As outlined in a previous post, a 55-year post-completion loan term might be an especially useful feature for CWIFP’s initial implementation. This post expands on the idea that limiting the scope of an amendment to extend WIFIA’s maximum may be critical to its chances.
Competing for High Quality Applications
The primary reason that the WIFIA program was surprisingly successful out of the gate was that very creditworthy entities submitted high-quality applications for low-risk projects. Applications like that get through the federal transaction processes and oversight bureaucracy with relative efficiency, quickly establishing an experience base of what works and a track record of reliably successful transaction completion. That kind of successful launch is self-reinforcing, internally by continually improving processing efficiency and externally by attracting further high-quality applications.
Contrast WIFIA’s story to that of TIFIA, a program that started with applications from complex and risky project financings. Those kinds of deals are hard enough for the private sector, but rough material indeed to feed into easily jammed federal machinery. And it showed in the program’s results and reputation.
However, there is one problem with high-quality applicants: they have very cost-effective financing alternatives in the tax-exempt bond market. Back in 2017, when WIFIA was starting up, a WIFIA loan with a 35-year post-completion term was competitive with 30-year muni high-grade water revenue muni bonds, primarily because the loan’s rate lock avoided negative arbitrage costs. That’s not the case in current market conditions, as outlined in the prior post.
A Quiet Veto
A 55-year loan term would dramatically improve the numbers and be a game changer for WIFIA and CWIFP loans. Unfortunately, the municipal bond industry knows that, too. Their lobby will have a quiet word with the Decision Makers Who Matter, and the 55-year term will be quietly dropped, as it has been when proposed over the past several years.
Wait…a federally subsidized debt market that has an effective monopoly on US public infrastructure finance due to that subsidy is acting behind-the-scenes to protect said monopoly by curtailing the capability of another federally subsidized source of infrastructure finance, one that incidentally utilizes genuine federal comparative advantages in lending and costs the taxpayers less? Isn’t that…rent-seeking? Yes, I’m afraid it is. And?
A Limited — and Realistic — Approach
Back in the real world, a 55-year term that can apply to all qualifying WIFIA projects (as HR 5664 and past amendments have proposed) will likely be a non-starter because the scope will include many municipal water projects that would otherwise be financed with bonds. But if the scope was limited to specific asset classes that aren’t part of the muni market’s bread-and-butter, then relative indifference, if not leniency, might be shown. The chances of that are improved if it can be shown that WIFIA loans to the asset class are likely to enable projects that wouldn’t have happened otherwise, providing the bond market (or at least its PAB segment) a new possible opportunity to get some of the non-WIFIA 51% share of project capitalization. I’d guess that similar arguments were critical in getting a 75-year term for TIFIA’s P3s and other tough transportation project financings.
It seems to me that dam safety projects are that kind of asset class, at least in terms of relative infrequency and unimportance to the muni market. And that’s the class CWIFP must start with in any case, not just because of the specific funding the program has received for dam safety projects, but due to the draconian strictures of the current FCRA Criteria, which block pretty much everything else that Congress intended CWIFP to do.
A successful start is important for any enterprise, but especially for a government lending program. A lot of long-term aspirations can be built on near-term results. So, with the real-world binding constraints and short-term goals in mind, I think there’s a compelling case to limit the current 55-year term amendment to dam safety projects for which CWIFP has funding. The operative language might look something like the draft at the top of this post.