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Conditions and Performance

2004 Conditions and Performance: Chapter 6 (Innovative)
Status of the Nation's Highways, Bridges, and Transit:
2004 Conditions and Performance
Chapter 6 (Continued)
  • Summary
    • Highways and Bridges
    • Transit
  • Highway and Bridge Finance
    • Revenue Sources
    • Historical Revenue Trends
    • Highway Expenditures
      • Types of Highway Expenditures
      • Historical Expenditure and Funding Trends
      • Constant Dollar Expenditures
      • Constant Dollar Expenditures per VMT
    • Highway Capital Outlay Expenditures
      • Capital Outlay by Improvement Type
  • Transit Finance
    • Transit Funding
    • Level and Composition of Public Funding
    • Federal Funding
    • State and Local Funding
    • Level and Composition of System-Generated Funds
    • Trends in Public Funding
    • Funding in Current and Constant Dollars
    • Flexible Funding
    • Capital Funding and Expenditures
    • Operating Expenditures
    • Operating Expenditures by Transit Mode
    • Operating Expenses by Type of Cost
    • Financial Efficiency
    • Cost Effectiveness
    • Rural Transit
  • Innovative Finance
    • Credit Assistance
      • TIFIA
      • State Infrastructure Banks
    • Debt Financing
      • GARVEE
    • Public-Private Partnerships

Innovative Finance

"Innovative finance" refers to a series of administrative and legislative initiatives, undertaken in recent years, which have removed barriers and added flexibility to Federal participation in transportation finance. Policy makers recognized they could accelerate surface transportation project development and expand the base of available resources by (1) removing barriers to private investment; (2) bringing the time value of money into Federal program decision making; (3) encouraging the use of new revenue streams, particularly to retire debt obligations; and (4) reducing financing and related costs, thus freeing up savings for transportation system investment. These financing initiatives and techniques, which are commonly used in the private sector, are relatively new to Federal-aid transportation funding, and are thus frequently referred to collectively as "innovative finance."

Q. What is innovative finance?
A.

Though broadly defined as a combination of special funding initiatives, in the transportation industry the term "innovative finance" has become synonymous with techniques that are specifically designed to supplement the traditional methods used to finance highways. USDOT innovative finance initiatives are intended to augment rather than replace traditional financing techniques.

Over the past decade, innovative finance has undergone several transformations. Since its inception with the passage of ISTEA, innovative finance has laid foundations for several new concepts designed to fund transportation investment. TEA-21 continued the development of innovative financing concepts, including credit assistance, innovative debt financing, and public-private partnerships. The current status of these programs is described in more detail below.

Credit Assistance

Federal credit assistance for transportation projects takes various forms. Direct loans to project sponsors may provide the necessary capital to advance a project and/or reduce the amount of capital borrowed from other sources. Credit enhancement, including loan guarantees or lines of credit, makes Federal funds available on a contingency basis, thereby reducing the risk to investors and allowing project sponsors to borrow at lower interest rates. The projects themselves may often involve partnerships between the public and private sectors. Two of the most significant Federal credit assistance programs, introduced in recent years, are the Transportation Infrastructure and Finance Innovation Act (TIFIA) and the State Infrastructure Bank (SIB) programs.

Transportation Infrastructure and Finance Innovation Act (TIFIA)

The Transportation Infrastructure and Finance Innovation Act (passed as part of TEA-21) authorized the USDOT to establish a new credit program by offering eligible applicants the opportunity to compete for direct loans, loan guarantees, and lines of credit for up to one-third of the cost of large infrastructure construction projects of national significance, provided that the borrower has an associated revenue stream, such as tolls or local sales taxes, that can be used to repay the debt issued for the project. To qualify, a project must have eligible costs that total at least $100 million or exceed 50 percent of a State's Federal-aid highway apportionments for the most recent fiscal year, whichever is less. This dollar threshold reflects congressional intent to assist major projects that can attract substantial private capital with limited Federal investment. Intelligent Transportation System projects are subject to a lower threshold, a minimum of $30 million. As of spring 2004, the TIFIA credit program has provided credit assistance of more than $3.5 billion for 11 projects accounting for more than $15 billion in infrastructure investment. These TIFIA projects include highway toll roads and bridges, transit systems, rail stations, ferry terminals, and intermodal facilities.

State Infrastructure Banks (SIBs)

Section 350 of the National Highway System Designation Act of 1995 (P.L. 104-59) authorized DOT to establish the State Infrastructure Bank Pilot Program. This program provides increased financial flexibility for infrastructure projects by offering direct loans and other credit enhancement products such as loan guarantees. SIBs are capitalized with Federal and State funds. Some States augment these operating reserves through a variety of methods, including special appropriations and debt issues. Each SIB operates as a revolving fund and can finance a wide variety of surface transportation projects. As loans are repaid, additional funds become available to new loan applicants. TEA-21 legislation limited the use of TEA-21 funds for SIB capitalization purposes to five States, of which only two are operating under the TEA-21 provisions; the remaining 31 States that participate in the SIB program operate under National Highway System rules and may not capitalize SIBs with TEA-21 funds. However, existing SIB programs continue to offer loan products. As of March 2004, 32 states have entered into 373 loan agreements with a total value of just under $4.8 billion.

Q. What are some other innovative finance techniques being used as part of the Federal-aid Highway Program?
A.

When trying to accelerate project construction, States often face challenges in aligning funding needs and availability. To address this, grant management tools commonly referred to as "cash flow tools" are being utilized to broaden a State's options for meeting matching requirements and to relax the timing restrictions placed on obligating funds.

