It’s a simple change. WIFIA’s current maximum loan term is 35 years post-construction. That should be extended to at least 55 years for long-lived water infrastructure projects. Now more than ever.

The topic has been covered in previous posts: Same Story, Different World (July 2022), WIFIA 55-Year Loan Term (September 2020) and Extended Term for WIFIA Loans (February 2021).

Different Story

This time, the basic story has in fact changed over the past year. Interest rates are again significantly higher than before, but the important factor is that the UST yield curve is even more inverted. That means a primary benefit of a WIFIA loan, avoiding the negative arbitrage of a construction escrow, is not too valuable in the current environment [1]. Relative to just financing the whole project with tax-exempt bonds, the borrower will save about 3% of project cost on an NPV basis for the current 35-year term. Not immaterial, but much lower than the 5-10% range WIFIA was able to provide in the past. A lot of potential applicants might take a pass.

A 55-year term gets the NPV benefit back up to about 8%. The other numbers (very slight FCRA cost increases, lower tax-expenditure) are also about the same:

The primary driver of the preserved level of benefit is the longer term’s relatively greater utilization of US Treasury flat-forward pricing. This factor is always important for federal infrastructure loans. It is an intrinsic strength of long-term federal lending which enacting a 55-year term will make possible to explicitly recognize and highlight. Much more sustainable and broadly applicable than periodic and potentially costly program benefits based on construction escrow negative arbitrage.

Even More Different World

What I wrote in last year’s post about the importance of the extended term seems even more applicable today:

“In the relative optimism of recent years [up to 2020], extending the maximum term of certain loans in a small sectoral program for large water utilities might have seemed…well, not exactly a compelling priority, regardless of logic or potential benefits. I think it was seen as a minor change for some Western water management projects that had other issues with the WIFIA program (federal budgeting) and useful only to a regional constituency. The WIFIA Improvement Act of 2020 went nowhere.

A pessimistic outlook will – or at least, should – change that perception. Yes, it’s still a minor change and only applicable to long-lived water projects. But more relevant in a tough environment:

• Local funding will be even scarcer, especially for types of infrastructure where it’s easier to kick the can and defer renewal – like stormwater systems. These projects tend to be mainly composed of long-lived, structural assets which could support and benefit from a 55-year loan term. As more water agencies look for WIFIA loans to mitigate the effects of higher interest rates and inflation, they’ll be plenty with long-lived assets. And they’ll be looking for every penny of benefit they can get. That constituency will be national in scale and highly motivated.
• Federal infrastructure loan programs will need to expand their capacity but also their capabilities. Not big, transformational changes (that’ll be impossible) but many small, specific modifications to loan products that have predictable benefits. Extending WIFIA’s maximum term is a perfect example of what’ll be required. As such it can serve as a demonstration that, despite overall political polarization and dysfunction [even worse now], at least one area of federal policy can be successful. It shouldn’t be difficult — TIFIA just extended their maximum term (to 75 years, no less) in the 2021 IIJAA. A win for WIFIA’s maximum term will encourage more of what will work.
• More subtly, longer terms for infrastructure loans help shift the focus to the long run, where it belongs, and away from a business-as-usual mindset. That focus matters for evaluating investment in climate change, long-term environmental sustainability and quality of life for future generations. It’s no secret that the ESG agenda doesn’t seem to have the kind of consensus behind it as it did recently – a trend that is likely to get worse [it has, dramatically]. An extended term for WIFIA loans is a small step in the right direction.“

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Notes

[1] Just mathematically, higher absolute levels of interest rates also erode a WIFIA loan’s value relative to a tax-exempt bond with a comparable term because the tax exemption is applied to a larger amount of income. Post here describes the numbers: Subsidized Debt and Term, Interest Rates. Beyond the 30-year term in the muni market, however, uncertainty about the tax code and income will likely outweigh this advantage — hence another reason for a 55-year WIFIA term.