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E-1 Public-Private Partnerships This section describes the different types of public-private partnerships (PPPs) used in transportation infrastructure proj- ects and evaluates the potential opportunities to leverage public funding. When private funding through a PPP can be used for an infrastructure project, it is expected to reduce the require- ment for public funding. Thus, the use of PPPs and associated private funding might reduce the need to raise public funds through other mechanisms. There are several types of PPPs. It appears that the term âpublic-private partnershipâ is being applied in a very broad sense to just about any project that has both public and private participation. In reviewing existing projects described as PPPs, five categories of PPPs were selected for analysis. Concession Agreement PPPs Concessions are contractual long-term agreements between a public agency and a private-sector entity or concessionaire that allow the concessionaire to participate in the develop- ment or operation of a transportation infrastructure project. This study considered two types of concessions, (1) the long- term lease of an existing facility and (2) the development and operation of a new facility. In each case, the concessionaire provides up-front funding or development commitments in exchange for the ability to receive payments over the term of the agreement. These payments can come from highway user tolls, shadow tolls, facility availability payments, or facility sublease payments. Shadow tolls are payments by the public agency that are based on use of the road. Availability pay- ments are payments made by the public agency for availabil- ity of the highway facility, and they can be compared to lease payments for availability of the road. In a simplified view of typical PPP financing, the conces- sionaire funds the project with a blend of equity and debt financing. The projection of the expected payment stream is used to secure debt financing and estimate return on equity. With a PPP in the form of a long-term lease of an existing facility, the concessionaire provides an up-front concession payment and takes on the obligation to operate and maintain the highway or port facility. In exchange, the concessionaire collects the facility tolls or tenant lease payments to amortize debt and provide return on equity. The concessionaire takes on the risk of the maintenance and operating cost as well as the risk of the revenue stream. Long-Term Lease PPP Concessions In the long-term lease of an existing toll road or port facility, the public agency receives an up-front concession payment and possibly a commitment to provide additional develop- ment of highway or port infrastructure. The concessionaire also operates and maintains the facility. In return, the conces- sionaire receives the toll payments for the toll road. With a port concession, the concessionaire receives lease payments from port tenants or stevedoring and operational service fees from port operations. The primary attraction of the long-term lease toll road concession is that the public entity can receive a large up- front payment. Because of the long-term nature of these con- cessions, this up-front payment can be quite substantial. The first toll road concessions of this type were for the Chicago Skyway and the Indiana Toll Road (ITR). The Chicago Sky- way concession was completed in 2005. It had a 99-year term and produced a concession payment of $1.8 billion for the City of Chicago. The ITR 75-year concession agreement was completed in 2006 and produced a concession payment of $3.8 billion for the State of Indiana. To what extent did these concession payments reduce the need for alternative sources of funding for transportation infrastructure? In the $1.8 billion Chicago Skyway concession payment, there was no commitment to utilize any of the funding for A p p e n d i x e Public-Private Partnerships and Investment Tax Credits
E-2 new transportation infrastructure. About $463 million (25.3%) was used to retire existing Skyway debt. This can be viewed as an exchange of public debt for private debt with no increase in transportation funding. About $392 million (21.4%) was used to retire City debt and pay for other City obligations. The remaining $975 million (53.3%) was placed into three City reserve funds: a long-term fund ($500 million), a mid-term fund ($375 million), and a neighborhood human infrastruc- ture fund ($100 million). With the exception of the original deposit in the long-term fund, it appears that all of the con- cession payment expenditures and earnings are being used to cover City operating expenses. Although use of the conces- sion money to fund city operations may have freed up other City money for transportation infrastructure, there appears to be no clear increase in transportation funding from the Skyway concession payment. The ITR concession will result in a significant increase in transportation infrastructure funding. The first use of concession funds was the retirement of $750 million of ITR bonds. The remaining $3.1 billion was allocated to fund transportation infrastructure projects through the Indiana Major Moves plan, a 10-year, $12 billion transportation plan established in 2005. It appears that the ITR concession cre- ated $1.9 billion more than would have been available with the state-operated toll road. In addition, the concession pay- ment allowed advancement of the Major Moves plan and cre- ated other cost savings resulting from the early retirement of the remaining toll road bonds. In these two case studies, the analysis shows that the con- cession agreements did produce higher net present value than the tolling agencies own value estimates. However, the focus of this analysis is how much of the concession payment and increased value was actually applied to transportation infra- structure investment. In the case of the ITR, virtually all of the concession payment, net of toll road debt retirement, was applied to highway improvements. However, in the case of the Chicago Skyway, little to none of the payment was directly allocated to highway infrastructure. There can be significant benefits to privatization of an existing toll road. Clearly, the up-front concession payment provides the driving benefit to a long-term concession agree- ment, especially for cash-strapped public entities. There can also be operating efficiencies and service improvements that result from private-sector management of these facilities. However, the privatization of an existing toll road has run into political opposition. Five key factors driving this opposi- tion were identified: ⢠Future toll road increases are controlled by a concession- aire that is not responsible to the public. ⢠Disagreement with the proposed uses of the concession payment. ⢠Loss of control of toll road operations to a private toll road operator that is not responsible to the public. ⢠Fear of the inherent uncertainty of an extremely long-term lease of 50 to 99 years. ⢠Political opposition from the existing toll road agency that would be displaced by the concessionaire. Design-Build-Finance-Operate-Maintain PPP Concessions With a PPP that is set up to develop and operate a new facility, the concessionaire is usually expected to design, build, finance, operate, and maintain (DBFOM) the new facility. Financing of the project can be more complex, using a combination of equity, bank debt, government loans, and public-sponsor payments. The concessionaire takes the risk of on-time, on-budget project delivery in the construction phase of the project. As with the long-term lease, the conces- sionaire also takes on the risk of maintenance and operating cost. The concessionaireâs revenue stream can come from tolls, shadow tolls, or availability payments. Shadow tolls and availability payments would have lower revenue risk as they may be agreed to up front. The concessionaireâs payments may also be tied to performance requirements to ensure stan- dards of maintenance and operation. The primary purpose of the DBFOM concession is to uti- lize private-sector sponsorship and investment to develop large-scale highway infrastructure. The primary advantage is completion of projects sooner without the need to use pub- lic funding sources. In many cases, projects that have been delayed due to a lack of public funding can be advanced with private capital under a PPP. Most of the highway projects involve tolling in order to provide the necessary return on invested private capital. Reliance on tolls usually places the concessionaire at risk to achieve the projected revenue. In some cases, the conces- sionaire is paid availability payments or shadow tolls by the public partner, thereby mitigating the concessionaireâs rev- enue risk. In either case, the highway facility is paid for over the life of the concession. Another potential benefit of a DBFOM PPP is on-time, on-budget project delivery. Private-sector partners take on the risk of meeting the project cost and delivery schedule. The profit motivation is an effective driver for project delivery performance. Most concessions have a long term, exceeding 35 years. Since the private-sector partner is responsible for long-term operations and maintenance, it considers long- term project life-cycle costs in making investment decisions. The concessionaire can thus make the tradeoffs between short-term cost savings and long-term value. Since DBFOM concessions are project-specific, private funding of project construction costs can represent a well-
