WIFIA Bank – Water Finance & Management
By John Ryan
The EPA’s WIFIA Loan Program 2020 Annual Report is a good read, and not just because it’s short and heavily graphic. This is a series of positive snapshots, including impressive overall stats, highlights of closed loans, and summaries of new features. The overall impression is of a federal program that works very well on several fronts, from developing responsive products for borrowers to the intricacies of executing transactions within a federal bureaucracy. WIFIA continued to operate efficiently and even on an increasing scale in 2020, despite the unprecedented challenges of COVID-19.
The report’s introduction also includes a low-key, technical sounding statement that is easy to ignore, but actually provides important insight into how WIFIA works. WIFIA is now characterized as “a public bank that offers unique flexibilities to borrowers”.
Of course, from a statutory and regulatory point of view, WIFIA remains officially a “program”, so the self-characterization is only a label in a public presentation. But more importantly, the label also recognizes an underlying reality. In terms of what he Is and did From its operational creation, WIFIA actually looks much more like a “bank” than a “program”.
Programs and Banks
Although the two terms are not precise, no one would consider “bank” and “program” to be synonymous. The differences in their ordinary use are revealing. It seems fair to say that something described as a government “program” is intended to solve problems for which there are not many other solutions. So one would expect a government infrastructure loan program to provide loans to innovative or risky projects because other finance for them is not cheap enough or available at all. The hard part of a loan program is the loans themselves. By definition, they will have uncertain credit quality or require a complex and idiosyncratic risk assessment. Dealing with tough loans isn’t something governments are necessarily good at, but that’s not the point. The task is undertaken because the intended results of the program will not otherwise occur.
In contrast, calling something a “bank” usually suggests that it operates in a well-defined financial environment where qualified borrowers have decent alternatives. In this context, a government infrastructure bank is not required to provide basic loans. They will be anyway, by other banks or in the debt markets. Instead, the purpose of a public bank is to offer loans that are a bit different, with special features that make borrowers change their infrastructure plans in ways that improve overall results. Individual changes can be small and significant only overall, so scale is important for the bank to really accomplish anything.
Governments tend to be good at large-scale financing transactions when the processes involved, no matter how sophisticated, are replicable in multiple individual situations with roughly uniform primary factors. Funding for basic public infrastructure falls into this category. The borrowers are mostly very creditworthy, with repayment sources coming from taxes or rates, and the projects themselves have a long lifespan with long periods of construction. A well-managed public bank can build a high-quality portfolio of this type of infrastructure loan with a reasonable degree of efficiency.
Portfolio building is a necessary capacity for a public bank, but it is not sufficient. The loans must include special conditions that will promote the bank’s public sector policy objectives. Their design is not easy.
First, high quality borrowers have high expectations. The benefits of the features must outweigh the cost of changing their plans and managing compliance and reviews that government loans will inevitably require. But not too much – windfall profits are not an acceptable political outcome. Next, the features should be fairly standardized so that they can be added to a basic loan and offered to qualified borrowers in an efficient and fair manner. It means developing a set of features that will be relevant in a wide range of specific situations. Finally, the features should pay off for government taxpayers in terms of the results achieved. It is by fulfilling this last condition that the strengths of a government as a lender to the debt market must be harnessed.
What WIFIA actually does
When promulgated in 2014, WIFIA was generally intended to be a “program” in the sense described above. It was closely modeled on the TIFIA loan program, which then provided difficult project finance for revenue risk toll roads with some success. WIFIA was reasonably expected to do the same for innovative but financially challenging water projects.
