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2.0 Performance Measurement Approach

This report is intended to measure the performance of innovative finance tools with respect to the original goals set by the program. As previously noted, the goals of the U.S. DOT innovative financing initiative were to:

• Accelerate projects by reducing inefficient and unnecessary constraints on states' management of Federal highway funds; and
  
  
• Expand investment by: 1) removing barriers to private investment in surface trans-portation infrastructure, 2) encouraging the introduction of new revenue streams, par-ticularly for the purposes of retiring debt obligations, and 3) reducing financing and related costs, thus freeing up the savings for investment into the transportation system itself.

The first goal of project acceleration proved difficult to directly measure, particularly over the entire universe of projects. Instead, the quantitative analysis that was developed provided a good proxy for management of Federal funds by measuring leverage. While leverage is more precisely defined below, for this report, it generally represents the ratio of capital project construction to Federal investment. The premise is that if states can construct more projects, with the same amount of Federal funding, innovative finance tools must be reducing constraints and improving their ability to manage Federal funding.

Expanding investment also proved difficult to measure directly for the group of projects analyzed. Instead, case studies were used to illustrate the removal of barriers to invest-ment (and its importance to project development); the introduction of new revenue streams, and cost savings.

As described in the following sections, the overall analysis approach is both quantitative and qualitative. This two-tiered approach first attempts to quantify what can be measured given available data. Next, it attempts to capture less quantifiable aspects of the tools through the analysis of specific projects.

2.1 Quantitative Analysis

Project Inventory

The first step in the quantitative methodology was assembling a detailed inventory of projects that have been advanced under one or more of the U.S. DOT innovative finance initiatives since 1994. The inventory records the available information on the four innovative finance categories, i.e., TE-045, GARVEEs, Federal credit, and state-based credit, as well as relevant information on the capitalization of the SIBs and the GARVEE bonds issued. These tools are defined in the glossary and in the FHWA Innovative Finance Primer (Publication Number FHWA-AD-02-004).

The project information was compiled from readily available data sources, including Federal data collection and reporting systems and through direct contact with the states. Data were collected through the spring of 2001, and represent information current as of that time. Since that time, of course, additional projects have been advanced using inno-vative finance techniques. For example, a new TIFIA project has now been approved, and the volume of SIB activity has approached $3 billion. While these additional innovative finance projects are not captured in the inventory and performance review, it follows that even greater benefits would be revealed from the larger universe of projects.

The information collected was captured in a single Microsoft Excel workbook. The Excel workbook contains a number of worksheets that track the unique data elements pertaining to each of the four categories of projects - TE-045, GARVEEs, Federal credit, and state-based credit - as well as the capitalization data elements in terms of the SIBs and GARVEEs. Data elements included for each of the project categories are described in Appendix A.

Summary Information

Table 2.1 summarizes information contained in the project inventory by innovative finance category. While a larger number of projects are contained in the database for the TE-045 category, only 62 of the 101 TE-045 projects approved since 1994 were analyzed in this report. The 39 excluded projects fall in the following categories:

• Were ultimately denied Federal approval (three projects);
  
  
• Were cancelled subsequent to their approval (three projects);
  
  
• Are inactive or ultimately did not employ the innovation proposed under TE-045 (16 projects);
  
  
• Used a different Federally-sponsored financing tool such as a TIFIA loan (three projects);
  
  
• Used STP Simplication (three projects); or
  
  
• Used phased funding, which was subsequently disallowed by FHWA (11 projects).

For the 62 TE-045 projects, the breakdown by specific tool is shown in Table 2.2.

Table 2.3 summarizes the number and dollar value of projects supported by innovative finance tools by state.

Table 2.1 Summary of Projects by Innovative Finance Category
(Dollars in Millions)

Note: GARVEES may refer to multiple projects. Does not include $450 million in TIFIA assistance awarded to the San Francisco-Oakland Bay Bridge, which occurred following preparation of this analysis.

Table 2.2 Breakdown of TE-045 Projects by Tool
(Dollars in Millions)

Notes: Section 129 project counts and costs include the George Bush Turnpike, which also utilized partial conversion of advance construction as part of its project financing plan. Certain TE-045 tools, such as partial conversion of advance construction and Section 1044 toll credits, became codified into the regular Federal-aid program, and no longer require special approval. These projects are difficult to distinguish from standard Federal-aid projects. Thus, only the projects that were advanced under TE-045 were counted as part of this analysis. If the addi-tional projects were counted, it would probably increase the quantitative results.

