Future Financing Options to Meet Highway and Transit Needs (2006)

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NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-1 4.0 The Role of Innovative Finance and Public-Private Partnerships The terms “innovative finance” and “public-private partnerships” are used to describe a broad array of policy initiatives designed to enhance the flexibility of Federal-aid funding, facilitate access to the capital markets, and encourage increased private sector participa- tion in project delivery and asset management. This section briefly describes some of the techniques included under those umbrella terms and provides examples of how they can be used to facilitate investment in surface transportation infrastructure.1 The strategies outlined below are not presented as alternatives to or substitutes for the revenue enhancement options discussed in Section 3.0. Innovative finance tools and public-private partnerships (PPP) can play a strategic role in efforts to secure resources for highway and public transportation projects, but their ability to reduce the funding gap on a nationwide basis is likely to be quite modest. State and local project sponsors need a broad-based, sustainable source of funding in order to maintain existing infrastructure and address critical mobility needs. The financing techniques that can be used to facilitate infrastructure investment are dis- cussed in the context of two basic approaches: 1. Leverage Existing Resources; and 2. Create Revenue-Generating Assets. The two approaches are not mutually exclusive, but with regard to increasing total resources available for highway and transit investment, it is useful to distinguish the debt financing tools in the first category from the project finance strategies in the second. Section 4.3 of this chapter outlines various PPP structures that can facilitate both financing approaches. The contractual arrangements outlined in the PPP section can help accelerate key investments (increasing public benefits) and improve asset performance (reducing life-cycle costs). Often they are used to advance large and complex projects that are diffi- cult to fund, develop, and operate through “conventional” means. The PPP strategies can involve generation of new revenues – such as those paid by direct users and other project 1 Additional detail and resources on innovative finance and public-private partnerships are available at www.innovativefinance.org and www.fhwa.dot.gov/ppp/index.htm. See also Performance Review of U.S. DOT Innovative Finance Initiatives, July 2002 and Report to Congress on Public-Private Partnerships, December 2004.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-2 . beneficiaries – but they do not represent revenue sources per se and do not directly address the funding gap. A summary of the financing and management tools is provided in Section 4.4 along with a brief discussion of some policy issues related to the increased use of innovative finance and PPPs. „ 4.1 Leverage Existing Resources State DOTs and transit authorities have pursued and are considering a number of strate- gies for leveraging available resources to expedite construction of important projects and to induce local governments and private entities to invest in transportation infrastructure. Federal Grant Management Tools – Over the last 10 years, various policies and regula- tions governing the distribution of Federal-aid reimbursements for highway projects have been modified to broaden the options for meeting matching share requirements and to provide states with more flexibility in managing how Federal funds are obligated.2 These fund management tools do not increase the total amount of Federal aid available to states, but they can help to accelerate construction of certain projects (which limits exposure to cost escalation) and may enable some states to reallocate funds that otherwise would have been used to provide the non-Federal match. Debt Payable from Federal Grants – Bonding against future Federal aid can be a cost- effective way to finance large projects or capital programs if the interest cost and other expenses associated with issuing the debt are less than the potential costs associated with completing construction on a pay-as-you-go basis. Among the benefits to be considered from debt financing are reducing construction cost inflation through faster phasing, achieving nonmonetary benefits such as travel-time savings due to congestion relief, and enhancing local taxes through accelerated economic development. Using the bond pro- ceeds to help finance revenue-generating projects, such as toll roads, can enhance the eco- nomics of using this approach. The Grant Anticipation Revenue Vehicle (GARVEE) borrowing tool was created in 1995 as part of the National Highway System Designation (NHS) Act. A GARVEE can be any “bond, note, certificate, mortgage, lease, or other debt financing instrument issued by a state or political subdivision,” whose principal and interest is repaid primarily with Federal-aid funds. As of July 2006, at least 16 states plus Puerto Rico and the Virgin Islands had issued GARVEE bonds for approved Federal-aid projects totaling about $5.7 billion (excluding refunding bonds).3 Over $5 billion of additional debt payable from 2 Innovative Finance Primer, April 2002. http://www.fhwa.dot.gov/innovativeFinance/brochure/ index.htm. 3 According to FHWA’s Innovative Finance Quarterly, Fall 2006 edition.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-3 Federal highway reimbursements (Construction Reimbursement Vehicles or RVees) also had been issued. RVees are sometimes referred to as “indirect” GARVEEs because the Federal funds used to pay all or a portion of the debt service are not necessarily linked to the projects being financed. RVees are issued pursuant to state laws and regulations and the proceeds do not have to be used on Federal-aid projects. Transit agencies can use a similar vehicle – Grant Anticipation Notes (GAN) – to borrow against future Federal Transit Administration grants that are allocated by formula (Section 5307) or by project (Section 5309).4 Approximately $3 billion of GANs have been issued thus far. Figure 4.1 shows the states that have issued debt payable from Federal transportation grants.5 Figure 4.1 Debt Payable from Federal Grants 2006 Sources: FHWA and Mercator Advisors LLC. 4 http://www.innovativefinance.org/topics/finance_mechanisms/bonding/bonds_gans.asp. 5 Primary source is FHWA Innovative Finance Quarterly, Fall 2006. MT WY ID WA OR UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN AL GA FL SC NC VA WV OH MI NY PA MD DE NJ RI MA ME VT NH AK PR GARVEE RVee VI MS Transit GAN NV A u t h o r i z e d t o i s s u e G A R V E E B o n ds

