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Federal Highway Administration > Publications > Public Roads > Vol. 69 · No. 4 > Financing Megaprojects

Jan/Feb 2006
Vol. 69 · No. 4

Publication Number: FHWA-HRT-2006-002

Financing Megaprojects

by J. Richard Capka

States are trying new funding techniques to help cover the costs of major highway projects.

The Woodrow Wilson Bridge, shown here under construction over the Potomac River near Washington, DC, is a megaproject that relies exclusively on public financing. Photo: Virginia DOT.
(Above) The Woodrow Wilson Bridge, shown here under construction over the Potomac River near Washington, DC, is a megaproject that relies exclusively on public financing. Photo: Virginia DOT.

Megaprojects--$500 million-plus major infrastructure projects designed to meet the Nation's growing needs--are critical to increasing the capacity of the transportation infrastructure and improving mobility. Unfortunately, the associated megacosts of the projects make it a challenge to finance these behemoths. States and localities already have their plates full meeting the requirements of operating, maintaining, and rehabilitating existing highway systems.

In addition, the size and scope of megaprojects make it difficult to use traditional pay-as-you-go financing methods. The amount of transportation funding available to an agency in a fiscal year may not be enough to cover the cost of advancing a major project, but waiting until the money is available may result in increased congestion and further deterioration of the infrastructure, making delays unacceptable to the driving public. And the costs of project delay or extending the project timeline increase over time in terms of disruption to public mobility, the value of money, and project overhead.

"There's simply not enough public-sector capital to undertake the backlog of transportation infrastructure work that needs to be done," says Robert Prieto, senior vice president of Fluor Corp., an engineering and construction firm. "The only option is to find new delivery mechanisms and sources of capital."

To address the challenges of financing megaprojects, transportation agencies are looking at new financing tools and techniques to pay for these huge undertakings and ways to start projects sooner. Agencies also are considering new models of financing that bring private-sector dollars into public projects to deliver the maximum infrastructure at the lowest cost to taxpayers and users in terms of time and money.

Most of today's megaprojects still rely exclusively on traditional public financing. A case in point is the Woodrow Wilson Bridge project near Washington, DC, which is designed to unclog a significant traffic bottleneck on the I-95 corridor. Federal funding participation for the Woodrow Wilson Bridge Project is approximately 85 percent, with the remainder of the funding coming from Maryland, Virginia, and Washington, DC.

An emerging trend in the transportation community is to use private-sector dollars to partially or totally finance megaprojects. For example, the Trans-Texas Corridor, a statewide network of transportation routes, is a public-private partnership that has attracted $7.2 billion in private investment. The Channel Tunnel (Chunnel) between London and Paris is wholly funded through private investors in a joint English and French venture managed by a private company under a long-term concession.

"Public-private partnerships provide new delivery mechanisms by allowing acceleration of what the public sector might be able to do. And they open access to sources of funds that are otherwise unavailable to the public sector," says Prieto.

Megaproject Beginnings

A growing need to rehabilitate the Nation's aging infrastructure made major projects part of the construction project mix in the United States in the 1990s. Major projects completed during the decade include the $2.4 billion Alameda Corridor, an express rail line for freight linking the ports of Los Angeles and Long Beach, CA, and the $1.6 billion reconstruction of 27 kilometers (17 miles) of I-15 before the 2002 Winter Olympic Games in Salt Lake City, UT.

The Central Artery/Tunnel project replaced an elevated highway with an underground expressway, shown here, to ease traffic congestion in Boston. The State and local governments are covering 42 percent of project costs.
The Central Artery/Tunnel project replaced an elevated highway with an underground expressway, shown here, to ease traffic congestion in Boston. The State and local governments are covering 42 percent of project costs.

Among the 1990s megaprojects still underway is the $1.3 billion Miami Intermodal Center, designed to improve access to Miami International Airport. Another is the $1.1 billion Foothill Freeway project to construct 45 kilometers (28 miles) of freeway between Los Angeles County and San Bernardino County, CA.