E-3 defined increase in funding for transportation infrastructure. However, private investment will only be made when the risk and return projections are attractive to the private investor and can be financed with debt. Therefore, DBFOM conces- sions will only be available for projects where the revenue stream can be reliably projected. In the case of the Pocahontas Parkway, the actual revenue stream was less than half of that projected, putting the bonds in danger of default. In the case of the Florida I-595 proj- ect, the toll revenues were not sufficient to attract the needed investment and the Florida Department of Transportation (FDOT) had to commit to acceptance and availability pay- ments to enable the necessary financing. In the case of Texas SH-130, the revenue projections were investment grade and enabled $1.1 billion in debt and $210 million in private equity funding. Port Long-Term Lease PPP Concessions Long-term lease concessions for U.S. port facilities are quite different from toll road lease concessions. Ports do not have the quasi-monopoly competitive market positions that toll roads have and must compete with other ports for ocean carrier business. Port authorities operate as businesses investing in port facilities and generating income from facil- ity leases and port operations. Most ports are owned by pub- lic port authorities that are controlled by a local or regional government entity. Ports are often viewed as generators of economic activity that create jobs and economic devel- opment for their communities. As such, ports can receive public funding to support their activities and infrastructure investments. A port authority can function as a landlord, a port oper- ator, or a combination of both. A landlord port authority develops and leases its terminal facilities to ocean carriers or terminal operating companies that operate these leased port facilities. Port authorities can also have operating capability to provide services to their ocean carrier custom- ers with their own employees. A third option is to lease cer- tain facilities and operate others. Port income is generated from facility leases as well as port operating services. It is this lease and operating income that supports investment in port facilities. Ports are capital intensive. Securing the necessary fund- ing for port modernization and capacity expansion is always an issue for public port authorities. Port financing can come from revenue bonds secured by port income or from public funding. The downturn in the economy in 2008 and 2009 led to reduction in port volume and difficult economic conditions for ports. Declines in port revenue reduced coverage on fixed debt obligations and also limited public funding availability for port development projects. As a result, there has been an increasing interest in developing PPPs to secure private fund- ing for port facilities through long-term lease concessions. Ports have historically leased their port facilities to ocean carriers and terminal operating companies. These leases typically ran for 10 to 15 years. However, in the case of long- term concessions, the concessionaire is looking for very long terms, exceeding 50 years, to provide the incentive to make large investments in port infrastructure. These long- term concessions are more than just facility leases. They also provide the ability to operate a business on the port facility. These concessions also require the concessionaire to invest in terminal facility upgrades and cover all of the operating and maintenance expenses of the terminal. The concessionaire also takes the business risk associated with the volume and revenue stream and receives the income from its port busi- ness. In exchange, the port authority will receive concession payments and possibly commitments to make investments in port facilities. These concessions may be considered as an alternative source of funding for port infrastructure. Three U.S. port concessions (Oakland, Baltimore, and Portland) were completed in 2009 and 2010 and a number of others are in various stages of development. In Oakland and Baltimore, the 50-year port concessions were driven by the need to secure private capital for near- term terminal facility development. The 50-year term gives the concessionaire sufficient time to earn an adequate return on any long-term investments that are made in port facilities. A second benefit for the ports was the reduction of long-term business risk related to lease and volume-related revenue streams. In each case, the selected concessionaire was a major marine terminal operator that could operate its business for the long term on the port property. The situation in Portland was different from that of Bal- timore and Oakland. In Portlandâs case, the primary driver for the concession was development of container volume growth. The concession period was shorterâ25 yearsâ and the concession did not develop any significant new capital investment. However, the port appeared to achieve its objective of getting a private operator that was focused on new business development. The Portland concession may be viewed as a model for small ports that wish to get a private operator interested in partnering with their port. Railroad Grant Agreement PPPs There are a number of private freight railroad projects that have been funded in part by state and federal grants. These projects have been referred to as PPPs because of the combined application of public and private funding. Grant- based railroad PPP projects are generally major railroad infrastructure improvements that are believed to have sig- nificant public-sector benefits. These large projects would
E-4 not go forward without some element of public participa- tion due to inadequate rail carrier return. The funding objective is to prorate the project cost on the basis of the projected benefits. The public-sector contribu- tion is based on the public benefits, and the rail carrier contri- bution is based on the private benefits. Public benefits from a rail infrastructure project can come from a variety of sources. Several types of public benefits have been identified including the following: ⢠Economic impact and job creation ⢠Reduced highway congestion and enhanced mobility ⢠Environmental benefits from reduced greenhouse gas emissions ⢠Improved railroad at-grade crossing safety ⢠Improved passenger rail service on the freight-rail system The objective of the public-private partnership analysis conducted under NCFRP Project 29 is to determine the extent to which the public grant funding provided to the PPP has been leveraged by the private-sector investment that would not have otherwise been committed to the project. In addi- tion, the analysis will consider the extent to which the projects themselves may reduce the need for publicly provided freight infrastructure. The following four major railroad infrastructure PPP grant projects were reviewed in detail: ⢠The Chicago Region Environmental and Transportation Efficiency Program (CREATE), a multicarrier upgrade of rail infrastructure in the Chicago region. ⢠The Heartland Corridor, a Norfolk Southern (NS) double stack clearance and terminal development project running from Norfolk to Columbus and Chicago. ⢠The National Gateway, a CSX double stack clearance and terminal development project running from North Caro- lina through Washington, D.C., to Chicago. ⢠The Crescent Corridor, a NS capacity expansion project from New Orleans and Memphis to New Jersey. In the projects reviewed, the rail carriers were able to gain the support of the public entities that stood to benefit from the project. In each case, a large number of compo- nent projects were assembled to make the overall project program large enough to be considered politically signifi- cant. Principal public benefits included economic impact, job creation, emissions reduction, and improved safety. The apparent strategy for the rail carriers in each case was to secure the financial, as well as political support, of the states and communities involved in the project. Political support to apply for and secure federal grant funding appears to be a key benefit in the formation of a coalition of public stake- holders. In each case, the federal SAFTEA-LU and TIGER grant funding provided a significant portion of the public funding. The funding theory advocated for these PPPs is that the public sector pays for the public benefits and the private sec- tor pays for the private benefits. From a political perspec- tive, it appears that the PPP projects are very attractive and warrant funding support. From the private-sector perspec- tive, many of the component projects in the overall pro- gram would not have gone forward without public funding support. However, it is likely that some of the component projects would have gone forward separately without the for- mation of the PPP. Overall, the PPPs are enabling funding of significant rail freight transportation infrastructure. How- ever, it remains undetermined just how much private capital was leveraged by the public capital that was committed in the projects reviewed. In some instances, it may have been quite low. Additionally, each PPP is unique, and continued incoming private funding cannot be achieved without new agreements continuing to be reached. Use of PPPs for Financing Freight Infrastructure The analysis and case studies described below identify four types of PPPs: concession PPPs for existing infrastructure, DBFOM PPPs for new infrastructure, port lease PPPs for oper- ation and improvement of infrastructure, and grant agreement PPPs for public participation in private infrastructure projects (e.g., railroads). Concession PPPs In selling concessions to operate existing infrastructure and collect future revenues, public agencies are essentially monetizing the expected future net revenue stream from existing infrastructure. The public agency gains access to the net present value of the expected net revenue less the return (profit) obtained by the private concessionaire. The direct benefits could include the following: ⢠Earlier access to the cash, enabling the agency to fund other projects. ⢠Access to more cash if the private concessionaire is more optimistic about the future revenue stream. ⢠A lower financing cost if the private concessionaire can place debt at a lower interest rate. Concession PPPs are therefore a means of extracting the net present value of a future income stream as cash for near- term use. Whether that cash is used for other infrastructure projects depends on case-by-case political outcomes.
