On June 10, 2014, President Obama signed into law the Water Resources Reform and Development Act (WRRDA). The act, which passed with broad bipartisan support, contains the long awaited Water Infrastructure Finance and Innovation Act (WIFIA). The WIFIA program, which is modeled on the highly used Transportation Infrastructure Finance and Innovation Act (TIFIA) program, will make available low interest rate federal loans to partially fund vital water and wastewater infrastructure.
WIFIA Program Structure and Funding
The U.S. Environmental Protection Agency will administer the WIFIA program for water, wastewater and desalination projects, and the Army Corps of Engineers will administer the program for water resources projects (e.g., flood control and navigation projects), as described in more detail below.
For the first year of the program, $20 million has been appropriated for each of the EPA and the Army Corps (i.e., a $40 million aggregate appropriation). The appropriation increases annually to $50 million for each of the EPA and the Army Corps in year five (i.e., a $100 million aggregate appropriation).
These funds cover the risk of WIFIA project defaults, allowing for significant leverage given the historically low rates of defaults in water projects. These risks are significantly less than those in the transportation sector, meaning the leverage level is likely to be much higher for WIFIA than for TIFIA.
Based on prior Congressional Budget Office projections, each dollar authorized and appropriated for WIFIA loans under EPA administration can support up to 30 times that amount in loans. Thus, for WIFIA loans under EPA administration, the initial $20 million aggregated authorization could potentially support more than $600 million in loans, and the $50 million aggregated authorization for the final year could potentially support more than $1.5 billion in loans.
This expected leverage level is approximately three times greater than leverage under the TIFIA program. The above figures do not include the WIFIA loans under Army Corps administration.
Program Limits
WIFIA financing is generally limited to 49% of eligible project costs. However, 25% of the overall appropriation may be used for loans in excess of 49% of total project costs. There is an overall cap on federal assistance at 80% of project costs.
A key limitation of the program is the prohibition on project sponsors combining WIFIA funding with tax-exempt debt. In contrast, TIFIA transportation funding is regularly coupled with tax-exempt debt. This element of the legislation has been subject to much criticism in the market. This aspect of the legislation, which was inserted late in the process, has not been well received by most sector participants.
Other Key Features
WIFIA loan interest rates will be based on U.S. Treasury rates, and loan terms can be up to 35 years. As with TIFIA, debt repayment (principal and interest) does not have to begin until five years after substantial completion.
Eligible WIFIA applicants include local government entities and instrumentalities, state infrastructure financing authorities and private entities (for public projects). Eligible projects under the EPA's remit include drinking water projects, treatment/desalination plants and transmission lines. Certain water system energy efficiency projects may also be eligible. Eligible projects under the Army Corps' remit include flood damage reduction and ecosystem restoration projects, inland waterways projects and coastal/harbor navigation projects, including channel deepening.
WIFIA Project selection criteria include, among other things, the regional or national significance of the project, based on its economic impacts and public benefits, the extent to which WIFIA will allow the project to move forward more quickly and at lower cost, and project readiness.
Generally, a project must have an estimated total cost of at least $20 million to be eligible. However smaller projects can be aggregated to meet the minimum cost threshold, and in communities with fewer than 25,000 residents, the threshold is lowered to $5 million. In all, 15% of the funding is set aside for projects in these smaller communities. A specific list of items, made primarily of iron or steel, used in projects receiving WIFIA assistance must be "produced in the United States."
Following TIFIA, WIFIA also includes a non-subordination or "springing lien" clause stating that the federal loan (which can otherwise be in a junior position) cannot be subordinated to other claims in the event of bankruptcy, liquidation or default. An investment grade rating is also required. Although this rating requirement is consistent with the TIFIA approach, it could be a significant impediment to smaller systems accessing WIFIA financing.
Conclusion
In 2013 the EPA estimated that over a 20-year period, $384.2 billion of capital improvements are needed to the public water system infrastructure just to provide safe drinking water to the public. This figure does not cover the costs of urgently needed repairs and expansions to the wastewater system.
As with the transportation sector, innovative approaches, such as P3s, are an important part of addressing the pressing need to capital investment in existing and expanding water and waste water infrastructure. WIFIA has the potential to play an important part in encouraging the use of P3s in the water and waste water sectors. The program could start inviting applications for funding as early as this fall.