Current Major Highway Infrastructure Projects

I-80/San Francisco-Oakland Bay Bridge (East Span), CA
S.R. 210/Foothill Freeway, Los Angeles, CA
I-25/I-225 Southeast Corridor (T-REX), Denver, CO
I-95/New Haven Harbor Crossing Corridor Improvement Program, CT
I-4, Orlando, FL
Miami Intermodal Center, FL
Tampa Interstate System (TIS), FL
CREATE, Chicago, IL
New Mississippi River Bridge (St. Louis), IL-MO
New Ohio River Bridges (Louisville), KY-IN
Central Artery/Ted Williams Tunnel, Boston, MA
Intercounty Connector, MD
I-94/Edsel Ford Freeway, Detroit, MI
Mon/Fayette Expressway Toll Facility, Pittsburgh, PA
Central Texas Turnpike, Austin, TX
I-10/Katy Freeway, Houston, TX
Trans-Texas Corridor, TX
I-64/Hampton Roads Third Crossing, VA
I-95/I-395/I-495/Springfield Interchange, VA
I-95/Woodrow Wilson Bridge, MD-VA-DC
I-43/I-94/I-794/Marquette Interchange, Milwaukee, WI



Most megaprojects are designed to enhance the existing infrastructure in busy urban areas, presenting the challenge of keeping traffic moving while the project is underway and increasing the complexity and cost of construction. As transportation agencies gained experience in developing megaprojects, they found that long-term cost projections, attrition of project staff, complex construction requirements, and unique engineering and design problems could make it difficult to keep cost overruns within bounds.

The Central Artery/Tunnel project, which replaced an elevated highway with an underground expressway and new bridge to ease traffic congestion in Boston, MA, has projected costs of more than $14.6 billion. Today the monumental cost involved in megaprojects such as this raises serious concerns about the public's ability to bear the financial burden using only public dollars.

Lessons learned from 1990s megaprojects led Congress to include a requirement in the Transportation Equity Act for the 21st Century (TEA-21) that every megaproject of $1 billion or more receiving Federal funds for construction have a financial plan that is updated annually. The recently enacted Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) redefined a megaproject to include projects of $500 million or more. The focus of the financial plan is to compare original cost estimates to actual costs and project completion schedules, as well as to provide reasonable assurance that sufficient resources are available to complete the project as planned.

As the Nation's infrastructure rehabilitation needs continue, so will the need to develop and finance megaprojects. At the end of fiscal year 2005, twenty-one active megaprojects receiving Federal funding were underway, ranging from projects in the final stages of environmental review to those under construction. The Federal Highway Administration (FHWA) anticipates the number of major projects to increase substantially over the next several years, especially with the new, lower threshold for defining a megaproject. (See "Current Major Highway Infrastructure Projects" on page 13.)

Federal dollars are financing 95 percent of the Springfield Interchange, a project to reconstruct the intersection of Interstates 95, 395, and 495 near Washington, DC. This aerial photograph shows ongoing work on the megaproject.
Federal dollars are financing 95 percent of the Springfield Interchange, a project to reconstruct the intersection of Interstates 95, 395, and 495 near Washington, DC. This aerial photograph shows ongoing work on the megaproject.

Funding Variations

Historically FHWA has financed highways through the Federal-Aid Highway Program, which generally covers up to 80 percent of project costs (90 percent on interstate projects), with States and localities providing the remaining funds. Federal funding participation in today's megaprojects, however, varies significantly.

Of the major projects under construction, four are being financed under a Federal funding ratio of 80 to 95 percent, with States and localities providing the remainder. The four projects under this funding structure include the Washington, DC-area Woodrow Wilson Bridge, the Springfield Interchange in Virginia, the Tampa Interstate System in Florida, and the New Haven Harbor Crossing Corridor Improvement Program in Connecticut.

Projects with less-than-traditional Federal funding participation include Boston's Central Artery/Tunnel, at 58 percent; California's Foothill Freeway, at 55 percent; the Miami Intermodal Center, at 5 percent; Denver's Southeast Corridor (T-REX) project, at 53 percent; the San Francisco-Oakland Bay Bridge, at 5 percent; the Central Texas Turnpike, at 28 percent; Houston's Katy Freeway, at 61 percent; and Milwaukee's Marquette Interchange, at 54 percent.

