Dams are critical pieces of the nation’s infrastructure, supporting flood reduction, waterborne commerce, hydropower and water supply. But over 50 percent of our dams were built before 1970 and as they age, safety liabilities increase while their effectiveness decreases. Of the nearly 90,000 non-federal dams in the U.S., more than 15 percent are considered high hazard, and many — perhaps as high as 75 percent — no longer serve their originally intended purpose.
Rehabilitating dams is often straightforward from an engineering perspective but paying for it faces three challenges. First, it’s not cheap; more than $75 billion is needed nationwide, including $24 billion for high-hazard dams alone. Second, because 85 percent of U.S. dams are non-federal, rehabilitating dams will have to be paid for by non-federal sources. And third, while there are potential benefits to rehabilitating any infrastructure (e.g., improvements in efficiency or safety through modernizing decades-old engineering), when money is tight for a community, other basic infrastructure needs, like bridge repair or water system upgrades, will often take priority.
Non-federal public infrastructure projects are typically financed with long-term debt via the tax-exempt municipal bond market. This long-established and highly efficient market offers federally subsidized interest rates and bond terms of up to about 30 years, allowing a community to spread payments for large infrastructure projects over decades, thus minimizing near-term budget impacts. For most basic public infrastructure, municipal bonds work very well.
But for dam rehabilitation projects, the bond market is not a perfect fit. Dam projects are relatively infrequent and idiosyncratic, limiting appeal to investors in a project they may not understand or have seen before. Also, once completed, a dam rehabilitation will usually have a beneficial life of 50 to 100 years, far beyond the term of a typical municipal bond. In effect, bond market parameters limit the extent to which municipal bonds can mobilize whatever capital might be available for dam rehabilitation — making a tough situation even tougher.
Fortunately, direct federal financing will soon become available for dam projects. This spring, the Corps Water Infrastructure Financing Program (CWIFP) will begin accepting applications. This new program, managed by the U.S. Army Corps of Engineers, will have the capacity to make about $7.5 billion of long-term loans, the bulk of which is specifically allocated to nonfederal dam improvement.
CWIFP loans will have features that help dam projects make the most out of a community’s available funding. For example, the loan’s interest rate will be fixed at the U.S. Treasury’s own cost of financing at the time of commitment. That rate is comparable or even lower than what is typical in the tax-exempt bond market. Also, the loan term is 35 years after project completion. This means an overall term of 40 to 45 years after project initiation is possible, significantly better than what could be done in the typical bond market where a 30-year clock would start ticking when the project was initiated.
Still, even the CWIFP is limited for the specific needs of dams, in part because the program was not actually designed for dams. CWIFP shares a statutory framework with the Environmental Protection Agency’s (EPA) highly successful Water Infrastructure Finance and Innovation Act (WIFIA) loan program, which was primarily intended for municipal public water system projects. Aspects of WIFIA law regarding loan features and federal budgeting perfectly adequate for municipal water systems will significantly constrain CWIFP’s capabilities for dam rehabilitation.
To reduce these statutory constraints, CWIFP stakeholders’ lawmakers in the House of Representatives introduced a bill last year, the Water Infrastructure Finance and Innovation Act Amendments of 2022. Proposed amendments include a 55-year loan term, which better matches the duration of benefits a dam can provide, and a clarification of federal budgeting treatment of loans to non-federal borrowers for projects with some federal intersection. On the surface, the budget issue can appear arcane. But if not resolved, it may severely restrict the effectiveness of CWIFP for large dam projects, which often have a legacy of federal involvement in development and construction.
WIFIA amendments specifically dedicated to dam rehabilitation could go a bit further when the bill is re-introduced in the new Congress. A loan term of 75 years is now permitted for federal loans to very long-lived transportation projects under the Department of Transportation’s Transportation Infrastructure Finance and Innovation Act (TIFIA) credit program. The same maximum term should be available to equally long-lived dam projects. In addition, TIFIA and another federal infrastructure loan program are allowed to adjust a loan’s interest rate at execution to reflect what it would have been at the time of loan application. This feature is helpful for projects with a long development period, also a characteristic of large-scale dam projects. WIFIA’s statute currently does not include the feature, but it would be easy to add using the language in the other loan programs’ statutes.
Federal financing will be critical to facilitate funding for dam rehabilitation. The Corps’ new program is important in terms of both loan capacity and capability, but it’s only the first step. CWIFP’s successful implementation in 2023 will provide the basis for further development — and, perhaps more importantly, active support from the many stakeholders of our nation’s dams.
Martin Doyle is a professor at Duke University focused on water resources and infrastructure.
John Ryan is principal of InRecap, LLC, which is focused on financing basic public infrastructure.