Advance construction (AC) allows States to seek approval and begin Federal-aid highway projects using their own funds before any Federal funds have been obligated. An advance construction project may be "converted" to Federal assistance, either in stages or in its entirety, once there is sufficient Federal-aid funding and obligation authority for the project. Through December 2004, projects totaling over $1.2 billion had entered into advance construction agreements.

Other cash flow management tools available to States include flexible match, tapered match, or the use of toll credits to meet the local financing share requirements for Federal-aid highway projects.

SIB loans are being used to fund both highway and transit projects. Seven SIBs have made loans of almost $45 million to assist 12 transit projects valued in excess of $135 million. The loans have supported a diverse spectrum of projects, including bus purchases, rail modernization, the development of intermodal facilities, a historic landmark rehabilitation, and rural transportation improvements. Many of the loans have assisted communities with local project match requirements. This has enabled local governments to accelerate the implementation of transportation infrastructure and services that might otherwise have been postponed because of a lack of available match funding.

Debt Financing

Because of their complexity, cost, and lengthy design and construction periods, transportation projects are often financed by issuing bonds. Repayment of the bonds over several years has traditionally been covered by sources such as State and local taxes or revenue generated from highway user fees. More recently, highway and transit project sponsors have begun issuing debt instruments called Grant Anticipation Notes (GANs), backed by anticipated grant moneys. Grant Anticipation Revenue Vehicles (GARVEEs) are a particular form of GAN being used for transportation projects.

Grant Anticipation Revenue Vehicle (GARVEE)

GARVEE bonds permit an expanded variety of debt issuance expenses to be reimbursed with anticipated Federal funds. In addition to traditional debt service (principal and interest), expenses such as underwriting fees, bond insurance, and financial counsel are also eligible for reimbursement. Previously, eligible reimbursement expenses were limited to principal repayment and were restricted to certain categories of construction projects. Debt instruments issued by special purpose nonprofit corporations (classified as 63 20 corporations by the Internal Revenue Service) may be repaid with Federal-aid funds if the bonds are issued on behalf of the State and the proceeds are used for projects eligible under Title 23. As of June 2004, the amount of GARVEE debt issued nationally had reached just over $5 billion.

Public-Private Partnerships

States are increasingly looking to the private sector as another potential source of highway and transit funding, either in addition to or in concert with new credit and financing tools. There is a long history of private sector involvement in providing highway transportation dating back to the late 1700s and early 1800s when numerous private toll roads were built to open interior areas of the country for commerce and settlement. In more recent times, private residential and commercial real estate developers have contributed directly to the growth of the transportation network by constructing local property access roads and upgrading adjacent collector or arterial routes, or by paying impact fees to local governments for use in improving the regional transportation system.

While private sector involvement in highway financing and construction slowed somewhat with the advent of dedicated public funding for highways, there has been renewed interest in private sector involvement in highway construction programs in recent years as highway budgets have been stretched. A variety of institutional models are being used including (1) concessions for the long-term operation and maintenance of individual facilities or entire highway systems; (2) purely private sector highway design, construction, financing, and operation; and (3) public-private partnerships in designing, constructing, and operating major new highway systems. While a few States currently account for the majority of private sector financing, many more States have expressed interest in the potential for greater private sector involvement.

Q. What is a public-private partnership?
A.

A public-private partnership (PPP) is a broad term that collectively refers to contractual agreements formed between public and private sector partners, where the private sector partner steps outside of its traditional role and becomes more active in making decisions as to how a project will be completed.

The FHWA has a number of initiatives underway to help remove barriers to greater private sector involvement in highway construction, operation, and maintenance. These include workshops to provide States with resources to overcome barriers to PPP implementation; development of model legislation for States to use in drafting new or more flexible State laws and regulations; development of a PPP Web site containing links to many PPP resources, both domestic and international; case studies of how States and local governments have overcome institutional barriers to PPP implementation; and creation of Special Experimental Program 15 (SEP-15) that provides States the flexibility to waive certain Title 23 rules and regulations on an experimental basis to evaluate alternative approaches to PPP project delivery.

More information on public-private partnerships can be found in the U.S DOT's December 2004 Report to Congress on Public-Private Partnerships, available at http://www.fhwa.dot.gov/reports/pppdec2004/index.cfm.

Q. What are some examples of recent public-private partnerships in the United States?
A.

Recent examples of public-private partnerships include the following:

  • The lease of the Chicago Skyway (a major 8-mile-long bridge connecting two Interstates). A consortium of private firms paid the City of Chicago $1.83 billion for the rights to operate and collect tolls on the Skyway for 99 years. The lease agreement establishes maximum toll rates and sets performance standards that must be maintained on the facility.
  • The Virginia Asset Management program, through which the State has contracted with a private sector firm to provide long-term maintenance and restoration of 1,250 miles of Interstate Highways.
  • The Dulles Greenway in northern Virginia. The design, construction, financing, and operation of this limited access highway has been entirely private, with operational responsibilities for the road scheduled to revert to the State after 42.5 years.
  • The 4,000-mile Trans-Texas Corridor system, which will be built with public-private partnerships. An initial segment between Dallas and San Antonio will include private investment of $6 billion to fully design, construct, and operate a four-lane toll road for up to 50 years, plus a payment of $1.2 billion to the State for the toll facility franchise rights. The State may use these monies to fund road improvements or high-speed and commuter rail projects along the corridor.

Page last modified on November 7, 2014.
Federal Highway Administration | 1200 New Jersey Avenue, SE | Washington, DC 20590 | 202-366-4000