E-5 DBFOM PPPs In DBFOM PPPs, the public agency is offering the right to build an infrastructure project and collect the ensuing reve- nue stream. There are several types of revenue streamsâtolls, shadow tolls, availability payments, and acceptance payments. DBFOM PPPs are essentially a means of purchasing infra- structure on the installment plan. Where the concessionaire collects tolls that would otherwise have been collected by a pub- lic toll road authority, users (e.g., drivers) are paying the install- ments directly. If the installments come in the form of shadow tolls, availability payments, or acceptance payments, the public agency is paying for the infrastructure on behalf of the users. DBFOM PPPs can be compared with the lease of the APM Portsmouth container terminal by the Virginia Port Author- ity. The APM terminal was built as a private-sector facility for private-sector use. In this case, the private-sector owner (APM Terminals) found itself cash poor and leased the terminal to a public agency in return for a future revenue steam (the lease pay- ments). Economically, this process is equivalent to a DBFOM PPP in which a private concessionaire builds a facility in return for annual availability payments. Port Lease PPPs Port lease PPPs can be considered a subset of concession PPPs. They tend to differ from ordinary port terminal leases in the length of the agreements, the presence of up-front cash pay- ments, and lessee commitments to infrastructure investments. Ports typically lease terminals for 5 to 10 years, with 20 years being an exception, and tenants are not usually committed to dredging, terminal expansion, or major capital investment. The combination of a longer term lease and an up-front payment gives the lessee a long-term investment and profit opportunity and provides the port authority with cash for other projects. Grant Agreement PPPs Grant agreement PPPs, which have so far been mostly rail projects, can be viewed as expanding private projects to include public benefits or facilitating the implementation of projects that generate public benefits (e.g., jobs, economic development, congestion relief, and emission reductions) but would other- wise not pass private funding hurdles. The amount of private funding being leveraged may be relatively small, and the pub- lic participation is mainly justified by the secondary benefits rather than by the direct transportation capacity increase. Grant agreements appear, then, to be an effective means of achiev- ing public goals, but are not a promising avenue to significant increases in infrastructure funding. If grant agreement PPPs follow the guideline of public funding for public benefits and private funding for private benefits they become financially neutral instruments for facilitating project development and implementation rather than revenue-generating mechanisms. Sources of Funds Investment funds typically consist of a mix of the following: senior private debt (e.g., higher-rated bonds); subordinate private debt (e.g., lower-rated bonds); TIFIA bonds; public agency funds or grants (however sourced); and private equity. Of the five types of capital, all but the private equity are accessible via revenue bonds or comparable public-sector instruments backed by future tolls or other fees. The conces- sion approach may be faster, easier, less costly, or a way to sidestep bonding capacity limits. The influx of private equity is usually the focus of interest for PPPs. As the case studies conducted in this project suggest, private equity is usually the smallest funding component. One question for NCFRP Project 29 is how much private equity PPPs attract that could not have been obtained by some other means. Although in the near-term private equity is a net increase in infrastructure investment, in the long term the concessionaire is expecting a return on that investment. Bond holders invest capital in return for a fixed revenue stream, with the level of investment (the bond price) determined by the terms and the credit rating. Equity investors, in contrast, provide capital in return for an expected but uncertain revenue stream as well as (usually) a measure of control in the enterprise. Public agen- cies cannot ordinarily tap equity capital. The balance between various debt and equity instruments is a major strategic issue in most private-sector financing efforts. Debt-heavy financing is typically regarded as riskier for poten- tial investors, and the bond portion is likely to be saddled with higher interest rates or greater discounts. An appropriate pro- portion of equity signals the strength, faith, and commitment of the organization itself and should result in more favorable debt terms. The inclusion of private equity in PPP financing may thus reduce the overall financing cost. The buying power of debt and equity capital are the same. In principle, access to both types of capital should result in lower funding costs than relying on debt alone. Given the relatively small role that equity has played in the PPPs examined, it appears likely that debt financing could have been expanded to cover the whole need, but at some small incremental financing cost. Higher Private Value Both the concession and DBFOM PPPs may entail higher up- front concession payments than the public agencies expected, indicating that the concessionaires had higher expectations of net revenue in the future. Ironically, the greatest short-term public benefit from differing public/private traffic growth expectations is likely to occur when the concessionaire is overly
E-6 optimistic and pays too much. However, under those circum- stance (which occurred in the Pocahontas Parkway project), financial failure of the concessionaire may leave the public agency with a serious dilemma. This is one of the underlying risks of PPPs: the reliability of revenue forecasts over the long duration of the project life. Greater efficiency is anticipated from a private concessionaire than from a public agency. Whether the manifestation is lower operating and maintenance costs, lower administrative over- head, lower wages and head count, or simply a profit incentive, the greater expected efficiency of private-sector operation may be a contributing factor to the higher-than-anticipated conces- sion bids. Whether or not such efficiencies are achieved and sustained is a matter for future research. The issue is clouded by the scarcity of truly comparable public and private operations. There is, however, an alternate means of achieving private- sector efficienciesâoutsourcing. Private-sector efficiencies may be realized by putting an operating and maintenance con- cession up for competitive bid, without giving potential bidders a lease on the facility or a right to the revenue stream. In this respect, PPPs might be regarded as an easier means of achieving the same end, with the difference coming down to the details or the contract and the bid/offer process. Another possible reason for higher private than public valuationsâaccess to lower interest ratesâis a function of current markets. In some cases, such as in the Pocahontas Parkway Association PPP, private concessionaires are able to issue tax-exempt revenue bonds, which should yield similar rates to public-sector, tax-exempt revenue bonds (such as those issued by ports, airports, or transit authorities). There may be a benefit, however, to any ability of private conces- sionaires to obtain higher credit ratings and thus more favor- able bond terms than their public-sector counterparts. Part of the willingness of private concessionaires to pay high up-front payments may be due to the handling of risk. As the case studies conducted under this project reveal, the degree of risk being assumed by concessionaires varies widely. Some PPPs appear to place almost all the risk on the concessionaire. Realistically, however, financial failure of a carefully structured joint venture, such as the ones created for the Chicago Skyway and the Indiana Toll Road, is unlikely to have repercussions for the parent organizations beyond the loss of their private equity. If the concessionaire for a vital piece of infrastructure is failing, the public agency involved will have no alternative to rescue or replacement, as was demonstrated in the Pocahontas Parkway case. This is another inherent risk: the lock-in effect, wherein long-term contracts written as part of PPPs could tie the hands of government in making future decisions. Overall Value of PPPs This discussion suggests that the major value of PPPs is not in providing capital that would otherwise be inaccessible, but in facilitating more