The US EPA’s WIFIA water infrastructure loan program has in fact established itself as an institutional lender to the US state & local public sector.

That’s not as easy as it sounds. Most state & local infrastructure agencies are highly rated and can issue tax-exempt bonds. In effect, state & local borrowers already have a long-established source of cost-effective, federally subsidized debt. How did a relatively new federal loan program make any headway against this alternative?

It’s not the interest rate on a WIFIA loan — the US Treasury rate WIFIA offers isn’t that different than the overall yield on a highly rated muni bond series for a highly rated issuer. But although WIFIA loans are similar to muni bonds, federal loans can include special features that make them especially attractive to public-sector infrastructure agencies. Currently, WIFIA’s primary loan product is a costless interest rate lock, which highly rated borrowers can use as an interest rate call option on long-term financing.

The free interest rate call option feature transformed WIFIA from what is was likely intended to be, an infrequently used project finance lender, to effectively a participant in the mainstream US state & local public-sector market.

Offering a free call option on long-duration debt is a great way to build a loan portfolio. But is that the point of a federal infrastructure loan program? Not exactly — the loans should have a real-world outcome that wouldn’t have happened otherwise. Free call options, though of course very welcome to borrowers, don’t really accomplish that.

But new WIFIA loan features — focused on current federal policy objectives like climate adaptation, water affordability & equity and SRF leverage — could. This potential to make a large-scale impact in US water infrastructure is the real significance of the WIFIA Bank. The federal government has built an efficient institutional lender to the US state & local public sector, an unusual achievement. Now what are policymakers going to do with it?