipes relate to the community. And consistently, federal infrastructure programs should facilitate solutions for those infrastructure-related issues — equally as real as the physical project — that pervade the national infrastructure challenge, just as they seek to do for the physical infrastructure.

WIFIA and Innovative Infrastructure-Related Initiatives

This is where WIFIA actually can realistically enable, not merely finance, innovation in the water infrastructure sector.  There’s a lot of scope for innovation in the development of infrastructure-related initiatives that seek to determine how a physical infrastructure project financed by a WIFIA loan will impact different communities in social, economic and health terms.  The initiative is defined by, and closely related to, the physical project.  But it is very different than anything going on in the project’s overall engineering and financing plan.  Importantly, for our discussion here, the overall plan will be going forward regardless – but an innovative infrastructure-related initiative might not.  A WIFIA financing for a physical project won’t be a critical factor, but WIFIA financing that facilitated an innovative initiative related to the project could be.

In theory, innovative initiatives could simply be included in WIFIA’s statutory Eligible Uses as an intangible asset, like capitalized interest or engineering studies.  There’s possibly some limited scope for that when community-impact research can be connected closely to project development and is within the Program’s discretion.  But a statutory amendment is likely required to support the full range of infrastructure-related initiatives and really encourage innovation and impact.  The direction is not unprecedented, at least indirectly.  Federal crosscutters like Davis-Bacon reflect national policy objectives that will in effect increase the amount of federal financing that goes into a project.  Implementing this type of amendment any time soon is another matter, however.  In the current political environment, there are a lot of other priorities, including for WIFIA.

Near-Term Actions

In the meantime – as in right now — the WIFIA Loan Program can still help facilitate innovative initiatives by encouraging the creative allocation of WIFIA loan benefits (which are not restricted by statute for specific uses) by the water systems that receive them.  Currently, most (or all?) of the cost savings from a WIFIA loan end up in the form of slightly lower water rates.  Absolutely nothing wrong with that, of course.  But perhaps some of them could be put to use in ways that will have more immediate and visible impact.  As with anything innovative, a little funding could go a long way.

The scale is about right, too.  A WIFIA loan typically delivers a present value of financial cost savings of about 5%-8% of project cost, or roughly $10 million for the average-sized project.  Of course, this comes in the form of relatively minor cash flow over decades, but in the context of a WIFIA financing, it is straightforward to realize some of this upfront with an additional small financing – that’s what the I3 Bond at the top of this post is about.

There’s one other thing that can be done now – raise awareness and provide data about the potential intersection of the approximate benefits of WIFIA loans recently closed or currently in process and indicators of the need for innovative initiatives in the communities where the WIFIA-financed project is being implemented.  That too is straightforward – there’s plenty of publicly available data around both. All that’s required is to put it together.