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-4 . Section 129 Loans – Section 1012 of ISTEA made state loans to certain transportation projects eligible for reimbursement from Federal-aid highway funds. This new oppor- tunity provided states with a means to recycle Federal-aid highway funds by lending them out, obtaining repayments from project revenues, and then reusing the repaid funds on other highway projects. Pursuant to Section 129(a)(7) of Title 23, states can use funds from their annual apportionments to make loans to public and private sponsors of any Federal-aid highway project. The project sponsor must pledge non-Federal revenues from a dedicated source of funding, such as tolls, excise taxes, sales taxes, property taxes, motor vehicle taxes, and other beneficiary fees. Loans can be in any amount, up to 80 percent of the project cost, provided that a state has sufficient obligation authority to fund the loan. One of the key advantages to Section 129 loans is the opportunity for states to get more mileage out of their annual apportionments. States benefit because every loaned dollar is repaid and recycled into further investment in the transportation system. From a project sponsor’s perspective, loans are useful in offsetting up-front capital requirements that might otherwise have to be borrowed in the open market at higher rates. Further, Section 129 loans can serve a credit enhancement function when repayment is subordinated to other borrowing. State Infrastructure Banks (SIB) – The use of Federal aid to fund loans that can be recy- cled was broadened in a programmatic way through State Infrastructure Banks. All states and territories and the District of Columbia are authorized under current law to enter into cooperative agreements with the Secretary of Transportation to establish infrastructure revolving funds eligible to be capitalized with Federal transportation funds authorized for fiscal years 2005 to 2009. These revolving funds, which are usually referred to as SIBs, provide an opportunity to leverage Federal and state resources by lending rather than granting Federal-aid funds, and they can be used to attract non-Federal public and private investment. Among the advantages to borrowers are that funds may be loaned on a low- interest basis, and SIB loans can be secured by a subordinate lien on pledged revenues. SIBs also are authorized to provide credit enhancement through loan guarantees, reserve funds, and other means. Thirty-two states and Puerto Rico have SIB programs and the aggregate amount of 491 loan agreements completed through the end of fiscal year 2005 exceeded $5.2 billion. Five states account for 50 percent of the total number of loan agreements and 89 percent of the total amount of loans.6 Not all SIBs are structured exclusively as loan revolving funds capitalized with Federal grants and state match. Some, such as in Arizona and South Carolina, rely principally on borrowing through the tax-exempt bond market to obtain lendable funds. Loan repay- ments then are used to retire the debt that has been issued, rather than being recycled into a “second round” of project loans. 6 FHWA Innovative Finance Quarterly, Fall 2005.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-5 Figure 4.2 State Infrastructure Bank Activity 2005 MT WY ID WA OR UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN AL GA FL SC NC VA WV OH MI NY PA MD DE NJ RI MA ME VT NH AK PR Over $200 million in loan agreements Between $10 million and $200 million Less than $10 million Source: Highway Statistics 2005, released October 2006. Pass-Through Financing, Availability Payments, or Shadow Tolls – Some states are encouraging local communities and private entities to finance and manage certain trans- portation improvements by agreeing to reimburse those entities over time for a significant portion of the cost. In Texas, these agreements are known as Pass-Through Financings and the state reimbursement will be based in large part on the number of vehicles that use the new facility.7 Florida is selecting a private concessionaire to design, finance, build, operate, and maintain a $1 billion tunnel to the Port of Miami, where the concessionaire may be compensated through annual “availability payments” based on various perform- ance standards. Miami-Dade County has contributed $100 million of general obligation bond proceeds to initial studies for the project and is expected to be responsible for a por- tion of the annual payments over a 35- to 40-year period.8 Long-Term Leases of Existing Assets – Public transportation authorities have leveraged various property assets to generate incremental cash or in-kind goods and services for many years. Several highway agencies, for example, have granted access to their 7 As of October 2006, TxDOT had completed 11 pass-through finance agreements with cities and counties. Additional information: http://www.dot.state.tx.us/publications/tta/pass_through.pdf. 8 www.portofmiamitunnel.com.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-6 . right-of-way to private telecommunications companies in exchange for donations of communications technology (principally capacity on fiber optic lines) or lease payments. Some transit authorities have had success entering into joint development arrangements with private developers that leverage air rights and publicly owned property around rail stations. A more dramatic development in recent months involves the long-term lease of existing toll facilities in exchange for upfront cash payments and/or a share of future project reve- nue. A private concession company paid the City of Chicago $1.83 billion in January 2005 for the right to operate the Chicago Skyway for 99 years. In January 2006, that same con- sortium submitted the winning bid of $3.85 billion for a 75-year lease of the Indiana Toll Road. The Commonwealth of Virginia received $603 million in June 2006 for a 99-year lease of the Pocahontas Parkway. The negotiated concession agreement for that project includes a provision for sharing revenue with the Virginia Department of Transportation (VDOT) if certain conditions are met and it allows VDOT to terminate the concession