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What is innovative surface transportation finance?

"Innovative finance" for surface transportation infrastructure is a broadly defined term that encompasses a combination of techniques and specially designed mechanisms to supplement traditional financing sources and methods.

Innovative finance for surface transportation includes such measures as follows:

  • New financing mechanisms designed to leverage resources
  • New funds management techniques
  • New institutional arrangements

The U.S. Congress has a long history of funding surface transportation infrastructure through grants from the Highway Trust Fund. Innovative finance provides an array of tools and institutional arrangements as alternatives to traditional, grant-based funding strategies. Innovative finance techniques have been designed to enhance the effectiveness of grant management techniques and bridge investment gaps between available resources and infrastructure needs. Several of these techniques may not be new or particularly innovative outside of the transportation sector. It is important to recognize that the benefits associated with these tools are not mutually exclusive and that there is potential synergy in combining tools on a single project.

Innovative finance has evolved at the Federal level as a product of dialogue between policy and administrative officials at USDOT and partners at the state and local levels. Most of the programs and tools have been enabled by legislative changes to the U.S. Code, Title 23. As transportation finance needs evolve, new tools and programs are likely to add to the field of innovative finance.

What are some of the constraints of the traditional approach to surface transportation financing?

Traditionally, the government has financed transportation infrastructure primarily through a combination of state and local taxes and fees and-for major projects-Federal grants based on national motor fuels taxes. These resources were typically combined to fund projects on a "pay-as-you-go" basis, meaning that projects have often been built in phases or increments as funds become available over a period of years. Project funding has been tied closely to Federal and state cash management policies, with nearly exclusive responsibility for the process vested in state and local public transportation agencies.

Because of competing demands on scarce public resources, state and local governments are faced with the challenge of inadequate funding to meet growing transportation needs, and critical projects may face years of delay before funding is available. State and local transportation entities understand the costs associated with project delays and have sought ways to get projects built faster by utilizing innovative finance techniques. However, innovative finance itself does not solve the problem of inadequate funding. Rather it is a group of tools that can increase the efficiency and flexibility in employing existing resources and managing the timing of their use. New money is not created, but projected money can be leveraged and utilized sooner.

While the pay-as-you-go approach (conventional financing) has the benefit of simplicity and avoids interest costs associated with indebtedness, it involves the hidden costs associated with inflation and foregone economic development, especially for projects delayed several years. In addition, delaying projects that reduce emissions or eliminate safety hazards also has obvious negative political and economic effects.

What are the basic innovative finance tools?

Innovative finance tools include a wide array of tools and programs to advance surface transportation projects. The following links guide users to the Tools & Programs content area of Innovative Finance that provides detailed information on specific mechanisms:

How is innovative finance different from conventional financing?

Employing the tools of innovative finance differs from the pay-as-you-go approach (or conventional finance ) in four ways:

  • It enables new ways for existing revenue to be used to finance highways
  • It utilizes financing mechanisms such as debt finance
  • It utilizes fund management techniques
  • It establishes new institutional arrangements

What are some of the driving forces behind interest in innovative surface transportation finance?

  • Funding shortfalls
  • Making the most efficient use of existing resources
  • Leveraging existing resources
  • Expediting the implementation of needed projects
  • Private sector interest in project development

What are the primary objectives of innovative finance?

Innovative finance tools are intended to maximize the ability of states to leverage Federal capital, attract new sources of funds to transportation investment, accelerate project completion dates, and more effectively utilize existing funds.

Who is using innovative finance?

  • State (DOTs)
  • County and Municipal Governments
  • Transit Agencies
  • Turnpike and Toll Road Authorities
  • Public Benefit Corporations
  • Private Infrastructure Developers
    • Concession Companies
    • Suppliers

What are the advantages of using innovative finance?

Innovative finance:

  • Enables new sources of capital
  • Leverages existing financial resources
  • Expedites project implementation

What are the barriers to innovative finance?

State officials wishing to implement an innovative finance program may face unique challenges that will potentially be different from those faced by other states, due to the varying programs, policies, and political traditions from state to state. Enabling legislation may be required for some innovative finance programs, such as the issuance of GARVEE bonds or the establishment of SIBs.

What types of projects lend themselves best to innovative finance?

Transportation officials must evaluate each project individually and determine what is the best financing approach. Some project types may be more suited for one type of financing tool. For example, the right financial tools can accelerate projects with the potential to generate revenue , such as through tolls or some other dedicated tax or user fee, are good choices for loans and credit support, since there is a dedicated repayment source. In these cases, the users of the facility pay for project debt over a period of years until the debt is paid off.

The pyramid drawing below highlights the distinction between the different mechanisms and programs that are used to finance both revenue and non-revenue projects. The pyramid's shape reflects the relative number of projects in each funding category.

The base of the pyramid represents the vast majority of projects that do not generate revenues as a matter of public policy and choice and, therefore, will continue to rely upon funding primarily through grants. The Federal government has implemented enhanced grant management techniques, such as advance construction and grant-supported debt service, to move Federally-funded projects to construction more quickly.

The middle layer of the pyramid represents those projects that can be at least partially funded with debt finance payable from project-related revenues. However, these projects also require some form of public credit assistance to gain market access.

The tip of the pyramid represents the very small number of projects that generate enough revenue to be financed on a standalone basis with limited governmental assistance.


Financing Pyramid

How can the private sector participate in innovative finance?

The private sector can participate in the innovative financing of the nation's surface transportation infrastructure through public-private partnerships, concessions, and lease transactions. Several Federal programs can provide attractive financing to private investors and infrastructure developers including the following:

How are innovative finance programs created?

Government-sponsored innovative finance programs are usually created through the enactment of specific legislation establishing the parameters for the program, including purpose, eligibility, use of the program, types of assistance, and requirements.

The Federal government often creates pilot programs to test new ideas. Pilot programs generally allow a small, specified number of projects to move forward on a test basis and exempt those projects and their funding from any legal restrictions. Pilot programs require close follow-up and documentation of results, which is most often documented in reports to Congress. When pilot programs are found to be effective, they may be incorporated into law and can be used on a wider basis.

For example, the TE-045 (Innovative Finance Test and Evaluation Program) of 1995 was used to facilitate several pilot projects. The following financing tools were tested under the TE-045 program and have now been approved as standard features of the Federal-aid Highway Program:

What are some examples of current or recent projects that have been financed through innovative means?

Examples of current or recent projects that have been financed through innovative means can be viewed in the Innovative Finance Project Profiles section.

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