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<< Preface |
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Transportation officials at all levels of government face a significant challenge when considering ways to pay for improvements to our nation's transportation infrastructure. Traditional government funding sources are insufficient to meet the increasingly complex and diverse needs of America's transportation system. Despite record levels of investment in surface transportation infrastructure in recent years, funding is not keeping pace with demands for improvements to maintain the vitality of the nation's transportation system.
The U.S. Department of Transportation (U.S. DOT) has documented this funding gap in a 1999 report to Congress. This report, 1999 Status of the Nation's Highways, Bridges, and Transit: Conditions and Performance indicated that highway capital spending by all levels of government would need to increase by 16 percent (in constant dollars) between 1998 and 2017 simply to maintain the physical condition of the existing system. Moreover, in order to improve the system and achieve the best economic outcomes for the nation, a 93 percent increase in spending (in constant dollars) would be needed.
Over the last decade, the Federal government has responded to the investment gap by providing new funding techniques that complement and enhance existing grant reimbursement programs. This Innovative Finance Primer describes those techniques and provides examples of the techniques as applied by state and local partners. The techniques described in this primer will continue to evolve, and U.S. DOT staff hope that this publication also lays the groundwork for identification of additional innovative strategies for financing surface transportation investments.
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A Legislative History of Innovative Finance |
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The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)
introduced several new concepts designed to increase transportation
investment levels by encouraging the use of user fees. For example, ISTEA:
The National Highway System Designation Act of 1995 contained several innovative finance provisions that built upon the experience of ISTEA and codified tools tested under the FHWA's Innovative Finance Test and Evaluation (TE-045) program. For example, the NHS Designation Act:
The Transportation Equity Act for the 21st Century (TEA-21):
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In 1994, the Federal Highway Administration (FHWA) launched a major initiative to identify barriers to highway infrastructure investment and develop strategies to overcome them. This "Test and Evaluation" program initiative, designated as TE-045, broke new ground by asking states to identify flexible approaches to blending Federal and non-Federal highway funds and leverage existing Federal resources. The states responded enthusiastically, and the TE-045 initiative ultimately incorporated this fresh thinking into an array of innovative financing techniques. New techniques supplement traditional financing techniques and move the transportation financing process from a single strategy of Federal funding on a "grant reimbursement" basis to a diversified approach that cuts the time needed to get projects underway and extends, or leverages, the value of existing resources.
Many of the innovations proposed under the TE-045 initiative were enacted into law under the National Highway System Designation Act (NHS Act) of 1995. As a result, a number of techniques previously considered "experimental" - and therefore requiring special approvals - became common practice. The Transportation Equity Act for the 21st Century (TEA-21), enacted in 1998, made further strides in broadening project sponsors' options for financing Federally assisted highway projects.
Most notably, the legislation established the Transportation Infrastructure Finance and Innovation Act (TIFIA) credit program, under which the Federal government can provide loans, loan guarantees, and lines of credit to public and private sponsors of major surface transportation projects.
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What is Innovative Finance? "Innovative Finance" for transportation is a broadly defined term that encompasses a combination of specially designed techniques that supplement traditional highway financing methods. While many of these techniques may not be new to other sectors, their application to transportation is innovative. Historically, through the Federal-aid program, FHWA has financed highways primarily through grants that generally cover up to 80 percent of project costs. However, because this approach alone cannot meet the nation's current and future transportation investment needs, U.S. DOT's innovative finance initiatives respond to the need to supplement - rather than replace - traditional financing techniques. The primary objectives of innovative finance are to:
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Since launching its innovative finance initiative in 1994, FHWA has advanced a broad range of innovative techniques that can be used in combination with traditional transportation funding programs. The resulting toolbox of innovative finance techniques and strategies has been put to use for hundreds of projects nationwide, resulting in the acceleration of critical infrastructure investments and attracting new resources to transportation investment.
One key to effective use of innovative finance strategies is to recognize what kinds of projects can most benefit from which kinds of tools. As states and private sector sponsors look to applying innovative finance tools, it is important to recognize the potential synergy in combining tools to advance a project. Figure 1.1 introduces the major categories of innovative financing strategies and aligns those categories with some of the key financial characteristics of candidate projects.
Figure 1.1 Project Finance Tools
The base of the pyramid represents the majority of highway projects that continue to rely primarily upon grant-based funding because they do not generate revenues, but can benefit from innovative finance tools that enhance flexibility and maximize resources. Various Federal funds management techniques, such as advance construction, tapered match, and grant-supported debt service, can help to move these projects to construction more quickly. When circumstances support the advisability of debt financing (as opposed to pay-as-you-go grant funding), these projects are prime candidates for GARVEE-style debt instruments, in which future Federal highway apportionments are used to pay debt service and other debt-related costs.
The mid-section of the pyramid represents those projects that can be at least partially financed with project-related revenues, but may also require some form of public credit assistance to be financially viable. State Infrastructure Banks can offer various types of assistance in the form of low-interest loans, loan guarantees, and other credit enhancements to state, regional, and local projects. State loans of Federal grant funds, known as Section 129 loans, are another possibility. And the new TIFIA Federal credit program is designed to assist large-scale projects of regional or national significance that might otherwise be delayed or not constructed at all because of their risk, complexity, or cost.
The peak of the pyramid reflects the very small number of projects that may be able to secure private capital financing without any governmental assistance. These relatively few projects may be developed on high-volume corridors where the revenues from user fees are sufficient to cover capital and operating costs.
The techniques and strategies presented in this primer are grouped into four classifications as shown in Table 1.1. Three of these - funds management, debt financing, and credit assistance - represent the tools captured in the bottom and mid-section of the pyramid. The fourth classification - tolling - cuts across all sections of the pyramid and deals with what remains the most direct beneficiary-based revenue stream in common use today.
| Classification | Strategies |
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| Innovative Management of Federal Funds |
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| Debt Financing |
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| Credit Assistance |
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| Tolling |
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The following chapters discuss in detail specific innovative finance techniques
associated with each classification.
The primer also describes the basic steps required to implement each technique. Note that these steps do not include all the basic Federal-aid requirements (such as following Federal-aid contracting and other procedures, placing projects on the STIP, etc.), but are focused on outlining the basic steps that must be taken in order to put each tool into practice. Virtually, all of the tools begin with the selection of an appropriate project, followed by consultation with FHWA, usually with the state division office.