Table 2.3 Projects by State
(Dollars in Thousands)

The second step in the quantitative analysis was determining how to measure the effectiveness of innovative finance, with respect to the goals of the program. Since the primary goal was to increase transportation investment without increasing direct Federal-aid funding, the evaluation first considers the leveraging effect of the program: how much project investment occurred for each Federal dollar invested? Next, the approach considers other ways of defining leverage. Since project acceleration was also a primary goal, available data on project acceleration are gathered and analyzed. Attraction of private investment and new revenue sources are also evaluated. Finally, to show the overall impact of these accelerated projects, economic results are reviewed.

Leveraging

In its broadest sense, financial leverage refers to the use of financial tools to increase the ability of your own resources to meet your project goals - just as you would use a mechanical lever to increase your ability to lift a heavy object.

When applied to specific circumstances, however, the term can mean different things to different people. When applied to debt-financed projects, for example, leverage typically relates to converting (or "monetizing") anticipated future revenues into up-front capital through borrowing. For example, a state might leverage a SIB capitalization of $50 million by issuing $100 million in bonds backed by future loan repayments. In these cases, the greater the degree of borrowing against the anticipated revenue stream, the more highly leveraged is the transaction.

In contrast, public agencies typically speak of "leverage" when referring to the level of co-investment that occurs in conjunction with Federal funds, either through matching requirements or through attraction of new revenue sources. Given limitations on Federal funding, success has often been measured in terms of how many total dollars of construc-tion can be funded for each Federal dollar contributed to a project. In these cases, the higher the level of co-investment, the greater the leverage of the original public funds. From the Federal perspective, the most highly leveraged projects are the ones that involve a higher amount of project construction for the same amount of Federal funding.

FHWA has most often used the term "leverage" in its second sense - that is, as a measure of co-investment. Accordingly, this report, like others that have preceded it, consider various innovative finance tools' leveraging effects in terms of their ability to attract addi-tional non-Federal sources of funding to Federally-assisted transportation projects. At the same time, the report also examines ways in which projects employing innovative finance strategies have further expanded investment levels through attracting new sources of up-front capital, encouraging the development of new revenue streams, and/or generating cost savings.

Principal Approaches to Measuring Leverage

Leverage as Co-Investment

Leverage of the Federal contribution has traditionally been expressed as a ratio between: 1) the total capital investment for a given project or program of projects, and 2) the Federal grant contribution for this same project or projects. Under this approach, the standard leverage of the Federal investment in conventional Federal-aid highway projects is shown as the ratio of 1.25 to 1. This ratio reflects the relationship between the standard Federal and non-Federal matching shares of 80 percent and 20 percent, respectively.[1] When applying this approach to innovative finance projects, one tends to obtain very high lever-aging ratios, especially given the large number of innovative finance projects that employ bond financing. Using this approach, the TE-045 evaluation published in 1996 reported a program-wide leveraging ratio of 1.9 to 1. This figure represented the ratio between the cumulative project cost of $4.26 billion and the cumulative Federal grant contribution of $2.27 billion.

Leverage as a measure of non-Federal co-investment is relatively easy to convert into a ratio, as the calculations rely simply on an accurate breakdown of capital funds by Federal and non-Federal sources. However, the method of calculation differs slightly depending on the category of tools in question.

TE-045 - For all TE-045 funds management projects, leverage is expressed as the sum of total cost of the projects in question, divided by the sum of the Federal contributions toward the same projects.

Example: State Route 520, Seattle, Washington. The total cost of this tapered match project is $57.1 million. The Federal contribution is $48.7 million. The resulting leveraging ratio is calculated as 57.1/48.7 = 1.17 to 1. (Note that this is lower than the standard 1.25 to 1 ratio because Washington has a significant share of Federal lands, and thus is subject to a slightly lower matching requirement).

GARVEE Projects - For a given GARVEE project, leverage is calculated as the total cost of the project in question, divided by the sum of any up-front Federal contributions (e.g., regular grant funds) and the appropriate share of the par value of the GARVEE bond. This appropriate share is determined by the split (if any) between the share of debt service to be covered by future Federal-aid apportionments and non-Federal funds.

Example: Spring-Sandusky Interchange, Ohio. The total project cost is $270 million, and the state of Ohio issued $136 million in GARVEE bonds for which debt service will be wholly repaid from future Federal-aid apportionments. Current Federal-aid highway funds cover an additional $87 million of project costs, yielding a total Federal contribution of $223 million. State and local funds will cover the remaining $47 million. The resulting leveraging ratio is calculated as 270/223 = 1.21 to 1. (Note that for this project, the ratio is lower than the standard 1.25 to 1 ratio because the project involves Interstate reconstruc-tion funds. This funding category carries the lower standard matching ratio of 90 Federal to 10 non-Federal, yielding a leveraging ratio of 1.11 to 1.)

