Recently enacted U.S. legislation contains important new financing programs that will be available for projects, including public-private partnerships, in the water infrastructure sector. The Water Resources Reform and Development Act (WRRDA) was signed by President Obama on June 10, 2014. The most significant component of the law in terms of programmatic innovation, and from a private sector perspective, is the Water Infrastructure Finance and Innovation Act (WIFIA), which authorizes a significant new credit support program. The legislation also includes a pilot program for federal funding of a limited number of public-private partnerships.
The WRRDA was the first water infrastructure spending bill to be passed by the U.S. Congress since 2007. It authorizes federal funding for projects in a number of areas, including for the purposes of reducing the risks posed by natural disasters such as floods, storms and hurricanes; maintaining inland waterways, ports and harbors; repairing and rehabilitating levees; and managing water resources. The law also contains the WIFIA credit support program, modeled after the similar Transportation Finance and Innovation Act (TIFIA). The WIFIA program, which is in the pilot stage for the next five years, is aimed at providing funding for a diverse range of water projects across the United States.
Overview of the Water Infrastructure Finance and Innovation Act (WIFIA)
The WIFIA program authorizes the federal government to provide secured loans or guarantees to local governments and private entities to support eligible projects. The program is to be jointly administered by the Army Corps of Engineers (USACE) and the Environmental Protection Authority (EPA). Loan proceeds will be able to be applied to all aspects of a project, including planning, revenue forecasting, construction, property acquisition, and the payment of any interest owed.
WIFIA authorizes the financing of a wide variety of water infrastructure projects, including the improvement of inland and coastal waterways and harbors; increasing the energy efficiency of public water systems; and repairing or replacing water treatment works.
To be eligible for WIFIA financing a project must cost at least $20 million, although certain exceptions are provided for small community projects. Project selection will be based on a number of factors, including:
- the national or regional significance of the project;
- alternative financing allocated to the project and whether receiving WIFIA funds will reduce the project’s overall level of federal assistance;
- if the funding will allow the project to begin earlier than it otherwise would; and
- the project’s state of readiness, with an expectation that the project should be able to begin within 90 days of the provision of the WIFIA loan.
Although the WRRDA does not describe the WIFIA application process in detail (this is expected to be addressed by subsequent regulations and programmatic guidance materials), it does provide important baseline information for potential applicants. All applicants must consult with and show the support of the state or local government associated with a project. Applicants must also provide at least one preliminary opinion letter from a rating agency giving the project an “investment-grade” rating (BBB- or above). A second letter from a different rating agency must also be provided as a condition precedent to the making of a loan or provision of a guarantee.
All WIFIA applicants, regardless of acceptance, will be identified on a publicly available website. After receiving an application, the relevant administering authority, either USACE or the EPA depending on the project, has 30 days to inform the state financing authority of the application and the state authorities then have a further 60 days within which to decide that they will finance the project on the same or better terms instead.
Terms of WIFIA loans will include the following:
- the applicable interest rate cannot be less than the yield on Treasury bonds of a similar maturity at the time the loan is made;
- the maturity date is to be the earlier of either the project’s useful life or 35 years following its substantial completion;
- the loan may contain security features such as rate covenants as well as a lien on dedicated revenues;
- WIFIA loans, like TIFIA loans, may not be subordinated to any other holder of project-related debt in the event of bankruptcy;
- repayments must commence within five years of the project’s substantial completion. However, discretionary deferrals can be granted if, at that time, the project is not generating sufficient revenue to repay the loans;
- prepayment will be permitted without penalty; and
- the government will have the right to sell a loan after the substantial completion of the project so long as no terms or conditions are modified without the recipient’s consent.
Restrictions that will apply include:
- a project receiving WIFIA support will not be permitted also to make use of proceeds from tax-exempt municipal or private bonds (this represents a significant distinction from the TIFIA program, where TIFIA loans are often paired with private activity bonds);
- a WIFIA loan generally will not exceed 49% of the anticipated project costs for a project, although exceptions to this requirement may be available for up to 25% of the available funding in each fiscal year; and
- total federal assistance from any source cannot exceed 80% for all WIFIA-funded projects.
The legislative text contains some level of ambiguity as to the total dollar amount authorized to be appropriated for the WIFIA program because authorized allocations are said to be provided to “each” of USACE and EPA. This had led to a mixed report as to whether $175 or $350 million has been made available to be split evenly between USACE and the EPA in aggregate for each of the fiscal years 2015–2019, with available funding to increase annually each year of the program. Based on our analysis and research, the actual figure is $350 million in total, to be split equally between the two authorities. Assuming a similar leverage rate to that of the TIFIA program, these funds can be leveraged to provide up to $3.5 billion in financing over the five-year period.
In addition to WIFIA, the WRRDA also contains a pilot program enabling Congress to authorize funding for specified public-private partnerships in areas such as coastal harbor improvement, inland navigation, flood damage reduction, aquatic ecosystem restoration, and hurricane and storm damage reduction. Under this program, USACE will identify at least 15 projects to receive funding and will work with each private partner to develop a project management plan before granting them control over the project.
The WRRDA should promote the growth of a new pipeline of water infrastructure opportunities in the United States. For example, Miami-Dade County has expressed interest in making use of the program for its projects, which include the construction of the $150 million South Miami Heights water treatment plant and an upcoming $2.2 billion wastewater treatment project.
However, there are still a number of obstacles that the WIFIA program must negotiate in order to prove effective. In particular:
- The limitation that prevents combining a WIFIA loan with tax-exempt financing could be viewed as depriving projects of what would otherwise be a necessary financing source at the lowest otherwise available cost. This limitation does not apply to TIFIA loans, which frequently are paired with private activity bonds on transportation projects. However, water projects are less capital-intensive than transportation projects so there may be sufficient existing bank liquidity to resolve this concern. Water projects, because of their smaller size, are also excellent candidates for the use of 4(a)(2) private placement financing. For example, Freshfields recently advised on aspects of the Bayonne, New Jersey privatization project, which was successfully financed by means of a private placement.
- Neither the EPA nor USACE is experienced in administering such a financing program. We hope that both agencies will promote industry participation in the establishment and development of the WIFIA program and will make use of experience from the administration of TIFIA (as well as other federal infrastructure financing programs such as those administered by the Department of Energy and overseas by agencies such as the Export-Import Bank of the United States and the Overseas Private Investment Corporation) to enable them to rapidly and effectively implement the program.
- Congress must still formally appropriate the necessary funds later this year for the program to come into effect, although this requirement is not unusual for U.S. funding programs.