On June 10, 2014 President Obama signed into law the Water Resources Reform and Development Act (WRRDA). WRRDA, 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 successful TIFIA transportation program, will make available low interest rate federal loans to partially fund vital water and wastewater infrastructure.
WIFIA Program Structure and Funding
The US Environmental Protection Agency (EPA) 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 Congressional Budget Office projections, each dollar authorized and appropriated for WIFIA projects under EPA administration can support up to 33 times that amount in loans. Thus:
- the initial $20 million aggregated authorization for WIFIA projects under EPA administration could potentially support more than $600 million in loans; and
- the $50 million aggregated authorization for WIFIA projects under EPA administration for the final year could potentially support more than $1.5 billion in loans.
This expected EPA leverage level is approximately three times greater than leverage under the TIFIA program. The above figures do not include loans for the WIFIA projects under Army Corps administration.
WIFIA financing is generally limited to 49% of eligible project costs. However, up to 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.
Other Key Features of WIFIA Program.
- Interest Rates, Term and Repayment. Interest rates will be based on US 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 Applicants and Projects. Eligible applicants include local government entities and instrumentalities, state infrastructure financing authorities and private entities (for public projects).
Eligible projects under the EPA’s administration include:
- projects that can receive assistance through the Clean Water and Drinking Water State Revolving Funds (SRFs);
- repair/rehabilitation of water systems, treatment plants and transmission lines (which is broader than SRF eligible projects);
- water system energy efficiency projects; and
- desalination projects.
The program allows SRF the opportunity to provide the assistance in lieu of WIFIA, to ensure that WIFIA credit assistance is needed.
Eligible projects under the Army Corps’ administration include:
- flood damage reduction projects;
- ecosystem restoration projects;
- inland waterways projects; and
- coastal and harbor navigation projects, including channel deepening.
- Selection Criteria: Project selection criteria include:
- the regional or national significance of the project, based on its economic impacts and public benefits;
- the inclusion of public or private financing in addition to WIFIA assistance;
- the extent to which WIFIA will allow the project to move forward more quickly and at lower cost;
- the use of new or innovative approaches;
- whether the project affords protection against extreme weather events;
- whether the project serves regions with significant (i) water resource challenges, including water quality and quantity concerns and/or (ii) energy exploration and development areas;
- the extent to which the project addresses municipal, state, or regional priorities;
- project readiness; and
- the extent to which WIFIA funding reduces other federal assistance.
- Focus on Large Projects, with Set Asides for Small Projects. Generally, a project must have an estimated total cost of at least $20 million to be eligible. However (i) smaller projects can be aggregated to meet the minimum cost threshold, and (ii) in communities with fewer than 25,000 residents, the threshold is lowered to $5 million. 15% of the funding is set aside for projects in these smaller communities.
Buy America(n): A specific list of items, made primarily of iron or steel, used in projects receiving WIFIA assistance must be “produced in the United States.”
Credit Rating and “springing lien.” A WIFIA loan must be repayable from dedicated revenue sources. A preliminary investment grade rating opinion letter is required from at least one rating agency, followed by two actual investment grade rating letters before close. Although this rating requirement is consistent with the TIFIA approach, it could be a significant impediment to smaller systems accessing WIFIA financing.
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.
The American Water Works Association has estimated that the cost of repairing and expanding US drinking water infrastructure over the next 25 years will exceed $1 trillion. 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 for capital investment in 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.