rapid capital investment at a comparable or even lower financing cost. The sources of PPP funding can, for the most part, be accessed through revenue bonds or other instruments. The efficiency attributes of private-sector devel- opment and operation are, theoretically, accessible through outsourcing and design-build contracts without private financing. PPPs, however, may prove to be a quicker and more flexible means of tapping those funding sources and efficiencies. In that respect, the true function of PPPs may be more institutional than economic. This conclusion also sug- gests that PPPs are not a substitute for revenue-generation mechanisms, but a complement that can make other mecha- nisms more effective by giving public agencies more choices over the timing of investments. The most important impact of PPPs may thus be decoupling the timing of capital invest- ments from the timing of revenueâat a cost. Not all states have legislation in place to encourage or allow PPPs, so there is a near-term limit on their usefulness. Yet the popularity of PPPs and the widespread funding shortfalls of public agencies suggest that enabling legislation is likely to emerge in most states. The long-term limitation of PPPs is the need for a secure revenue stream from infrastructure projects. So far, PPPs have been limited to toll roads, port terminals, and other facilities for which tolls or user fees are in place or acceptable. It is conceiv- able that PPPs could be used to build locks, airports, new marine terminals, bridges, and tunnels. In essence, if it is possible to charge a fee for a facilityâs use, a PPP might be able to build it. The use of shadow tolls or availability payments sidesteps this limitation and might enable the use of PPPs for non-toll and non-fee facilities. This is a promising optionâallowing public agencies to contract for the construction of infrastruc- ture they cannot presently fund and pay for the infrastructure over time. This option also bypasses the limitation of revenue bonds, which must ordinarily be tied to a specific source of revenue. A DBFOM PPP using shadow tolls or availability payments is the rough equivalent of financing transportation infrastructure with general obligation bonds, where debt ser- vice does not come from a specific source. That strategy was used in California for the so-called Infrastructure Bonds (Prop- osition 1B), but was stymied in part by poor bond markets. The shadow toll or availability payments strategy, in contrast, does not require the public agency to either issue bonds or identify a specific source for the revenue. It is conceivable, however, that a public agency could over commit its future revenue from taxes or other sources and find itself unable to meet commitments to shadow tolls or availability payments. PPPs and VMT Fees The concept of shadow tolls raises the possibility of coupling VMT or road pricing fees with DBFOM PPPs to finance infra- structure and then service the debt. VMT fees are, effectively,
E-7 non-specific tolls that could be used to fund all or part of shadow toll payments for non-toll facilities. Shadow tolls are payments to the concessionaire based on vehicle counts. A concessionaire could be assigned all or a portion of the VMT fees generated by the facility, or there could be some mix of VMT fees and other funds. Such a strategy would offer a middle ground between revenue bonds tied to tolls and shadow tolls or availability pay- ments without a specific revenue source. If the VMT concept is extended to enable road pricing, every road could become a toll road and therefore a candidate for PPP funding. It is also conceivable that the technical infrastructure for highway user fees, area tolls, or other financing mechanisms could be developed through PPPs, as has been done with some highway and bridge toll systems. In that respect, PPPs could become part of an implementation strategy for VMT fees, congestion fees, or other financing initiatives. Investment Tax Credits Investment tax credits (ITCs) have been proposed as eco- nomic incentives for increased private investment in trans- portation infrastructure for railroads and potentially for other modes. The key issues are understanding the extent to which ITCs actually leverage additional private capital beyond that which would have been invested anyway and determining the potential role for ITCs in a long-term revenue-generation strategy for freight transportation infrastructure. A tax credit is generally calculated as a percentage of the pri- vate investment that meets eligibility requirements of the appli- cable tax law. The net increase in infrastructure funding would be additional private-sector capital investment induced by the availability of ITCs over the amount that would have been invested without ITCs. The direct funding for ITCs would come from the federal General Fund, because the use of ITCs will result in a corresponding reduction in federal corporate income taxes. Where transportation firms do not have enough income in a given year to use all the ITCs that are available, ITC rules may allow them to carry the credit forward or back to another taxable year or transfer the credit to an entity that can use it. The amount of investment that may occur in response to ITCs is difficult if not impossible to predict. ITCs are nec- essarily imprecise in both the kind and amount of invest- ments induced. ITCs typically specify a category of eligible investments, not a case-by-case review. The accuracy of such categorization is limited. A somewhat narrow categorization will diminish the response, as was reportedly the case with the original short line railroad ITC. A broad or loose categoriza- tion may elicit investments in marginal projects. The litera- ture on ITCs located and reviewed in this project is generally focused on the efficacy of the measures in achieving increased investment or completed projects, rather than on the dollar amount of investment induced. Overall, ITCs are probably best viewed as policy tools rather than as revenue-generating mechanisms. ITCs have been used with success to encourage private investment in align- ment with clear policy directions. The effectiveness of ITCs as part of a freight infrastructure strategy will depend on how well the policy goals can be articulated and how well they can be expressed as infrastructure investment objectives. ITC Background An investment tax credit has been, on and off, a part of the Internal Revenue Code (the âCodeâ) for almost 50 years. Con- gress and a number of administrations have believed the credit to be an effective way to direct investment. In 1962, the Kennedy Administration and Congress determined that the economy would benefit from increased investment in industrial capac- ity, and Congress enacted a credit for investment in tangible personal property and other tangible property, not including buildings or structural components thereof.1 ITCs have not been permanent. For example, while the Rev- enue Act of 1962 did not contain a sunset date for the ITC, the credit was suspended in 1966, reinstated in 1967, repealed in 1969, reenacted in 1971, modified substantially in 1975, expanded in 1978, adjusted significantly in 1981, readjusted in 1982, and repealed generally in 1986. The changes were gener- ally in response to perceived differences in economic activi- ties and budgetary constraints (Rosacker and Metcalf, 1992). Other tax credits have also shown this on-again/off-again behavior, which some observers have noted as limiting the impact of ITCs. Since 1986, a large number of different credits have been enacted for particular types of investments. Some of these have been ostensibly permanent; others have had sunset dates.2 The rules applicable to these credits vary widely in terms of the following: ⢠Qualifying investment or production; the taxes against which they may be credited.3 ⢠The percentage limits of the taxes that may be credited. ⢠The percentage of qualifying basis for which a credit is allowed. ⢠Whether the basis must be reduced by a portion of the credit. 1The Revenue Act of 1962, P.L. 834, adding, inter alia, sections 38, 46 and 48 to the Code. 2Changes in Congressional budgeting rules over the years have made permanent credits difficult to enact, even when Congress intends to reenact the credit. The best example may be the credit for increasing research activities, section 41 of the Code, which has been extended no fewer than 10 times. 3Regular tax only, regular tax and alternative minimum tax, essentially refundable in 1981 and 1982 under the period of safe harbor leasing provisions of section 168(f)(8).