Federal Credit - Leverage of the Federal investment in TIFIA projects and its three prede-cessor projects is calculated as the total cost of the project in question divided by the sum of the Federal subsidy cost for the project plus any up-front Federal grant contributions.[2]

Example: State Route 125, San Diego County, California. The total project cost is $454.5 million. The project sponsor is scheduled to receive TIFIA assistance in the form of a loan of $94 million and a $33 million line of credit. The estimated subsidy cost for these two instruments is approximately $13.7 million, and no other Federal funds are expected to be directed to this project. The resulting leveraging ratio is calculated as 454.5/13.7 = 33 to 1.

State-Based Federal Credit - When considering the extent of co-investment in the SIB program, this report treats the SIBs themselves as the innovative finance projects, rather than the individual transportation projects that in turn receive financial assistance from the SIBs. The primary reason for calculating leverage at the level of the banks themselves rather than the projects is that Federal assistance conveys to each SIB directly, rather than to the projects that the SIB later supports. Also, the credit assistance subsequently offered by the SIBs to individual transportation projects combines Federal and state capitalization funds; it would not be possible to discern what portions of a $2 million SIB loan, for example, are comprised of Federal and state capitalization grants.

Leverage for the SIB program is thus calculated as the total current capitalization of the SIBs (Federal and state contributions combined) plus any loan repayments to date (repre-senting recycled funds), divided by the amount of Federal outlays employed thus far to capitalize the nation's SIBs.

For projects advanced with Section 129 loans, the calculation resembles that used for funds management tools: the total cost of the project divided by the amount of Federal grant funding that the state subsequently lent to the project.

Limitations of the Traditional Model for Calculating Leverage

The traditional model for calculating leverage is one way to describe the power of innova-tive finance. However, the traditional methodology may, in some cases, over- or under-state the actual benefits achieved from the various innovative finance tools available. It is easiest to illustrate what these limitations are by demonstrating how this model would calculate the leveraging benefits from an example project, if it were assisted by any one of the tools.

Table 2.4 compares the leveraging benefits that would be expected from the different cate-gories of innovative finance, under this theoretical approach. The comparison is achieved by considering a hypothetical bridge project with a total eligible cost of $300 million. Under the traditional Federal-aid program, Federal-aid funds would provide $240 million of the cost, and the state would contribute a non-Federal share of $60 million. For this scenario, the leveraging ratio would be 1.25:1, or each Federal dollar would buy $1.25 worth of capital project.

Table 2.4 Potential Leveraging Ratios for Innovative Finance Tools:
Assisting a Hypothetical $300 Million Bridge Project

As the table shows, most of the TE-045 projects involve administrative changes affecting cash management, such as partial conversion of advance construction or flexible match, and do not generally reduce the Federal contribution as a share of the overall project costs. Since this methodology measures leverage from the Federal perspective only, this can understate the value to the state of some of the tools. For example, the flexible match tool might enable a private contribution to support a Federal-aid bridge project. Using the traditional leverage calculation, the ratio would not appear any different from a traditional project, but the state would have additional funding to dedicate to other transportation projects.

If the bridge were to be financed with a Section 129 or SIB loan, the state would have to either capitalize a SIB with sufficient state funding (and applicable match) to provide the loan, or directly fund the loan out of their Federal-aid program. In most cases, states have used Federal-aid funding to capitalize SIBs and Section 129 loans. Under these scenarios, the traditional leverage calculation would not show anything different from the standard 1.25:1. In particular, it would not show the benefit of having loan repayments available for future projects. As noted above, in this report, the analysis is done not at the project level, but at the level of the State Infrastructure Bank.

Under the report's methodology, the SIB itself is considered the project, not the individual projects to which it provides assistance, and loan repayments made to date are added to the total capitalization. This level of analysis avoids the limitation identified above. If the bridge were to be financed with a GARVEE bond, again, the Federal and state ratio would probably not vary, and the leveraging ratio would still work out to be 1.25:1.

