The WIFIA loan program is currently divided into three areas, (1) the ‘original’ and apparently successful WIFIA for state & local water agencies, (2) the currently small and only slightly differentiated SWIFIA section, and (3) the Corp’s new co-authorized program, CWIFP.

What is the reason for this division? Simply a bureaucratic matter within a unified statutory framework? Loan product branding for different potential borrowers? Echos of legislative history?

Perhaps all of those, and others like them besides. None are as important as the fundamental differences emerging between the divisions:

Irreconcilable Differences

Here’s a controversial idea: Regardless of its original groundbreaking role, State & Local WIFIA is now holding back the development of SWIFIA and CWIFP:

• State & Local WIFIA loans will inevitably compete head-on with the municipal bond market. But that market can’t beat WIFIA’s free interest rate options. This is why Congress is so parsimonious when it comes to WIFIA appropriations — a small fraction of what TIFIA and CIFIA get, despite the water program’s rapid growth and apparent success.

• Why don’t State & Local WIFIA stakeholders fight harder to expand the program? Because they’re also (and even more so) stakeholders in the municipal bond market. In theory, a better approach might be for them to promote synergies between the two sources of infrastructure financing, expanding and improving both. But in the real world of entrenched monopolies, long-established relationships and zero-sum solutions, their prioritization of one over the other is a rational choice.

• Because State & Local WIFIA was the original version and has a track record of delivering results, their stakeholders will naturally be more organized, focused and energized than those of the new, as-yet unutilized divisions. Any proposals that could upset their part of the WIFIA applecart will meet effective opposition. The SRF WIN Act’s ambitious plans in 2018? They might have posed a threat to State & Local WIFIA’s détente with muni bonds, in addition to the usual resistance of any group to a dilution of its influence. Despite broad-based (but less organized?) support, the Act got reduced to a consolation prize.

• It goes beyond appropriations. Loan programs can expand their capabilities not just with increased funding, but by loan product development as well. State & Local WIFIA has done a good job (perhaps too good) in enhancing and expanding the scope of their interest rate-lock products. But its stakeholders won’t back product development that isn’t important to state and local water utilities and agencies. 55-year loan term for long-lived projects? Not usually relevant to our projects. Improving OMB’s FCRA non-federal criteria? Not our problem. Sub-Treasury rates to incentivize small SRFs? Our highly rated borrowers are quite happy with their free interest rate options. And so on.

Unstable Disequilibrium

Well, the federal government is filled with sub-optimal programmatic outcomes. Why should the trajectory of the WIFIA program be any different? It’s easy to imagine that State & Local WIFIA will soon plateau into a kind of captive US ExIm Bank for minor transfer payments to a sub-sector of water infrastructure, exactly to the extent allowed by the municipal bond market. SWIFIA and CWIFP will remain as its stunted and ineffective satellites, kept around for political convenience and to prevent other federal loan programs occupying the space, but not given the funding or loan capabilities to succeed.

Perhaps. But I don’t think so. Even for federal programs, a more-or-less permanent sub-optimal outcome requires the absence of destabilizing factors. There are at least two of these in the background:

• Most fundamentally, the growing needs of the sectors that SWIFIA and CWIFP serve. A few more years of failing infrastructure, economic difficulty and a changing climate can quickly become a perfect storm. Obviously unmet needs will coalesce and energize the sectors’ stakeholders to demand that their existing loan programs be given the required funding and capabilities, and they’ll be prepared to take on State & Local WIFIA’s stakeholders to get them. Now add in regional and political overtones (a ‘Cross of Muni Bonds’ speech?) and the issue goes beyond the technicalities of federal loan programs. I think some movement in this direction has already started.

• Most explosively, State & Local WIFIA’s exposure to huge funding losses. I’ve written about this frequently in other posts, so I won’t go into the details. The important point here is that State & Local WIFIA’s success is not real. Its $16 billion portfolio of executed loan commitments will almost certainly cost far more than the program’s Congressional appropriations to date, and taxpayers are the hook for the difference. If this unexpected cost becomes another Solyndra-type issue (and I think it will), then State & Local WIFIA’s influence will be significantly diminished, and SWIFIA and CWIFP stakeholders will be motivated to distance their programs from the mess. I don’t know how this type of destabilizing event will end, but a reversion to the status quo ante is not likely.

An Unnecessary Intra-Sectoral Conflict

There’s no need for all this. The current and potential problems with WIFIA’s divisions highlight the inadequacy of a purely sectoral approach to federal infrastructure loan programs. They’ll each have their own stakeholders that are quite rationally concerned with their own sector, without regard to the bigger picture. Worse, if a ‘sector’ is defined too broadly, there’ll be competing stakeholders within a single loan program. Without a non-sectoral authority to sort out the issues and develop equitable solutions, the strongest stakeholder in the program will prioritize its own interest, to the detriment of the others, as I think we’re seeing at WIFIA.

For now, SWIFIA and CWIFP stakeholders have no choice but to focus on their respective sectors. Paradoxically, however, one way to advance their causes may be to support a more unified approach to federal infrastructure loan programs. Cross-sectoral loan program stakeholders will naturally have an interest in SWIFIA and CWIFP growth and development. But perhaps in this case, given the relatively extreme degree of sub-optimality caused by sectoral differences, they’ll also begin to recognize their potential central importance.