This is the first post in the series, Dam Finance Recommendations for CWIFP

According to the Association of State Dam Safety Officials, there are about 83,600 non-federal dams [1] in the US. Nearly 70% of them require some sort of work, the aggregate cost of which ASDSO estimates to be about $157 billion. The extent to which funding that huge expenditure might benefit from CWIFP financing essentially defines the current universe of potential Program borrowers.

CWIFP’s $75 million of budget authority for dam projects translates to about $7.5 billion in CWIFP loans or (with the usual 49% limit) about $15 billion in total project cost. Compared to $157 billion, on the surface it would seem that CWIFP should have plenty of potential borrowers relative to its resources. After all, that has been EPA WIFIA’s consistent experience since it began operations in 2017 with roughly the same budget authority for an infrastructure sub-sector with the same scale of potential eligible borrowers and required aggregate project costs.

But with a closer look, things are not so simple. Dam and dam project characteristics vary much more widely than those of WIFIA’s water agencies and their capital expenditures. In particular, a lot of dam projects that are otherwise completely eligible will not meet CWIFP’s various specific and statutory thresholds for size and credit worthiness. To determine — even very approximately — the Program’s pool of realistic potential borrowers requires a more granular classification of US dams and dam projects, in effect a specialized ‘taxonomy’ of the sector.

Even a quite limited taxonomy designed to identify certain types of dam project financing would ideally involve a lot of real-world dam sectoral expertise and experience, neither of which I have. That caveat should be borne in mind for the following discussion. Fortunately, however, there are two excellent data sources that, when used together, appear (at least to me) to provide the basic real-world metrics which I can then connect to financing concepts. The first is an invaluable recent report from ASDSO, The Cost of Rehabilitating Dams in the U.S. This report not only summarizes the overall numbers but outlines the sophisticated methodology behind them in some detail. The second is FEMA’s National Inventory of Dams, a comprehensive online database with very effective search filters.

The Basic Numbers Using ASDSO’s Logic Diagram

I start with the logic underlying ASDSO’s methodology, which their report summarizes in the chart below. Click on any of the graphics here to enlarge.

Applying the first two steps in the logic as filters in the NID database, I get the following numbers for size and age of US non-federal dams.

The results correspond to the general impression that most US dams are old and on the small size. The drop-off in numbers about 50 feet in dam height is pretty dramatic, though.

I use ASDSO’s next two logic streps for dam condition and expected remediation as additional filters in the NID database to estimate what capital work US dams seem to require. For simplicity, I label all potential works as ‘projects’ even though some may not ordinarily be described as such (e.g., repairs).

About 58,000 dams currently need some type of project, ranging from repair to extensive rehabilitation. Here I make an assumption that is outside the scope of the ASDSO report but might be relevant re potential CWIFP borrowers: The dams that require rehabilitation include those that ideally would simply be removed. I’m assuming this because dams slated for removal are probably (though not necessarily) in a poor/unsatisfactory condition, either as the reason for removal or the result of long neglect of an unwanted fixture. I’m guessing that, if correct, it’s likely truer of smaller dams than larger.

Dam Projects by Aggregate Cost

Two more steps beyond ASDSO’s logic diagram are required to connect the data to the financing aspects relevant to CWIFP. The first is to assess the cost of the projects, as that metric is what requires funding and might benefit from financing. The ASDSO report has got us covered there, too. Here are their estimates of project cost for each dam size and project type category:

Simply multiplying the average cost estimates by the numbers in each category shows us how the $157 billion total cost is distributed. My numbers include another assumption about dam removal, that the cost of removal is essentially the same as that of rehabilitation. I think this makes sense since both involve extensive work and although removal won’t need to include the specific reconstructive aspects of rehabilitation, it will likely require removal of a lot of debris, restoration of the site, landscaping of the drained reservoir, etc.

You can see that despite the low number of 50+ foot dams, their aggregate project cost as a proportion of the total is a bit higher. But not by much.

The second step is more subtle but central to the analysis. Dam height is perhaps an indicator of several things that might be relevant to CWIFP financing, especially in connection with the potential urgency of completing projects for safety reasons. But height only roughly correlates to the primary aspects of a project’s financing. For example, CWIFP requirements for minimum $20m in project cost don’t really correlate with dam height because it depends on the project type — a medium dam’s rehabilitation project might be over $20 million whereas a large dam’s repair project won’t. Other financing aspects will have similar overlaps between dam height categories. A reclassification of aggregate project cost is required for our purpose here. I use three project cost size categories that I think are especially relevant to the Program, as further explained below.

With the numbers resorted in the three categories, the story gets clearer.

• Small Project – under $2m: Almost all dam repair and a significant percentage of retrofits will fall below $2m in project cost. There are a lot of projects in this category — almost 28,000 — with an aggregate cost of $33bn. But the weighted average project cost (WAPC) in this category is only about $1.3m.

• Medium Project – $2m to $20m: In contrast to small projects, almost all of the major dam work — rehabs and removal — will fall into the medium $2m to $20m range, along with the big majority of retrofits. There are even more projects in this category, about 30,000, with an aggregate cost of $114bn and WAPC of $4.2m. Clearly, this segment is the core of US dam funding requirements and therefore potential financing benefits.

• Large Project – over $20m: Finally, large projects of over $20m in cost are only a small percentage of the total, with an aggregate cost of about $10bn and WAPC of nearly $27m. Most importantly, there are only about 400 projects in this category.