after 40 years upon payment of certain costs. With regard to generating resources available for transportation investment, a long-term lease of an existing asset should be viewed as a financing mechanism, not a new source of revenue. There is considerable debate among transportation policy-makers as to the “value propo- sition” for long-term operating concessions. Private owners may have more incentive to introduce new technologies, implement operating efficiencies, and control costs in order to enhance the profitability of their franchise. But it also appears that private owners have a much greater willingness to raise tolls (i.e., use “market pricing”) and are less sensitive to public criticisms than governmental entities. Proponents of asset leases have pointed to the capital structure of concessions – taxable loans and private equity – as producing a larger upfront cash infusion than tax-exempt debt financing models for assets managed by government agencies. In 2006, the Harris County Toll Road Authority, a public agency responsible for building, operating and financing 491 lane-miles of toll roads in the Houston metropolitan area, sought to resolve that question through a “controlled experiment.” It furnished a set of uniform operating assumptions to three separate investment banking teams to perform a financial valuation of the Authority’s toll roads under three different models: i) continued public agency ownership and operation; (ii) a long-term lease to the private sector; and (iii) an outright asset sale to private sector. The study concluded that all three approaches could generate financial valuations in the same order of magnitude, if aggressive leveraging was pursued. The single most impor- tant driver of financial value was found to be the assumed toll revenues, which are deter- mined by the toll schedule and traffic volume, and which were fixed for purposes of the experiment. Maximizing the value of an existing toll facility, therefore, is largely deter- mined by the assumed level of toll rates. Other factors, such as relative operating mar- gins, nominal cost of capital and the tax benefits derived from private ownership of the business, were determined to be of much lesser importance. With the increasing frequency of privatization proposals, public sponsors will need to develop a framework for evaluating these and other policy questions.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-7 Examples of Strategies to Leverage Existing Resources • Flexible Match – In Pennsylvania, the use of flexible match accelerated construction of a $3.2 million project that encompassed seven individual transportation enhancement projects. Of the total cost, $1.0 million was funded from private sources. These funds directly offset the non- Federal matching fund requirement; no state funds were directed to this project. The ability to substitute private funds for public matching funds offered PennDOT a means to expedite con- struction of these projects that otherwise lacked the required match. • Partial Conversion of Advance Construction – The Connecticut State DOT advanced a major bridge project with a total construction cost of $55.4 million through a phased conversion of a $35.7 million component to Federal funding. Connecticut spread its Federal-aid obligations for the I-95 bridge project over two years, enabling it to redirect some funds to other smaller bridge projects. • GARVEE Bonds – Oklahoma’s first GARVEE issue of $50 million was sold in March 2004. In August 2005, the State issued an additional $48.9 million in GARVEE bonds as part of the financing for the Governor’s identified 12 corridors of “economic significance.” These issues are part of an anticipated $799 million program authorized by the legislature in 2000, of which $500 million is expected to be funded with GARVEE bonds. Within these corridors, the State is anticipating issuing a total of $300 million of GARVEE bonds by October 2007, with an addi- tional $200 million planned after that date. It is expected that improvements within these identified corridors will enhance the business climate throughout the State. Examples of the proposed projects include U.S. 77 Broadway Extension in Oklahoma City, I-44 in Tulsa, and U.S. 183 from U.S. 70 to I-40 in Southwest Oklahoma. • State Infrastructure Bank – Arizona’s Highway Expansion and Extension Loan Program (HELP) has been one of the nation’s most active SIBs, ranking third nationally in loan activity. A seven- member HELP Advisory Committee accepts loan applications, reviews and evaluates requests for financial assistance, and makes recommendations to the State Transportation Board on loan and financial assistance requests. To date, the Transportation Board has approved 49 loans totaling $564 million. The program has been used throughout Arizona with loans in 14 of Arizona’s 15 counties, benefiting both rural and urban areas. Each of the three major regional areas of the State – Maricopa County, Pima County, and statewide (the other 13 counties) – have received substantial assistance from HELP. Loans have ranged from an $80,000 loan to the Town of Miami for two street widening and resurfacing projects to a $100 million loan to the Arizona Department of Transportation (ADOT) for the purchase of right-of-way for the Regional Freeway System in Maricopa County. • Full Funding Grant Agreement – In order to enhance prospects for securing Federal Transit Administration funding for the first phase of the Dulles Corridor Metrorail Project, a group of commercial landowners submitted a petition to Fairfax County to establish a transportation improvement district to provide funding for a local contribution. The petition was approved in 2004 and the tax levy is expected to be sufficient to support $400 million of bonds. • Shadow Tolls – A developer advanced $6.5 million to the E-470 Public Highway Authority to pay for construction of a new interchange. The repayment terms are based in part on the number of vehicles that use the interchange. • Long-Term Lease of Existing Toll Road – The State of Indiana recently entered into an agree- ment to privatize the 157-mile Indiana Toll Road. A joint venture between the Spanish trans- portation services company Cintra and the major Australian investment bank Macquarie will operate the toll road as a for-profit enterprise under the 75-year deal. The agreement called for the consortium to pay the State $3.8 billion in advance and assume the responsibility for oper- ating and maintaining the toll road to explicit standards. In exchange, the consortium will col- lect all revenues from operation of the road. The funds that the State derives from the deal will be used to pay for other major transportation projects within the State.