E-8 ⢠The degree of government review.4 ⢠Whether the credits are essentially unlimited (as was true of the traditional tax credit). ⢠Whether they are subject to a statutory maximum for all taxpayers (e.g., the Section 48A and 48B credits) or per taxpayer (as in the case of the Section 45G credit for certain railroad maintenance). ⢠Whether the taxpayer has an option to claim credits com- puted in multiple fashions (e.g., a choice between the pro- duction tax credit of Section 45 or the energy credit of Section 48). The history of the investment tax credit points out the flex- ible manner in which this statutory tool has been used. There is precedent in the current Code, or in provisions that are no longer effective, for almost any form of incentive for invest- ment or production that Congress deems worthy of addi- tional investment.5 The key nexus appears to be between the structure of an ITC and the national freight transportation infrastructure policy that it should support. ITCS and National Freight Transportation Policy An investment tax credit is primarily a policy instrument rather than a revenue-generation mechanism. The use of ITCs to promote infrastructure investment is conceptually linked to elements of freight transportation policy. Unlike most other proposed tools to increase freight transportation infrastruc- ture spending, ITCs would require an initial implicit or explicit policy decision on what kind of investments would qualify and should be encouraged. Other revenue mechanisms (such as fees and taxes) generate revenue first, and have a separate process for choosing and funding infrastructure projects. ITCs would require legislators or the IRS to create rules for firms to follow, but would not ordinarily give public agencies any voice in the actual choice of projects. There are, however, grant programs that allow project review and then deliver the grant in the form of a tax credit. There are also grants âin lieu of tax creditsâ such as Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, which applies to investments in renewable energy sources. ITCs have been used to influence the direction of private investment (e.g., more for capital goods, less for real estate), or to encourage specific social goals (more coal gasification plants, more preservation of historic buildings). Their suc- cess has been judged on progress toward those goals rather than on the net new investment induced. ITCs implemented to date have been temporary, in line with their use to pro- mote specific goals. In essence, Congress has decided from time to time that the nation needs more investment of some kind (e.g., research and development, short line railroad maintenance, and so forth) and has used an ITC to encourage private investment in that field. When the ITC expires, there is an implicit or explicit choice made between renewing the ITC (because there is not yet enough of the desired outcome) or not renewing the ITC (because there is now enough of the desired outcome or private investment can now be expected to provide enough without further incentives). The effectiveness of an ITC depends critically on the preci- sion with which relevant policy can be articulated. Policy direc- tion can be relatively clear in fields such as coal gasification and preservation of historic buildings. At present, national policy regarding freight transportation infrastructure is far less clear. Alignment of a freight transportation infrastructure ITC with uncertain public policy is inherently difficult. Creating an effective ITC for rail infrastructure, for example, would require answering some basic questions: ⢠What national freight transportation objectives would be served by railroad capital investment? ⢠What type and amount of rail infrastructure is required to achieve those national freight transportation objectives? ⢠How much of that infrastructure are the railroads likely to build and maintain on their own initiative with existing capital resources? ⢠What is the gap between ânormalâ railroad investment and the policy-dictated investment level? ⢠How can an ITC be structured to induce railroads to fill the gap? Railroad capital investment might serve one or more of the following conceptual policy objectives: ⢠Maintain railroad network capacity for efficient move- ment of current and expected rail freight. ⢠Expand the capacity of railroads to accommodate new types of rail freight or an increased market share. 4Simply claimed on a tax return and subject to normal audit proce- dures, as was the case of the âtraditionalâ investment credit, or requir- ing an application to be reviewed and particular projects selected by the Department of Energy and the Internal Revenue Service as in the case of the advanced coal project and coal gasification credits of sec- tions 48A and 48B. 5In addition to tax credits, similar types of benefits, i.e., reductions in the cost of capital, have been provided to railroads through the depreciation rules. As the Third Circuit explained in Armstrong World Industries, Inc., v. Commâr, 974 F2d 422 (3rd Cir., 1992), before the enactment of Economic Recovery Tax Act of 1981, Pub. L. 97-34, section 167(r) per- mitted common carriers to compute depreciation on railroad track and related items using the Retirement-Replacement-Betterment method. Under this method, the cost of new rail lines and the cost of improve- ments to existing lines were generally capitalized over a period of many years (e.g., 36 or 50 years), but the cost of replacing original rail lines (âreplacement propertyâ) could be deducted in the year the expense was incurred.
E-9 ⢠Improve the future efficiency of railroads to move freight, thereby promoting environmental goals. ⢠Increase railroad capacity and efficiency as a complement to port development strategies. ⢠Enable railroads to attract freight from other modes, there- by reducing congestion and investment needs for high- ways and waterways. These different objectives would imply different ITC for- mulations. An emphasis on overall capacity and efficiency might lead to a broad definition of eligible projects while an emphasis on alleviating highway congestion might better be served by a narrower focus on intermodal terminal facilities. In this respect, ITCs have much in common with PPPs. PPPs tend to be more project-specific, but would nonetheless be more effective in promoting long-term strategic goals if the strategy were clear. ITCs and Capital Investment Decisions The investment choices made by private firms are influ- enced by far more factors with far more variability than have apparently been addressed in econometric studies to date. The response of the private sector in general to an ITC will depend on, among other factors: ⢠The overall investment climate, access to capital, and cur- rent interest rates. ⢠Competing capital investment needs and opportunities. ⢠The tax situation facing the potential investor. ⢠The flexibility of the ITC in terms of credit transfers, roll- overs, and so forth. ⢠The expected life and availability of the ITC. ⢠The relative attractiveness of eligible investments with and without the ITC. Based on the experience of study team members who have participated in freight carrier capital investment planning, the process tends to be sequential. Carriers (e.g., railroads) begin with the capital requirements of sustaining existing business: maintenance, renewal, repair, or replacement of existing physical plant and rolling stock. Such needs are usually but not inevitably funded before expansion projects are considered. Capital investments for capacity expansion are typically prioritized on financial grounds (e.g., internal rate of return [IRR]). Within that process, an ITC would improve the IRR for eligible projects by reducing the car- rierâs out-of-pocket cost. The carrier could