CWIFP Potential Borrowers

With a basic — and hopefully approximately accurate — taxonomy in place, we can draw some conclusions about CWIFP’s potential dam project borrowers. Two conclusions for small and large projects are relatively straightforward:

• Small projects are not likely to be a significant source of CWIFP demand: CWIFP’s project size threshold is an obvious limitation, but it’s perhaps not the most fundamental. Infrastructure capital projects in the $1-2m range are usually funded out of cash flow or other internal resources by substantial entities. They have the credit quality to borrow, but discrete external financing for small amounts is usually not worth the transaction costs. Entities that can’t fund such a small project out of internal resources are unlikely to be creditworthy enough to access cost-effective market financing, much less meet CWIFP’s investment-grade threshold. And these won’t want to (or simply can’t) consider anything too complicated. They’ll be looking for grants, soft loans from philanthropic or state funds, etc. Yes, in theory, some sort of scale could be achieved with a portfolio of small loans to this category, but any leverage involved would probably need to be very basic, which excludes a relatively sophisticated CWIFP loan and its subtle benefits. I could be wrong, but I think the Program can (at least at the beginning) basically ignore this project size category.

• Large projects are likely to be financed and to benefit from direct CWIFP loans: Capital projects above $20m are likely to be undertaken by substantial, creditworthy entities which can arrange cost-effective financing to fund the cost. Most, if not essentially all, of their large projects will pass the Program’s eligibility tests. For these potential borrowers, a direct CWIFP loan is an obvious option that can deliver a range of benefits not found in their private-sector alternatives. In many ways, they’re similar to WIFIA’s water agency borrowers, and the success of the EPA program should help encourage large dam project borrowers to take a close look at CWIFP. I’d predict that there’ll be significant demand from this group. However, in contrast to the potential scale of demand from WIFIA’s pool of qualified potential borrowers sustaining that program’s consistent success, there just aren’t many potential large dam project borrowers and they don’t need that much financing, relative to CWIFP’s $7.5bn loan capacity. Direct loans to large dam projects should obviously be an important part of CWIFP’s development and policy outcomes, especially in the Program’s early phases. A lot of WIFIA experience will neatly translate to large dam loan origination and execution at CWIFP, jump-starting operations and the first closings. But then what?

The third conclusion concerns medium-sized dam projects, by far the largest segment of potential demand for funding and financing in the sector, and it is less straightforward:

• Medium-sized projects might be an indirect source of CWIFP borrower demand through project bundling and loans to dam funds: Obviously, a single project with a cost of less than $20m won’t meet CWIFP’s minimum size threshold [2]. That precludes a direct CWIFP loan for the project, but there are two paths for medium-sized dam projects to indirectly obtain CWIFP financing. The first is ‘project bundling’ or a combination of medium-sized projects with aggregate cost exceeding $20m that submits a single application. This is not a practical path for small projects, but it may be for medium-sized ones, e.g., a combination of just two $10m projects would get there. And at the medium size, CWIFP’s creditworthiness threshold for the combination is more likely to be achieved. The second path is through CWIFP direct lending to public (e.g., SRFs) or private funds that then on-lend to smaller projects. However, as discussed in this post, CWIFP Loans to Small Dam Funds (where ‘small’ there is ‘medium-sized’ in this taxonomy), neither path is simple in practice for either borrowers or the Program. I think CWIFP will need to push the interpretation of current law (as WIFIA has done in several cases for other loan features) to make the project combination path feasible. Lending to public funds will rely on their specific eligibility rules for dam projects [3] and the situation is a bit ambiguous for private dam funds, were they even to exist in scale. And I’m sure I’m missing a lot of real-world devils in the details. Indirectly financing medium-sized dam projects will almost certainly require sustained effort, outreach and innovation by CWIFP. But that would seem to be justified in terms of the Program’s objectives. This segment of the dam sector is not only the largest by far in terms of aggregate cost of necessary work, medium-sized projects are where CWIFP financing could have the most impact and demonstrable additionality [4]. Even if a lot of work is required to get there, the policy payoff could be transformational, not only for CWIFP but federal infrastructure lending in general.

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Notes

[1] I’m not sure how ASDSO is defining ‘non-federal’ here compared to how it will be applied in WIFIA’s FCRA Criteria. Absent any amendment or clarification of these fundamentally flawed Criteria, I’d guess that a number of ASDSO’s non-federal dams will be considered ‘federal’ by OMB (especially larger ones with some type of federal ownership or management history) thereby precluding from them from CWIFP financing.

[2] The WIFIA statute makes an exception to the $20m threshold that I assume is also available to CWIFP. Project cost can be as low as $5m for small communities when the project is eligible under CWSRF and DWSRF rules. In theory, this might be applicable for medium-size dam projects that are involved in some way with clean or drinking water management. Perhaps storm run-off management or connected to a reservoir? But I don’t know how frequently this could work in practice — I doubt it’s significant.

[3] WIFIA’s ability to lend to SRFs under SWIFIA is specific to their purpose under the CWA. Re the note above, maybe that’ll occasionally include some dam projects. But if an SRF were to expand their eligibility beyond CWA rules to include more dam projects that were also eligible under CWIFP (except for size, perhaps credit rating), I’m not sure that the Program is authorized to make a SWIFIA-type loan for that portfolio. Another detail to clarify.

[4] Demonstrable additionality — clearly enabling a project that would not have happened otherwise — is not easy for a loan program with institutional investment-grade standards. WIFIA’s track record in this is not great, to put it mildly. CWIFP will probably face the same issue in its loans to large dam projects. But medium-sized projects are a very different world, one in which a new type of policy-oriented finance might unlock a lot of potential.