The tool that shows the highest leveraging potential is the TIFIA credit program. By stat-ute, the credit assistance available under TIFIA is limited to 33 percent of total eligible project costs. Therefore, no TIFIA project can have a leveraging ratio of less than 1:3.03 (based on the TIFIA assistance alone; TIFIA projects with other Federal contributions may have a lower leveraging ratio, based on the other Federal funds involved in the project. Since TIFIA credit assistance is "scored" with a budgetary amount representing the risk of nonpayment, the actual leverage ratio is much higher. As of 2002, the weighted average subsidy rate for TIFIA projects was 5.30 percent. Thus, TIFIA leveraging ratios would be expected to average 56.60:1 (depending on the amount of other Federal funds contributed to the project).

On a theoretical level, therefore, the only tools that should show a higher leveraging ratio than for a traditionally-financed project would be TIFIA and SIBs. This report applies the analysis to all tools, however, for several reasons. First, most of these tools are not used in isolation, but as part of a financing package. Frequently, this package involves greater non-Federal contributions than a traditional project, thereby increasing the leveraging ratio indirectly, if not directly through the tool itself. Using this means of analysis can capture this additional leveraging indirectly. Second, the traditional means of measuring leveraging is a benchmark, for which data are readily available and calculable. Partly for this reason, the leveraging ratio has been used in the past to discuss and evaluate this pro-gram, and while its value may be limited, it is useful to examine the data across time, and determine if there are changes or trends of note. Still, as discussed in the following sec-tion, innovative finance tools also have the capacity to expand investment in ways that are not easily captured by the traditional comparison of total project costs to grant funds.

Leverage as Resource Expansion

As noted above, the traditional approach to calculating leverage characterizes the extent to which non-Federal sources of capital expand the purchasing power of Federal funds. It is also worthwhile to investigate ways in which innovative finance strategies expand the purchasing power of all public funds (Federal, state, or local).

This more subtle form of leverage typically occurs in one of three ways. The first is through attracting new private contributions and equity investment to the mix of funding sources available to fund a given project. The second is by fostering expanded reliance on new project- (or user-) based revenue streams, rather than general taxes, as a means for retiring the given project's debt obligations. And the third mechanism for expanding the purchasing power of existing public resources is by producing cost savings, which in turn free up resources for investment in other projects.

• Private Investment - For some projects, it was possible to determine the level of pri-vate investment in the sources of funds. Two innovative finance tools are of special consequence here: flexible match and Federal credit, both of which specifically seek to lower barriers to the infusion of private capital into transportation projects. Through the GARVEE tool, private capital also participates in the financing of public sector infrastructure, when bondholders lend funds in exchange for future repayments from Federal-aid funds.
  
  
• New Revenue Streams and Project Financings - This analysis centers on state-based Federal credit (namely, the SIB program and Section 129 loans) and direct Federal credit (in the form of the TIFIA program and its three predecessor projects). For the SIBs, this report focuses on the volume of outstanding loans that are expected to be repaid with new and/or specially dedicated revenue sources - such as tolls, tax increment financing, special fees, and private payments. The reason for this focus is that repayments of original capitalization grants from these sources represent an infu-sion of new project-based funding into the transportation system; loan repayments that derive from existing transportation funding sources or general taxes replenish the original capitalization grant but over the long term do not represent a net gain in resources devoted to the transportation system.
  
  As for direct Federal credit, this report identifies the volume of project debt that is expected to be repaid from user-based revenues such as freight fees, tolls, or other facility charges. While calculating leverage based on levels of co-investment is relatively easy to accomplish with available data, it may overstate the actual impact of the Federal dollars. For example, if a project costing $100 million utilizes $10 million in Federal credit, at a budgetary cost of $1 million, the Federal leverage ratio would be 1 to 100, but it would not imply that completion of the project hinged on the small Federal investment. Rather, an assessment of Federal credit's role in making feasible or otherwise promoting true project financings, in which the primary revenue pledge derives from the project itself, must rely on a qualitative assessment of individual projects.
  
  
• Cost Savings - This report recognizes three potential sources of cost savings: avoided inflation, avoided interest expense through improved credit quality, and avoided financing costs. The report describes the ways in which these savings can be generated in a qualitative fashion, with examples from individual projects where possible. While it is valuable to recognize how these savings can accrue, a definitive comparison in any of these three areas is impossible, given the absence - or purely speculative nature - of information on, for example, future inflation rates or, as another example, how project debt would have been structured in the absence of a Federal loan.

Project Acceleration

One of the primary purposes of U.S. DOT's innovative finance program is to improve cash flow management and flexibility for transportation agencies. In particular, this involves accelerating the construction and operation of transportation facilities that otherwise would have to wait for pay-as-you-go Federal reimbursements. Advance construction (AC) and partial conversion of advance construction (PCAC) are perhaps the clearest examples of tools that seek to accelerate the completion of a transportation facility.

