In three prior posts, I described aspects of the limited buydown provision, which allows an infrastructure loan program to lower (within limits) a loan’s execution interest rate to what it would have been at the time the loan application was accepted.  CIFIA, the primary focus of the posts, has this provision, as does TIFIA, but WIFIA does not.  I explained that I thought that the limited buydown provision was likely to be an important feature for CIFIA borrowers because they face a lot of uncertainty before loan execution can occur.  Locking in a project’s interest rate at an earlier stage of development reduces one important element of that.  In contrast, WIFIA’s typical borrowers to date, state and local agencies financing drinking and wastewater projects, don’t have to manage nearly the same level of pre-execution uncertainty and the provision isn’t so important to them.  That difference might explain why CIFIA adopted and even refined the limited buydown provision in TIFIA, but WIFIA excluded it completely.

Now there’s a new development.  The Army Corps of Engineers is in the process of activating its part of WIFIA’s authorization.  The Corps’ part is intrinsically defined by current WIFIA statutes and operating procedures, but it has a new name (the Corps Water Infrastructure Financing Program, or CWIFP), its own rules for project prioritization, and – most importantly for this post – a very different type of expected borrower.     

As you’d expect from the Corps’ overall mission, CWIFP loans are intended for projects that reduce flood damage, restore aquatic ecosystems, and improve US waterways.  These projects are likely to be large-scale, involve multiple private and public-sector parties and jurisdictions, and require a long development period.  Before construction starts, they’ll need to obtain many authorizations, including those related to securing a revenue stream to qualify for financing and amortize the project’s cost.  I’d expect that in most cases, the necessary revenue stream will be primarily tax-based and generally subject to voter referenda, given the special nature, size and infrequency of these projects. The interest rate on the project’s permanent long-term financing will be a factor in the amount of taxes required.

If this turns out to be the typical profile for CWIFP projects, the amount of uncertainty that CWIFP borrowers will face before loan execution is likely much closer to that faced by CIFIA and TIFIA borrowers than by WIFIA borrowers.  As a result, CWIFP borrowers would also likely benefit from a limited buydown provision.  As I’d expect at CIFIA, interest rate volatility during pre-execution development might not stop a project, but additional certainty early in the process about the project financing’s final execution rate may help to accelerate the start of construction.  Acceleration is clearly an important policy goal of federal infrastructure loan programs.  Fundamentally necessary projects will necessarily get done, but the availability of finance with special features that work for specific project types and sectors can make them happen sooner.  I think the limited buydown is one of those features for the projects that CWIFP intends to support.

Adding a limited buydown provision to WIFIA’s statute (and thereby enabling it for CWIFP) doesn’t seem be an especially radical move.  The provision was established and apparently utilized at WIFIA’s model predecessor, TIFIA, and was included and refined at a WIFIA successor, CIFIA.  The fact that the provision was not included in the original WIFIA statute probably reflects only that the program’s advocates didn’t think it would be useful for drinking and wastewater agencies, not that there was any fundamental problem.  Since CWIFP’s expected borrowers have a very different profile, and might find a limited buydown provision useful, perhaps adding it should be considered.