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-8 . The upfront financial proceeds from an asset monetization need to be weighed against other local public policy considerations to determine whether the transaction is advisable. Among the factors that should be considered are: • Will control of the asset by a private owner, whose orientation will be to set tolls so as to maximize profitability, be consistent with the public sector desire to increase access and improve mobility? • Is there any risk of diversion of traffic to non-tolled roads, and to what extent would there be greater congestion on those roads or higher public expenditures for opera- tions and maintenance? • Will turning over operational control of a toll road for a long-term (50 years or more) period interfere with transportation planning in future years? „ 4.2 Create Revenue-Generating Assets Innovative finance and public-private partnerships are expected to play a significant role in advancing new toll facilities and other capital improvements supported by user fees. Outlined below are certain strategies, including the use of credit enhancement, that can facilitate the development and financing of such projects. In terms of increasing total transportation investment, the contractual arrangements between the public and private entities involved in creating the assets and the form of financing (tax-exempt versus taxable debt and equity) are not as important as the framework established for setting the tolls or user fees. On any given project, the gross amount of revenue generated under a policy goal of simply retiring the construction debt, for example, is likely to be significantly lower than the revenue realized if tolls or user fees are set at the maximum levels the market will bear. One of the challenges faced by state and local authorities developing revenue-generating assets is establishing clear and con- sistent policies for subsidizing projects that cannot generate sufficient revenue to cover associated costs and for generating and allocating surplus revenue from facilities in more robust markets. Given limited discretionary funding, many states also may need to supplement their tra- ditional sources of revenue in order to effectively pursue project finance strategies. The Texas Transportation Commission, for example, secured an amendment to the State con- stitution and other legislation needed to create a Texas Mobility Fund that will be used, in part, to supplement funding for regional toll roads. The revenues dedicated to the Texas Mobility Fund (various driver license and motor vehicle fees) are expected to support approximately $3 billion of bonds.9 9 ftp://ftp.dot.state.tx.us/pub/txdot-info/lao/strategic_plan2005.pdf.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-9 Make Strategic Investments – State DOTs and transit authorities can facilitate the creation of revenue-generating assets by assuming responsibility for a portion of the capital costs or operating expenses that cannot be supported by projected revenues. Based on experi- ence to date, few start-up infrastructure projects are likely to be completely self- supporting. In a recent GAO survey of state transportation officials, for example, the most frequently cited reason for not pursuing tolling was insufficient revenue.10 Many of the respondents were unwilling (or perhaps unable) to consider tolling unless the projected toll revenue was sufficient to cover the capital costs and the anticipated operating and maintenance expenses. Tolling and user fees, however, can be beneficial from both a financial and operational perspective even in situations where public investment or sub- sidy is required. Public sector financial support can be beneficial at various stages of a project life cycle. Some states, for example, have established special funds to help project developers (public and private) offset the costs of environmental analyses and preliminary design.11 Others have facilitated various project financing efforts by securing specific Federal appropria- tions, contributing right-of-way, building key feeder roads, or providing commitments to cover certain costs or project risks. The State of California facilitated financing of the Orange County toll road system by agreeing to own and maintain the facilities upon com- pletion. The State of Maryland intends to fund a portion of the Intercounty Connector toll project by leveraging future Federal funding with GARVEE bonds and by seeking a TIFIA loan.12 Access the Tax-Exempt Market – One way to secure financing for revenue-generating infrastructure projects is to access private investors in the U.S. municipal market. State and local governments can issue tax exempt revenue bonds through established conduit issuers or newly created public authorities. In the toll road sector, for example, North Carolina and Colorado have recently established state turnpike authorities and in Texas, there are several new Regional Mobility Authorities that are authorized to issue project debt on a tax-exempt basis. Several highway and transit projects have been funded with proceeds from debt issued by nonprofit corporations, which, pursuant to Internal Revenue Service (IRS) Revenue Rule 63-20 and Revenue Procedure 82-26, are able to issue tax-exempt debt on behalf of private project developers. Examples include toll roads (the Pocahontas Parkway in Virginia and the Southern Connector in South Carolina), the State-supported Massachusetts Route 3 North project, and the Las Vegas Monorail project. A new option for accessing the tax-exempt market was created under SAFETEA-LU with the establishment of a new class of Private Activity Bonds (PAB) for “qualified highway or surface freight transfer facilities.” To be eligible, projects must be Title 23 eligible projects, 10 States’ Expanding Use of Tolling Illustrates Diverse Challenges and Strategies, GAO-06-554. 11 Virginia Transportation Partnership Opportunity Fund, Texas Toll Equity grants and loans, Florida Toll Facilities Revolving Trust Fund. 12 http://www.e-mdot.com/News/2006/May%202006/ICC_fed_appr.htm.