The simplest way to measure acceleration due to innovative finance is to estimate the timing of a project with a particular innovative finance tool compared to its timing with-out the tool. The difference can vary significantly - from zero, to two or more years, to the case where a project might not have happened at all without innovative finance.

As noted above, there are two primary economic benefits that can occur because of project acceleration. First, projects with net benefits that occur sooner rather than later will enjoy benefits from the time value of money. Net user benefits typically include travel time savings, reduced operating costs, accident reductions, and environmental impacts.

The second benefit accruing because of project acceleration is the avoidance of costs. The first category of cost savings is due to avoided inflation costs. Project acceleration allows for the purchase of right-of-way and construction services to occur earlier than they would otherwise. To the extent that right-of-way and construction costs are increasing at rates faster than transportation revenues, and inflation in general, there are real economic bene-fits tied to accelerating transportation projects. In addition, corridor preservation (the purchase of property in anticipation of a future transportation facility) can reduce right-of-way inflation costs to the point where a project may not have occurred otherwise.

The second category of cost avoidance due to acceleration is for rehabilitation projects. It is typically much less expensive to maintain, operate, and rebuild roads in better condi-tion. So, to the extent that acceleration results in earlier road rehabilitation (when roads are still in good shape), costs are reduced. These "life-cycle" costs can also lead to signifi-cant savings.

Unfortunately, data to translate the raw information on project acceleration into meaning-ful information concerning the resulting economic benefits of acceleration described above are not readily available. Project acceleration benefits are thus presented in terms of years, with case studies providing additional qualitative evidence of the types of costs saved and user benefits advanced as a result of constructing projects more quickly than would oth-erwise be possible.

Economic Impacts

The construction of new and expanded transportation facilities typically generates two types of economic impacts: short-term and long-term. Short-term economic impacts are related to construction and would be expected to last only as long as the construction period. Long-term economic impacts, on the other hand, are more permanent, typically generated from the translation of travel time savings into productivity and production cost benefits. It should be noted that the short-term economic impacts from highway con-struction are generally substitution effects in the sense that expenditures on transportation would most likely be spent elsewhere if not for the transportation investment. It is possi-ble, however, that expenditures on transportation construction could have larger eco-nomic benefits than would alternative expenditures.[3]

Due to data availability, this report focuses at the aggregate level on the short-term eco-nomic impacts. The methodology utilizes the IMPLAN input-output model to estimate total economic impacts from transportation investments related to innovative finance. IMPLAN is the most widely accepted input-output model and offers the benefits of cur-rent data and multiple output variables (employment, income, sales/output). Input-out-put models are typically used to capture the multiplier effects of economic activities. The first mechanism through which the multiplier works is by capturing inter-industry pur-chases. For example, when a new road is built, expenditures are made on many input goods, including materials (cement, steel), engineering services, etc. The second mecha-nism of the multiplier is induced spending generated by the wages paid to the highway construction workers. For example, wages paid to construction labor will lead to addi-tional spending on food, clothing, transportation, etc.

The measurement of economic impacts demonstrates the magnitude of economic impacts (measured in terms of employment, income, and output) from total construction expen-ditures on the universe of projects utilizing innovative finance tools. While this measure is important, it should be acknowledged that some of the expenditures would have been made on other transportation projects absent the innovative finance tool.

2.2 Case Study Approach

To supplement the quantitative, macro-level analysis of benefits, case studies show how innovative finance tools have benefited individual projects. These case studies address each of the four major categories of tools, and attempt to capture key aspects of the tools that are difficult to measure, or for which data were not available for the entire group of projects analyzed in this report.

For example, the case studies describe the range of financing approaches and tools that were considered for each project, and the reasons they were rejected in favor of the inno-vative finance approach. By showing how the new tool or approach proved to be a better choice than traditional methods, the case studies illustrate the value of these tools to state and local governments seeking alternative ways to finance critical transportation projects.

Further, the case studies summarize the benefits accruing from use of the innovative finance tools, in terms of costs and/or time saved (as available from project sponsors) as well as the mobility, safety, environmental, and other benefits of the project's implemen-tation. These case study projects provide real-world documentation of project acceleration and other benefits that were impossible to calculate over the entire universe of projects.

Significant results from the case studies are referenced in Chapter 3.0, while the full case studies are presented in Chapter 4.0 of this report. Table 2.5 summarizes the analysis approach, showing which types of benefits could be measured quantitatively, and which types of benefits were measured qualitatively through the case studies.

Table 2.5 Summary of Analysis Approach by Type of Benefit