State transportation agencies have compelling reasons to look to sources other than Federal funds to pay for megaprojects. Federal dollars apportioned to the States do not cover all of the projects eligible for Federal funding, so States must make hard decisions on how they will use the funds they do receive. In many cases, smaller projects that have captured the interest of local or political stakeholders use up the available Federal funding in a given fiscal year.

In addition, many megaprojects are so large and the need for them is so critical that pay-as-you-go is not a viable option. Instead, States are stepping up with higher contributions and using innovative financing techniques--including Federal loans, State bonding initiatives, and public-private partnerships--to secure funds sooner so they can get these projects underway.

GARVEE and TIFIA Programs

The Federal Government and some States have introduced innovative tools to help State and local agencies finance transportation projects. Two programs that agencies are using to finance megaprojects are the Grant Anticipation Revenue Vehicle (GARVEE) Program and the Transportation Infrastructure Finance and Innovation Act (TIFIA). Although the programs differ, they share the concept of financing projects by leveraging Federal assistance and accessing capital markets.

The GARVEE program enables States and other public authorities to issue debt-financing instruments, such as bonds, to pay for current expenditures on transportation construction projects and repay the debt using future Federal apportionments. In general, projects funded with the proceeds of a GARVEE debt instrument are subject to the same requirements as other Federal-aid projects with the exception of the reimbursement process. Instead of reimbursing construction costs as they are incurred, the reimbursement of GARVEE project costs occurs when debt service is due.

The benefit of the GARVEE financing mechanism is that it generates upfront capital to keep major highway projects moving forward at tax-exempt rates and enables a State to construct a project earlier than is possible with traditional pay-as-you-go financing. With projects completed sooner, costs are lower because of inflation savings, and the public realizes safety and economic benefits. By paying with future Federal highway reimbursements, the cost of the infrastructure is spread over its useful life rather than just over the construction period.

Using GARVEE bonds to provide upfront capital enabled CDOT to accelerate reconstruction of the I-225/I-25 interchange near Denver, CO. The photo shows I-25 running horizontally as I-225 connects from the bottom left.
Using GARVEE bonds to provide upfront capital enabled CDOT to accelerate reconstruction of the I-225/I-25 interchange near Denver, CO. The photo shows I-25 running horizontally as I-225 connects from the bottom left.

Without the ability to issue GARVEE bonds to provide upfront capital, the Colorado Department of Transportation (CDOT) would have been unable to bridge the funding gap on the $1.7 billion T-REX project to reconstruct sections of I-25 and I-225 and build a light transit line in Denver. With pay-as-you-go financing, T-REX would not be finished until 2017 instead of its anticipated 2006 completion date. The GARVEE program along with other financing options is being considered to partly finance the proposed Intercounty Connector, a new highway that would link major travel corridors in Montgomery and Prince George's Counties, MD, north of Washington, DC. The Maryland General Assembly passed legislation giving the Maryland Transportation Authority, an agency under the Maryland Department of Transportation (MDOT), permission to issue up to $750 million in GARVEE bonds specifically for the project.

While GARVEE bonds help States obtain funding that will be repayable from future Federal-aid streams, the TIFIA program provides assistance to projects with their own repayment streams, such as tolls or other dedicated funding sources. Under TIFIA, the U.S. Department of Transportation (USDOT) provides direct credit assistance--up to 33 percent of eligible project costs--to sponsors of major transportation projects. Credit assistance can take the form of a loan, loan guarantee, or line of credit.

TIFIA assistance provides a number of benefits to project sponsors, including improved access to capital markets, flexible repayment terms, and potentially more favorable interest rates than can be found in private capital markets for similar instruments. TIFIA can help advance large, capital-intensive projects that otherwise might be delayed or not be built at all because of their size, complexity, and the market's uncertainty over the timing of revenues.