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-10 . international bridges and tunnels, or intermodal rail-truck transfer facilities that receive some form of Federal assistance under Title 23. A national limit of $15 billion is author- ized under the program, to be allocated by the Secretary of Transportation on a discre- tionary basis. The PABs are Federally tax-exempt but purchasers are subject to the alter- native minimum tax. Access the Taxable Debt and Equity Markets – Several states are pursuing opportunities to create partnerships with private consortiums in order to advance development of major improvements. In addition to providing technical and management expertise, the private sector, in certain circumstances, also can access the taxable debt and equity markets to secure project financing. To date, relatively few privately financed infrastructure projects have been completed in the United States, but several are in development in California, Georgia, Texas, and Virginia. Table 4.1 U.S. Infrastructure Projects in Operation or under Construction that Were Financed with Taxable Debt and Equity Project Year Open Initial Financing (in Millions) Dulles Greenway (Virginia) 1995 $350 SR 91 Express Lanes (California) 1995 $126 United Toll Systems Toll Bridges (Alabama) 1994 to 1998 $38 Camino Colombia Toll Road (Texas) 2000 $90 Adams Avenue Parkway (Utah) 2001 $12 South Bay Expressway/SR 125 (California) 2007 $621 Utilize the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program – The TIFIA program, which was enacted in 1998 as part of TEA-21 and expanded in SAFETEA-LU, provides Federal credit assistance to major transportation investments in the form of direct loans, loan guarantees, and lines of credit. The program is designed to fill market gaps and leverage substantial private co-investment by providing supplemen- tal and subordinate capital and credit rather than grants. A review of TIFIA undertaken for a 2002 Report to Congress found that the program also was useful in helping project sponsors consolidate political and financial support for certain projects.13 Figure 4.3 highlights TIFIA projects approved as of October 2006. 13 http://tifia.fhwa.dot.gov/.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-11 Figure 4.3 Approved TIFIA Projects October 2006 Source: Federal Highway Administration. Utilize the Railroad Rehabilitation and Improvement Financing (RRIF) Program – This U.S. DOT program was enacted in 1998 as part of TEA-21 and was reauthorized and expanded under SAFETEA-LU in 2005. RRIF provides credit assistance to state and local governments, railroads, government-sponsored authorities and joint ventures that include a railroad partner. The direct loans and loan guarantees may be used to acquire, improve, or rehabilitate intermodal or rail equipment or facilities. RRIF also can be used refinance debt previously incurred for these purposes and to establish new intermodal or railroad facilities. Direct loans can fund up to 100 percent of a railroad project with repayment terms of up to 25 years and interest rates equal to the cost of borrowing to the government. As of October 2006, RRIF loan agreements had been executed for 13 projects with an aggregate loan amount of approximately $517 million.14 Under SAFTEA-LU the program is authorized to issue up to $35 billion in direct loans and loan guarantees. Up to $7 bil- lion is reserved for benefiting freight railroads other than Class 1 carriers. RRIF currently does not have an appropriation to cover the risk cost to the government of providing the credit assistance. This credit risk (“subsidy”) cost must be paid by the applicant at the time the loan or loan guarantee is provided. 14 http://www.fra.dot.gov/us/content/268.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-12 . Examples of Strategies to Create Revenue-Generating Assets • Make Strategic Investment – Approximately $2.3 billion of debt was issued to finance the Central Texas Turnpike System project in 2002. Upon completion in 2008 through the final maturity of the bonds in 2042, the project is expected to generate over $8.2 billion of gross toll revenue. That amount will be sufficient to pay scheduled debt service and toll operations, but does not cover all anticipated maintenance costs. Support from the Texas Transportation Commission, therefore, was key to securing financing from private investors (and a loan com- mitment from TIFIA). State financial support includes investment of $700 million of state highway funds, agreements with local municipalities to secure $512 million of funding for right-of-way acquisition, and a pledge to cover construction cost overruns and to budget for any operational costs that cannot be supported by toll revenues. • Supplement Project Revenue – During the planning stages for E-470, a tolled beltway around the eastern perimeter of Denver, Colorado, the public highway authority formed to develop the project sought and received voter approval to impose a $10 per motor vehicle registration fee. The revenue generated by the fee comprised a relatively small portion of total project funding, but it showed investors there was strong local support for the project and supported authority operations during construction. • Provide Access to the Tax-Exempt Market – The State of Nevada facilitated private financing of the Las Vegas Monorail project by serving as the issuer of approximately $600 million of tax- exempt revenue bonds secured primarily by farebox and advertising revenue. • Access International Debt and Equity – The South Bay Expressway, a 9.5-mile toll facility being built in San Diego County, California, will cost approximately $635 million and is pri- vately financed by California Transportation Ventures, Inc. Funding sources include bank loans, a $140 million Federal loan provided by the U.S. Department of Transportation under the TIFIA program, as well as private equity capital. Area developers also have dedicated right-of- way valued at more than $40 million. A link from the Expressway to the existing SR125 costs about $140 million and is being funded by the San Diego Association of Governments (SANDAG). • Facilitate User Fee Financing with TIFIA – The Rhode Island Airport Corporation and Rhode Island Department of Transportation are constructing the $222 million Warwick Intermodal Facility at T.F. Green State Airport that includes a consolidated rental car garage, a commuter rail station, parking, and a hub for local and intercity buses. One of the keys to the successful project financing was obtaining a $42 million subordinated TIFIA loan secured primarily by customer facility charges imposed on airport rental car customers. • Federal Loan Financing through RRIF – The Iowa Interstate Railroad (IIR) received a $32.7 mil- lion Federal loan to help it improve service to rural areas that rely on trains to ship corn, soy- beans, steel, chemicals, and other products to market. The loan will pay for track improvements needed to haul heavier freight cars and get products to key shipping points faster and safer. Specifically, the funds from the RRIF program will improve 266 miles of track, replace 180,000 crossties, lay thousands of tons of new ballast, and rebuild 95 highway-rail grade crossings between Council Bluffs, Iowa, and Bureau, Illinois. A portion of the loan also will be used to purchase a rail line that IIR currently is leasing and refinance debt incurred from previous infra- structure improvement projects.