respond in any one of several ways: ⢠By funding more capacity expansion projects that would not have otherwise been justified. ⢠By funding the same expansion projects and using the net ITC benefits to increase spending on non-eligible projects. ⢠By funding the same capital program at a lower cost and retaining the ITC benefit in the form of retained earnings, wages, dividends, or perhaps reduced prices. Projects that do not meet IRR standards or rank near the top of the IRR scale, even with the ITC contribution, are unlikely to be funded. This may well be the case with projects that serve social goals but do not generate internal returns, such as increased passenger service or short haul intermodal service to divert trucks from highways. By lowering the cost of capital investment relative to other uses for funds, ITCs could introduce market distortions. It is possible that an ITC might encourage overinvestment in capi- tal. The result could be operations that are too capital inten- sive, or âgold platingâ of infrastructure. This distortion is likely to be smaller when private companies are making long-run decisions that capture full life-cycle costs of the infrastructure, including operating and maintenance costs, and comparing those costs with the long-term revenue stream. Section 45G Railroad Maintenance Tax Credit Section 45G of the Internal Revenue Code of 1986, as amended, originally adopted as part of the American Jobs Creation Act of 2004, provided a tax credit for track main- tenance expenditures of Class II and Class III short line rail- roads. The tax credit was 50% of qualified expenditures, capped at $3500 per mile for the railroadâs total rail miles. This tax credit will expire at the end of 2011, and the short line rail industry continues to work to ensure the continuity of the Section 45G incentives. It is instructive to note that the stated purpose of the tax credit was to promote short line railroads as an alternative to highways. The railroad maintenance tax credit for short line and regional rail carriers was in place for expenditures from 2005 through 2009. The 50% tax credit was available for eligible capital and maintenance expenditures on railroad track and structures and was capped at $3500 per mile for a carrierâs total rail miles, which include yard track as well as main line track. As an example, if a railroad had 300 miles of track, its tax credit would have been capped at $1.05 million. With the 50% tax credit, it would take about $2.1 million of spending to utilize the maximum tax credit on those 300 miles of track. It does not appear possible to establish a direct year-to- year comparison of capital expenditures before and after the inception of the section 45G tax credit or to determine how much investment was induced. There are no comprehensive data on capital investment in the short line rail industry. An immediate increase in capital investment, carefully and
E-10 appropriately defined, would indeed provide evidence of the provisionâs efficacy. Lacking access to actual taxpayer data, the study team had to rely on survey data voluntarily submit- ted to the American Short Line and Regional Railroad Asso- ciation (ASLRRA), which has been helpful. At the same time, in addition to the data limitations noted, the association has only the data submitted by voluntary participants, well under half of the industry for any one survey. Since the IRS does not release data, it is not possible to know the actual amount of the tax credit that is received. According to a source at ASLRRA, the Joint Committee on Taxation of the U.S. Congress estimated the maximum qualifying tax expen- diture for the railroad maintenance tax credit to be $165 mil- lion per year. That is, taxpaying short line entities could have claimed that much credit in total in a given year if they used the tax credit to the maximum extent possible. The means by which this estimate was derived are not documented. Table E-1 provides an estimate of eligible section 45G short line maintenance expenditures from ASLRRA. The fig- ures are somewhat higher than the $330 million that would be implied by the Joint Committee estimate of a maximum of $165 million in tax credits. Private spending usually exceeds the stated 1:1 ratio of private spending to tax credit since not all spending will qualify and not all qualified spending will actually be used to obtain credits. The ASLRRA source interviewed provided an estimate of $140 million for the tax credit amount actually claimed. That estimate, as well as estimates of the actual capital expendi- tures, were derived from surveys of ASLRRA members. While ASLRRA represents a large part of the industry, not all short lines are members, so the estimates had to be extrapolated from the survey results. The estimated $140 million in tax credits used implies a corresponding private investment of at least $280 million up front, half of which would be refunded. The data in Table E-1 imply that, for example, short line railroads spent $365.9 million on maintenance in 2008 and received (according to the ASLRRA estimate) $140 in tax credits. The net private expenditure was thus $225.9 million, with the other $140 million coming from the public sector. Given the history of deferred maintenance typically inherited by cash-poor short line operators, there seems to be little doubt that the section 45G program has achieved its intended purpose of encouraging and accelerating short line maintenance. Legislative Proposals Several bills have been introduced in Congress to provide ITCs for railroad infrastructure investment. Section 45G Extension The first set of bills, H.R. 1132 and companion bill S. 461, would extend section 45G through 2012 and increase the cap from $3500 to $4500 per mile. As of September 2010, the leg- islation had not advanced beyond its initial referral to com- mittee. Targeted tax legislation on this topic and others was subsumed into the giant, end-of-the-year tax package passed by the House and Senate in mid-December 2010, retroactively extending numerous expired provisions and reinstating them through 2011. The Freight Rail Infrastructure and Expansion Act of 2010 H.R. 1806 was introduced on March 29, 2009. Its compan- ion bill, S. 3749, was introduced on August 15, 2010. Although neither bill advanced beyond committee in the 111th Con- gress, Rep. Leonard Boswell of Iowa reintroduced the legisla- tion as H.R. 2091 in the current Congress. The key provision of these bills is the 25% tax credit for capacity expansion of qualified freight-rail infrastructure and locomotives. The legislation is designed to ensure that the tax credit applies only to new infrastructure that increases freight-handling capacity. Locomotive additions must provide a net addition of total locomotive fleet horsepower over the previous year to be eligible. This tax credit is also intended to apply to shippers and any other entity that invests in rail capacity expansion. For port authorities or public agencies that do not have a tax liability to receive the benefit of the tax credit, credit transfer provisions would need to be added to the legislation. If H.R. 2091 were passed as currently worded, investment in new rail infrastructure and locomotives would receive a 25% tax credit. The Association of American Railroads (AAR) esti- mates this tax incentive would cost the U.S. Treasury about $300 million per year6. The AAR estimate was based on con- Source: Adam Nordstrom, Washington Representative, ASLRRA, Chambers, Conlon and Hartwell, LLC, email dated August 20, 2009. Table E-1. Estimated short line maintenance expenditures. 6Statement of Charles W. Moorman, Norfolk Southern, on behalf of the Association of American Railroads before the House Committee on Ways and Means Subcommittee on Select Revenue Measures July 23, 2009.
