Go to.... Home Federal Credit Concepts & Issues State Infrastucture Banks Quarterly Newsletter TE-045 Research Innovative Finance Program Guidance

Highway development in the U.S., particularly regarding new capacity, is undergoing fundamental statutory, regulatory and funding changes.

Highway infrastructure development in the United States has traditionally followed a limited number of models which have generally been based upon Federal Aid Highway programs, formulas and procedures or upon toll authority powers. But the fundamentals of highway development are changing, and due to funding limitations, new Federal policies and legislation (such as state infrastructure banks and other initiatives), and the increasing acceptance of public/ private partnerships, there is an increasing diversity of highway development models now being considered throughout the nation.

Shadow toll concepts can be beneficially used in the U.S.

Shadow tolls have been successfully used abroad, and can be applied in the United States under the new highway development "models." This is increasingly appropriate as a wider range of project sponsors, legal frameworks and potential financing sources are explored and utilized.

Shadow tolls may apply when real tolls are unacceptable and the project structure requires some or all traffic risk to be borne by a developer or DFBO.

Shadow tolls are a funds disbursement method to a highway developer/operator (or DBO or DFBO) which is directly keyed to actual, achieved traffic levels. It thus passes all or a portion of the traffic risk to that entity. In a broader sense, however, shadow tolls can sometimes permit a development process to be structured which can be more responsive to institutional, financial and political realities and acceptable project development approaches. Shadow tolls may be appropriate if:

• Proposals of competing developer/operators or DBO's for the project actually influence traffic and revenue levels (are alignments and other characteristics given to them, or are they developed by the DBO's); or

• Life-cycle costs of the DBO strongly reflect annual M&O components, which in turn are driven by traffic levels; or

• There are significant political/institutional concerns such as a political sentiment of "no windfalls for the developer."

Shadow toll project debt can be tax-exempt and cover some or all of the life-cycle project costs.

Project debt may be issued to cover construction costs only, or construction and specific recurring major maintenance costs. Debt may be issued by the project sponsor or administrator or by the DBO. While the administrator and the DBO could be either public or private sector entities, it will be more likely that the former is from the public sector and the latter from the private. Depending on this, either entity may be able to issue tax-exempt debt — which can reduce interest costs to the project. This should be a major consideration in project formulation and the selection of sponsor and developer/operator entities and the determination of their roles and responsibilities.

The availability of shadow toll project debt and its interest rate is largely reflective of the creditworthiness of underlying funding sources and is not affected by traffic elasticity.

In a typical (real) toll financed, non-recourse debt project, the variability of traffic and the fact that revenue derived therefrom is subject to demand elasticity, as well as possibly political concerns at times of proposed toll increases, directly influences interest rates and overall project viability. Shadow-toll-based debt issued by the DBO would have its terms influenced by traffic variability, but not elasticity or political resistance to toll increases. Debt issued by the project administrator would be completely independent of all of these concerns, and instead would reflect the creditworthiness of the underlying funding sources.

The potential number and diversity of these funding sources also can improve the credit worthiness of an issue dependent on them. Further, the project administrator could be granted the power to increase income from some or all of these sources under specified conditions. From the perspective of financial markets, this ability to increase revenues, if required, could take the debt out of the pure "non-recourse" category and improve its marketability and interest rate.

Shadow tolls can be a mechanism to compensate existing toll agencies for instituting socially or environmentally-oriented operational and/or toll modifications.

Many toll authorities today, particularly in urban areas, are often requested to institute congestion relief measures or modifications/improvements to achieve environmental or social objectives. These measures may include: the reduction of tolls during off-peak periods; the conversion of an existing traffic lane to high-occupancy vehicle usage; and the construction of new high-occupancy vehicle or other special use lanes. Trust indenture agreements may specifically prohibit any actions which will impair net toll revenue levels. Thus the foregoing measures, while socially, environmentally or politically most desirable, cannot be implemented within the present legal arrangements under which many toll authorities must operate.

The calculation of the revenue loss per vehicle were such measures to be implemented could be the basis for shadow toll payments — or more precisely in this case, shadow toll supplements to the real tolls charged by the operating toll agency. The shadow toll payments could be met from recurring annual payments from a federal or state program, or other sources.

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In summary, shadow toll concepts can be selectively utilized in the United States. Considerations influencing their viability for a particular set of circumstances include:

• The creditworthiness of a project, which is dependent upon the quality, and possibly diversity, of the underlying funding sources used to meet required shadow toll payment levels;

• Whether tax-exempt interest rates can be obtained;

• If shadow toll project debt is issued by a private sector entity, can other advan tages or incentives compensate for the taxable interest rates that would prevail;

• If traffic risk is borne by the investors, can the higher cost of capital due to this additional risk be justified;

• If reliable creditworthy revenue sources and tax-exempt debt are used, a shadow toll-based issue could represent a better credit (and a lower cost of capital) than a conventional toll facility credit due to the absence of traffic elasticity and toll rate modification concerns; however, due to the presence of traffic risk, a shadow toll- based bond would represent a higher cost of capital than those payable from the same underlying payment sources; and

• Shadow tolls can be a method for a state DOT to encourage environmentally or socially desirable goals such as subsidized high-occupancy vehicle lanes on a toll road; with the state paying a portion of the foregone toll on behalf of the motorist, the toll agency can meet restrictive terms of its bond covenant and still implement the desired improvements.

References

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Curry, Keith. Introduction to Public Finance And Public Transit. U.S. Department of Transportation, Federal Transit Administration, Office of Technical Assistance and Safety, Washington, DC. 1992.

Feldman, Roger D. Reinventing Transportation Infrastructure Credit Enhancement. McDermott, Will & Emery, Washington, DC. 1993.

Haugen, Robert A. Modern Investment Theory. Prentice-Hall, Englewood Cliffs, New Jersey. 1986.

Miller, John. Innovations in Transportation Development sponsored by Public Financial Manage ment, Inc., Philadelphia, PA. 1990.

Osceola County. Official Statement for the Osceola County, Florida Transportation Improve ment Bonds (Osceola Parkway Project), July, 1992.

Public Works Financing. "U.K. Shadow Roads Review," 110. 1997.

Public Works Financing. "U.K. Shadow Toll Savings Suspect," 115. 1998.

Raitanen, Nina. Private Finance for Main Road 4. Ministry of Transport and Communications, Finland. 1997.

Reinhardt, William G. "San Joaquin Toll Road Funding Builds A Strong Base For New, Urban Infrastructure In The U.S." Public Works Financing, 61. 1993a.

Reinhardt, William G. "Kiewit Moves SR 91 Financing To Closure Launching A New Era In U.S. Toll Roads." Public Works Financing, 65. 1993b.

Reinhardt, William G. "First U.S. Private Startup Toll Road Is Financed And Under Construc tion." Public Works Financing, 70. 1994.

Standard & Poor's Corporation. Public Finance Criteria. McGraw Hill, New York, NY. 1997.

United Kingdom Highways Agency. DBFO — Value in Roads: A Case Study on the First Eight DBFO Road Contracts and Their Development. 1997.

 

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