Government Funding Won’t Address Western Water Issues

By Nicolas Loris, Heritage Foundation Fellow in Energy and Environmental Policy

Those who do not learn from history are doomed to repeat it. Sometimes, members of Congress have the memories of goldfish. One such example is a taxpayer-backed subsidy program for water infrastructure projects.

The Bureau of Reclamation within the Department of Interior oversees water resource management in Western states for activities like water supply, storage, hydroelectric power, irrigation, and more.

The bureau manages 476 dams and 337 reservoirs. In January, members in the House introduced the New Water Available To Every Reclamation State Act, or the New WATER Act. The bill would provide government-backed financing to entities building water infrastructure projects in Western reclamation states.

Eligible projects for WATER Act financing include nonfederal infrastructure projects for domestic, agricultural, environmental, municipal, or industrial use, improving energy efficiency of a water system, repairing and replacing aging water distribution facilities, desalination projects, and acquiring property for water storage, reclaimed or recycled water, or wastewater projects.

The bill would offer secured loans and loan guarantees for water projects exceeding $20 million in costs, where the taxpayer would finance up to 80 percent of the cost of the project. Projects receiving other federal funds would still qualify to receive WATER Act loans and loan guarantees.

In discussing additional eligibility requirements of creditworthiness, the legislation inadvertently makes the case for why the federal government should not finance these projects.

The bill says, “The project shall be creditworthy, as determined by the [secretary of interior], who shall ensure that any financing for the project has appropriate security features, such as a rate covenant, if applicable, and adequate coverage requirements to ensure repayment.”

What qualifies the secretary of interior to make a better determination that a project is creditworthy than a private bank?

Generally speaking, secretaries are not loan officers. More importantly, if a project is creditworthy, the private sector should fund it entirely.

Local government and municipalities regularly find ways to finance capital-intensive public projects through bonds, other long-term credit instruments, or user fees. Private investors understand the risk involved but when the federal government artificially lowers that risk through taxpayer-backed loans, the risk and reward become disconnected. The reward accrues to the private company but the taxpayer bears the risk

The Department of Energy’s loan and loan guarantee programs provide telling evidence as to why the federal government should not play the role of loan underwriter. Several patterns and problems stand out throughout the portfolio and when analyzing all of the projects in the Department of Energy’s loan portfolio, the following themes are pervasive:

  • Failed companies that could not survive even with the federal government’s help.
  • Projects labeled as success stories but are still in the infancy of their operation, and it is too early to tell if they will succeed in the long run.
  • Projects that have the backing of companies with large market capitalizations and substantial private investors. These companies should have no trouble financing a project without government-backed loans if they believe it is worth the investment.
  • Private investors hedging their bets and congregating toward public money. These projects on their surface appear to be financial losers, but the government involvement entices companies to take a chance.
  • Companies and projects that benefit from a plethora of federal, state, and local policies that push renewable energy.
  • Government incompetence in administering and overseeing the loans.

Not only do government loan and loan guarantee programs put taxpayers’ money at risk, they fundamentally distort how markets operate. Because capital is in limited supply, a dollar loaned to a government-backed project will not be available for another project.

Innovative projects may not receive private financing while companies with strong political connections or those that produce something that politicians find appealing will get support. Congress should work to eliminate government-backed financing, not add more.

Wholesale reform to water issues in Western states is necessary, but government-backed financing is not the solution. Instead, Congress should eliminate the Bureau of Reclamation, which effectively subsidizes special interests and encourages overconsumption.

In place of federal management of water supplies, Congress should create a system of water rights allocated by competitive bidding and empower states and independent conservation trusts to assume stewardship of water resources.

Transitioning away from federal control and management will more effectively properly price water and meet Western states’ water demands.

*Originally published in The Daily Signal, click here.

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