Innovative federal credit programs for the renewal of American public infrastructure are an important part of the solution to a major problem.  We all agree on that, right?

I’m sure we’d also all agree that innovation requires experimentation.  That means building and operating prototypes which will inevitably have both good and bad results.  The good results are the basis of further development and full-scale implementation.  The bad results show what needs to be fixed.  A successful prototype is one that demonstrates clear results and produces useful data.  It is not the final version, and to evaluate a prototype that way is a wasteful and dangerous category mistake.

The WIFIA Loan Program at this point is a successful prototype.  The Program has demonstrated that the federal government can be an efficient institutional lender to highly rated public-sector agencies, giving them a cost-effective alternative to the municipal bond market.  It has also shown that a federal loan program can offer relatively sophisticated and much-needed financial management products for large-scale public infrastructure, not just cheap loans.

But operationally and statutorily, WIFIA is not by any means in a final form.  The Program’s good results noted above are quite limited in terms of scope and policy outcomes relative to the multi-faceted needs for infrastructure financing in the water sector.  Further development is clearly possible and fundamentally required.

Unsurprisingly at this stage of development, the prototype has also shown some bad results.  These are less visible but equally significant.  As discussed in a prior post, WIFIA’s exposure to rising rates will almost certainly result in large and apparently unanticipated funding losses.  The Program’s impact on the municipal bond market is obvious, but the serious policy ambiguities surrounding such an interaction with a fully functioning (and politically powerful) private-sector market have not yet been officially acknowledged, much less resolved.  Both issues are fatal flaws in WIFIA’s current design.  Until they are thoroughly addressed, the Program is not realistically sustainable.

Of course, in the agenda-filled political and policymaking environment where decisions about federal credit programs are made, there will be incentives to evaluate results to date as if they came from a final version, not a prototype.  Proponents of the Program will highlight the good results without noting required improvements.  Opponents will highlight the bad results without considering how the issues can be fixed.  Both will be making a classic category mistake, unintentionally or otherwise.  That’s suboptimal at best, and more likely to be actually detrimental for water infrastructure financing.

That’s where we are.  Where should the Program go?

First and foremost, category mistakes must be avoided and hidden agendas exposed.  The current WIFIA Loan Program should be seen solely and explicitly as a prototype, the first iteration in a development series.  Calling it something like ‘WIFIA 1.0’ would clarify that and help frame discussions from the outset.

Second, after four years of operations and about $9 billion of loans, there’s now plenty of results and other data from WIFIA 1.0 to review.  It’s clear that the Program is a very effective federal policy tool.  It’s also clear that a major redesign is required to unlock its full potential and address its fatal flaws.  In the context of development, a redesign after initial operation is a completely positive concept. It’s an opportunity to make something that’s fundamentally good even better — a new and improved version, WIFIA 2.0. Program stakeholders and policymakers should embrace prototype redesign, not avoid it.

Third, carpe diem.  Notwithstanding the agendas noted above, the current situation in Washington is ideal to initiate and pursue a plan for WIFIA 2.0.  Major infrastructure legislation is being developed and will probably be enacted in some form this year.  The new Administration has ambitious goals for federal programs which align very well with what WIFIA 2.0 could accomplish.  All this involves large amounts of federal funding.  As a practical matter, it’s probably a good time to propose an expanded Program budget for new product development and ask for (sotto voce) increased reserves to deal with future funding losses.  The numbers will be relatively trivial in the context of a major bill, which might not be the case in coming years.

Perhaps WIFIA 2.0 will be the final design iteration.  The traditional kind of judgmental evaluation can then be applied going forward, with an emphasis on outcomes and not on development.  Or maybe a WIFIA 3.0 will be required for new economic, social and climatic conditions?  They’re all changing rapidly enough, and the picture is complex. One thing is certain, though – stopping Program development now, at the WIFIA 1.0 iteration, is simply not an option.