TIFIA has helped accelerate the Miami Intermodal Center, which involves construction of a multimodal transportation center for car rental, transit, commuter rail, Amtrak®, and intercity bus services. The Florida Department of Transportation (FDOT) is using a $433 million TIFIA loan package to finance part of the first phase of the project, which includes construction of the rental car facility and central station, right-of-way acquisitions, and roadway improvements. State fuel tax revenues and rental car fees secure the loans.

In Florida, a TIFIA loan package is helping FDOT finance part of the construction of the Miami Intermodal Center. Fees generated by the car rental facility, shown here in an artist's rendering, will help pay off the loans. Features shown in the rendering include the customer lobby in the background, metal screens on the exterior of the garage, and the glazed wall of the ramp structure.
In Florida, a TIFIA loan package is helping FDOT finance part of the construction of the Miami Intermodal Center. Fees generated by the car rental facility, shown here in an artist's rendering, will help pay off the loans. Features shown in the rendering include the customer lobby in the background, metal screens on the exterior of the garage, and the glazed wall of the ramp structure.

Another project using TIFIA financing is the Central Texas Turnpike, a 196-kilometer (122-mile) toll facility in the Austin-San Antonio corridor designed to relieve congestion, improve safety, and enhance freight movement through central Texas. A $917 million TIFIA loan will finance nearly one third of the cost of phase one of the project. The Texas Turnpike Authority will repay the loan using toll revenues.

Public-Private Partnerships

New developments in megaproject financing involve more than differences in the split between Federal and State dollars. Although innovative financing tools are making public dollars more available for project financing, they are not enough to meet the Nation's transportation infrastructure needs. Agencies are looking beyond public dollars and exploring public-private partnerships to help share the costs of major projects.

These partnerships enable transportation agencies to tap private-sector financial, technical, and management resources to achieve public objectives such as greater cost and schedule certainty, innovative technology applications, specialized expertise, and access to private capital.

"The single most important thing the public sector gains in a public-private partnership is certainty in terms of funding, cost, and schedule for the project--it's not subject to annual appropriations," says Fluor's Prieto. "The taxpayer benefits from that certainty, but he also gets a new or upgraded facility earlier than he might under a traditional financing approach. And from a public policy standpoint, there is a better match between who bears the costs and who accrues the benefits of projects because many will be toll facilities."

The Texas Turnpike Authority will use toll revenues from the Central Texas Turnpike to repay the TIFIA loan used to finance part of the cost of the project. This aerial shot shows the Loop 1/State Highway 45 interchange of the toll road under construction.
The Texas Turnpike Authority will use toll revenues from the Central Texas Turnpike to repay the TIFIA loan used to finance part of the cost of the project. This aerial shot shows the Loop 1/State Highway 45 interchange of the toll road under construction.

Risk transfer is another significant benefit of public-private partnerships, according to Robert Poole, director of transportation studies and founder of the Reason Foundation.

"Public-private partnerships shift some of the risks involved from taxpayers to the private capital markets and large global companies that can afford and are willing to take those risks under the right kinds of agreements," he says. "The challenge is to develop public-private partnerships that are genuinely partnerships and have benefits for both sides."

An example of this new breed of public-private megaproject is the Trans-Texas Corridor. As part of the financing arrangement for the proposed Oklahoma-to-Mexico element of the Trans-Texas Corridor (TTC-35), a private consortium has agreed to invest $6.0 billion in a toll road between Dallas and San Antonio and give the State $1.2 billion for additional transportation improvements between Oklahoma and Mexico. In return, the firm plans to negotiate a 50-year contract to maintain and operate the toll road.

The result is that the Texas Department of Transportation (TxDOT) will have more money for roadbuilding than it would otherwise. Additional public-private partnerships may play a key role in financing the corridor project. Based on the Crossroads of the Americas: Trans Texas Corridor Plan, the 6,440-kilometer (4,000-mile) corridor is estimated to cost $31.4 million per centerline mile, not including right-of-way or miscellaneous costs.

