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Forty-three entities have expressed interest in borrowing from the US government under a new WIFIA loan program administered by the US Environmental Protection Agency. WIFIA stands for the Water Infrastructure Finance and Innovation Act.
EPA has not released the names of the prospective borrowers or the projects for which they submitted letters of interest, but it said the requests add up to US$6 billion of WIFIA loans, which is four times the approximately US$1.5 billion of loans that EPA estimates it currently has the budget authority to make.
The Trump administration appears to be prepared to implement WIFIA, which was authorized by Congress in 2014 during the Obama administration.
The fiscal year 2018 budget that the Trump administration sent Congress in late May would continue to fund the WIFIA program at the same level it was initially funded for 2017.
Trump’s pick to head the EPA, Scott Pruitt, sent the message that WIFIA is important in a speech in early March that he delivered to the US Conference of Mayors. Pruitt said in this speech that investment in water infrastructure will be an important part of the President’s infrastructure plans.
WIFIA will provide loans or loan guarantees for eligible water projects.
Loans can carry low interest rates at the US Treasury borrowing rates for similar maturities. There is no spread above the Treasury rate.
They can have flexible repayment terms, including provisions that allow for a 35-year maximum final maturity date from substantial completion of the project and up to five years of payment deferral after substantial completion.
There are certain statutory limitations. For example, WIFIA can only fund up to 49 percent of eligible project costs. This reflects a policy that the federal government’s role in these projects should be to fill market gaps, or to provide credit support to projects that will leverage federal loans to attract additional debt and equity from the private sector.
Eligible projects include drinking water, wastewater, desalination, drought mitigation, aquifer recharge, water recycling, and projects for enhanced energy efficiency at drinking water and wastewater facilities.
Eligible borrowers include government entities at the state, local or federal level, tribal governments, and state infrastructure financing authorities. Private entities are also eligible borrowers.
For a private borrower, the federal government would expect a demonstration of public support. A public-private partnership would be eligible, as would a wholly private project that could demonstrate appropriate public support. The public support gives the federal government the confidence that it needs that the project fits within the broader public goals in the region or area.
EPA will review the expressions of interest and invite selected projects to submit full loan applications. The amount of time to reach a formal loan will depend on how quickly EPA can complete the detailed financial and engineering review for a particular project and agree on loan terms with the applicant. Applicants will be required to pay an application fee when they submit their applications. The application fee will be applied toward a credit processing fee paid by the borrower after financial close. The credit processing fee reimburses EPA for actual engineering, financial and legal costs, which EPA expects to range from US$350,000 to US$700,000 in the typical project.
Although the WIFIA program was originally passed by Congress in 2014, Congress did not appropriate any money for WIFIA to start making loans until the end of last year when it provided US$20 million of budget authority.
EPA announced on May 17 that WIFIA received an additional US$8 million of budget authority in an appropriations bill signed by President Trump on May 5. Together with the earlier appropriation from December 2016, EPA estimates that it now has the budget authority to make up to US$1.5 billion in loans.
There have been some recent high-profile problems that have drawn the attention of lawmakers and the public to the need for investment in water infrastructure.
President Obama declared a state of emergency last January in response to a water crisis related to contaminated drinking water in Flint, Michigan.
California imposed the state’s first-ever mandatory water restrictions two years ago as a result of four years of the worst drought in the state’s history.
More recently in California, a damaged spillway at the Oroville dam threatened severe flooding, leading to the evacuation of an estimated 200,000 residents. Officials are moving quickly to get the spillway fixed before next winter’s rainy season.
Even without these high-profile problems, the case for investing in US water infrastructure has been building for many years. The US has fallen behind both on maintaining existing water infrastructure and building new facilities to accommodate population growth. Investment gaps are quantified in different ways, but there appears to be a consensus that the needs in the US water sector are substantial.
The Value of Water Campaign, which is supported by a diverse group of leaders in the water industry, released a report in March, called the “Economic Benefits of Investing in Water Infrastructure,” that said many underground pipes that were installed early in the first half of the 20th century are coming due for replacement because they are reaching the end of their 75- to 100-year useful lives.
In addition to infrastructure aging, if the infrastructure was being built today it might be built in different ways, given advances in technology. More modern infrastructure could also target considerations such as sustainability and resiliency and take advantage of real-time information about system performance.
The federal government’s contribution to funding US water infrastructure has been falling for decades. It was 63 percent of total capital spending on water infrastructure in 1977. It was just 9 percent in 2014. Federal spending was US$76 per person in 1977 and just US$11 in 2014. Both per capita figures are in 2014 dollars.
State and local government spending increased during the same period.
Congress designed the WIFIA program based on the US Department of Transportation’s existing “TIFIA” program, which makes loans and loan guarantees for road, mass transit and other surface transportation projects.
The TIFIA program was first passed by Congress in 1998 and has been reauthorized multiple times since then. Congress expanded TIFIA substantially in 2012, as the program’s popularity increased, giving TIFIA enough budget authority to make more than US$17 billion in additional loans.
In 1998 TIFIA was, in many ways, starting from scratch. WIFIA should be able to start making loans relatively quickly by building on the experience with TIFIA.
Experience suggests annual budget authority for WIFIA may lag the pipeline of projects that are ready to borrow from the program. As the TIFIA program attracted more borrowers, its budget authority was not always quickly adjusted. This resulted in a backlog of projects competing for a limited amount of TIFIA loan capacity.
Congress seems to have become more attuned to this issue over the years with respect to TIFIA, and may be flexible in adapting the appropriations process to help meet demand for WIFIA loans.
TIFIA has invested over the years in crafting transaction documents, including template terms sheets, template loan agreements, application forms and letter of interest forms. These documents should be relatively easy to adapt to WIFIA.
An immediate focus for the WIFIA program will be the criteria that are in place to evaluate projects.
The notice of funding availability that EPA issued in January 2017 to solicit letters of interest for WIFIA’s current budget authority included a list of the statutory selection criteria that are to be used to select projects. These criteria include things such as the national or regional significance of the project and whether WIFIA funding will accelerate delivery of the project.
The EPA notice also included a list of EPA priorities. They include such things as adaptation to extreme weather and climate change, enhanced infrastructure resiliency, enhanced energy efficiency, green infrastructure and the need to repair, rehabilitate and replace infrastructure.
Changes to the statutory selection criteria would require action by Congress. However, the Trump administration and the EPA could revise the EPA priority list in a future notice of funding availability.
EPA is expected to work through the 43 letters of interest this summer, at which point it should be able to start inviting prospective borrowers to provide information for a financial and engineering review and to start negotiation of loan terms.
Implications for cryptocurrency trading, smart contracts and AI
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