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-13 „ 4.3 Use Public-Private Partnerships to Enhance Project Delivery and Asset Management State and local transportation agencies are using a wide range of contractual arrangements to enhance private sector participation in Project Delivery (development phase through design and construction), Asset Management (long-term operations and maintenance), and Project Finance (debt and possibly equity financings secured primarily by project revenues). These public-private partnerships can provide substantial benefits in terms of accelerating project development and construction, increasing operating efficiency, and limiting public sector exposure to certain risks, such as cost overruns or project revenue shortfalls. As of October 2006, 21 states and Puerto Rico had adopted enabling legislation author- izing some form of public-private partnership with regard to delivery of transportation projects.15 These states are portrayed in Figure 4.4. Figure 4.4 States with Significant PPP Authority 2006 15 Authorization varies from state to state and is limited in some cases to a specific project. Source: Nossaman Guthner Knox & Elliott. http://www.fhwa.dot.gov/ppp/ppp_legis_table.htm. MT WY ID WA OR UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN AL GA FL SC NC VA WV OH MI NY PA MD DE NJ RI MA ME VT NH AK PR MS NV

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-14 . The Federal government also is encouraging increased use of public-private partnership approaches to deliver transportation projects. In 2004, FHWA established a new Special Experimental Project (SEP-15) to encourage experimentation in the entire development process for transportation projects. Under SEP-15, states can apply for waivers from Federal-aid rules in several areas, including contracting, right-of-way acquisition, envi- ronmental requirements, and project finance. In addition, SAFETEA-LU expanded upon previous Federal legislation by authorizing design-build procurement for Federally assisted projects of any size and allowing transportation agencies to enter into design- build contracts prior to completion of the environmental clearance process under NEPA. The legislation also established a three-project pilot PPP program for FTA-assisted transit projects. As shown in Figure 4.5, project delivery approaches can combine many phases of the project life cycle. Figure 4.5 Alternative Contractual Arrangements Preplanning and Acquisition Finance Design Construction Operations and Maintenance Upkeep and Improvements Full Delivery or Program Management In-house Consultants or Public-Private Partnerships (PPPs) D-B-F-O Design-Build-Finance-Operate D-B-B Design Build D-B-O-M Design-Build-Operate-Maintain Segmented Combined Capital Projects Long-Term Maintenance Contracts Source: Pakkala, Pekka. Innovative Project Delivery Methods for Infrastructure – An International Perspective. Finnish Road Enterprise, Helsinki, 2002. Outlined below are some basic vehicles for securing benefits from private sector partici- pation in design and construction, asset management, and project finance. Design-Build Contracting – Design-build is a generic term for a method of project deliv- ery in which the design and construction phases of a project are combined into one con- tract. Under the traditional design-bid-build (D-B-B) approach, two different contracting efforts are undertaken in sequence to procure architecture/engineering services on a negotiated-price basis and construction services on a lowest-responsible-bid price basis.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-15 Between 1995 and 2002, about 300 highway projects totaling approximately $14 billion were proposed for design-build contracting by transportation agencies in 32 states, the District of Columbia, and the Virgin Islands. A Design-Build Effectiveness Study com- pleted in January 2006 analyzed data from some of the design-build projects that were completed by year end 2002 as well as surveys of project sponsors and other research.16 The study highlighted certain project features and circumstances that merit consideration of a design-build approach, including: • Medium to large projects that are more complex in nature and can benefit from the application of innovative concepts in project design and development earlier in the project conceptualization process; • Projects that have a high sense of urgency (due to natural disasters or facility failures); and • Projects with a dedicated revenue stream associated with completion (such as toll roads) provide added incentive for the public sector to complete a project on time and within budget. With regard to generating additional investment capital for transportation, the design- build approach provides an indirect benefit to the extent it facilitates financing of projects that generate user fees or other new revenue. Design-build projects funded with Federal and state funds or with proceeds from bonds secured by public revenues however do not necessarily increase total investment. Performance-Based Maintenance Contracts (PBMC) – Performance-Based Maintenance Contracts (also referred to as Total Contract Maintenance or Asset Management Maintenance Contracting) are now being utilized by many state highway agencies as a method of per- forming their routine maintenance workloads. While there are many variations on this con- tracting technique, PBMC generally consists of identifying routine maintenance needs (e.g., mowing, signs, guardrails, drainage, and emergency