The Chicago Region Environmental and Transportation Efficiency Program (CREATE) is a first-of-its-kind partnership involving the State and city departments of transportation (DOTs), Chicago-area commuter rail system, and six private railroads. The need to work together to solve common transportation problems led the railroads to partner with the transportation agencies on CREATE, according to Illinois Department of Transportation (IDOT) Secretary Timothy Martin.

"If everybody waited around for the other person to do it, it would never get done," Martin says. "That's what brought everybody to the table--shared pain and shared gain."

CREATE will invest $1.5 billion--including $212 million from the railroads--in capital improvements in the Chicago region's railroad infrastructure, including 25 new roadway overpasses and underpasses to eliminate traffic crossing tracks at grade level and six overpasses and underpasses to separate passenger and freight train tracks.

"We think this could be one of the models for the future," says Martin. "We're getting away from the traditional 80-20 percent split of Federal and State funding and bringing private partners into the process. We're figuring out what we can learn from each other. It's a matter of putting aside the idea that we've never done it that way and asking ourselves 'Why can't we do it that way?'"

Developing Valid Estimates

No matter how a megaproject is financed, a critical component of success is an initial cost estimate that stands up over time. Aside from supplying Congress and the public with valid data on which to make informed decisions, a true representation of costs is necessary to determine the most appropriate financing mechanism.

"Part of the problem has been an incentive to underestimate the cost because of the fear that people wouldn't approve a project if they knew the true cost," says the Reason Foundation's Poole. "Ultimately, that's a mistake. It's important to develop a realistic initial cost estimate."

Underestimation of megaproject costs is a concern overseas as well. In a study of 258 transportation infrastructure projects worldwide, Professor Bent Flyvbjerg of Aalborg University in Denmark found that costs were underestimated in 9 out of 10 projects, actual costs of all types of projects were on average 28 percent higher than estimated costs, and actual costs of road projects were 20.4 percent higher.

"Underestimation of costs at the time of the decision to build is the rule rather than the exception for transportation infrastructure projects," Flyvbjerg writes in "Underestimating Costs in Public Works Projects" in the Journal of the American Planning Association. "Frequent and substantial cost escalation is the result."

FHWA encourages project sponsors to evaluate risks and include appropriate contingencies when developing both cost and revenue estimates. "One of the virtues of going with a private arrangement is that once you get the project costed out and the financing plan approved and turn it over to the private sector, they have to keep costs within what they can finance based on project revenues," Poole says. "The private team has strong incentives to resist further add-ons [increases in project scope] that would make the project more costly."

A private consortium has agreed to invest in the proposed Oklahoma-to- Mexico element of the Trans-Texas Corridor (TTC-35), shown here in an artist's rendering, in return for negotiating a 50-year contract to maintain and operate the section as a toll road.
A private consortium has agreed to invest in the proposed Oklahoma-to-Mexico element of the Trans-Texas Corridor (TTC-35), shown here in an artist's rendering, in return for negotiating a 50-year contract to maintain and operate the section as a toll road.

Even with realistic cost estimates, projects can fail to meet revenue expectations. When the Dulles Greenway, a privately owned toll road in the Washington, DC, area, did not meet its initial traffic and toll revenue projections because of a slowdown in real estate development, the owner was forced to restructure its debt. Since then, a development spurt has led to increased traffic and toll revenues that led to the owner investing in expanding and improving the road.

"If the Dulles Greenway had been a public-sector project, the taxpayers of Virginia would have been at risk [instead of the private sector]," says Poole. "That's the advantage of risk transfer."

The objective of setting up a public-private partnership, however, should not be to take advantage of private organizations. The best public-private partnership is a win-win relationship, with risk shared between the public and private sectors. From the public viewpoint, the objective is an infrastructure gain, while the private-sector priority is a return on investment. When both public and private sectors win, it enhances the possibility for future private-sector investments in the transportation system.

New Skills for a New Era

As public dollars continue to fall short of what is needed to address transportation infrastructure challenges, public-private partnerships and private-only investment arrangements have the potential to play a significant role in how major projects are financed in the future.