E-11 tinuation of Class I railroad capacity expansion investments, which run between $1 billion and $1.5 billion per year. For Class I railroads to claim $300 million in tax credits, they would have to invest $1.2 billion in spending on new infra- structure capacity. This tax credit would apply to any entity that invests in the qualifying rail infrastructure. The Class I rail carriers will be the most likely prospects to take advantage of the tax credit. If tax credit transfer provisions are included in the legislation, the benefit may also be applied to customers with rail-served facilities, port authorities, and other entities that can expand freight-rail capacity. In terms of leveraging private capital, the legislation would require a minimum of $3.00 of private funding for each $1.00 of federal tax credit. It is difficult to assess the ability of a future tax credit to leverage more than the minimum 75% private funding requirement. The 25% tax credit may serve to reduce after-tax cost to the point where a given project exceeds its return requirement. The improvement in proj- ect returns should increase the number of eligible projects by lowering the cost threshold, thereby encouraging a higher level of investment. The FREIGHT Act In July 2010, Senators Lautenberg, Murray, and Cantwell introduced S. 3629, the Focusing Resources, Economic Invest- ment, and Guidance to Help Transportation Act of 2010 (the FREIGHT Act). This bill seeks to establish a comprehensive, multimodal, national freight transportation policy. Compan- ion legislation has been introduced in the House. To the extent that the FREIGHT Act succeeds in establishing a coherent national freight transportation and infrastructure policy, such a policy statement would also facilitate the establishment of cor- responding ITCs. Temporary versus Permanent ITCs If ITCs are to be part of a long-term infrastructure financ- ing strategy, they may need to be made permanent. Numer- ous federal tax incentives live a precarious life as temporary measures with a given expiration date. In the worst case, an incentive can be allowed to lapse, only to be renewed pro- spectively at a later date. Perhaps the most notable such provision is the overall corporate research and development tax credit, which has expired for the 14th time. The stop-start syndrome has ham- pered attempts to prove the net value of any of the provisions so affected. With the research and development tax credit, for example, attempts have been made to model, econometri- cally, the net additions to corporate research and develop- ment and ultimately to national output, if only the provision were made permanent. Under the circumstances, however, demonstrating specific examples of multiyear projects not otherwise undertaken has remained daunting. The need for an enduring, if not permanent, ITC is even more apparent if the goal is to encourage freight infrastructure investment. While private firms are often faster at planning and completing projects than public agencies, a deliberate network expansion strategy would likely span multiple fis- cal and calendar years. Critical facilities such as intermodal terminals at ports (e.g., BNSFâs Southern California Inter- national Gateway project) or serving metropolitan areas can require years of planning, permitting, and environmental review that a prudent private-sector firm would not be likely to undertake for a tax credit of limited or uncertain dura- tion. The same observation would apply to truck terminals or investment in waterway facilities and domestic vessels. Contribution of ITCs to Infrastructure Funding The potential of ITCs for infrastructure funding depends in large part on alignment with a national freight transporta- tion policy that is not yet fully articulated. Unlike other kinds of financing mechanisms, ITCs require that the nation make a decision on what kind of infrastructure and how much of that infrastructure it wants to encourage before the revenue is available. In essence, the ITC rules would specify what kinds of investments would be eligible and then turn the choice of actual investments over to the private sector. The benefits of the ITC will depend in large part on the rules and how the affected industry responds. ITCs can contribute to net infrastructure funding when they induce greater net private investment in beneficial infra- structure than would otherwise have taken place. If ITCs merely reduce the cost of investments that the recipients would have made anyway, they become a subsidy with no net revenue devoted to transportation infrastructure. If ITCs accelerate the stream of capital investment so that railroads or others expand beneficial capacity sooner, the benefits depend on how soon the capacity is used. While there is a economic benefit to reserve capacity (related to the concept of option demand), the benefits become more con- crete and the expenditure becomes easier to justify when the new facilities fill with traffic. Another possibility is that ITCs might induce railroads (or other carriers) to cooperate with public-sector initiatives to use some of the added capacity for passenger service or other public purposes by lowering the threshold for capacity invest- ment decisions. Public agencies might thus share in both capacity funding and capacity use. Response of the industry to such proposals in the past has been mixed. In California, Caltrans has a history of successful cooperation with BNSF on
E-12 publicly funded capacity increases to handle Amtrak or other regional passenger trains. In sharp contrast, Union Pacific (UP) withdrew its application for $47 million in âInfrastruc- ture Bondâ proceeds to increase clearances over Donner Pass because the state government made accepting more passen- ger trains a condition of the grant. (UP completed the project with its own funds instead.) From a national policy perspective, it might seem ideal if railroads would use ITCs to add capacity for truck-competitive services that could relieve the pressure on highways (e.g., intermodal capacity). In this respect, rail ITCs could reduce the need for highway investment by prolonging the life of existing road capacity. (This concept supports the use of pub- lic funds for the Heartland Corridor and I-95 Corridor rail capacity.) The same argument might be made for rail services that offer a competitive alternative to inland waterways, if such alternatives would reduce the long-term need to invest in those waterways. If railroads invest instead in capacity for rail-dominant freight flows (such as coal from captive shippers), the public benefit would depend on how much of the long-term cost savings (if any) were passed onto the customers or the ulti- mate consumers. Investment Eligibility The history of the short line ITC and the current legislative proposals raises the question of what railroad investments should be eligible for ITCs. Adding or rebuilding capacity is unquestionably an infrastructure investment. Railroad track and right-of-way maintenance (also known as maintenance of way), however, could be regarded as an ordinary operating expense conceptually similar to maintenance performed on highways or maintenance dredging at ports. Tax credits reduce the level of private investment required for a given project. This reduction in the private cost increases the effective rate of return on the private investment and makes an individual project more attractive. In the capital budgeting process, carriers will select the best projects from the portfolio of available investments. There is an open question regarding the use of ITCs for locomotives, rolling stock, or other non-track rail capital needs. Rail network capacity depends on track capacity as well as on related factors such as signaling and communi- cations. Making such expenditures eligible for ITCs would be consistent with an emphasis on physical network infra- structure. Locomotives, however, are more akin to trucks or vessels and are not, in most peopleâs minds, part of âinfra- structure.â Moreover, the railroads enjoy many more choices when it comes to acquiring locomotives and cars, including financial and operating leases for both new and used equip- ment and pooling options, so there is less concern over an investment shortfall. Railroad rolling stock is also highly interchangeable and very durable, so there is a strong resale market that reduces investment risk. Net Fiscal Impact Solid evidence on the net benefits of ITCs is sparse. There have been a number of different ITCs offered at the federal and state levels. The economic literature includes many studies of their impacts, but most such studies are focused more on the specific goals of the ITC (e.g., preservation of historic buildings) than on the net investments made. Hungerford and Gravelle (2010) observe that â[d]espite attempts to analyze the effect of the investment tax credit, considerable uncertainty remains. Time series studies of aggregate investment using factors such as the tax credit (or other elements that affect the tax burden on capital or the âpriceâ of capital) as explanatory variables tended to find little or no relationshipâ (p. 8). ITCs appear to be generally efficacious in inducing the kinds of investments desired. For example, Massachusetts has provided businesses with an ITC for tangible property investments since 1970. Ernst & Young (2004) found that The ITC is a very effective tax incentive. Massachusetts gains $7.00 of additional net personal income for each dollar of net costs to the state. This is a significant long-run return in terms of new jobs and higher incomes as a result of the stateâs invest- ment. In the aggregate, the ITC added $314 million to the stateâs personal income. (Executive Summary) There are also doubts, however, regarding the long-term economic efficacy of ITCs. Goolsbee (1997) argued that much of the benefit of an ITC for capital goods is actually captured by capital suppliers in the form of higher prices (and higher wage payments to capital workers), finding that a 10% ITC increases equipment prices 3.5 to 7.0%. Chirinko and Wilson (2008), in an examination of state ITCs, found that the result may be a âzero-sum game,â with increases in investments that qualified for ITCs in one state offset by reductions in non-qualified investments in other states. To the extent that the investments themselves can reduce costs and increase income, increased future cash flows will enhance a carrierâs ability to make future infrastructure investments. In other words, the returns on the tax credit spending can be used for future investment. This observa- tion suggests the possibility of a multiplier effect coming from the public investment in private facilities. However, there is no requirement that the private returns from the public investment be plowed back into additional infra- structure investment. Supporters of the Manufacturing Extension Program have noted such an effect from that federal program, in which funds of about $100 million are matched by state funds and then supplemented by fees