response), preparing performance-based requirements, and bundling them to allow a contractor to manage and direct the work effort to meet these standards. The DOT conducts oversight of a PBMC contract generally through random inspections. While some DOTs have procured PBMC with the low-bid process, an alternative is to bid the work as a negotiated, best-value contract. Design-Build-Finance-Operate (DBFO) – With DBFO procurements, the responsibilities for designing, building, financing, and operating a new transportation facility (often referred to as a “Greenfield” project) are bundled together and transferred to private sector partners. States using this approach generally conduct competitive processes based on conceptual proposals and then negotiate a comprehensive development agreement with the private consortium that offers the “best value.” Several states, notably Virginia and Texas, are pursuing DBFO strategies. But for transac- tion volume to grow, it will be necessary to resolve some critical outstanding issues con- cerning the private sector’s role in matters such as environmental permitting, acquisition of right-of-way, and the degree of public sector oversight of long-term concession contracts. 16 http://www.fhwa.dot.gov/reports/designbuild/designbuild.pdf.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-16 . Examples of Project Delivery and Asset Management Initiatives • Design-Build Contract – The $1.59 billion Interstate 15 reconstruction was the Utah Department of Transportation’s (UDOT) first design-build procurement. The project involved the recon- struction of 26 kilometers of interstate mainline and the addition of new general purpose and high-occupancy vehicle (HOV) lanes through the Salt Lake City metropolitan area. The project also included the construction or reconstruction of more than 130 bridges, the reconstruction of seven urban interchanges, and the reconstruction of three major junctions with other interstate routes, including I-80 and I-215. In addition, the project provides for the construction of an extensive regionwide advanced traffic management system. UDOT’s decision to use the design-build model was motivated by two factors. The first was the strong public support for completing the project as soon as possible to minimize the period of severe traffic congestion resulting from the diversion of more than half of the traffic from I-15 during the construction period. The second factor was the need to have the project completed before the 2002 Winter Olympics in Salt Lake City. It was generally accepted that use of the design-build contracting methodology was the only way to satisfy these goals. • Performance Maintenance Contract – The District of Columbia Division of Transportation (DDOT), with FHWA, entered into a $69.6 million, five-year contract with a private highway asset management firm for the maintenance of city streets, tunnels, pavements, bridges, road- side features (curbs, gutters and retaining walls), pedestrian bridges, roadside vegetations, guardrails, barriers, impact attenuators, and signs in Washington, D.C. The operating conces- sion also includes citywide snow and ice control responsibilities. The maintenance contract is performance-based and requires the contractor to apply rigorous asset management practices. • Design-Build-Finance-Operate – In April 2005, the Virginia Department of Transportation signed a comprehensive agreement with Fluor Enterprises, Inc. and Transurban (USA) Inc. to improve the Capital Beltway (I-495) in Northern Virginia. The project will add two high-occupancy toll (HOT) lanes in each direction on a 14-mile segment of the Capital Beltway, from north of the Springfield Interchange to north of the Dulles Toll Road. Before construction can begin, Transurban and Fluor will pay for and complete an in-depth traffic and revenue study and more detailed engineering, which are under way. The study will determine if HOT lanes are economically viable and help to set a fair and equitable toll structure. The comprehensive agreement was signed under the Public-Private Transportation Act (PPTA). The PPTA allows Virginia to partner with private companies to build projects more efficiently, with the private sector sharing in the financial risk of project development, construction, and operation. When fully built, construction of the four HOT lanes is estimated to cost $900 million, which would be paid for primarily by revenues from the HOT lanes. Transurban’s investment would be at least 15 percent of the cost. As a result of Transurban’s investment, the Commonwealth will bear little or no financial risk in the construction of the HOT lanes or their operation. „ 4.4 Summary and Key Policy Issues Table 4.2 provides a summary of various financing tools and partnering arrangements that can be used to leverage existing resources, create new revenue-generating assets, or enhance operating efficiency.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-17 Table 4.2 Candidate Financing and Management Tools Modes Highway/Bridge Transit Scope Preservation and Maintenance New Capacity Operations and Maintenance Capital Program Project Locations Used Finance or Management Tool 1. Leverage Existing Resourcesa Federal Grant Management Tools z z z Many states GARVEE Bonds, RVees and Transit GANs z z z z z AK, AR, AZ, CA, CO, GA, ID, KY, MA, ME, MI, MS, MT, NJ, NM, ND, OH, OK, PR, RI, VA,VI State Infrastructure Banks z z z z 33 states (Figure 4.2) Section 129 Loans z z z TX Pass-Through Financing/Availability Payments z z z z z CO, TX; Proposed in FL Long-Term Asset Leases z z z z IL, IN, VA 2. Create Revenue-Generating Assets Access Tax-Exempt Market through a Public or Nonprofit Issuerb z z z z CA, CO, FL, NV, NY, SC, TX, VA, WA Access Tax-Exempt Market with Private Activity Bondsc z z Proposed in TX, but none to date ($15 billion national cap. Access Taxable Debt and Equity Markets z z AL, CA, TX, UT, VA TIFIA/RRIF Assistance z z z CA, NV, TX, NY, SC, FL, PR, DE, DC, MD, VA, LA, RI, IA, ME, MN, TN, AK, MO Use PPPs to Enhance Project Delivery and Asset Management (mechanisms can be used with both #1 and #2 above) Design-Build Contracting z z z As of April 2006, 37 states had some authorization to employ design-build. Performance-Based Maintenance z z z z FL, TX, VA, DC, TN, OK, AK Design-Build-Finance- Operate (DBFO) z z z CA, TX, VA a The financing tools are used primarily for new capital projects, but major rehabilitation and reconstruction needs also may be appropriate to finance over the long term. b Includes major (greater than $25 million) user fee-backed project financings completed after 1991; does not include system expan- sions or other project financings undertaken by public authorities prior to 1991. c Qualified Highway or Surface Freight Transfer Facilities under the SAFETEA-LU private activity bond provision (§11143) include any surface transportation project that receives Federal assistance under title 23 and any facility for the transfer of freight from truck to rail or rail to truck that receives Federal assistance under either title 23 or title 49. While highway and intermodal projects clearly are the focus of this provision, the eligibility link to title 23 programs potentially creates the opportunity to assist other types of surface transportation projects funded under Title 23 as well.