Recent action in Congress may catalyze more private investment in water and wastewater infrastructure in the U.S. Last week, the House and Senate both passed the bipartisan Water Resources Reform and Development Act (WRRDA) of 2014 (H.R. 3080) by overwhelming margins. If signed into law by President Obama, the legislation will create a new five-year pilot program—the Water Infrastructure Finance and Innovation Act (WIFIA)— offering low-interest federal loans and loan guarantees to help finance significant water projects through public-private partnerships (PPPs), lowering the cost of capital for such projects.
Specifically, under the WIFIA program, the Army Corps of Engineers and the Environmental Protection Agency (EPA) would be authorized to provide up to $175 million in direct loans and loan guarantees for the construction of critical water infrastructure projects—such as drinking water systems, wastewater treatment plants, desalination plants, new water supply facilities, levee and flood control projects—including those delivered through PPPs. Eligible loan/guarantee recipients include state and local governments, corporations, partnerships, joint ventures, trusts, tribal governments, and state infrastructure financing authorities.
Interest rates on WIFIA loans would be set to those on long-term Treasury bonds, and WIFIA loans could be used for up to 49 percent of project costs for large projects in excess of $20 million (or $5 million for projects serving less than 25,000 people), according to an analysis by law firm Mayer Brown. Municipalities would not be able to use tax-exempt debt to finance the remaining 51 percent of project costs, encouraging the use of private financing.
The program is largely modeled after the Transportation Infrastructure Finance and Innovation Act (TIFIA) administered by the Federal Highway Administration, which has been used to help finance many transportation PPP projects nationwide, including the Capital Beltway HOT Lanes in northern Virginia, the Port of Miami Tunnel and I-595 expansion projects in Florida, and the North Tarrant Express and I-635 Managed Lanes projects in Texas.
WRRDA also creates a separate 15-project pilot program—the Water Infrastructure Public-Private Partnership Program—to evaluate the use of PPPs to accelerate the planning and construction of projects for coastal harbor improvement, channel improvement, inland navigation, flood damage reduction, aquatic ecosystem restoration and hurricane/storm damage reduction to help the Corps address a $60 billion project backlog.
Potential PPP projects will be evaluated based on the extent to which they have national economic significance, leverage federal investments to encourage non-federal contributions, use innovative project delivery and cost-saving methods, involve previously approved projects experiencing delays or schedule slips, have unobligated Corps funding balances, and have not received additional federal appropriations for recapitalization or modernization since originally authorized.
Individual projects will need to receive specific congressional approval and have detailed project management plans, and in approved projects, the non-federal partner would get full project management control for financing, design and construction (or combinations thereof). If signed into law, the bill also requires Corps to submit a report to Congress within three years that describes the results of the program and recommendations on whether the program should be expanded.
WRRDA is the product of a House-Senate conference committee formed to forge consensus on a single water infrastructure bill after each chamber passed different versions of a water bill last year. In an unusual show of bipartisan support given the current political dynamics in Congress, WRRDA passed by overwhelming margins in each chamber: 412-4 in the House and 91-7 in the Senate.
Overall, the legislation authorizes $12.3 billion in water-related spending over the next decade—down significantly from the $23 billion approved in the last water reauthorization in 2007—and makes some other reforms, most notably streamlining the environmental review process used by the Corps to accelerate projects and amending the Clean Water Act’s provisions on State Revolving Loan Funds to increase flexibility in their use. The WRRDA received support from a broad range of organizations, including the U.S. Chamber of Commerce, American Society of Civil Engineers, National Governors Association, National League of Cities, Nature Conservancy, and a variety of state, regional and local government entities.
If ultimately enacted, it remains to be seen how much of a boost WRRDA will give to privatization in the water space. As the Mayer Brown analysis noted, the WIFIA program is much smaller in scale than the TIFIA program was when it was first enacted as a pilot —$20 million in first year WIFIA funding compared to TIFIA’s $80 million back in 1999—despite the larger investments needed nationally in water projects relative to transportation. Hence, while it represents a symbolic step forward in federal credit support for water PPPs, the WIFIA program appears to be more of a toe in the water than jumping in with both feet.
To that point, WIFIA appears to fall somewhere in between the opinion bookends of Heritage Action—which criticized WRRDA for “a failure to privatize a sufficient number of government-funded projects”—and the reliably anti-privatization Food & Water Watch, which complained that WIFIA will “place inappropriate pressure on local governments to privatize their drinking water and wastewater systems.”
Further, unlike TIFIA, WIFIA does not allow project sponsors to use tax-exempt debt to cover any portion of the remaining 51% (or more) of project costs, including private activity bonds (PABs). A number of transportation PPP projects over the past decade have relied on both TIFIA and PABs as part of their financing package to minimize the costs of capital. It’s also worth noting that even though TIFIA was modified in recent years to allow it to cover up to 49 percent of project costs like WIFIA, in practice no project has had more than 33 percent of its costs covered through TIFIA. It’s reasonable to expect water projects to be treated similarly.
While this restriction on combining tax-exempt debt with WIFIA loans may be less relevant in the current era of historically low interest rates and small spreads between taxable and tax-exempt debt, if rates were to rise significantly in the future, it could impact the financial viability of potential PPP projects. That said, PABs have been less relevant to water projects than transportation and other sectors given the current federal cap on states’ use of PABs, which was left intact by WRRDA.
Still, the PPP provisions in WRRDA are an encouraging start overall, especially in the context of an estimated $600 billion to $1 trillion in needed U.S. water and wastewater system investment in the coming decades—$384 billion alone in drinking water investments, according to the EPA—to address chronic deferred maintenance and modernize aging infrastructure. PPPs are increasingly being viewed as a viable way to address at least some of those pressing needs, given the ongoing fiscal pressures at all levels of government.
Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.