The public-sector decisionmakers responsible for developing megaprojects need to become adept at negotiating and working financial logistics with the private sector. But IDOT's Martin cautions that public-private partnerships cannot be one-size-fits-all endeavors. "Public-private partnerships will have to be developed specifically for each State and each challenge," he says. "What may work for the railroads and the city of Chicago and the State of Illinois may not work for the airlines and the city of Fort Worth and the State of Texas."

To accommodate this new world of megaproject financing, public agencies will need new skills to ensure that they make the best use of the resources available. The risk management, financial management, traffic modeling, and business development skills needed to evaluate public-private partnerships are different from those needed to evaluate more traditional transportation projects.

"These skills exist in the United States, but they have not traditionally been applied to projects like these," says Fluor's Prieto. "It's a matter of drawing these skills into the transportation sector."

Public agencies need the capability to evaluate the overall economic benefits of competing proposals, not just the ability to conduct a purely financial evaluation of which offers the best rate of return. "When agencies are looking at proposals, they need the skills to compare an apple to an orange and determine which is better for the State and the taxpayer," Prieto says. "That's not something DOTs traditionally have been called on to do."

One way to be successful, according to IDOT's Martin, is to find experts who can look out for the State's best interest. In most cases that means hiring outside specialists--such as law firms expert on U.S. tax laws and financial service firms knowledgeable about the international markets--to advise the State DOT as it negotiates a public-private partnership.

"When you hold a competition to select the best-qualified private-sector team to do a megaproject, you can be sure that the private sector will have world-class legal and financial expertise on their side of the table," says the Reason Foundation's Poole. "Public-sector agencies need to have the same kind of expertise."

Financing for the Future

For nearly 100 years, highway construction in the United States has been financed almost entirely by the public sector, but that is changing. Today's highway agencies have a spectrum of financing options available, from traditional public-sector funding sources to innovative tools that leverage public dollars to new models that bring private-sector investment into the mix.

A TIFIA loan has been approved for use on the San Francisco-Oakland Bay Bridge project, shown here in a computer rendering. Toll surcharges on seven bay area bridges will be used to repay the loan.
A TIFIA loan has been approved for use on the San Francisco-Oakland Bay Bridge project, shown here in a computer rendering. Toll surcharges on seven bay area bridges will be used to repay the loan.

Because of their size, complexity, and high cost, transportation megaprojects present a particular challenge to agencies trying to balance the dollars available for construction projects with the need to rehabilitate and enhance the transportation infrastructure. As the number of megaprojects grows, the transportation community will need to be both innovative and strategic in putting together the resources to build these huge undertakings.

That process already is underway in State DOTs across the country. The Indiana Department of Transportation (INDOT), for example, is considering a range of options as it crafts a financing strategy for the proposed Evansville-Indianapolis corridor of I-69. The options under consideration include TIFIA loans and public-private partnerships.

If traditional funding mechanisms were used to finance the $1.78 billion project, the State would not be able to start construction until 2016, and the project would take 14 years to complete.

"That's not acceptable," says Robert Tally, administrator of FHWA's Indiana Division, which is working with INDOT to develop a financing strategy for the I-69 project. "Our challenge is to work in cooperation with INDOT to find innovative ways to finance and construct this important project in a more accelerated timeframe."

By combining the various tools and techniques available, highway agencies will have more options to deliver innovation, cost savings, and quality improvements. And by exploring ways to stretch public dollars with private investment, agencies will be able to get construction of megaprojects underway sooner and ultimately provide the maximum infrastructure at the lowest cost to users and taxpayers.


Acting Federal Highway Administrator J. Richard Capka is responsible for shaping the management of highway megaprojects across the country and developing other FHWA programs and initiatives. Before joining FHWA, Capka was executive director and chief executive officer of the Massachusetts Turnpike Authority, where he directed oversight of the Central Artery/Tunnel project. He spent three decades in the U.S. Army Corps of Engineers and retired as a brigadier general after serving as commander of the Corps' activities in the West/Southwest and Southeast regions of the United States and the Central/South America region.

To learn more about FHWA's major projects, visit www.fhwa.dot.gov/programadmin/mega. For more information on public-private partnerships, visit www.fhwa.dot.gov/ppp/.

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