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-18 . Utilizing innovative finance and PPPs to augment existing programs and accelerate key investments does raise important issues for policy-makers. Two of these issues are briefly discussed below. Identification and Development of Project Finance Candidates A major investment bank recently estimated that there is over $200 billion of private capital currently available for investment in U.S. infrastructure projects.17 It will be diffi- cult to put that money to work in the surface transportation sector, though, without a robust pipeline of viable investment opportunities. Public Works Financing, a monthly industry newsletter, periodically publishes an inven- tory of PPP projects. Based on the most recent annual survey, about $32 billion of major highway and transit projects (minimum size of $25 million) were financed using some form of PPPs between 1993 and 2005. Figure 4.6 highlights many of those projects. 17 JP Morgan presentation, Texas Transportation Forum, June 2006. Estimate is based on purchasing power of private equity and pension funds seeking investment opportunities in infrastructure- related businesses and assets. Areas for investment include toll roads, rail, airports, seaports, energy, water & wastewater, and telecommunications. Figure 4.6 Benchmark PPP Transactions Project Location Intermodal Projects Highway Projects Transit Projects Reno Rail Corridor SR 125 Toll Road -Hudson Bergen Light Rail Line Chicago Skyway Asset Lease Dulles Greenway Miami Intermodal Center Central Texas Turnpike Pocahontas Parkway Camden Trenton Light Rail Line San Joaquin Hills Toll Road Foothill Eastern Toll Road Alameda Corridor -Trans Texas Corridor Denver E-470 Northwest Parkway NM 44 (US 550) Southern Connector Hiawatha Light Rail Line Jamaica JFK Airtrain Tacoma Narrows Bridge Osceola Parkway Las Vegas Monorail I-15 Reconstruction AZ-17 Indiana Toll Road Asset Lease CREATE

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-19 Reasons the amount of private investment in the U.S. has not been greater include the complex environmental permitting process for major highway expansions and new transit facilities and local political resistance to the imposition of tolls and other user fees. It took nearly 10 years to obtain environmental clearances and permits for the State Route 125 Toll Road in San Diego, California, for example, because off a law suit and other chal- lenges. Another issue is the use of tax-based resources, such as proceeds from GARVEE bonds, to fund projects that are candidates for financing with user fees or value capture mechanisms. Some state DOTs have taken steps to address those issues. The Texas Transportation Commission, for example, has created incentives for metropolitan planning organizations to identify candidates for project financing early in the planning process and it has pro- vided significant resources to expedite development of those projects. Management of Debt and Long-Term Financing Commitments A concern that is sometimes raised regarding innovative finance strategies is the potential over-reliance on debt financing and other long-term obligations. Some of the techniques discussed above, such as GARVEE bonds, leverage future revenues in ways that could potentially limit operating flexibility. A brief examination of FHWA’s Highway Statistics publication indicates that states gener- ally appear to have been prudent in their use of debt for highway purposes. Although the total amount of bonds outstanding for highways at all levels of government has increased significantly (growing from $58 billion in 1993, for example, to more than $136 billion in 2005), over 60 percent of the additional bonding occurred in just six large states that have committed additional resources to transportation.18 Twenty-eight states had less than one percent growth in total outstanding highway debt over the period 1993 to 2005 and 10 of those states actually reduced their total outstanding obligations over that period. Figure 4.7 shows total annual disbursements for state highways from 1970 to 2005.19 The annual amounts used for payment of interest and bond retirements over that period increased from $1.3 billion to $9.6 billion. Figure 4.8 uses the same data but it shows the percentage of total disbursements represented by each category of spending. In aggre- gate, the percentage of available resources applied to debt service has been very stable over the last 35 years, averaging approximately 10 percent of total disbursements. In 2005, five states devoted more than 20 percent of available resources to debt payments, but for most states (38) debt service was less than the long-term average of 10 percent of total disbursements. 18 FHWA Highway Statistics, Series HB-2. The six states are California, Florida, Massachusetts, New Jersey, New York, and Texas. 19 FHWA Highway Statistics, Series SF-21.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs 4-20 . Figure 4.7 Annual Disbursements by State for Highway Purposes Gross Dollars 0 20 40 60 80 100 120 Year of Expenditure Dollars (in Billions) Transfers to Local Government Interest and Bond Retirement Hwy Police and Safety Maintenance and Hwy Services Capital Outlay 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Year Figure 4.8 Annual Disbursements by States for Highway Purposes Percentage of Total 0 10 20 30 40 50 60 70 80 90 100 Percent Transfers to Local Government Interest and Bond Retirement Hwy Police and Safety Maintenance and Hwy Services Capital Outlay 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Year