E-13 charged to small and medium-sized companies receiving technical assistance (Selko, August 31, 2007). Potential Application of ITCs to Non-Rail Modes ITCs are most often discussed in application to railroads because railroad infrastructure itself is privately funded. As noted below, the application of ITCs to other modes appears to have very limited potential. Highway The possibility of application of an ITC for motor car- rier infrastructure was also considered by the study team. An ATA representative confirmed that there was at present little or no private road infrastructure financed by motor car- riers.7 Although the addition of motor carrier tractors can be considered an increase in transport capacity, the tractors are considered rolling stock and not infrastructure. The only infrastructure assets that might be considered infrastructure would be buildings, primarily truck terminals. It was noted that the trucking industry currently has an adequate supply of truck terminals, so an ITC for construction of truck ter- minals would not be a meaningful use of federal incentives. Some motor carriers and equipment manufacturers have expressed interest in ITCs for costs associated with federal- or state-mandated safety, emissions, or fuel conservation rules. While ITCs could encourage faster replacement or expansion of legacy fleets with newer, cleaner, safer equipment, those would not be infrastructure investments. Based on this assessment, there does not appear to be any real opportunity to use an ITC to leverage trucking indus- try investment in infrastructure. A multimodal ITC strategy might include trucking, but it is doubtful that such a program would add significant infrastructure or funding. Ports and Waterways As a general rule, the only privately owned or funded infra- structure at ports or on the inland or coastal waterways is in proprietary terminals. Many, if not most, marine terminals handling bulk materials (crude oil, minerals, and so forth) are privately built, owned, and operated. The owner and operator is typically the shipper or the receiver, so such terminals are not usually accessible other users or for other uses. It is con- ceivable, however, that investment in additional bulk terminal capacity could enable the user to divert business from high- ways or railroads, thus increasing total available infrastructure capacity in the same way that ITCs for railroads might. Most marine container terminals are built and owned by port authorities, which are public agencies. A very few such terminals (notably the APM Portsmouth terminal) have been built as private initiatives. A crucial question for a national freight transportation policy is whether the domestic inland and coastal marine transportation industry is being held back by lack of invest- ment in vessels (tugs, towboats, barges, and seagoing ships). Much of this industry is subject to the Jones Act (dealing gen- erally with coast-wise trading), notably the need to use U.S.- built vessels. Industry spokesmen have pointed to the high relative cost of U.S.-built vessels as an industry handicap in expanding and competing with other modes. If this factor is limiting the industryâs ability to handle cargo and freight for which it would otherwise be suitable and efficient, then there may be a logical application of an ITC for U.S.-built vessels. The Maritime Administration (MARAD), however, already has the Capital Construction Fund (CCF) program, created to assist owners and operators of U.S. flag vessels in accumulating capital for the modernization and expansion of the U.S. merchant marine. The program encourages con- struction, reconstruction, or acquisition of vessels through the deferment of federal income taxes on monetary deposits of money or other property placed into a CCF. MARAD also administers the Construction Reserve Fund (CRF), which provides tax deferral benefits to U.S. flag operators. The pri- mary purpose is to âpromote the construction, reconstruc- tion, reconditioning, or acquisition of merchant vessels which are necessary for national defense and to the development of U.S. commerce.â Eligible parties can defer gains from the sale or loss of a vessel, provided the proceeds are used to expand or modernize the U.S. merchant fleet. Finally, MARAD over- sees the Title XI Federal Ship Financing Program, which pro- vides U.S. Government credit guarantees for debt issued by (1) U.S. or foreign ship owners to finance U.S. flag vessels or eligible export vessels constructed, reconstructed, or recon- ditioned in U.S. shipyards and (2) U.S. shipyards to finance advanced shipbuilding technology. Air Cargo Air cargo infrastructure can be divided into those facili- ties that are built as parts of municipal airports and those facilities that are built by major air cargo carriers such as UPS, FedEx, or DHL. The privately built facilities tend to be sorting or maintenance centers off the airport property and would not ordinarily be considered part of the transportation infrastructure system. The use of ITCs to encourage devel- opment of air cargo infrastructure would thus be extremely limited. 7Robert Pitcher, American Trucking Associations, telephone interview September 2, 2010.
E-14 Key Findings ITCs appear to be a potentially valuable part of a compre- hensive freight transportation financing package, but can do only part of the job by themselves. Their usefulness is par- ticularly limited until the nation decides what kind and how much freight infrastructure to build. It seems clear that the usefulness and effectiveness of ITCs for infrastructure fund- ing will depend heavily on what projects are eligible, what the tax credit rate is, and how permanent the ITC becomes. ITCs can provide an incentive for private-sector invest- ment in transportation infrastructure. The tax credit is gen- erally applied as a percentage of the value of the qualified expenditure. There is very limited evidence on the amount of new private investment that is induced by ITCs. In the case of the section 45G tax credit for short line maintenance, it was not possible to determine whether the private-sector investment was any greater than it would have been without the tax credit. There are some fundamental differences between ITCs and grant programs. ITCs have an advantage in expediency and low administrative cost. Once passed into law, a tax credit is presumably politically neutral, as all eligible railroads have equal access to the program. In the section 45G program, the rail carrier need only select eligible projects, fund 100%, then utilize the tax credit for a 50% reimbursement. The tax credit is thus equal to the net, post-refund private expenditure. The tax credit does, however, require the railroad to fund the full expenditure up front, which may require some recipients to borrow the funds and pay interest, offsetting some of the benefits. The tax credit also lacks project-by-project control over how the money is spent. A grant program could instead provide the funds up front, but would ordinarily entail far more up-front work and time to apply for the grant and jus- tify the specific project. The ARRA section 1603 grants, for example, are not payable until a qualifying project is placed in service. An ITC can be effective in encouraging additional private investment of a particular type or in a general development direction. As such, an ITC can supplement the public sectorâs own infrastructure investment efforts. It does not appear possible, however, to predict the amount of private invest- ment that will occur. Given an overall infrastructure invest- ment goal of some amount, we can say that an ITC will help achieve that goal but we cannot say by how much. References Chirinko, Robert S. and Wilson, Daniel J., State Investment Tax Incen- tives: A Zero-Sum Game?, Federal Reserve Bank of San Francisco, Working Paper 2006-47, 2008. Ernst & Young, The Economic and Fiscal Effects of the Massachusetts Investment Tax Credit, prepared for the Associated Industries of Massachusetts Foundation, Inc., 2003. Goolsbee, Austan, Investment Tax Incentives, Prices, and the Supply of Capital Goods, Dissertation, Massachusetts Institute of Technol- ogy, 1997. Hungerford, Thomas L. and Gravelle, Jane C., Business Investment and Employment Tax Incentives to Stimulate the Economy, Congressional Research Service, 2010. Rosacker, Robert E. and Richard W. Metcalf, âUnited States Federal Tax Policy Surrounding the Investment Tax Credit: A Review of Legislative Intent and Empirical Research Findings over Thirty Years (1962â1991),â Akron Tax Journal, Vol. 9 (1992). Selko, Adrienne, â Wisconsin MEP Increases Manufacturing Revenues: Partnership fuels sales growth and productivity gains,â Industry Week, Aug. 31, 2007. (http://www.industryweek.com/articles/ wisconsin_mep_increases_manufacturing_revenues_14892.aspx, accessed September 4, 2010).