But since the start of operations in 2017, WIFIA has consistently attracted high credit scores (and often distinctly not financially distressed) public sector borrowers of the water supply system seeking to finance necessary basic water infrastructure projects. This type of borrower will typically issue tax-exempt water revenue bonds to finance their investment projects. These bonds are particularly profitable, with rates close to or even lower than the US Treasury rates offered by WIFIA. A fixed Treasury loan rate is a valuable feature in most debt situations, but it’s not much of a selling point in this one. Instead, highly rated public systems that apply for a WIFIA loan clearly conclude that other features of a WIFIA loan – primarily, an interest rate lock-in for construction drawdowns and a post-completion term. 35-year-olds – will perform well in their financing plans and provide significant net savings, even over their tax-exempt bond alternatives. It is also evident from the number and diversity of qualified WIFIA applications to date that rate lock-in and 35-year term features are popular products, widely applicable to a range of water infrastructure finance.
The freeze on rates and the 35-year term use the strengths of the US federal government. Locking in WIFIA rates can effectively channel the immense economies of scale and efficiency of US Treasury operations into individual infrastructure finance. A 35-year term is basically free for a federal lender who can hold a creditworthy loan almost indefinitely without worrying about its liquidity or conditions in a 30-year bond market. Such inherent federal strengths allow WIFIA to meet the demand for these popular infrastructure lending features on a highly profitable basis for taxpayers. A WIFIA loan to a highly rated borrower requires very little taxpayer funding, but offers a multiple of that amount in cost savings for financing water infrastructure, a kind of leverage that is both sustainable and scalable.
It should be noted that the WIFIA lending features were not originally designed for high-rated borrowers or federal forces. The rate freeze and the 35-year term were inherited from the TIFIA program model, where they served as relatively minor enhancements to TIFIA’s main product, complex and difficult project finance loans. In contrast, WIFIA borrowers actively use the features in sophisticated ways that have significant value in highly rated long-term infrastructure finance. WIFIA has been very responsive to this reorientation, more recently broadening the scope of rate foreclosure (through framework agreements) and its value in a declining rate environment (through loan reruns). These two developments are highlighted on the first page of the annual report. Optimal use of the 35-year term of a WIFIA loan by using the “sculpting” of the debt service schedule has been explicitly encouraged since 2019. As enhanced by WIFIA and used by borrowers, rate locking and characteristics of the 35-year term have become innovative and unique. sources of value for infrastructure financing.
By lending on a large scale to highly rated borrowers attracted by lending features that are both unique and based on federal strengths, WIFIA ticks all of the boxes in the description of the government “bank” above. In substance if not in name, it has been a bank from the start. The fact that WIFIA works so well is an unintended consequence of delivering an existing lending program framework to a different infrastructure sector and then using it successfully in a new way.
But this was by no means a necessary consequence. The WIFIA bank did not happen automatically. When high-rated candidates unexpectedly showed up, WIFIA’s management and team effectively shifted from a program mindset to that of an institutional lender in a competitive capital market. This pivot required the immediate recognition that high-quality borrowers have alternatives, that value-added features are the center of attention, and efficient execution is essential. This is no small feat for any lender, let alone for a brand new federal transaction. The transition to a banking mindset is truly at the heart of WIFIA’s continued success and the impressive results of the 2020 Annual Report. If there is a note of pride in WIFIA’s self-characterization as a “government bank offering unique flexibilities ”, it is certainly well deserved.
Policymakers looking for ways to meet the Biden administration’s ambitious infrastructure goals should take a close look at WIFIA Bank. Most importantly, WIFIA demonstrates that inherent federal strengths can be channeled and harnessed to improve funding for public infrastructure. This approach in general has great potential for expansion. For water sector policy objectives in particular, innovative features of infrastructure finance may influence outcomes in climate change adaptation, environmental affordability and justice, and the lending capacity of funds. renewables, which are now all the main priorities of the Administration. The federal government is in fact well positioned to offer such loan features in a cost effective manner that has minimal impact on federal taxpayers or the budget deficit. These should be explored and developed without delay. The WIFIA bank is a great place to start.
John Ryan is director of InRecap LLC, focusing on debt alternatives for the recapitalization of basic public infrastructure. He has extensive experience in structured and project finance and was most recently an expert consultant to the US Environmental Protection Agency. The opinions expressed in this article are solely those of the author.